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Japan lawmakers agree to avert 'fiscal cliff', election looms

By Tetsushi Kajimoto

TOKYO (Reuters) - Japan's ruling and opposition parties agreed on Tuesday to quickly pass a deficit funding bill in parliament, in a move that will keep the country from falling off its version of a 'fiscal cliff' as the prime minister eyes elections as early as next month.

The bill is needed to borrow some $480 billion and fund roughly 40 percent of this fiscal year's budget.

Without it, the government could run out of money by the end of this month and would have to stop debt auctions next month, just as the economy teeters on the brink of a recession.

Until recently the opposition has used its control of the upper house to stall the bill in a bid to press Prime Minister Yoshihiko Noda to call an election. Noda had promised in Agusut to go to the polls "soon" in order to win support for an unpopular plan to hike the sales tax.

Hoping to force Noda's hand, however, the main opposition Liberal Democratic Party (LDP) and its former coalition ally New Komeito have changed tack and looked poised to pass the deficit bond bill Noda has set as a condition for calling elections.

"I'm glad that we have demonstrated the wisdom of parliament by overcoming differences between ruling and opposition parties," Goshi Hosono, policy affairs chief of the ruling Democratic Party of Japan (DPJ), told reporters.

"We managed to show the people even at the last minute that parliament is functioning," he said, after striking a deal with his counterparts from the two opposition parties.

The bill is expected to pass in the lower house as early as Thursday and looks set to be enacted in the upper house with the backing of the two opposition parties during the current parliament session that ends on November 30.

In reaching the deal, the Democrats made concessions to the opposition parties by promising to review spending earmarked for the current fiscal year and curb deficit bond issuance.

The three parties agreed to allow issuance of deficit bonds through the fiscal year that starts in April 2015, meaning that passage of deficit bond bills would be secured without the bills being taken as a political hostage in the coming few years.

Countering a concern that guaranteeing issuance of deficit bonds may jeopardize fiscal discipline, the three parties said in a statement that the deal was aimed at stabilizing fiscal management on condition that the government keeps such bond issuance under control and maintains sustainable finances.

The three parties also said they would seek a swift end to deferrals on government spending such as on tax grants to rural governments, which have been put in place since September to avoid a cash crunch due to the deadlock over the funding bill.

Finance Minister Koriki Jojima told reporters on Tuesday that swift passage of the bill is badly needed as the government is considering crafting an extra budget at some point to stimulate the economy after a contraction in the third quarter.

Noda, under opposition pressure to call an early poll, looks to be leaning towards holding one as early as next month, after pledging support for a controversial U.S.-led free trade pact.

But some in his party would prefer to delay the day of reckoning with support for his government at its lowest since Noda took office last year.

The risk that Japan could lurch over its "fiscal cliff" -- a term coined to describe massive tax hikes and spending cuts that could hit the United States early next year -- has prompted fresh warnings from rating agencies that a prolonged political gridlock could prompt credit downgrades.

(Editing by Kim Coghill)

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