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Success in Public Spending Cuts Turns to Japan Rebound Snag

Success in Public Spending Cuts Turns to Snag
A worker constructs a temporary housing unit for survivors of the March 11 earthquake and tsunami in Minamisanriku, Miyagi prefecture, Japan. Photographer: Kimimasa Mayama/Bloomberg

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

Reconstruction bids are going unmet one year after the earthquake that devastated the northeast region, because builders lack resources to fill them. 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 20 trillion yen ($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.”

Finance Minister Jun Azumi said today in Tokyo that he expects “good signs” for the economy toward spring.

Cash Unallocated

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 to 6.2 trillion yen. 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.”

Payrolls Drop

Cuts to public works over 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 a piece, 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 seven percent in 2010, according to the Land Ministry.

Political Challenge

“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 have also posed a challenge.

The Reconstruction Agency -- mooted 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 1.9 trillion yen marked for subsidies for local-authority initiatives has yet to be assigned to specific projects.

While some 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.

‘Pushed Back’

“We expect reconstruction investment will emerge and begin to boost the economy during the current quarter,” said Yasuo Yamamoto, a senior economist at the Mizuho institute in Tokyo. “There is a concern the timing of their effects could be pushed back” should labor shortages and administrative delays hamper spending, he said.

Tokyo bureaucrats have tried to help clear the delays, with the finance ministry’s budget bureau seconding 10 officials to the northeast to speed subsidy applications, according to the ministry. Municipalities throughout Japan have sent 79,000 workers to quake-affected areas at various times to help with efforts such as managing shelters and other emergency work, government data show.

Volume of Wreckage

Politicians have also pushed the central bank to inject more stimulus, with Noda saying in January he expected the Bank of Japan to take “bold” actions. The BOJ the following month added 10 trillion yen to its asset-purchase program, helping stoke a rally in stocks and reverse some of the yen’s gains.

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 by the March 11 tsunami, told reporters at a news conference on Feb. 24. “Local building companies are making their utmost efforts but they’re struggling to secure enough workers.”

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