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

Author

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  • Georg Erber
  • Mechthild Schrooten

Abstract

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.

Suggested Citation

  • Georg Erber & Mechthild Schrooten, 2011. "Japan at the Crossroads: State Budget Remains the Achilles' Heel," DIW Economic Bulletin, DIW Berlin, German Institute for Economic Research, vol. 1(2), pages 16-21.
  • Handle: RePEc:diw:diwdeb:2011-2-5
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.377108.de/diw_econ_bull_2011-02-5.pdf
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    More about this item

    Keywords

    Japan growth; fiscal stability; tsunami-quake impacts; nuclear. - accident;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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