Tue, Sep 18, 2001 page21

• Tokyo's spending harms recovery

  • By William Pesek / BLOOMBERG
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  One definition of insanity is repeating the same action over and over again, expecting a different result. One wonders if Japan is doing exactly that with its economy.

  The nation has spent the better part of a decade building bridges no one uses, roads that go where people don't and tunnels to nowhere. The spending hasn't helped the economy and yet Japan continues to look for new places to cover with concrete. The hope is to boost the economy with the same tools that haven't worked.

  All of this makes you wonder if government spending is really what's holding back Japan.

  It's a suggestion that might have John Maynard Keynes -- who championed the use of fiscal stimulus to boost growth -- turning in his grave. For 11 years now, Japan has embraced Keynesian economics with an enthusiasm that may have surprised the English economist himself. It hasn't worked.

  By March 31, 2002, Tokyo will have issued ?666 trillion worth of bonds. With the economy probably back in recession, Prime Minister Junichiro Koizumi is thinking about selling yet more debt. The idea is that a few more highway projects, a couple of bridges and another dam here or there will raise Japanese output and support the ailing stock market.

  When will Tokyo rethink its concrete-will-save-the-day strategy? When a government issues debt, it's borrowing from the private sector and sucking up resources that could be employed there. The money could be used more productively in areas like technology and finance.

  Virtually everyone agrees that it'll take revolutionary change to end Japan's slump. Much of the policy uprising will involve weaning Japan off its duel addictions to debt and concrete. The concrete, or course, is thought to create jobs and help the economy. The debt provides the funding to maintain the concrete habit.

  Yet the so-called "crowding out" dynamic continues to loom larger in Japan.

  When governments issue piles of debt, as Japan has over the past decade, private-sector firms have fewer opportunities to issue debt or obtain financing. True, Japan doesn't have the kinds of corporate, municipal or asset-backed security markets found in the US and, to a lesser extent, Europe.

  But did you ever wonder why? With Tokyo hogging capital, how much room is left for private issuers? The central government planning involved here has some economists calling Japan the biggest experiment in financial socialism since Josef Stalin's day.

  Koizumi's proposals to return more economic autonomy to local governments -- including collecting taxes -- have been met with powerful resistance. So have his plans to privatize state-run companies, many of which issue lots of their own debt.

  "Lower debt is essential for sustainable economic growth," says Kohei Iwahara, an economist at Commerz Securities (Japan) Ltd.

  If Japan stopped borrowing and left money in private hands, it might do far more good. It might stimulate investment and entrepreneurship.

  The nation wouldn't have to forsake its Keynesian ways, just counterbalance them with some supply-side strategies.

  It's Tokyo's addiction to bond selling -- some might call it Keynesianism gone awry -- that's holding back Japan. The borrowed funds have been used to build unnecessary dams, roads and bridges and prop up inefficient banks and companies. The poor planning involved in Tokyo's strategies prevented the economy from getting the expected boost.

  "The present state of the Japanese economy and fiscal policy bears strong similarities to late 1929 and early 1930 when traditional measures to jump-start had failed and the government leaned toward supply-side reform," explains Jun Ishii, chief market economist at Tokyo-Mitsubishi Securities Co.
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