Bullet Trains to Nowhere

This time of year the Joetsu Line, a bullet train (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 less than two hours from Tokyo. 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.

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 week the Diet (parliament) passed the Second Supplementary Budget, which is aimed at boosting employment (the first, passed in July, was directed at ameliorating rising crude oil prices, hich now seems like ancient history).Combined with the fiscal 2009 budget now under consideration it contains emergency measures worth Y75 trillion or about $800 billion.

The second largest fiscal 2009 expenditure after social security, accounting for about Y7 trillion is public works expenditures. It is well ahead of defense spending which is pegged at Y4.7 trillion. It will be financed in part by increase in borrowing, which will boost the country’s bonded indebtedness to Y581 trillion.

When combined with the borrowings of local governments, the outstanding debt balance zooms to more than Y800 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 Y20 trillion alone will be spent on debt service.

For comparison, as part of his overall stimulus plan, U.S. President Barack Obama proposes to spend about $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 U.S., 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 the “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 the 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 of it 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. In 1996 the country posted four per cent annual growth, the 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 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 (through 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) switched courses. He 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 (sales) tax, now 5 per cent, 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.

The Toyota Shokku

Prime Minister Taro Aso postponed the general election that was widely assumed to follow soon after his election last September in order to concentrate on the deteriorating economy in Japan and to boost the Liberal Democratic Party’s election prospects. In the three months since his election, however, both the economy and his party’s prospects have deteriorated in tandem.

The Diet (parliament) convened on January 5, just after the traditional New Year holiday, an unusually early sitting, to consider the passage of the Second Supplementary Budget for fiscal2008 and the regular 2009 fiscal budget, both of which include multi trillion yen spending proposals and tax cuts to stimulate Japan’s economy.

Just how serious things are getting came home to many Japanese in late December when Toyota Motor Corp, announced that it would suffer its first operating loss since the company was founded just before World War II. Toyota is in some ways the flagship and symbol of “Japan Inc.”, and its difficulties are already being described as the “Toyota Shock”.

Of course, the global depression in the automobile industry is hardly limited to Toyota, and the company, is not running out of cash, like the American giants that successfully lobbied Congress for bridge loans. But the Honda Motor Company, too, saw its profits tumble and announced it was pulling out of Formula One racing to save money.

The prime minister tried to put a bright face on the economic situation with his first post holiday remarks: “the future is bright,” Aso said. They contrasted with the brutally realistic assessment of Toyota President Katsuaki Watanabe: “It is a kind of emergency we haven’t experienced before.”

To confront what Aso himself, in a more serious moment, calls a “once in a century recession” the government has tabled a yen 77 trillion ($830 billion) stimulus program of tax cuts, housing loans and direct spending, which by some accounts equals about 2 per cent of the nation’s gross national product. It compares with those bruited in the U.S. and announced in China:

In a separate action in December the Bank of Japan lowered its benchmark interest rate to .01 percent. The action followed the Federal Reserve’s motion to cut rates to near zero, Like the Fed, the Bank of Japan has also promised to pump more liquidity into the market, perhaps by buying corporate bonds or even by propping up the stock market.

As in the U.S., the supporters of the stimulus are promising quick action. By some accounts, the House of Representatives could pass the supplemental budget after only a debate lasting a week or so, sending it to the House of Councillors, now controlled by the opposition Democratic Party of Japan (DJP), which can stall passage by 30 days if it wishes.

In a difficult year, the U.S. has one advantage over Japan. For the most part, the politics are settled, allowing the new Barack Obama administration to concentrate on the economy with a considerable amount of bipartisan cooperation. In Japan, however, the politics are wildly unsettled. No one is even sure when a general election might be held, except that it must be held before September when the term for lower house members expire.

It seems as if the economy and the fortunes of the LDP have been deteriorating hand-in-hand. The Aso government’s public approval ratings now hover around 20 percent. There is an undercurrent of dissent and resentment inside the party. Several polls and analyses see the LDP losing a majority for the first time in 60 years and going into opposition after the election.

A former cabinet minister Yoshimi Watanabe broke party discipline to vote with the opposition on a motion calling on the premier to hold an immediate general election, a move obviously calculated to draw out opposition in the LDP and add to Aso’s headaches as party president. Watanabe is only one member, but a move to bolt or join the opposition could bring along followers.

And, of course, there remains the problem of a divided Diet, with the upper house in hands of the DJP and its allies. When it looked like Aso would call a snap election last year, shortly after assuming office, the DJP was inclined toward cooperation. When he postponed the election, DJP leader Ichiro Ozawa reverted to the previous tactic of obstruction. Ozawa accused Aso of doing nothing to solve the nation’s economic problems, creating a political vacuum.

The opposition parties have promised to cooperate in swift passage of the Supplementary Budget, provided that the government drops a provision to hand out yen 12,000 ($1,200), to every Japanese citizen. DJP leader Yukio Hatoyama has dismissed the yen 2 trillion program as “a waste of taxpayer money” and an obvious ploy to win popularity in the forthcoming election.

His voice is not alone. The Nikkei, Japan’s largest financial newspaper editorialized that “much of [the stimulus plan] looks like vote-getting rather than true economic effects.” Opinion polls show that the cash handout is surprisingly unpopular with the public too.

But the LDP seems determined to keep the cash handout in the stimulus plan using its big majority to jam it through the lower house. If he does that the opposition in the upper house will almost certainly delay final passage for 30 days, after which it would automatically become law as the lower house vote has priority on budget matters.

Aso’s stubborn determination to include the cash giveaway could cause him problems with his own members. LDP rebel Watanabe has said that its inclusion would be cause for him (and perhaps followers) to leave the LDP and form a new party.

The economic crisis has thrown virtually all fiscal restraint out of the window, with new spending supported by bonds, adding to the country’s huge national debt. As part of the budget proposal, Aso insisted on including language calling for an increase in the sales tax (called the consumption tax in Japan) in 2011 depending on economic circumstances. This example of fiscal probity is considered mainly a sop to the shrinking band of fiscal reformers, followers of former premier Junichiro Koizumi, still left in the party.

The official GDP projection for the coming year is zero (some private firms project negative growth), with the economy not beginning to show even a taste of any recovery until the end of 2009. But that might be too late to rescue Aso and the LDP.