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Cuts in public works spending snag Japan's post-quake rebound

By Bloomberg News

POSTED:
LAST UPDATED: 02:31 a.m. HST, Mar 09, 2012


After years of criticism for public works spending that rewarded political constituents and added debt, Japan succeeded in cutting the largesse in half. Now that legacy of success is hampering an economic rebound.

Reconstruction plans are stuck one year after the earthquake that devastated the northeastern region, because builders lack resources.

Builders' payrolls fell 24 percent nationwide in the decade through March 2011.

Sendai, where the airport was wrecked by the post-quake tsunami on March 11, has 14 ready-mix cement factories, compared with 30 in 1998.

The longer it takes to complete the resurrection of towns, utilities and transport networks under Prime Minister Yoshihiko Noda's $246 billion in relief spending, the more limited the economic impact it will have, says Akio Makabe, who has written books on behavioral finance.

With limited scope to speed the projects along, Noda's administration has instead pressed the central bank into stepping up monetary stimulus.

"There will be a huge difference, psychologically — the speed and timing really matters in disaster reconstruction," Makabe, a professor of economics at Shinshu University in central Japan, said in an interview. "Economists expect stimulus from reconstruction demand will peak in the April-to-June period, but given the current pace of progress, we must assume such a projection is already being pushed backward."

With exporters contending with the impact of Europe's crisis, higher energy costs and exchange-rate gains, Japan is counting on reconstruction to help propel a rebound this year from a contraction in 2011. Even so, almost half of the funds earmarked through three extra budgets for the rebuilding efforts remained unassigned to any projects as of Jan. 31, according to data submitted by the Reconstruction Agency to parliament.

"Reconstruction demand, currently one of the few hopes for economic growth and expected to raise this year's growth by 1 percentage point, may not emerge as strong as expected," said Hiroshi Watanabe, a senior economist in Tokyo at SMBC Nikko Securities, a unit of Japan's second-biggest bank by market value. "It's a big misfortune for the Japanese government that the reduction of public work spending over the years to improve the economy's productivity is now causing a bottleneck."

Japan has halved annual outlays on public works in the past decade. Former Prime Minister Junichiro Koizumi led the charge as he capped sales of new debt. Noda's Democratic Party of Japan continued the effort after taking power in 2009, cutting budgets for roads, bridges and community halls under the slogan "spending for people, not concrete."

Cuts OF public works in the past decade — designed to restrain the world's largest debt — contributed to the 1.6 million decline in builders' payrolls, to 4.98 million in the fiscal year through March 2011, labor ministry data show.

In Sendai, the largest city in the Tohoku region and capital of Miyagi prefecture, the remaining 14 cement factories have about seven trucks each to service them, when they once had 15 vehicles apiece, according to Yoshiharu Chiba, president of Atsumi Construction Co.

Miyagi, an area about the size of Delaware, saw about a third of its public works projects go without bidders in January, compared with an average of 7 percent in 2010, according to the Land Ministry.

"The lack of workers with special skills is a particularly serious problem," said Hirohide Ito, managing director of the Miyagi General Construction Association. "Everything is scarce at the moment, and that's driving up the cost of construction."

Politics has also posed a challenge.

The Reconstruction Agency — to oversee recovery efforts days after the magnitude-9 quake that caused a devastating tsunami — didn't start until last month, after opposition lawmakers threatened to stymie legislation, and the ruling party changed leaders. Eighty-four percent of the money marked for subsidies for local-authority initiatives has yet to be assigned to specific projects.

While about 220 communities damaged by the tsunami plan to move residential areas to higher ground, only a dozen have so far succeeded in reaching a consensus among residents needed before work can begin, according to the Land Ministry.

A delay in quake spending has already weighed on the world's third-largest economy, which contracted in the fourth quarter. Rebounds in industrial production and retail sales in January offered signs that reconstruction funds are starting to flow. Mizuho Research Institute estimates that demand from post-quake recovery efforts will add about 1 percentage point to gross domestic product in the fiscal year starting April 1.

The sheer size of the recovery task is another issue. In Ishinomaki, a coastal city north of Sendai and hometown of Finance Minister Jun Azumi, more than half the debris left from March 11 remains, environment ministry data show. The volume clogging Ishinomaki's streets is about 100 times the waste normally produced by the city each year, the ministry estimates.

"We've seen many public work project auctions, such as small-scale road reconstruction, fail to be completed," Azumi, whose Ishinomaki house was destroyed in the tsunami, told reporters at a news conference Feb. 24. "Local building companies are making their utmost efforts, but they're struggling to secure enough workers."






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