Japan debates digging itself out

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After huge public works push of 1990s, some call tactic unwise

By Blaine Harden

updated 4:55 a.m. ET, Mon., March. 30, 2009

TOKYO - Within a block of one another, three public works projects gummed up traffic one day last week. Workmen upgraded a gas line, installed a new water main and replaced sand in a public playground.

It was part of the Tokyo Metropolitan Government's crash program to triple the number of public works projects in the city, create thousands of jobs and fight back against a global recession that is punishing export-dependent Japan more severely than any other major industrialized country.

Japan's economy, the second-largest in the world, is shrinking at the fastest pace in more than 30 years, roughly twice as fast as the U.S. economy. Exports and imports declined in February at a record rate, with monthly sales to the United States down nearly 60 percent compared with last year.

Tokyo, by far the largest and richest city in Japan, is giving itself public-works medicine for these global trade ills. It is deploying legions of men and women with flags and hard hats to repave streets, repaint crosswalks and fix broken clocks in city parks. Potholes, cracked sidewalks and peeling paint -- never that common in this immaculately maintained city -- have all but disappeared from public spaces. Now, a heated political argument is erupting across Japan over whether the entire country should follow Tokyo's lead and pour taxpayer money into major public works. The Obama administration, it has been noted here, has embraced this idea as a way to kick-start the U.S. economy, spending hundreds of billions on roads, broadband and other infrastructure projects.

The dilemma for Japan is that it has already been there and done that -- in spades and not so long ago.

In the 1990s, during the "Lost Decade" that followed the bursting of a real estate bubble, Japan's government spent more than $2 trillion on public works. In so doing, it dug itself the deepest public-debt hole in the history of the developed world, totaling more than 175 percent of the country's gross domestic product.

All the spending has made Japan's infrastructure the envy of the world. It has a public transportation system that is unrivaled for convenience and ubiquity. Its fiber-optic broadband infrastructure enables the world's fastest Internet connections, delivering more data at a lower cost than anywhere else.

Going too far?

But many critics say the government has gone too far, outfitting itself with more dams, bridges, highways, museums and airports than it will ever use. Japan has the oldest population in the world and the lowest proportion of children.

"Our infrastructure is impeccable," said Takayoshi Igarashi, a professor of politics at Hosei University and an expert on public works spending. "More public works would be surplus to real need. It would not stimulate anything but the construction industry."

Still, Prime Minister Taro Aso and his ruling Liberal Democratic Party (LDP) seem to favor another big round of spending on public works. Aso has said that these projects, including building roads, burying telephone wires and thinning forests, have been neglected and will produce much-needed jobs.

One of Aso's economic advisers, Richard C. Koo, who is also chief economist at the Nomura Research Institute, says that as Japan sinks into what seems certain to be its worst recession since World War II, nothing can produce more economic benefits more quickly than massive government spending on public works. "You can bash public works all you want, but in this type of recession, where companies and individuals have stopped spending, government expenditures become absolutely essential," he said. "We need speed more than anything in responding to this crisis."

Koo said that while public works spending in the 1990s saddled the government with an onerous debt, it also prevented the economy from slipping into a depression, despite an 80 percent collapse in asset prices after the bubble burst.

"Our unemployment rate never went above 5.5 percent," Koo said. "Public works was an extremely effective fiscal stimulus, even though a few projects were really stupid."

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