Japan’s fatal tunnel tragedy this week escalated a political debate over infrastructure spending as the nation heads for elections, bringing focus to aging transport networks in the world’s third-largest economy.
The 4-kilometer tunnel near Mt. Fuji that saw about 270 concrete slabs each weighing 1.4 tons fall and cause the deaths of nine people was built in the 1970s. Prime Minister Yoshihiko Noda yesterday said while repairs are a priority, the opposition Liberal Democratic Party’s call for broader infrastructure spending is a throwback to “wasteful pork-barrel” projects.
With the LDP leading in polls before the Dec. 16 vote, the prospect of more spending would add to fiscal strains that have already seen Japan accumulate more than twice the size of its economy in debt. At the same time, failure to update the road system risks boosting production costs as an estimated 40,000 bridges reach the end of their durability in the coming decade.
“Aging infrastructure multiplies the risk of damage from natural disasters and hinders the distribution of goods and people, threatening to erode the country’s productivity,” said Takashi Shiono, an economist at Credit Suisse Group AG in Tokyo. “It will further lower the Japanese economy’s potential growth.”
The cost of maintaining and repairing bridges, roads, sewer lines and other public infrastructure is projected to increase by more than 40 percent over the next 20 years, to 7.1 trillion yen ($86.6 billion) per year. The Transportation Ministry, which released its estimate of infrastructure replacement needs in July, has ordered a nationwide inspection of 49 tunnels after the Dec. 2 failure.
Japan’s stocks have rallied the past three weeks as investors embraced the prospect of LDP leader Shinzo Abe becoming the next prime minister after he called for greater monetary stimulus to stoke growth and end deflation. The Nikkei 225 Stock Average gained 5.8 percent last month, and was down 0.4 percent at the close of today’s morning session after U.S. manufacturing unexpectedly contracted.
Japan Bridge Corp. (5912) rose as much as 13 percent in Tokyo trading, following a 21 percent gain yesterday. Sho-Bond Holdings Co. (1414) jumped as much as 4.5 percent to a record high. Maeda Road Construction Co. (1883) climbed as much as 3.1 percent, reaching the highest since February 1997.
This fiscal year the repair bill alone may reach 4.9 trillion yen while the budget for public works is 4.6 trillion yen, according to the ministry. The LDP didn’t say in its platform how it would pay for repairs, though its lawmakers in June submitted a bill calling for 15 trillion yen in public- works spending over the next three years. The legislation didn’t move forward after Prime Minister Yoshihiko Noda dissolved parliament last month.
A return to the spending that contributed to doubling Japan’s public debt in the 1990s, without a plan to pay for it, could spark market turmoil, said Hideo Kumano, chief economist at Dai-Ichi Life (8750) Research Institute and a former Bank of Japan official.
“It’s worrisome that the LDP’s election pledge fails to spell out concrete plans to pay for its spending,” he said. “Should the government be forced to increase its bond issuance, the risk that the market becomes more volatile will surge.”
Noda yesterday criticized the LDP’s pledge to increase spending on new roads and other facilities, writing on his official blog that repairing existing infrastructure should be given priority.
The Organization for Economic Cooperation and Development said in a Nov. 27 report that the Japanese government needs a “detailed and credible fiscal consolidation plan, including specific revenue increases and spending cuts.” Any delay could result in higher bond yields, risking both the banking industry’s and the country’s fiscal sustainability, the Paris- based group said.
Abe last month proposed issuing construction bonds to pay for more public-works projects and asking the BOJ to buy them from the debt market.
Japan’s new government should prioritize repair rather than new projects, said Yuji Nemoto, a professor at Toyo University and a former official of the Development Bank of Japan (8301), a state- backed lender.
“This accident shouldn’t have happened,” Nemoto said of the tunnel disaster. “This symbolizes that Japan’s infrastructure -- roads, bridges, water and sewers -- are aging because investment was concentrated in the 1960s and 1970s. Something must be done about this swiftly.”
One goal mentioned in the LDP’s manifesto is to make the country more resilient to natural disasters such as earthquakes, tsunamis, rain storms and heavy snow. It also wants to expand “missing links” in the nation’s highway network, it said, without providing further details.
Noda’s Democratic Party of Japan says it has reduced spending on public works by 32 percent in three years. In its platform released last week, it vows to increase support for child care, medical services and to reduce medical payments for the elderly. The LDP, in turn, wants to reduce subsidies for poor families by 10 percent.
In other news in the Asia-Pacific region, Japanese wages rose in October for the first time in six months. The Reserve Bank of Australia may lower its benchmark interest rate by a quarter of a percentage point, according to 20 of 28 economists surveyed by Bloomberg News.
In Europe, Spanish unemployment probably increased for the fourth month in November, according to a survey of economists, while U.K. house prices may have risen for the first time in five months. Producer price inflation in the euro region probably slowed in October from the previous month.
Brazilian industrial production may have risen in October after falling in the previous month, according to a survey of 35 economists. The Bank of Canada is forecast to keep rates unchanged at a meeting today.
Japan’s ratio of funds for public works to gross domestic product has fallen to 3.2 percent in 2010 from 6.3 percent in 1995, according to finance ministry data. That compares with about 3.1 percent in France and 2.5 percent in the U.K.
“Japan is an unprecedented case as it will see infrastructure that was built in a short period of time reach its expiration all at once,” said Naoki Takesue, a research director at Mitsubishi Research Institute in Tokyo. “Given the severe fiscal situation, it’s more than obvious that Japan can’t maintain all the infrastructure.”
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