The Constitution of Japan stipulates the financial procedures of the State as follows:
Based on these constitutional principles, financial procedures of the State are detailed in the Finance Law, the Accounting Law, other laws, and relevant ordinances and regulations.
The Diet controls the executive branch financially through its deliberations on State budgets, final accounts and relevant laws.
2.1 APPROPRIATION PROCEDURES
The Cabinet prepares and submits to the Diet a budget for each fiscal year. All expenditures and revenues of the State must be included in the budget. The revenue budget is divided into major items according to their nature, while the expenditure budget is divided into items according to their purpose. The amount of revenues and expenditures are thus shown by major items and items. The detailed accounts for estimates of major items and items are not submitted to the Diet.
The budget is first submitted to the House of Representatives, where it is considered in detail by its Budget Committee and approved at its Plenary Session. The budget is then forwarded to the House of Counsellors where the same procedures as in the House of Representatives are followed. A joint committee of both Houses is convened where the House of Counsellors adopts a resolution different from that passed by the House of Representatives. Where no agreement is reached even through a joint committee of both Houses, or in the case of failure by the House of Counsellors to reach final resolution within thirty days after the receipt of the budget passed by the House of Representatives, the decision of the House of Representatives becomes the decision of the Diet.
After Diet approval, Cabinet allocates the budget to the heads of the ministries and agencies. These organisations are not allowed to use the appropriation budget for objects other than those provided in the respective items.
2.2 PROVISIONAL BUDGET
Where the budget for a particular fiscal year is not passed by the Diet by the start of that year, Cabinet may submit a provisional budget to the Diet covering necessary expenditures until the budget is finally passed.
The provisional budget requires the Diet's approval as does the regular budget. The expenditures to be included in the provisional budget are limited to the minimum requirements for the period up to the approval of the regular budget. The provisional budget is absorbed in the regular budget on the latter's approval by the Diet.
2.3 SUPPLEMENTARY BUDGET
A supplementary budget amending the regular budget is submitted to the Diet where compliance with the approved regular budget becomes impossible or inappropriate due to unexpected circumstances, such as natural disasters and changes in the economic situation. However Cabinet may submit such a supplementary budget only when additional expenditures are reasonably certain to occur after the regular budget has been approved by the Diet. Supplementary budgets have been prepared every year in the past, sometimes more than twice for a single fiscal year.
2.4 RESERVE FUND
In order to provide for unforeseen contingencies, Cabinet may include a reserve fund in the budget. This reserve fund is spent at the discretion of Cabinet. However it is necessary for Cabinet to obtain subsequent approval of the Diet for all payments from the reserve fund.
3.1 MINISTRY OF FINANCE
The Ministry of Finance plays a major role in formulating and executing national budgets. It is responsible for formulating budget bills by examining budget estimates submitted by the respective State ministers and making any necessary adjustments. The Ministry exercises strong controls over annual expenditures in these processes. In the budget execution stage, the Ministry also controls expenditures through approval of disbursement plans and fund transfers among budgeted items, and requests various reports. In addition, the Ministry of Finance prepares final accounts based on financial reports from the heads of ministries and agencies.
3.2 OTHER GOVERNMENT AGENCIES
The Management and Coordination Agency is responsible for controlling and studying the organisational structure, number of personnel, and is also responsible for inspecting administrative operations. In particular, the Agency monitors accountability of the executive branch by issuing recommendations based on the results of its inspections .
3.3 CENTRAL BANK
The Bank of Japan carries out a variety of financial operations to stabilise the currency value and to maintain credit through constant contact with financial markets. In its role as central bank, the Bank of Japan exclusively handles State treasury funds and also is in charge of the receipt, payment, and keeping of securities on behalf of the government.
The independence of the Board of Audit (SAI) is guaranteed by the Constitution. The Board of Audit consists of the Audit Commission which is a decision-making instrumentality, and the General Executive Bureau which is an executive instrumentality. The Audit Commission consists of three commissioners who are appointed by the Cabinet with the consent of both the House of Representatives and House of Counsellors, and attested by the Emperor. The term of office for each commissioner is seven years, with individual positions guaranteed to ensure independence in the operations of the Board of Audit.
The Audit Commission is chaired by the President, who is appointed by Cabinet based on mutual election among the three Commissioners. As the final decision-making instrumentality, the Audit Commission supervises the General Executive Bureau by deciding important matters such as the enactment of the regulations and rules of the Board, the matters subject to audit by the Board, matters to be reported in its annual Audit Reports, and the appointment of staff members.
