Thursday 8 December 2016

Japan bets on big infrastructure after QE failed to lift growth

Ami Miyazaki, Izumi Nakagawa and Kiyoshi Takenaka

Published 26/07/2016 | 02:30

Japanese Prime Minister Shinzo Abe (AP)
Japanese Prime Minister Shinzo Abe (AP)

Politics is seen as the main driver behind Japanese Prime Minister Shinzo Abe's decision to invest public funds in a $90bn (€82bn) high-tech "maglev" railway.

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The project may be one of many.

Years of monetary policy action, including the kind of quantitative easing and negative interest rates now seen in the Eurozone, have failed to bounce Japan into a sustained recovery. Big ticket projects like the proposed maglev are seen as the next alternative.

Proponents say lending government money to Central Japan Railway Company (JR Tokai) to speed up the launch of a service linking Tokyo and Osaka with a high-speed, magnetically levitated train will spark growth in an economy still fragile after three years of an "Abenomics" mix of hyper-easy monetary policy, spending and promised structural reforms.

"Abe needs to spend a lot of money and it's easy to spend on big projects," said Fujitsu Research Institute economist Martin Schulz. "Abe needs things that are linked to technology, the future of infrastructure and getting Japan into the next century. On paper, maglev ticks most of the boxes," said Schulz, adding that the benefits might not stack up in practice.

Other private economists share those doubts. "It is highly questionable whether we need to fast-track this," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

Abe's administration decided to back the project only after the Bank of Japan in January adopted a negative interest rate policy and the government got a Group of 20 go-ahead for more fiscal spending, interviews with local and national government officials, a JR Tokai executive and an Abe adviser showed.

Abe has pledged a stimulus package by the end of July, including using the government's Fiscal Investment and Loan Programme (FILP) to help JR Tokai bring forward operation of the maglev line from Nagoya to Osaka by up to eight years to 2037.

The government is looking to lend 3 trillion yen ($28bn) over three years at 0.3pc interest, to be paid back over 20 or 30 years, an LDP politician told Reuters.

JR Tokai's original plan called for finishing a line from Tokyo to Nagoya, central Japan, by 2027 and - after an eight-year break to pay back debt - opening a service to Osaka in 2045.

The maglev, with speeds of up to 500km (311 miles) per hour and running through tunnels deep under mountainous terrain, would cut the trip to Nagoya by one hour to 40 minutes, and to Osaka to just 67 minutes from 145 minutes.

Unable to find a powerful political sponsor and with big public works projects out of fashion, JR Tokai had abandoned efforts to get government aid about a decade ago.

In December 2014 it began construction for the Tokyo-Nagoya line using private funding.

That same year, business leaders, governors and LDP politicians in western Japan stepped up lobbying for a "national project" to finish the line to Osaka at the same time as that to Nagoya.

"Originally, JR Tokai said it would fund this itself... but people in Osaka wanted to speed up the second stage and wondered if FILP could be used," said a senior government source.

FILP loans are financed by government bonds, but are not included in the regular budget so issuing them technically doesn't increase Japan's debt. Its the kind of off-balance sheet debt the Eurozone could see more before long too. (Reuters)

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