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Japan's Economic Stimulus: How Long Can It Help?

Posted by: Kenji Hall on April 10, 2009

Back in the late 1990s, Japan doled out billions of dollars for public works to revive its flagging economy. But the pork-barrel spending was never popular with economists. Many criticized lawmakers for building roads and bridges “to nowhere” and creating jobs that disappeared once the projects were finished.

So how do economists think Prime Minister Taro Aso’s administration should spend 15.4 trillion yen ($154 billion) announced today as part of a big stimulus package of tax breaks and deregulatory measures? Oddly enough, public works—and lots of it.

But pouring money into roads and bridges in rural areas where there are few residents is the last thing Japan should do, economists say. Instead of focusing simply on getting job seekers back into the work force, the government has to make sure it gets the most out of its stimulus. For example: Spend it on improving transport in and around Japan’s densely populated commercial centers, such as Tokyo, Osaka and Fukuoka, on the southern main island of Kyushu, or in Aichi prefecture, where carmaker Toyota has its headquarters. “The economy is collapsing mainly in the urban areas,” says Barclays Capital economist Kyohei Morita. Those kinds of projects are also attractive because they could pay for themselves and boost Japan’s cachet as a business hub in Asia, others say.

Some of the government’s proposals point to that. There’s talk of lengthening the runways at Haneda airport in Tokyo and building a fast train link to halve the travel time between Haneda and the more distantly located Narita airport. Upgrading roads to relieve the congestion problems along thoroughfares that ring Tokyo and other big cities would be worthwhile, too. Much of the rest of the stimulus package, valued at 56.8 trillion yen ($568 billion), aims to help companies get emergency funding as well as tax breaks that encourage the elderly to pass on some of their wealth to their children to buy homes.

But Parliament has to approve the measures, and there’s still time to haggle over the details. Another wild card: The government has to hold a national election by September. Lawmakers in the ruling coalition could be tempted to buy rural votes with promises of public funds for big projects, diverting money from urban areas.

For now, the sheer size of the package—along with the combined 75 trillion yen ($750 billion) of the three previous ones passed in recent months—should give the economy a jolt. Deutsche Securities had previously estimated that Japan’s real gross domestic product in the current fiscal year through March 2010 would shrink 7.6%. The extra spending could lessen the contraction to 5.5%, Deutsche’s economist Mikihiro Matsuoka wrote in a report.

But that’s just over the next year. “It would be insufficient to steer the economy back to a recovery path in the face of the current steep slide in growth,” according to Matsuoka. To keep the economy from worsening again, the government would have to budget similarly huge public expenditures over the next couple of years, he said. Japan’s central bank, The Bank of Japan, “probably thinks that the Japanese economy cannot return to sustainable growth without a rebound in the global economy,” JP Morgan economist Masamichi Adachi wrote in a note to investors.

The problem with just spending its way out of the recession is, Japan already has a huge amount of debt, estimated to be near 200% of GDP. (As of 2006, the U.S.’s debt was above 60% of GDP and for European countries that use the single currency it was 75%, according to the OECD.) Tokyo will soon need to take a more disciplined approach to its finances. Japan has poured more than $6 trillion into public works projects between 1991 and September of last year, before the first of the government’s stimulus packages, according to Cabinet Office statistics.

Many economists think Tokyo should invest the money to nurture new industries, not try to save old ones. Some of the loan guarantees might keep small and mid-sized businesses going for a year or two. But when the money runs out, then what? Bankruptcies often rise a couple of years after a stimulus package of this nature, said Fujitsu Research Institute economist Martin Schulz, and Tokyo could be setting itself up for a similar result.

Some had hoped Tokyo would come up with a three-year plan and channel more money to green technologies such as solar panels for schools and homes and eco-friendly gas-electric hybrid cars. Those are areas where Japan has led the world and could add to its advantage with some subsidies from the government. The country used to be the leader in solar energy use but it has struggled to regain its top spot after Germany jumped ahead a couple of years ago. Critics of a so-called Green New Deal say that while it would benefit the high-tech industry, it probably wouldn’t create many jobs since many of the processes for churning out these products are highly automated. The idea of a three-year plan has since been shelved and spending on green tech appears to be only a small part of the package.

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Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.

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