The General Executive Bureau (GEB) is responsible for conducting audits under the supervision of the Audit Commission. This bureau consists of the Secretariat and five constituent bureaus with a total of 39 divisions. The Secretariat manages general affairs, including personnel management and accounting, and is also engaged in the adjudication and settlement of claims against the government.
The number of staff of the Board of Audit is determined by the Board itself, as the law relating to the number of personnel in the Executive Branch is not applicable to the Board of Audit. This exemption also contributes to the independence of the Board of Audit, in conjunction with its independence in personnel management.
The accounts and organisations subject to audit by the Board of Audit are categorised:
The Board of Audit prepares an annual Audit Report which is submitted to Cabinet. The Cabinet sends the Audit Report to the Diet in the fiscal year following the year covered by the Report, together with the statement of revenue and expenditure accounts audited by the Board of Audit.
The Audit Report is required to cover the following matters:
4.1 RELATIONSHIP WITH THE DIET ACCOUNTS COMMITTEE
The final accounts of State revenue and expenditure are submitted to the Diet and considered by its Accounts Committee. As these accounts usually include no more than simple figures and a short statement, it is difficult for members of the Diet to determine the appropriateness of the budget execution. Accordingly, the Audit Report of the Board of Audit is a valuable source of information for the Diet Accounts Committee in considering the appropriateness of the budget execution. During its examination of the final State accounts, members of the Diet Accounts Committee question heads of ministries and agencies-and related parties-who exercise supervisory and monitoring functions vis-a-vis the financial activities of the executive branch. Senior officials of the Board of Audit attend these meetings of the Diet Accounts Committee, explaining audit results and expressing opinions on the final State accounts before Committee approval.
5.1 PRESENT BUDGET SYSTEM
As the first step in budget formation, at the end of July Cabinet determines overall limits and other guidelines for the budget requests of ministries and agencies for the following fiscal year. Ministries and agencies then submit their budget requests to the Ministry of Finance at the end of August in accordance with these guidelines. The formal budget formation process starts at the beginning of September. These guidelines, which are set to limit the amount of budget requests to a certain percentage of the budget of the previous fiscal year, are in fact upper limits ("ceilings").
Budget ceilings were first introduced in the fiscal 1961 budget formation. Although these ceilings originally had a relatively loose framework, they gradually became more rigid, with fixed or minus ceilings being recently introduced to limit increases in requests for budget funds.
As stated above, the Japanese budget formation process now begins with the setting of overall limits, with subsequent budget requests restricted to these set limits. However, although the budget indicates amounts by expenditure items such as personnel and equipment expense, there has been some criticism that the budget does not show the total costs of certain projects. Estimated expenditures are shown only for single fiscal years.
5.2 BUDGET CLASSIFICATION
The national budget of Japan consists of the General Account and 38 Special Accounts, all of which are submitted to the Diet for approval.
GENERAL ACCOUNT: The General Account which directly reflects the policy of the government, includes expenditures for major government activities such as social security, education, defence, public works, economic cooperation, and energy. Most national tax revenues are budgeted as General Account.
SPECIAL ACCOUNT: A Special Account is established by law where the State government carries out a specific undertaking, or holds a specific operating fund, or where it is necessary to manage a fund separate from the General Account by appropriating specific revenues for specific expenditures. The special accounts have specific revenue sources such as tax revenues from public corporations, social insurance premiums, and interest from government loans.
6.1 PLANNING
The Japanese budgetary system employs a single fiscal year system and does not prepare mid-term or long-term fiscal plans. However, major government projects have their own mid or long-term operational plans which incorporate cost estimates for mid or long-term project implementation. For example, the Defence Agency has established the Mid-Term Defence Capability Improvement Plan (five years) starting from fiscal 1986. This midterm plan sets specific targets for the enhancement of its defence capability as well as expenditure estimates to accomplish these targets. The national five-year Road Improvement Program of the Ministry of Construction, and the Comprehensive Land Development Plan of the National Land Agency, are also examples of such long-term plans.
