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Japanese Budget Thrown Into Disorder

The election of the new more liberal government in Japan this year has led to major proposed changes in their overall budget and defense spending. The decision to delay spending on the PATRIOT PAC-3 air and missile defense system has already been discussed. The new budget is reflecting a proposed shift to more social spending and less on the military. This may disrupt plans for purchases of equipment and contracts with U.S. and other defense contractors.

The budget that was approved on Christmas Day is a record $1 trillion (92.3 trillion yen) which relies on borrowing about $480 billion. This plan will increase the total public debt to almost twice the Gross Domestic Product (GDP) of Japan. Prime Minister Yukio Hatoyama's plan shifts funding from public works to more social programs reflecting a promise to spend money on people rather then businesses.

The Asian nation has been struggling with its economy in doldrums since the Nineties with the different governments trying to spend on public works to spur the economy. Over the last several years Japan has also been investing in its military to counter developments in North Korea.

One part of the defense program that has already suffered is the submarine building program. For the last several years Japan has ordered one submarine a year alternating between Mitsubishi Heavy Industries and Kawasaki Shipbuilding. This year no submarine was purchased meaning Kawasaki missed out on their turn. The Japanese Maritime Self Defense Force (JMSDF) also plans the 2010 order to be competitive which puts the two companies at odds. The recession has made them very dependent on this work and two years without a contract will have a negative affect on the companies prospects.

Another company that is being affected by the drop in the Japanese defense budget is Fuji Heavy Industries. Eight years ago they signed a contract to build AH-64 Apache attack helicopters with the plan to buy about sixty-two aircraft. Fuji had to invest in technology and equipment from Boeing (BA) in order to build the system but now the Government ended the contract after only ten deliveries. Despite discussions of fees and payments related to this termination the Japanese government stated recently that they would pay no more money to Fuji. They are now planning on suing to get back some of its money including that for the canceled aircraft.

Japan has signed several major contracts with U.S. companies like Boeing and Lockheed Martin (LMT). These include tankers and AEGIS missile defense systems for their destroyers. A long term decline in the Japanese defense budget might mean cutbacks in these systems as well. Japan has also discussed buying F-22 aircraft if foriegn sales were allowed. They also plan to buy the F-35 JSF. All of these plans could be affected if the Japanese economy continues its limp growth and the government stresses social program over infrastructure and defense spending.

Unfortunately many think that the Japanese system is the one that will eventually face the U.S. Right now the U.S. debt is about $12.1 trillion. The GDP in 2008 is estimated at $14.29 trillion so right now the debt is about ninety-five percent of GDP. Less then half of what it is in Japan. The annual deficit though has been increasing rapidly over the last two years as tax revenue falls and spending increases. It may end up that the U.S. may have to choose between spending on new defense items and social programs.

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