TOKYO: What do you buy the nation that already seems to have everything?
That is the question facing Japanese Prime Minister Shinzo Abe as he aims to spend more than US$100 billion on infrastructure in the next 15 months to help revive his country’s economy. But with its gleaming bullet trains, jungles of elevated highways and strings of man-made islands, ultra-modern Japan doesn’t appear to want for much.
“We cannot simply continue to build roads and infrastructure the way we used to at a time when the population is ageing and shrinking,” says Takayoshi Igarashi, a public policy professor at Japan’s Hosei University who has advised the previous Democrat administration on rebuilding from the 2011 earthquake, tsunami and Fukushima nuclear accident.
Infrastructure spending tops Abe’s economic agenda alongside nudging the central bank into more aggressive steps to end deflation. Since he took power in December, Abe has earmarked 10 trillion yen (US$107 billion) for new infrastructure and upgrades over the next 15 months – half of it funded by government debt.
That is equivalent to a quarter of the amount that the Organisation for Economic Cooperation and Development estimates the entire world needs to spend on transport infrastructure each year.
Government spending is a classic remedy for weak growth. But it is one Japan has tried over and over – pouring roughly $2 trillion into concrete and steel since 1990 in a vain effort to resuscitate the economy, now in its fourth recession since 2000.
Economists warn that, without reforms to lift Japan’s long-term growth potential, more such spending will produce only a temporary jolt that swells a government debt already worth more than double national output.
“The impact should be substantial but also a short-term one,” said Tomo Kinoshita, chief economist at Nomura Securities in Tokyo. Kinoshita estimates that every 10 trillion yen of spending would add only about 11 trillion to GDP.
But even getting that sort of bang for the buck will be difficult, because so much has already been built. Though Abe swept to power promising to wield a new broom, his Liberal Democratic Party’s decades-long addiction to concrete has left Japan bristling with reminders of the pork-barrel policies that have helped establish its political dominance since 1955.
The world’s 61st largest country, Japan has 1.2 million km of roads, the world’s fifth-largest network. It has 680,000 bridges, almost 10,000 tunnels, 250 bullet trains and 98 airports. Government critics have long derided many as white elephants – unnecessary, costly and environmentally harmful.
The airport in Ibaraki, 85 km north of Tokyo, for example, opened in 2010 at a cost of about US$225 million as a hub for low-cost carriers. Today, it handles just six flights a day. Construction of the nearly US$5 billion Yanba Dam in northwest Japan began in 1967 to help power the needs of a growing population. With Japan’s population now shrinking, it remains unfinished 45 years later.
When the Democratic Party ousted the LDP in 2009, it tried to shelve such projects as part of a campaign to cut waste and shift the government’s focus “from concrete to people”.
Abe’s government says it may be resurrecting public works, but not past mistakes. “We need to keep in mind that there are benefits when infrastructure is being built, but maintenance costs and debt remain after the projects are completed,” Economics Minister Akira Amari told a recent TV talk show. “We won’t do public work projects only for the sake of building.”
The bridge and tunnel crowd
But if building more “white elephants” is out of the question, the government risks missing its spending goals and it could fail to achieve the desired stimulus. In short, it is unclear just what Japan needs to spend US$100 billion on.
That sum is roughly four times the 2.466 trillion yen (US$26 billion) spent to build the Kansai international airport on an artificial island off Osaka. A 10-year project to build a 254-km stretch of highway by Mt. Fuji will cost just $47 billion, says its operator Central Nippon Expressway.
That means Abe’s 10 trillion yen is enough to build another 500 km of expressways, four major international airports or 20 dams.
And the plan doesn’t include 6 trillion yen the government has added to its 19 trillion yen post-quake reconstruction budget, just over half of which has been spent.
Yet the money represents only what Abe hopes to spend by April 2014. He has suggested spending similar sums every year for a decade – if he holds onto power that long. With the private sector and local communities expected to match government investment, this would add up to 200 trillion yen (US$2.16 trillion) over 10 years – or roughly 40 percent of GDP.
Abe says the goal is to spur growth and improve Japan’s ability to withstand disasters such as the quake and tsunami that hit Japan in March 2011, killing nearly 20,000 people.
Many of Japan’s roads, bridges, tunnels and dams were built during the post-war boom and need fixing, as tragically illustrated in December when a 1970s era tunnel 80 km west of Tokyo collapsed, killing nine people.
But a study published in 2010 by Japan’s Land Ministry estimated that costs of upgrading Japan’s infrastructure, which generally include making structures more disaster-resistant, would keep rising and add up to 190 trillion yen by 2060. But annual outlays, including repairs and maintenance, would be reaching just over 5 trillion yen – half what Abe plans to spend – by the end of this decade.
Investing in unnecessary infrastructure, beyond what is necessary to keep Japan safe, makes little economic sense, said Atsushi Miyawaki, public policy professor at Hokkaido University. “There is a question of how much contribution to the economy would come from massive domestic investment,” he said.
Economists also question whether the government could borrow as much as Abe will need. “We should not take the 200 trillion yen figure at face value, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
“I don’t think that’s realistic.”
Built it, but they wont come
It is not even clear who would use all of the new infrastructure, or even who would build it.
Thanks to Japan’s low birthrate, the population is declining by more than quarter of a million a year, government statistics show, with its working-age population shrinking at double that pace. According to Health Ministry projections the number of Japanese is expected to fall by nearly a third, to below 90 million, by 2060.
That means fewer cars on Japan’s roads. Japanese automotive research company Fourin Inc. estimates car sales in Japan will fall from nearly 5.4 million last year to 4.5 million in 2020, and to about 3 million a year by 2040.
Japan’s construction workforce is also shrinking: today it is a third smaller than in 1997 and building firms are already having trouble finding workers to rebuild areas from the 2011 disaster.