6.2 ORGANISATION AND ROLE OF BUDGET MANAGEMENT DEPARTMENTS
Responsibility for government budget formation and control is vested in the Budget Bureau of the Ministry of Finance. Headed by the Director, the Budget Bureau consists of six divisions of administrative services, such as the coordination division and research division, and twelve budget examiners. A budget examiner is an official ranking equal to a divisional director, with a pivotal role in government budget formation which is normally carried out in separate groups handling different ministry/agency budgets. One budget examiner is responsible for budget formation for two or three government organisations.
In the yearly budget formation process of the Ministry of Finance that continues from September to December, rough budget requests submitted by ministries and agencies are first examined by lower ranking staff of the Budget Bureau, then reviewed by assistant budget examiners and budget examiners. The budget examiner examines individual budget requests from higher government policy viewpoints. The final draft of the budget is determined in the Budget Bureau meetings held from October to November. Budget examiners also control the execution of budgets by requesting ministries and agencies to submit specific budget execution programs, and by reviewing expended appropriations of individual ministries and agencies.
6.3 BUDGET STEPS
The first step of budget formation is a Cabinet meeting in July where the basic guidelines for budget formation are approved. Ministries and agencies submit their budget requests for the next fiscal year to the Ministry of Finance by the end of August. After receiving these requests, the Budget Bureau conducts hearings from the organisations concerned, requesting them to show the necessary data to justify every item included.
In late December, taking into account the Economic Planning Agency's economic forecast and other information, the Ministry of Finance prepares a draft budget and submits it to the Cabinet for approval. In parallel with this process, the Ministry of Finance notifies each ministry and agency informally of its budget authorisation. At the end of December the Cabinet approves the Ministry of Finance budget draft as the Government budget estimates.
The Ruling Party also exerts strong influence over the budget formation processes and the Ministry of Finance budget authorisation process. Each ministry and agency endeavours to obtain the support of the Ruling Party for their specific policy-oriented budget. The Ruling Party's Policy Affairs Research Council has several divisions which function as watchdog groups for government agencies. In its budget formation processes, the Ministry of Finance considers and adjusts the requests from the Ruling Party. The Government's budget guidelines are adjusted in accordance with the budget guidelines prepared by the Ruling Party.
The government budget estimates are first submitted to the House of Representatives in late January and to the House of Counsellors at the beginning of March. The following chart shows the budget formation process.
6.4 ROLE OF MINISTRIES AND AGENCIES IN BUDGET PROCESS
As described earlier, ministries and agencies make rough estimates of requests based on their respective policy priorities. These estimates lay the foundation of budget formation for the next fiscal year.
The National Personnel Authority, an independent public sector agency in charge of government personnel management, recommends salary increases by referring to comparable levels in the private sector. The government, in principle, is obliged to comply with such recommendations by including them in the proposed budget.
The Economic Planning Agency also plays an important role in budget formation. In implementing economic policy, the government establishes a short-term economic forecast and specific policy implementation strategies- along with long-term policy-as the basis of national economic plans. For this purpose, the Economic Planning Agency presents Cabinet with an annual "Economic Forecast and Basic Direction of Economic Policy" for approval. This document, usually for the following fiscal year is prepared during the period late December to January when budget formation work reaches its maximum. Accordingly, the economic forecast of the Economic Planning Agency is used as basic information by government agencies, not only for budget formation but also for basic economic policy planning. The forecast is modified from time to time in response to changes in the political and economic environment to allow flexible economic policy management.
7.1 ROLE OF MINISTRIES AND AGENCIES IN EXPENDITURE AND REVENUE CONTROL
After Diet approval of the budget, Cabinet allocates the agreed amounts of revenue, expenditure and public debt to the heads of the ministries and agencies responsible for budget implementation. These heads control the respective annual revenue and expenditure budgets under their jurisdictions. Actual budget execution is, however, carried out by the accounting departments in each organisation. To secure checks and balances in budget execution, the Government accounting system has clear dividing lines between the functions of decision-making and its execution. As for revenue collections and expenditure payments, relevant decisions are made by the various section heads and staff concerned.
The heads of the ministries and agencies also have to prepare payment plans and submit them to the Ministry of Finance for approval. The Ministry of Finance approves the plans taking into account relevant factors such as treasury fund balances, annual revenues and the financial market situation. The Ministry of Finance also notifies the Bank of Japan of payment plans which are made by disbursement officials issuing cheques drawn on the Bank of Japan.
State revenues must be collected or received in accordance with the provisions of applicable laws and regulations. Similarly, contracts must be fulfilled in accordance with the laws and regulations, in addition to compliance with budgetary provisions.
