Bullet Trains to Nowhere?

This time of year the Joetsu Line, a bullet train, or shinkansen to Niigata prefecture from Tokyo, is packed with skiers. They head by the thousands to the old hot springs resort in the mountains east of the Sea of Japan, to the "Snow Country" made famous by Japan's Nobel laureate in literature Yasunari Kawabata.

The Joetsu Line was the original "shinkansen to nowhere" – nowhere being a fair approximation of what Niigata was to the average Tokyoite back then. But then the JR East Railroad Co. extended the Joetsu line to the Yuzawa Hot Springs, where entrepreneurs have opened some 20 ski megaplexes spanning several parks. Suddenly nowhere had become somewhere.

The Joetsu shinkansen line opened in 1982, which shows that Japan's preoccupation with building railroads, roads, bridges, dams, art museums, airports and concert halls, long predates the collapse of the Bubble Economy in 1989 and long years of fairly stagnant growth that followed. And contained this long-lived burst of construction are the seeds what the new US administration of Barack Obama is trying to do in the US. Although Japan has been criticized for the plethora of construction projects, the fact is that they did play a role in propping up the economy, something Republicans in the US would do well to listen to.

During the post bubble years various Japanese governments passed numerous economic stimulus packages, all of which contained a considerable amount of spending on public works. As Japan faces perhaps its most serious economic downturn since the war, it has returned to tried and true pump-priming.

This month the Diet passed the Second Supplementary Budget, which is aimed at boosting employment (the first, passed in July, was directed at ameliorating rising crude prices).Combined with the fiscal 2009 budget now under consideration it contains emergency measures worth Y75 trillion (US$800 billion).

The second largest fiscal 2009 expenditure after social security, accounting for about ¥7 trillion is public works expenditures. It is well ahead of defense spending which is pegged at ¥4.7 trillion. It will be financed in part by increase in borrowing, which will boost the country's bonded indebtedness to ¥581 trillion.

When combined with the borrowings of local governments, the outstanding debt balance zooms to more than ¥800 trillion, or 157 per cent of the country's gross domestic product, the highest such ratio in the developed world. In the coming budget about ¥20 trillion alone will be spent on debt service.

By contrast, as part of his overall stimulus plan, Obama proposes to spend about half that -- US$355 billion over two years -- building roads and other infrastructure projects, the biggest American infrastructure program since President Franklin Roosevelt's public works projects in the Great Depression of the 1930s.

Unlike in the US, however, public works spending has been a major part of Japan's national and local budgets for many years. The spending has accelerated in the nearly 20 years since the end of the Bubble Economy as successive governments have passed first, second, even third supplementary budgets to try to juice the economy.


One reason is that construction accounts for more of Japan's economy than in the US. There are some 500,000 construction companies throughout the archipelago. Japan has sometimes been called the "doken dokka" or the construction state, a reference not only to the magnitude of the activity but also the cozy relationship between contractors and the politicians that keeps the pork rolling.

For years politics in Japan was largely dictated by an iron triangle of politicians, contractors and bureaucrats, which helped keep everyone either in power or employed. Then the Liberal Democratic Party (LDP) was largely a rural-based organization. Thousands of small construction firms soaked up a lot of rural labor, while in the cities white collar workers benefitted from life-time employment practices of Japan's large corporations.

Of late, the LDP has become much more of an urban party, less dependent on rural votes. Meanwhile, the pressure of low-cost Asian competition has weakened the system of providing security in exchange for loyalty. Corporations hired legions of "freetas" or temporary or part-time workers, and are now shedding them wholesale. And their plight is not easily ameliorated by building more bridges.

"The whole argument that the government spends too much on infrastructure is ridiculous," says longtime commentator Gregory Clark. "There is a serious lack of domestic demand in Japan, and somebody has to fill the consumption gap. Fortunately, it has been filled by government spending, some for welfare, and some for public works."

Clark argues that when the government was spending freely, the Japanese economy tended to improve. "The country was on upward trajectory after the Bubble Economy collapse until 1996 when the country posted four per cent annual growth, largest in the developed world." The ever increasing national debt is inevitable to fill the gap in domestic consumption, he maintains.

There has been a kind of ebb and flow tension in the past two decades between the spenders and the fiscal hawks. It is a drama played out almost entirely within the LDP, which has been in power virtually without interruption all of those years. Until its recent capture of the upper house of parliament, the opposition has added little to the debate.

Former premier Kiichi Miyazawa (1991-1993) was a committed Keynsian believer in pump priming. Under his administration Japan passed a stimulus package, equal to about $85 billion, much of it earmarked for public works, in order to turn Japan into a "lifestyle superpower").

In 1995 the government headed by socialist Tomiichi Murayama (though supported and dominated by the LDP), rolled out a $137 billion stimulus plan, much of it too destined for public works (augmented by massive reconstruction aid for Kobe following the deadly Hanshin Earthquake).

Former Prime Minister Junichiro Koizumi (2001-2006) vowed to "destroy the LDP", by which he meant taking direct aim at the politician-bureaucrat-contractor nexus. He managed to privatize some state assets, such as the postal service, forced banks to acknowledge their debt problems and advocated a policy of spending restraint. He set a goal of achieving a balanced budget by 2011.

Prime Minister Taro Aso falls mainly into the category of spenders, but the influence of "Koizumi's children" in the party continues to restrain him. In defiance of the ruling party stalwarts, he insisted on writing into the 2009 budget the idea of raising the consumption tax (now 5 percent) from fiscal 2011.

But this is seen mainly as a sop to the fiscal conservatives left in the party. Given Japan's dire straits (the Bank of Japan now says that economy is projected to contract by two percentage points in 2009), it is far from certain that he can achieve that goal. Meanwhile, any thought of a balanced budget by 2011 has gone by the board.