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The final budget is often different from the initial budget, which may be formulated in a contractionary stance compared with the previous year. Frequent use of supplementary budgets has a risk of undermining confidence in the value of the initial budget.

4.2.10. Budgetary implications of other bills

In cases where a motion of amendment on bills brings about an increase of the budget or requires budgetary action, the Diet Act requires a House or Budget Committee to afford the Cabinet an opportunity to give its opinion on an amendment to increase the total amount of the budget (Art. 57ter).

4.3. Budget execution

4.3.1. Apportionment of expenditure authority

The PFA governs budget implementation. The PFA requires the Cabinet to allocate appropriations to line ministries by article and by item (Art. 31). The Ministry of Finance is required to report this to the Board of Audit (Art. 31). Overall responsibility for executing the budget is given to the head of each ministry and agency, following detailed allocation (Art. 32). To spend, the PFA requires line ministries to prepare a draft disbursement plan and submit it to the Ministry of Finance for approval (Art. 34). The Ministry of Finance also is required to prepare implementation guidelines to be decided by the Cabinet, taking into account the state of National Treasury funds, revenues, finances and expenditures. When the Minister of Finance approves the draft disbursement plan, he/she is required to report it to the line ministries and the Bank of Japan.

4.3.2. Cancellation of budget authority and other in-year expenditure controls

There is no legal provision which allows the cancellation of a spending authority by the executive. In practice, when the executive needs to cancel appropriations, a supplementary budget is proposed.

4.3.3. Emergency spending, excess spending and contingency funds

The Constitution requires a contingency fund to be authorised by the Diet and to be expended for unforeseen deficiencies in the initial budget upon the responsibility of the Cabinet (Art. 87). On this basis, the Cabinet prepares a certain amount of unallocated expenditure in the annual budget not specifying any particular purpose, and the Diet reviews whether the proposed amount is appropriate. Once the draft budget is approved by the Diet, the Cabinet may spend the money as it deems appropriate for unexpected circumstances such as natural disasters or a weaker-than-projected economy. The PFA provides procedures on how to use the contingency fund. The

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Ministry of Finance is granted the power to manage and use it (Art. 35). For the use of the contingency fund, the PFA requires line ministries to prepare documents specifying the reasons for its use, the amount of the expenditure to be used and the grounds of the calculation of the expenditure to be used, and submit it to the Ministry of Finance (Art. 35). Then, the Ministry of Finance reviews and adjusts the request and seeks the Cabinet decision. When Cabinet approves the proposal of the Ministry of Finance, spending may take place. After using the contingency fund, line ministries are required to prepare and submit the report on how it used the money. The Ministry of Finance then prepares a comprehensive report for the Diet’s approval, after the opening of the subsequent ordinary session of the Diet.

4.3.4. Transfer and virement of appropriations within the year

The PFA strictly limits the use of budget spending authority by line ministries. The PFA prohibits line ministries from using expenditures for any purpose other than those appropriated in the approved budget (Art. 32). The PFA also prohibits line ministries from transferring budget authority for paragraphs (kwan) among ministries and divisions (Art. 33). Only in cases where such a transfer was approved in advance by the Diet, taking into account the necessity of implementing the budget, can the appropriated budget be transferred upon obtaining the approval of the Ministry of Finance. Spending ministries that wish to transfer budget spending authority at the item level (i.e. within articles, kou) can only do so upon obtaining the approval of the Ministry of Finance (Art. 33.2). If the ministry would like to transfer money between articles (kou), approval of the Diet is required.

4.3.5. Cash planning and management of government assets and debts

The Ministry of Finance is responsible for cash planning and management of government assets and debt. Based on the implementation plan approved by the Ministry of Finance, money is allocated to line ministries from the National Treasury funds established in the Bank of Japan (Art. 2 of the Public Accounts Act 1947, as amended). The Bank of Japan, in cases where a cheque issued by line ministries is presented, is required to pay the amount of money required (Art. 28). The Public Accounts Act also requires the separation of the duty of disbursement and account keeping in order to prevent any possible corruption (Art. 26). The PFA provides the legal basis for the management of national public property. National property, unless otherwise authorised by law, is not to be exchanged as a payment or transferred without the receipt of a proper price. It needs to be managed in the most efficient manner (Art. 9).

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4.3.6. Internal audit

Line ministries’ financial activities are under the control of the Ministry of Finance. The PFA requires line ministries to implement their budgets in accordance with guidelines issued by the Ministry of Finance, which need to be approved by the Cabinet. In addition, under the Public Accounts Act 1947, as amended, line ministries are required by the Ministry of Finance to report revenues and expenditures, to conduct field examinations of the state of budget implementation and, subject to Cabinet decision, to give the necessary instructions for implementation of budget (Art. 46). Even though the Ministry of Finance has authority to require field examinations of budget implementation, in practice this authority has not been exercised for a long time. Instead, the Ministry of Finance has carried out a budget execution survey on selected projects since fiscal year 2002 to review whether the budget execution of each line ministry is efficient and effective. Internal audit procedures are set out in the administrative guidelines of line ministries, and internal audits are subject to review by the Board of Audit.