7.2 INTERNAL AUDITING
The Ministry of Finance inspects ministries and agencies in order to monitor and ensure appropriate budget execution, giving such directions as may be necessary. Each ministry or agency has its internal audit section, which is responsible for the internal control and answerable to the minister. The practice of internal audit differs widely between these institutions. Although internal audit has been generally strengthened, it is not yet satisfactory in many cases. The Board of Audit often makes suggestions for the improvement of internal audit in individual ministries and agencies.
8.1 ROLE OF MINISTRIES AND AGENCIES
It is mandatory for the accounting departments of ministries and agencies to maintain a revenue ledger, expenditure ledger, and payment ledger to record relevent details of budget implementation. The accounting departments submit monthly budget execution reports to the heads of the ministries and agencies while these, in turn, submit monthly budget execution reports to the Finance Minister and the Board of Audit.
The Japanese Government recently introduced the Automatic Accounting System which connects computer terminals in the ministries and agencies with the mainframe computers in the Ministry of Finance Accounting Centre. The national budget and public debt are controlled using consolidated reports from this facility.
Regarding project evaluation, the headquarters of the various ministries and agencies make their own determinations through project planning, budget making, and preparation of guidelines. Projects are normally implemented by branch offices of these ministries and agencies or delegated to local governments. However headquarters are normally responsible for guidance and supervision of program execution and evaluation.
The accounting system of the Japanese Government mainly consists of systems to execute annual revenue and expenditure budgets. As mentioned previously, the revenues and expenditures involved are accounted for by means of the General Account and 38 Special Accounts. The former is an account to manage general revenues and expenditures of the State. This account receives taxes and public bond sales as revenue and expends for basic government administration such as social welfare, education and defence.
The Special Accounts, on the other hand, are established by law to enable the Government to run specific entrepreneurial projects or to hold funds for specific purposes. Accordingly, the expenditures of a Special Account are normally met by the revenue earned by that Special Account.
9.1 TYPE OF ACCOUNTING SYSTEM
The General Account is maintained basically on a cash basis. Accordingly no profit and loss statements or balance sheets are prepared. The reason is that the nature of the government activities reflected in the General Account, such as education, defence, or economic co-operation, does not lend itself to profit calculations in the private sector sense.
The Special Accounts are divided into two types. Special Accounts of the first type do not involve preparation of profit and loss statement, as in the case of the General Account. In contrast, Special Accounts of the second type, which relate to 22 public enterprises, produce profit and loss statements on an accrual basis together with the revenue and expenditure statements on a cash basis.
9.2 ACCOUNTING LAWS AND REGULATIONS
The principles and procedures for Japanese Government accounting are defined by laws and regulations. Fundamental matters are regulated by the Finance Law and the Accounts Law, and detailed accounting procedures are specified in an ordinance on budgets and the settlement of accounts. Some other ordinances and regulations are also relevant.
These accounting laws and regulations are also partly applied to the Special Accounts for public enterprises which are required to be maintained on an accrual basis.Compliance with those laws and regulations, which mainly relate to accounting on a cash basis, is inadequate for these enterprises, which must prepare periodic profit and loss statements on an accrual basis. Accordingly, accounting principles and procedures on an accrual basis are defined by special laws and applied to these enterprises.
9.3 OTHER ACCOUNTING PROCEDURES
In addition to systems for revenue and expenditure accounting, there are other systems for the management of credits, debts, commodities, and State real estates. The Credit Management Law, Commodity Management Law, and National Real Estate Management Law stipulate the principles and procedures governing these operations for the proper acquisition, use and disposal of national assets. The increases or decreases of credits, debts, goods, and national assets, and their current amounts at the end of the each fiscal year, are also reported by ministries and agencies.
Profit and loss statements are not prepared for the General Account, and Special Accounts other than those for public enterprises. Accordingly neither depreciation nor bad debt reserve is provided in these accounts. Therefore credits, commodities, or State properties shown in year-end financial statements do not reflect real values.
9.4 ACCOUNTING STANDARDS
As stated earlier, government accounting principles and procedures are detailed in relevent laws and regulations. Accordingly, it is considered that there is no need to have separate accounting standards in Japan.
