Financial markets and people appear to hope that the economic policy to be adopted by the incoming administration of Liberal Democratic Party chief Shinzo Abe will improve the Japanese economy. Clearly people want deflation to end, the economy to pick up and the reconstruction from the effects of the 3/11 disasters to accelerate.
But Mr. Abe’s economic policy must be scrutinized closely because it could cause undesirable side effects.
Mr. Abe calls for compilation of a large-scale supplementary budget as well as bold monetary easing by the Bank of Japan. Specifically, the LDP government is expected to submit a ¥10 trillion supplementary budget to the Diet in January, and Mr. Abe has asked BOJ Gov. Masaaki Shirakawa to set a 2 percent inflation target. The LDP proposes spending ¥200 trillion over 10 years on public works projects in the name of making the nation resilient to natural disasters.
Since Japan’s infrastructure is aging, it is important to carry out necessary repairs. It may also be necessary to take steps to minimize the damage from massive earthquakes and tsunami expected to happen in the future.
But one wonders whether the LDP and the government have a strong enough mechanism for strictly prioritizing public works projects and for turning down calls by politicians for pork-barrel projects to maintain their popularity. The LDP’s policy may end up piling on unnecessary public works projects.
In the past, the LDP relied on public works projects as a means of buoying the economy. But that policy led to massive accumulation of debts. The debts owed by the central and local governments now reach nearly ¥1,000 trillion.
The LDP government should not repeat the same mistake. The policy of emphasizing public works projects also would only increase reliance by local economies on the construction industry and nip in the bud local-level efforts to build economies based on new industries.
Mr. Abe wants the BOJ to adopt a policy of unlimited monetary easing — including the BOJ’s purchase of all construction bonds issued by the government — until inflation of 2 percent is achieved.
But as long as there are few opportunities for enterprises to increase their capital investments, unlimited monetary easing will only lead to rises in commodity prices without gains in employment and wages.
Ordinary people’s income will not increase and will only suffer from inflation. The glut of money may also give rise to an asset bubble. Mr. Abe’s policy could also result in lowering public trust in the BOJ and the government, thus causing the collapse of government bond prices and rises in long-term interest rates.
Instead of applying pressure on the central bank, the government should seriously carry out measures to create new markets and demand. It should take appropriate steps in such areas as renewable energy sources, agriculture, medical and nursing care services and services to help child-rearing families.