Japan Agrees Record Draft Budget

China may have eclipsed Japan to take on the role as the world’s second largest economy, but that doesn’t change Japan’s place in the word in economic terms to any significant extent.

Japan has been suffering from deflationary pressure for much of the last twenty years since the collapse of the Japanese property bubble. Prices have been in decline for the last 20 months, a trend which tends to dissuade people from making purchases of big ticket items now because they now they will be cheaper in a few months time. Japanese unemployment stands at a post World War 2 record high of 5.1%; interest rates are extremely low and public debt is the highest in the developed world (in terms of GDP ratio).

Against this backdrop, the Japanese government has given approval to a draft budget worth 92.4 trillion Yen ($1.1 trillion). Of this sum, 55% will be used for social security spending and for servicing the nation’s debt. A further 18.2% is earmarked for local authorities. The rest of the budget will be spent on public work projects; education; technology and defence spending. The administration intends to hold new borrowing at 44.3 trillion Yen in 2011; the same level as this year. The budget must be passed by parliament before the end of March 2011 to come into effect.

The Japanese public debt is expected to reach approximately 184% of the nation’s GDP by the end of March. It is estimated that it will be 891 trillion Yen ($10.8 trillion) and servicing the debt is a major drain on the nation’s finances. Tax revenues for the next fiscal year will net about 41 trillion Yen and a further 4.2 trillion Yen can be raised from special reserves.