By: Dr. Mike Campbell

The Japanese government has agreed a second emergency budget to cope with the aftermath of the 11th March earthquake and Tsunami which brought death and destruction to the northeast coast of the country. The new budget will provide a further 2 trillion Yen ($24.7 billion) of funding for reconstruction efforts and to provide compensation to those affected by the Fukushima nuclear power plant radioactive excursions. Some 85000 people had to be evacuated because of the nuclear accident.

Japan has the highest debt burden of any industrialised nation and it has decided not to go to the market to raise these funds. If lenders were to lose confidence in Japan’s ability to meet its obligations, the cost of servicing existing debts would rise as investors demanded more compensation to cover the higher perceived risk of the investment. Instead, the money is to come from savings from last year’s budget.

The budget will require parliamentary endorsement, but the opposition has indicated that this will be a formality. A 4 trillion Yen emergency budget was passed in May. It is likely that embattled Prime Minister, Naoto Kan, will step down once the funding is approved. He has been heavily criticised for his handling of the nuclear crisis and his position won’t have been strengthened by the resignation of his Reconstruction Minister, following some intemperate remarks after only a week in office.

News of the budget buoyed the Nikkei which closed at its highest level since the quake at 10082.48. Investors are optimistic that Japan will recover quickly from the natural disaster. However, the summer is likely to put further strain on the nation’s power supply as the use of domestic air conditioners spikes. If power shortages curtail manufacturing output the mood of optimism is likely to be short-lived.