I BUDGET SYSTEM AND PROCESS

    Public Finance Law prescribes the composition of the budget to be submitted to the Diet. The budget consists of general provisions, a revenues and expenditures budget, continued expenses (multi-year expenses), approved carried-over expenses (expenses approved to be carried-over into the following year), and contract authorization.

(1) General provisions
    General provisions provide general rules to be commonly applied to all of the individual budget components. Also included in these provisions are the ceilings on the amount of government bonds as well as of Treasury bills and temporary borrowings, and other matters necessary for budget implementation. These provisions form the basic framework of the budget.

(2) Revenues and expenditures budget
    The revenues and expenditures budget is the main part of the budget. The revenue section shows the estimate of total national receipts, and does not mean that the government will collect the estimated amount of revenues. The expenditure section is different. Expenditures are permitted only when listed in this budget, and the estimated expenditures are basically the upper limits of expenditures for each budget item.

(3) Continued expenses
    Continued expenses contain items for which the government makes payments over a period of several years, the maximum period being five years. These payments are for projects in construction, production, and others. Prior Diet approval is required for a continued-expense item, and the Diet specifies the total amount of expenses as well as annual allotments. However, in recent years, continued expenses are used only for the construction of destroyers and submarines of the Defense Agency.

(4) Approved carried-over expenses
    The Diet may allow for carried-over expenses that can be used in the subsequent fiscal year. This system covers cases in which an expenditure item is not spent within the current fiscal year, due to the nature of the expenditure or to unexpected circumstances arising after the formulation of the budget. Prior Diet approval is necessary for these carried-over expenses.

(5) Contract authorization
    The contract authorization system allows the government to make contracts for projects in which it is necessary to incur a liability within a given fiscal year and make all or part of the outlays in subsequent years. Prior approval of the Diet is needed to incur such a liability. The government must also appropriate actual outlays for the year in its annual budget.

(1) Introduction The Fiscal Investment and Loan Program (FILP) uses various interest-bearing public funds, such as the Fiscal Loan Fund, which issues FILP bonds in the financial market to implement various public policies such as social infrastructure and policy-based loans. In this sense, it may be said that the FILP is a means to implement the fiscal policy through financial measures. Every year, a FILP plan is drafted and managed in line with the budget to fulfill efficiently its functions of resource allocation and cyclical adjustment from the standpoint of the whole national economy. (2) Outline of the FILP
(i	) Financial Resources FILP resources consist of the following three resources. a. Fiscal loan The Fiscal Loan forms the core of FILP's financial resources. Of the FILP Plan for FY2003 of 23.4 trillion yen, 19.5 trillion yen is allocated to Fiscal Loans. It represents 83% of the FILP Plan for FY2003. The Fiscal Loan is mainly raised by the government through the issuance of FILP bonds in the financial market. Surpluses in special accounts and other public entities are deposited with the Fiscal Loan as usual. b. Industrial Investment The resources for Industrial Investment are dividends from the Electric Power Development Company Ltd, Japan Tobacco Inc., Nippon Telegraph and Telephone Corp., and payments to the government by the Japan Bank for International Cooperation. The Industrial Investment handles capital subscription of the FILP plan. c. Government Guarantee FILP agencies, such as the Japan Highway Public Corporation, issue their bonds in the financial market. With the government guaranteeing their bonds, the agencies can smoothly procure funds.
(i	i) Investments and Loans The FILP lends or invests public funds to FILP agencies, such as government special accounts, government financial institutions, public corporations, and local governments, in order to achieve public policies for which it is appropriate to use interest-bearing funds. Using FILP funds, the FILP agencies carry out projects which are difficult for the private sector to carry out, and provide long-term and fixed-rate funds which are difficult for the private financial institutions to provide, in areas such as housing, small and medium sized businesses, social infrastructure, education, medical care, social welfare, industry, technological development, regional development, and international cooperation. Some areas are funded with a combination of subsidies (taxes) and interest-bearing funds (FILP funds).
(i	ii) Areas targeted by the FILP program

(3) Procedure of Planning FILP and Discussions in the Diet
(i	) FILP Plan Government ministries and agencies submit their requests for FILP to the Ministry of Finance by August 31st of the previous year, just as they do for the national budget. The Financial Bureau of the Ministry of Finance holds hearings with related organizations, reviews requests, and, after negotiations, completes the FILP plan at the same time as the budget is formed, usually by the end of December. In the process of the examination, much attention is paid to the coordination between FILP and the national budget.
(i	i) Discussions in the Diet FILP is divided into three parts according to fund resources, and each part is discussed in the Diet along with the other budget components. FILP is a policy tool based on financial means, and needs to be managed flexibly in accordance with economic conditions. Therefore, the national budget includes a so-called "flexible management clause" for the Fiscal Loan Fund as well as for government-guaranteed bonds and borrowings. This clause allows FILP agencies to increase their initially planned amount up to 50%. However the total amount of their increase is limited up to 25%.
(4) Fundamental Reform of FILP On April 1, 2001, the FILP system was fundamentally revised from a scheme with compulsory deposit of postal savings and pension reserves, to a scheme to raise only the necessary amount of funds for FILP agencies' projects in the market through FILP agency bonds and FILP bonds in order to harmonize the FILP with market principles, as well as to promote the reform and efficient operation of FILP agencies.

The fiscal System Council, composed of scholars, journalists, and business executives, is an organ of the Ministry of Finance that researches and discusses important topics related to the budget, the settlement, and the accounting system of national government. The major activities of the Council are the following.
(1)	Deliberation of the next fiscal year's budget request from the standpoint of a third party, alongside the budget examination by the Ministry of Finance;
(2)	Making proposals for the measures to be taken for the next fiscal year's budget formulation, which is submitted to the Minister of Finance at the end of December. The proposals will be based on the Council's deliberation described in (1) ;
(3)	Conducting research and making recommendations in regard to measures toward fiscal structural reform. Specifically, doing an in-depth research on such topics as the concrete means for expenditure cuts as well as rationalization, or the setting of concrete consolidation targets such as an appropriate level of debt-to-GDP ratio; and,
(4)	Conducting research and making recommendations concerning the government accounting system as well as the budget system.

In January 2001, the "Council on Economic and Fiscal Policy (CEFP)" was instituted. Its purpose is to research and deliberate on some key issues including basic policies on economic and fiscal management and guideline for budget formulation with a view to supporting the prime minister. The council is composed of senior ministers including the prime minister and finance minister, the governor of the Bank of Japan, university professors and business executives.
With regards to the budget related issues, the CEFP have produced reports on strategies for annual budget formulation and medium-term fiscal consolidation, and formed the basis of key government documents on these issues.

(i	v) Policy (Subsidy) Cost Analysis
	Framework of Projects Funded by FILP and Subsidies
	Estimate of Policy Cost in the Future (example) Estimate revenues and expenditures of projects during the analysis period (30 years). Then, estimate the subsidies and other costs required in the 30 years, based on estimated cash flow. Policy cost is obtained by adding the present values of subsidies and other costs of each year in the analysis period.