Japan at the Crossroads - State Budget Remains the Achilles' Heel

Economic Bulletin of August 5, 2011

Japan at the Crossroads - State Budget Remains the Achilles' Heel (PDF, 190.22 KB)

by Georg Erber, Mechthild Schrooten in: DIW Economic Bulletin 2/2011

The natural and nuclear disaster on the 11th of March 2011 pulled Japan into a renewed recession. Projected on the annual basis, the gross domestic product nosedived by 3.5% in the first quarter of 2011. Indeed the consequences of the earthquake, tsunami and subsequent nuclear disaster will be very noticeable for the remainder of the year with regard to economic development. However, initial signs of a rebound have begun to appear in the meantime. Extensive public spending programs are currently sustaining the demand. Prior to the earthquake, the public debt was already approximately 200% of the gross domestic product and was rising rapidly. The government must harmonize duties, responsibilities and financial conditions; otherwise its room to maneuver in times of more "extreme events" decreases. Thus the Japanese government faces a dilemma: Increasing the tax burden, which is low when compared internationally, will have a negative impact on economic development. Fiscal consolidation and debt-financed economic growth are contradictory.