Government expenditure on public works has a mixed record in Japan. In the 1990s, often referred to as Japan's 'lost decade', public works projects were extensively employed to maintain GDP growth. But there was a backlash due to the cost involved and the many instances of misappropriation of funds. Starting in 2001 the prime-ministership of Junichiro Koizumi aimed for fiscal rectitude and tried to roll back public investment, often labelled as æpork barrelÆ politics, and as a result became accused of primarily enriching the constituencies of the ruling Liberal Democratic Party.
But with such a serious picture of economic stagnation reflected in the BOJÆs latest report, it could be that public works are the lesser of two evils, despite the BOJÆs historical opposition to such schemes.
What is striking about the BOJ report is the picture it gives of successive governments since 2000 abandoning public investments as an economic tool.
"Public investment has been sluggish," the report states, adding that "on a GDP basis, real (inflation-adjusted) public investment has been essentially level. Looking at monthly indicators, both the amount of public construction completed, which reflects the progress of public works, and the value of public works contracted ûa measure that reflects orders û have been sluggish on average."
A graph attached to the report shows that public investment and public construction have been slowing ever since 2000, when they peaked at Ñ37 trillion ($410 billion at today's exchange rate) per year and Ñ31 trillion per year respectively. The figures for 2008 hover around Ñ20 trillion and Ñ17 trillion respectively. This confirms the emphasis Koizumi placed on reducing government expenditure and reining in ballooning government debt.
Yet, despite the unpopularity of huge government deficits among the Japanese population, itÆs difficult to see the government not increasing its expenditure on public investment and public construction. In the BOJÆs own words "exports have decreased, corporate profits have continued to decrease, and business sentiment has also deteriorated...business fixed investment has declined...private consumption has weakened as the employment and income situation has become increasingly severe". Indeed, with the economy weakening since as long ago as 2006, itÆs surprising greater public investment hasnÆt already occurred.
TodayÆs problems place a question mark over the achievements of former prime minister Koizumi. He did prepare the ground for some corporate and government restructuring, such as the privatisation of the post office, which had the potential to revitalise JapanÆs economy. However, his focus was on reducing government debt and his policy was therefore essentially a tightening one. The economy was saved, however, by the explosion in exports from Japan to the US.
Akira Maekawa, an economist at UBS in Tokyo, predicts that the BOJ will resume its quantitative easing (QE) policy, introduced in 2001 and stopped in 2006, in order to counter the deflationary impact of diminishing domestic and international demand. Maekawa expects the real economy to register its biggest decline since 1998 this year, with a contraction of 0.9%.
The timing of the first use of quantitative easing is significant, as it coincided with KoizumiÆs 2001 election victory. The BOJ appears to have agreed to æturn on the tapsÆ in return for the corporate and political reform agenda promised by Koizumi. However, as mentioned, some analysts and economists such as Kyohei Morita, an economist at Barclays Capital, believe that JapanÆs mini-boom from 2002 until 2006 was the result of the improved export performance, not of QE.
In a recent interview with FinanceAsia, Morita says: ôWe have to ask: how could Japan grow during the Koizumi cabinet? It was purely down to exports. It was exports which underpinned GDP growth at the time. In other words, Koizumi was very lucky since exports are purely dependent on external factors û other countriesÆ ability to absorb exports.ö
UBS's Maekawa is equally tentative about the benefits of QE, noting in a recent report that "QE can provide only a limited effect in boosting the economy and pricesö.
If Morita and Maekawa are right about QE, and with exports unable to take up the slack, then reluctantly or not, public works and public investment could once again become essential to the governmentÆs efforts to prevent a depression. Where that leaves the health of the political system is another matter.
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