The latest economic stimulus package, unveiled last Thursday, reinforces the impression that deficit spending in the name of economic recovery has become an annual routine. In fact, almost every year since the economic bubble burst a decade ago, the government has pumped trillions of yen into the system, often putting political expediency before economic rationality.
This has much to do with the realities of postbubble politics here. The end of the Cold War — which had kept the Liberal Democratic Party solely in power for nearly four decades — ushered in a period of coalition politics. Amid the shifting political alliances, the struggle for power became the central concern of various parties. That may have been unavoidable. But using an economic package for political gains could endanger the economy itself, particularly at a time of uncertainty.
The series of economic measures taken over the past decade has failed to put the economy back on its feet. Instead, liberal spending has delayed structural reform and led to an inflated budget deficit. Enormous quantities of construction bonds have been issued every year to finance public-works projects, even though the macroeconomic benefits from such infrastructure investment have markedly diminished.
The latest 11 trillion yen package does have some redeeming features — an indication, perhaps, that the government and the ruling parties are reordering their priorities. A case in point is investment in projects related to information technology, touted as the catalyst for an “IT-driven economic revival.” However, conventional public-works projects still represent one of the biggest items in the stimulus program.
There is no question that the IT sector is important. The package includes, for example, measures to build computer networks linking more than 10,000 schools and community centers and to give 7 million people basic training in Internet operation. But these and other IT-related programs have essentially nothing to do with ad hoc stimulus measures. They should be promoted as part of structural reforms, such as deregulation and legislative change.
Politicians and bureaucrats are doing otherwise — hopping on the “stimulus bandwagon” in order to push IT projects. It looks as if they are pushing forward with a one-off “special vehicle” to promote a long-range policy of structural reform. Indeed, the spending package comes across as a mixed bag, creating the impression that the government and the coalition parties lack a well-defined long-term strategy.
That said, the package does provide a fairly large amount of real stimulus — 3.9 trillion yen in central-government funds earmarked for social infrastructure projects, including Internet-related measures. But whether that stimulus will foster a solid economic recovery is open to question. To be sure, improved corporate earnings are spurring capital spending, particularly in the IT sector. But consumer spending — by far the largest engine of growth — remains in the doldrums.
The reason for stagnant consumption is clear enough. People keep their purse strings tight not only because of high unemployment, rock-bottom deposit rates and falling asset prices, but also because they are worried, and rightly so, about the likely consequences of the gigantic budget deficit — tax hikes, pension cuts and the like. To ease their anxiety, the government needs to take long-term measures to change the economic structure, rather than short-term, makeshift steps that can perk up demand only temporarily.
Public-works spending used to have extensive “spillover” effects on the economy, leading to the steady growth of consumer demand. Over the past decade, however, such synergy has all but disappeared, reflecting the economy’s maturity. In other major industrialized economies, which have also suffered large budget deficits in the past, government spending no longer plays a key role; it has given way to monetary policy and private-sector initiative.
The Nikkei stock average dropped below the 15,000 mark to its lowest level in 19 months last Wednesday, in reaction to the fresh signs of a U.S. economic slowdown that had jolted the New York stock market earlier. The Tokyo market apparently paid little attention to the economic package, perhaps because investors are so accustomed to the ways of Japanese politics that they are hardly surprised by government decisions.
Yet every time an economic package is put together, politicians boast about it as if it is a miracle remedy for an ailing economy. There is indeed a wide gap between political perception and economic reality, and it has not significantly narrowed over the past decade. The only way to close it is to promote structural reform with courage and insight.
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