A critical decision

Bloomberg has a piece out describing the debate in Japan over the Aso government's plans for a new spending package, noting that "Japan’s 17-month recession is showing no signs of abating, and Aso may be tempted to attract rural voters with the pork-barrel projects that left the country with the world’s largest public debt." The Bloomberg piece adds that "some ruling Liberal Democratic Party lawmakers, led by former Finance Minister Koji Omi, this month urged Aso to spend 14.7 trillion yen, mainly on improving rural roads, airports and harbors and developing magnetic-levitation train lines."

This would be a terrible mistake.

Any infrastructure spending should be directed to the country's major metropolitan areas, where productivity would be increased by improved traffic flow. The last thing Japan needs is more infrastructure in rural areas, where population is shrinking more rapidly, and where vast sums have already been spent.

Bloomberg points out that "Japan invested trillions of yen in roads, bridges and buildings in the 1990s to rejuvenate the economy after the collapse of an asset-price bubble caused a decade-long slump. The spending failed to sustain growth, and gross domestic product only began expanding in consecutive quarters when exports recovered during the technology bubble of 2000." Most of this spending benefited rural areas and domestic construction companies. "The investments fueled the expansion of the construction industry, “which isn’t very productive,” said Ryutaro Kono, chief economist at BNP Paribas in Tokyo and also a member of the group that met with Aso. That may explain why Japan’s potential growth rate decreased since then, Kono said."

Exactly. Government spending should be directed toward projects that will result in increased productivity, as the country will need it as its aging population results in a major shrinkage of the workforce. Japan's political and economic system has been based on subsidizing rural areas and the export sector at the expense of the working populations concentrated in major metro areas. This needs to change for the country to return to long term economic health.