KEYNES, TRAINS AND AUTOMOBILES / THE ECONOMIST

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Japan’s economy

Keynes, trains and automobiles

Can a fiscal and monetary splurge reboot Japan’s recessionary economy?

Jan 12th 2013
TOKYO
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FOR 35 years the steel bolts holding up the ceiling of Sasago Tunnel, on a busy toll road west of Tokyo, were never checked. On December 2nd more than 600 of them had worked themselves so loose that a 130-metre stretch of the roof collapsed, crushing nine motorists.

The disaster played into the hands of Shinzo Abe, who two days later launched his successful campaign to become prime minister partly on a promise of renovating Japan’s rusting infrastructure. As promised, on January 10th Mr Abe approved a massive public-spending bonanza, expected to exceed ¥13 trillion ($150 billion)—more than was spent in emergency measures after the 2011 earthquake, and about 2.6% of GDP.

 

Much of the cash will go towards making tunnels, railway lines and other infrastructure safer. Those are the sort of public-works projects that Mr Abe’s Liberal Democratic Party (LDP) was famous for during much of post-war Japan’s history. His supporters believe it will help jolt the economy out of recession. Critics argue that it is a rehash of the concrete-slathering policies that helped saddle Japan with the biggest public debt in the world.

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It is being accompanied by pressure on the Bank of Japan (BoJ) to print more money to weaken the yen and help exporters, such as Japan’s carmakers and electronics firms. The architect of that policy is Koichi Hamada, a Yale University professor and cabinet adviser who is a former mentor (and recently tormentor) of Masaaki Shirakawa, the governor of the BoJ. The government’s supporters have christened the fiscal and monetary strategy “Abenomics”. But it appears to be ripped largely from John Maynard Keynes.

In principle, there is nothing wrong with the plan, provided that the government’s spending generates higher returns than the borrowing costs. Robert Feldman of Morgan Stanley says that if the money is spent well, on projects like energy-saving technologies, the rewards could be huge, bolstering efficiency and tax revenues.

But if the cash is wasted on projects with no economic merit, it will add to a gross public debt without materially boosting output, raising a debt-to-GDP ratio that already exceeds 200%. Although deficit-financed stimulus is justifiable in the short run, Mr Abe has spoken of the need for ¥200 trillion of public works over the next ten years, with less talk of how to pay for it. Those sums easily exceed the additional ¥12.5 trillion a year that Japan hopes to collect by eventually doubling the consumption, or sales, tax. Mr Feldman notes that in Mr Abe’s campaign documents there was no mention of debt.

For now, the financial markets are happy. In just over a month, the stockmarket has climbed by 10%. It has been pushed higher by a weakening currency, with the yen falling from around 82 per dollar to 88 in the same period. Some of the credit for this may go to the pressure on the central bank, which is expected shortly to double its inflation target to 2% in an effort to forestall Mr Abe’s threat to change the BoJ law guaranteeing its independence.

 

 

Just as much of a factor, though, is Japan’s current account, which is sailing closer and closer to the red (see chart). Analysts say it is likely to deteriorate further because of a burgeoning need for energy imports.

The risk is if government-bond yields rise without an increase in inflationary expectations. The latest stimulus package will reportedly be part-financed by ¥5.2 trillion of construction bonds; the new finance minister, Taro Aso, shows no allegiance to the last government’s efforts to cap bond emissions this fiscal year at ¥44 trillion. Some fret that if the market’s appetite for these bonds weakens, the Abe administration will ask the BoJ to buy them, something it is loth to do under duress.

A bigger concern, however, is that a fiscal and monetary splurge may give the government an excuse to postpone more sensitive measures such as deregulating the economy and opening the country to international competition through free-trade deals. Business leaders hammer away at the urgent need for structural reform. Mr Abe may offer some corporate-tax relief, but frustratingly, he seems keen to wait until after upper-house elections in July before making more progress.