4.4. Government accounting and fiscal reporting

4.4.1. The accounting framework

The PFA states that the government accounts consist of the general account and special accounts (Art. 13). Expenditure authority is cash based, as the PFA states that “expenditure shall mean disbursed funds” (Art. 2). The term “income” as used in the law, shall mean received funds that serve as the source of payment to meet demands, while “expenditure” shall mean disbursed funds to meet various demands (Art. 2). Non-cash transactions are excluded.

4.4.2. Government banking arrangements

The National Treasury funds account is at the Bank of Japan, into which revenues from the general account and the special accounts are paid and out of which the expenditures from both accounts are met (the Public Accounts Act 1947, as amended). All national funds are accounted for as government deposits at the Bank of Japan. They are classified into a checking account, a separate account, or a designated account, and receipts into and payments from the accounts are made only from the Bank of Japan (Ministry of Finance, 2004, p. 16).

4.4.3. In-year reporting

The Constitution provides that at regular intervals and at least annually, the Cabinet is required to report to the Diet and the public on the state of the national finances (Art. 91). Accordingly, there is quarterly reporting to the Diet and the public on the execution of the budget, with a one quarter lag. There is

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also monthly reporting of the receipts and outlays of national treasury accounts, with a two month lag (IMF, 2001a).

4.4.4. Annual accounts and reports

The Constitution requires the BOA to audit the government’s annual accounts and for the Cabinet to submit the accounts to the Diet, together with the audit report of the BOA (Art. 90 of the Constitution and Art. 40 of the PFA). For the Ministry of Finance to prepare the annual accounts, after the close of the fiscal year, the PFA requires line ministries to submit their accounts to the Ministry of Finance. Based on these, the Ministry prepares consolidated accounts for total revenues and expenditures, as well as a statement of liabilities (Art. 37). After approval by the Cabinet, the annual accounts are required to be sent to the BOA by 30 November (Art. 39), i.e. within eight months after the end of the fiscal year.

There is no legal provision requiring the government to make special reports such as long-term projections, statements of fiscal policy intentions or of the major fiscal risks in budget projections.

4.5. External audit

4.5.1. Managerial, financial and operational independence

The Board of Audit (BOA) is established in the Constitution, which requires an annual audit and statement of audit by the BOA (Art. 90). The Constitution leaves the details of the organisation and competency of the BOA to be set out in legislation. In view of this, the Board of Audit Act (BOAA) was adopted in 1947. Unlike many countries, the BOA is not directly under the Diet, but under the Cabinet. The BOAA, however, states that the BOA is independent from the Cabinet in terms of operation, appointment and finance (Art. 1).

The BOA is composed of Audit Commission consisting of three commissioners and a General Executive Bureau in order to secure the independence of the BOA in terms of its management and decision making (Art. 2). Commissioners are appointed by Cabinet with the consent of both Houses of the Diet (Art. 4). The president of the BOA is appointed by the Cabinet in accordance with the decision of the commissioners (Art. 3). Their term of office is seven years and they may be reappointed only for one additional term (Art. 5). A commissioner can only be removed from office on the decision of both Houses where he/she is unable to perform their duties due to mental or physical impediment or he/she is in violation of their duties in office (Art. 6). A commissioner is also not required to resign unless he/she is condemned to a serious penalty by a criminal court (Art. 7). The PFA provides a special budget process for the BOA in order to strengthen its financial

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independence, giving the BOA the authority to prepare its budget estimates and submit them to Cabinet.

4.5.2. Institutional coverage of audits

The BOAA requires the BOA to audit all financial and non-financial matters/activities of the central government, as well as of public corporations (Arts. 22 and 23). Public corporations include entities partially owned or invested in by the government. Audits cover:

●Revenues and expenditures of the government.

●Acceptance and distribution of cash and goods owned by the government.

●The accounts of legal entities if more than half of the capital is invested by the government.

●Securities which are owned or taken custody of by the government, and cash and goods taken custody of by the government.

●Acceptance and distribution of cash, goods and securities by entities other than on behalf of the government.

●The accounts of bodies that receive subsidies, incentive grants, or other financial assistance such as loans or indemnity of losses, directly or indirectly by the government.

4.5.3. Types of audit

The BOAA requires the BOA to audit annual accounts to secure their adequacy and rectify their mistakes from the viewpoints of accuracy, regularity, economy, efficiency and effectiveness (Art. 20): 1) whether expenditures (settlement of accounts) fairly reflect implementation of the budget and its financial position (accuracy); 2) whether accounting is in conformity with the budget requirements, laws and regulations (regularity); 3) whether projects are implemented in economical and efficient ways (economy and efficiency); and 4) whether project goals are achieved (effectiveness). Traditionally, the first two objectives used to be dominant, but since the late 1990s, economy, efficiency and effectiveness audits have become increasingly important (OECD, 2000).

4.5.4. Powers of investigation

Those bodies subject to audit by the BOA are required to submit to the BOA statements together with supporting documents in accordance with the regulations (Art. 24). The BOA may dispatch its staff to conduct field audits on a regular or irregular basis (Art. 25). The BOA, if necessary for its audit, may demand submission of books, documents or reports from those bodies subject