10.1 PREPARATION OF FINAL REVENUE AND EXPENDITURE ACCOUNTS
The heads of ministries and agencies prepare the final revenue and expenditure accounts under their jurisdictions, together with statements of other accounts such as those for government debt for each fiscal year. These accounts are submitted to the Ministry of Finance by July 31 of the following year.
The Ministry of Finance prepares a comprehensive and detailed statement of revenue accounts based on the various reports from the ministries and agencies. The Ministry of Finance also prepares a statement of revenue and expenditure accounts based on the individual revenue statements and expenditure statements submitted by the ministries and agencies.
In the process of preparing the annual statement of revenue and expenditure, the Ministry of Finance verifies its correctness by reconciling the relevent figures with those in the revenue ledger and expenditure ledger based on the monthly revenue and expenditure reports submitted by ministries and agencies. The Ministry of Finance's revenue and expenditure ledgers, which are the basic documents for preparation of Government revenue and expenditure accounts, are closed at the end of July each year in the presence of the officials of the Board of Audit.
10.2 VERIFICATION OF ACCOUNTS BY THE BOARD OF AUDIT
The Cabinet submits the statement of revenue and expenditure accounts to the Board of Audit, together with statements of revenue, statements of expenditure, statement of multi-fiscal year expenses, and statement of government debt.
Government ministries and agencies are obliged to submit monthly revenue and expenditure statements to the Board of Audit in accordance with the Accounts Verification Regulation. After examining these statements, the Board of Audit prepares its own final statement of accounts which is subsequently used to verify the statement of revenue and expenditure submitted by Cabinet. The Board of Audit reports the result of its verification of the final statement of accounts in its annual Audit Report and sends it to Cabinet.
10.3 SUBMISSION OF STATEMENT OF REVENUE AND EXPENDITURE TO THE DIET
The Cabinet submits to the Diet the statement of revenues and expenditures verified by the Board of Audit together with the Audit Report prepared by the Board of Audit, usually in the regular session of the Diet convened in December of the following fiscal year.
11.1 ROLE OF THE SAI
Article 90 of the Japanese Constitution stipulates that: "Final accounts of expenditures and revenues of the State shall be audited annually by the Board of Audit and submitted by the Cabinet to the Diet, together with the statement of audit, during the fiscal year immediately following the period covered. The organisation and competency of the Board of Audit shall be determined by law".
11.2 ACCOUNTS COMMITTEE
The deliberations on the statement of the final revenue and expenditure accounts in the Diet starts from the plenary sessions of both Houses, where the Finance Minister outlines the final accounts and answers questions raised by the Diet members. The statement is subsequently referred to the Accounts Committees of both Houses.
The Accounts Committee in each House is one of a number of standing committees. The committee in the House of Representatives consists of 25 members, and that in the House of Counsellors 30 members. Both committees start with the outlining of the final revenue and expenditure accounts and the Audit Report by the Finance Minister and the President of the Board of Audit respectively, followed by consideration of the final accounts of each ministry and agency.'
11.3 DIET RESOLUTION ON THE FINAL ACCOUNTS
Each House of the Diet deliberates on the final accounts separately to exercise post facto financial supervision of the Cabinet. Accordingly, the resolution of the one House is not sent to the other, and the resolutions of the both Houses on the same matter are often different. For example, while one House may point out an irregularity, the same matter may not be considered an irregularity by the other House.
When each House adopts resolutions on the final accounts, the chairman of each House sends the resolution to the Cabinet. The resolutions are transmitted by Cabinet to the Finance Minister. The Finance Minister conveys these resolutions to the heads of the ministries and agencies, along with his requests to observe the resolutions and prevent repetition of any irregularities in the final accounts reported in the resolutions. However resolutions on the final accounts by the two Houses of the Diet are not in the nature of remedial action to be taken by the Executive.
In the following regular Diet session, in his written statement to the chairman of the House of Representatives the Prime Minister reports the measures which were taken by ministries and agencies based on the resolutions of the House of Representatives. However the measures taken by ministries and agencies, based on the resolutions of the House of Counsellors, are normally reported by the Finance Minister to the Accounts Committee of the next regular session of the Diet.
The efficient allocation of resources in the Japanese Government is imperative, especially in the present adverse economic and budgetary environment. Under these circumstances, the Japanese Government needs more advanced financial accountability and management systems. Although the Board of Audit contributes to achieving enhanced efficiency in public sector resource allocation, additional measures are required by other instrumentalities in the relevant decision-making and related processes of Government.