Analysis: Japan election points to return of "construction state"

NAGANOHARA, Japan Tue Dec 11, 2012 5:09pm EST

1 of 3. Bridge piers built at a construction site of Yanba Dam stand in Naganohara, Gunma Prefecture in Naganohara, Gunma Prefecture December 3, 2012.

Credit: Reuters/Tetsushi Kajimoto

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NAGANOHARA, Japan (Reuters) - A big winner from Japan's December 16 national elections may be the country's construction industry and towns such as Naganohara, where a sprawling dam development sits unfinished after more than four decades.

Polls show the election is likely to return to power the long-dominant Liberal Democratic Party (LDP), which has promised to boost public works and talks of spending 200 trillion yen ($2.4 trillion) on projects over the next decade -- about 40 percent of Japan's economic output.

Many economists are troubled by the plan. Japan already has the heaviest public debt load in the industrialized world and they note that similar public works programs in the past 20 years have done little to counter the economy's long stagnation.

But it is music to the ears of construction industry executives, who saw public works budgets slashed by a third by the incumbent Democratic Party of Japan (DPJ), and has already boosted the stocks of builders such as Kajima Corp, Taisei Corp and Obayashi Corp.

It would also be a boon for communities like Naganohara, which count on government investment to help the local economy.

"We have been made a fool of by the Democrats, which opposed the dam for the sake of opposing whatever the LDP had promoted," said the town's mayor Kinya Takayama. "Most local residents want the LDP back."

Japan's Democrats stopped the $5.6 billion project after they won power in 2009 promising to switch focus "from concrete to people," but later backtracked, faced by the high costs of killing it off despite doubts whether the dam was really needed.

Half-finished bridges, ramps and roads now stand as a symbol of Japanese politicians' long addiction to concrete and a short-lived push to kick the habit.

The proposed dam would flood part of Naganohara and turn its surroundings into a 300-hectare reservoir. Hundreds of people in this town of 6,243 have already been moved. Takayama says government funds and a new artificial lake could bring new jobs and tourism to the area.

QUAKE-PROOFING

While the Yanba Dam is a throwback to Japan's past -- construction began in 1967 -- the LDP's spending plan comes with a new twist: it will focus on quake-proofing of buildings, bridges, tunnels, dams and transport networks.

That is bound to resonate after last year's magnitude 9 earthquake and a deadly tsunami killed nearly 20,000, triggered a nuclear crisis and caused over $200 billion in damages, making it the world's costliest natural disaster.

A collapse earlier this month of a 1970s tunnel on a major highway also backs the LDP's argument that Japan's world-class infrastructure built during its postwar boom is ripe for a revamp.

"It came as a chilling reminder of over-age infrastructure," said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Morgan Stanley Securities. "I guess it may make sense to increase spending on public works to some degree."

The LDP's election manifesto is short on detail, but officials involved in drafting the plans say about half the spending could come from the national budget and the rest from the private sector and local governments.

Under such assumptions public works would cost the budget 10 trillion yen per year, twice as much as now. LDP lawmakers say they would find savings to limit extra borrowing.

"Spending 100 trillion yen over a decade would not be such a stunning figure," said Yoshimasa Hayashi, an LDP lawmaker who serves as a special advisor to the party's secretary general.

ONE-OFF EFFECTS

Whereas massive investment in roads, train networks, ports and other infrastructure contributed, alongside exports, to Japan's postwar boom in 1950s and 1960s, later on the law of diminishing returns kicked in.

As the focus shifted from meeting the rapidly growing economy's needs to using public works as a way of stimulating growth, creating jobs and catering to special interest groups, economic benefits have dwindled, economists say.

"Building dams and roads in depopulated areas can only have one-off effects," says Takayoshi Igarashi, a Hosei University professor, a leading expert in public works who advised former Prime Minister Naoto Kan.

"It's totally different from spending on highways and bullet trains linking big cities like Tokyo and Osaka during the rapid economic growth era, which had far greater multiplier effects by stimulating car purchases and other private spending."

Nomura Chief Economist Tomo Kinoshita estimates every 100 million yen spent on public works would only add 110 million yen to overall economic output. So if government spending stops, the economy would return to its slumber.

Since the bursting of the speculative bubble in the early 1990s, successive LDP governments relied on public works -- spending 110 trillion yen over 10 years -- to try to revive the economy.

It remained an economic policy tool of choice in the last decade, except under Prime Minister Junichiro Koizumi, who made efforts to consolidate budget finances part of his reform agenda in 2001-2006.

PORK BARREL

LDP's rivals accuse the party that ruled Japan for over half a century of trying to resurrect old pork barrel politics.

"It would be a return to old politics," said Shuji Kira, a Democrat party member. "Last year's disaster has given the LDP a perfect excuse for creating demand for construction industry."

The old system would have the central government fund public works projects to benefit local communities in return for their votes for the ruling party. Those in turn would bring contracts for construction firms which kept cozy ties with bureaucrats, often employing former officials, and which supported LDP politicians with donations.

One senior official from a construction industry lobby acknowledged a public works boost would benefit the sector.

But he insisted tougher political financing laws and closer scrutiny made the links between politicians, builders and bureaucrats a thing of the past.

"No one is using money now in order to associate with politicians," the official said on condition of anonymity.

Shinzo Abe, the LDP's leader and a former prime minister, says big government spending is needed to spur growth because the aggressive central bank easing he has prescribed will take time to work.

Shares in Kajima, Taisei and Obayashi have risen between 11 percent and 16 percent since mid November in anticipation of the election and an LDP win.

"Monetary policy would not have immediate impact on private investment. It could take one, two, three years to stimulate private investment, consumption and create jobs. We cannot just wait for that to happen," he said last week.

But economists warn the policy will fail if not accompanied by deregulation and other reforms.

"Just doing infrastructure spending is not going to accomplish anything," Jesper Koll, head of equity research at JPMorgan Chase, said.

"If all you do is ‘baramaki' (pork barrel), debt monetization and massive fiscal spending, it will end in tears and Japan will become the Argentina of the 21st century," he said, referring to the collapse of the Latin American nation's finances a decade ago.

($1=82.37 yen)

(Additional reporting by Linda Sieg and Kaori Kaneko: Editing by Tomasz Janowski and Neil Fullick)

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