Analysis: Japan's mission impossible: to spend $100 billion in 15 months

Thu Feb 21, 2013 4:06pm EST
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By Tomasz Janowski and Kaori Kaneko

TOKYO (Reuters) - What do you buy the nation that already seems to have everything?

That is the question facing Japanese Prime Minister Shinzo Abe as he aims to spend more than $100 billion on infrastructure in the next 15 months to help revive his country's economy. But with its gleaming bullet trains, jungles of elevated highways and strings of man-made islands, ultra-modern Japan doesn't appear to want for much.

"We cannot simply continue to build roads and infrastructure the way we used to at a time when the population is ageing and shrinking," says Takayoshi Igarashi, a public policy professor at Japan's Hosei University who has advised the previous Democrat administration on rebuilding from the 2011 earthquake, tsunami and Fukushima nuclear accident.

Infrastructure spending tops Abe's economic agenda alongside nudging the central bank into more aggressive steps to end deflation. Since he took power in December, Abe has earmarked 10 trillion yen ($107 billion) for new infrastructure and upgrades over the next 15 months - half of it funded by government debt.

That is equivalent to a quarter of the amount that the Organisation for Economic Cooperation and Development estimates the entire world needs to spend on transport infrastructure each year.

Government spending is a classic remedy for weak growth. But it is one Japan has tried over and over - pouring roughly $2 trillion into concrete and steel since 1990 in a vain effort to resuscitate the economy, now in its fourth recession since 2000.

Economists warn that, without reforms to lift Japan's long-term growth potential, more such spending will produce only a temporary jolt that swells a government debt already worth more than double national output.

"The impact should be substantial but also a short-term one," said Tomo Kinoshita, chief economist at Nomura Securities in Tokyo. Kinoshita estimates that every 10 trillion yen of spending would add only about 11 trillion to GDP.   Continued...

A man walks on a street in Tokyo February 20, 2013. REUTERS/Yuya Shino