Japan's government on Tuesday approved a record budget for the fiscal 2013 that envisages spending cuts, the first time in seven years, and a reduction in new bond issuance.

Prime Minister Shinzo Abe's Cabinet endorsed a JPY 92.6 trillion budget for the coming fiscal year, cutting the size of overall government spending to gain control over the widening budget deficit.

The government raised public works spending, and defense expenditure to beef up security over islands that are claimed by China.

Social welfare spending will increase around 10 percent to JPY 29.1 trillion and public works spending by 15.6 percent to JPY 5.3 trillion. Further, the government has set aside JPY 25 trillion for reconstruction of the 2011 earthquake hit northeastern coast.

Japan's huge debt has lifted the debt servicing costs to a record JPY 22.2 trillion. The budget on the top of a JPY 10 trillion stimulus announced weeks ago suggest that the deficit reduction plan has taken a back seat to the goal of reviving economy.

Of the JPY 92.6 trillion overall spending, new bond issuance will finance JPY 42.9 trillion, indicating that the government relies on borrowing to cover 46.3 percent of its spending.

Nonetheless, the government's planned new bond issue is 3 percent lower than in the current fiscal and predicts tax revenue to exceed proceeds from bond sales for the first time in four years.

The conservative Liberal Democratic Party came to power defeating the Democratic Party of Japan in the December election. After taking office, Abe pledged to drive the economy out of recession and end the deflation regime.

The government yesterday raised its growth outlook for the fiscal 2013 to 2.5 percent from 1.7 percent. The Cabinet estimates 1 percent real GDP growth for this year.

On mounting pressure from Abe's government, the Bank of Japan this month doubled its inflation target to 2 percent in a bid to end deflation.

RTTNews