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Bridges to somewhere: Infrastructure spending in Japan.

February 10th, 2009 · Greg Atkinson · 6 Comments

It seems that the old bubble economy stories about Japan are doing the rounds again in business journals and finance websites these days as lazy journalists try to make comparisons between infrastructure spending in Japan during the 1990’s, and the economic stimulus packages being proposed in the U.S and other countries.

But rather than these articles highlighting the folly of the Japanese infrastructure spending they more often than not, simply demonstrate the ignorance of the author and their inability to really understand Japan.

Japan is a mountainous country that is subject to around 20% of the world’s earthquakes. In addition the country is struck annually by a number of typhoons which result in landslides, flooding and heavy seas buffeting coastal areas.

Many rural townships in Japan are accessible only by a bridge and therefore having a good solid bridge that will not fail during an earthquake, or a road that will not be washed away by a landslide is often a matter of life or death.

Thankfully, economists, journalists and analysts etc. are not entrusted with designing and constructing national infrastructure. As a result when they write articles about large bridges in rural areas of Japan they make assumptions based on their own limited knowledge and simply judge that a solid looking multi-lane bridge in Japan is a so called “bridge to nowhere”.

The fact is that these bridges link many small rural communities and are solid and large in nature because they are engineered to withstand large earthquakes and high winds.

These bridges are not aimed at generating ongoing revenue and just because they carry relatively few vehicles does not mean they are over engineered. They are built to survive nature’s fury and in a 100 years time they will still probably be in faithful service. In addition heavy equipment (such as excavators) may need to cross these bridges after landslides and this is another reason that they tend to be of solid construction. Makes perfect sense to me.

Another target for ridicule by western observers is some of the apparently large community and sporting facilities in rural Japan. However what these observers fail to appreciate is often these facilities are used as evacuation centres and can shelter for people for many days during typhoons or after earthquakes.

So perhaps a town looks small, but remember in the advent of a major disaster the centre may have to house a few hundred people from the surrounding region.

Then there are dams which help prevent major floods (which use to kill hundreds in the past), coastal barriers to prevent seaside communities from heavy seas and concrete cladding on hillsides to prevent landslides. These might seems wasteful to some people, but they have without doubt saved lives. Again this infrastructure will be in use for a hundred years or more. Wasteful spending…I think not.

To an economist I guess a back-up system on a commercial aircraft is probably unnecessary, unless of course they are on the plane.

In the past I spent several years working in engineering roles in Japan, and during that time I came to appreciate why some things appear “over engineered”. However when storms and earthquakes do strike what is actually surprising is the lack of damage caused, compare this for example to the chaos caused when Hurricane Katrina struck the United States.

The Japanese also spent much effort and money repairing the damage caused by the Great Hanshin Earthquake in 1995, and this work had nothing to do with any economic stimulus package. There was also a lot of retro fit work needed as a result of the lessons learned from this earthquake, but many economists fail to mention this when they ridicule the amount of money the Japanese government spent on construction related projects in the 1990’s.

Of course there were projects that were ill conceived or motivated more by politics than necessity, but this is not a phenomenon exclusive to Japan. However in general the roads, bridges,dams,concrete barriers and community centres will reap benefits for the nation long after their critics have gone.

6 responses so far ↓

  • 1 Ned S // Apr 25, 2009 at 9:54 pm

    I never gave much creedance to the bridges to nowhere arguments Greg. But the Zombie bank thought seemed to hold water.

    I’m not a big fan of inflation as you know. But I still would have expected the Nickei 250 to be a bit above its 1982 level (a month ago) if the Japanese economy was producing real growth?

  • 2 Greg Atkinson // Apr 26, 2009 at 8:44 am

    Ned S the zombie banks certainly did not help..there were cultural reasons that made the situation worse but I also think the problems with Japanese banks were also somewhat exaggerated. In any case it is just a little ironic that the banking model that the U.S. was trying to force down Japan’s throat has fallen in a heap. I remember the Japanese banks coping years of lectures from U.S experts, bank executives etc. because they were too conservative…I am guessing some U.S. banks now wish they had been a little more conservative as well!

    The Nikkei is hard to get a handle on. There are many reasons why it has underperformed but even if you take these into account it still seems to have underperformed! I think one of the big drags on the Nikkei is the relative low levels of foreign money flowing into Japanese stocks and one reason I hear for this is because many Japanese companies are not very generous in terms of dividends.

    In addition many Japanese firms are managed with long term goals in mind and not necessarily focused on beating earning estimates every quarter or trying to push up the stock price. Western analysts do not like that approach but if you compare Toyota against General Motors then I think this perhaps illustrates that the Japanese way is sometimes the best way.

  • 3 Ned S // Apr 26, 2009 at 9:16 am

    I’d say it is way more than a little ironic that America managed to find itself with some ultra zombie banks Greg. I’ve even had the thought that the reasons in America’s case might be at least partly cultural as well – Different cultural reasons to those in Japan – But cultural nonetheless.

    Thanks for the general feedback on the Nikkei! (I’d also wondered if it might have had anything to do with Returns on Investments in so many Japanese asset classes having been so low for so long that even a reasonable swag of Japanese money had been sent abroad?)

  • 4 Greg Atkinson // Apr 26, 2009 at 9:47 am

    Ned S – yes I think your are right about the Returns on Investment issue (ROI) in Japan and yes a lot of money went abroad (though a lot has come back since the crisis started)

    This raises an issue I have not mentioned before and that is seldom covered in the media and that is “competition”.

    Japan I would say is one of the most competitive if not the most competitive, domestic economies in the world. Western companies often do not understand this and get wiped out in just a few years because they simply cannot compete. (although they often blames cultural reasons, red tape, taxes etc) I worked for a major western company in Tokyo that has to bail out and I can tell you the reason the company failed was all internal! (although what they stated to the media was somewhat different)

    Every sector of the Japanese economy crammed with companies trying to make money and so there are ongoing price wars and thus margins are tight. If you put this together with a population that is not growing (and by the way the decline in population in Japan appears to levelling out) then it is hard to push up your ROI.

    In addition many Japanese companies continue to invest abroad but it sometimes takes years for these investments to start paying off and so these can also drag down profits/ROI etc.

    Finally I think R&D spending is also a drag on company profits but over the long term it will pay off. In any case if you lack natural resources you need to come up with products that nobody else has and so R&D is vital.

  • 5 Mathew // May 4, 2009 at 11:09 am

    Interesting comments above, some correct some wrong. Japan has the best infrastructure in the world bar none, Honestly makes American infrastructure look 3rd world. But they spend triple the actual ammount they need to. Each prefecture, city and ward has a yearly budget and if they don’t spend this budget the following year will be cut. So towards the end of the fiscal year there is mad spending on constuction that really doesn’t need doing. For every yen correctly used two yen is wasted on handouts etc. This is a fact that is a hard to prove as the officials are very cunning in hiding the ammounts spent. How do I know this, I have worked for the Japanese government for 10 years in all the ministries but spend most of my time at Zaimushou(MOF).
    Now in saying this, I don’t condone it but I know when there is a natural disaster the infrastructure in general will hold up and do the job required.
    Great article, keep them coming.

  • 6 Greg Atkinson // May 4, 2009 at 12:04 pm

    Mathew, thanks for the comment. There is some over the top spending by the Japanese government but this happens in most government projects in most nations. Also the rush to spend the budget each year is not isolated to the Japanese government, it happens in the public and private sectors across much of the world. I am not saying this is something to be proud of, just highlighting the fact that some issues are not unique to Japan.

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