Japan Aims to Restructure its Economy.

[Big Orange]

Japan is begining to concentrate on social spending, while shifting funds from its over polished infrastructure and unbalance exporting:

Japan set for sensible but risky economic change
After enduring two decades of economic stagnation, Japanese voters seem to think change is worth a shot.

By Martin Hutchinson, Breakingviews.com
Published: 2:21PM BST 27 Aug 2009

Opinion polls suggest a landslide win for the opposition Democratic Party of Japan (DPJ) on August 30. It wants to shift priorities by shifting 3pc of Japan's GDP from public works to social spending.

The DPJ thinks two policies of the Liberal Democrat Party, in power for all but a year since 1955, are counterproductive. The first is the easy transition senior bureaucrats make after retirement to top positions in major private companies. The result is an easy consensus between government and industry. The second is the substantial share of government spending - 6.5pc of GDP at its 2001 peak - dedicated to rural infrastructure.

Those policies worked superbly until 1990. But they have been much less successful since the Japanese financial bubble burst. A partial reversal of them under Junichiro Koizumi in 2001-06 produced the only signs so far of sustained economic revival.

The DPJ now wants to go further than Koizumi. It plans to prohibit senior bureaucrats from moving to private employers on retirement, sharply cut infrastructure spending and redeploy the savings to transfer payments for families with children and pensioners. Japan's voters seem to think the DPJ's alternative worth trying.

The electorate is probably right. A reorientation of Japan's economy towards domestic consumption and away from infrastructure and exports might well stimulate higher growth and a better economic balance. Interest rates high enough to give Japan's savers a decent return on their money would also help.

The problem is Japan's government debt, which the International Monetary Fund expects to reach 217pc of GDP by the end of 2009. That's a level close to the highest ever successfully handled - Britain's debts in 1815 and 1945. It is made more manageable by Japan's low interest rates and high savings rates, but urgently needs to be put on a downward trajectory.

Total debt, not the composition of public spending, is the central question of Japan's economy. It's not yet clear whether the DPJ has the answer.

Telegraph.co.uk

[Surlethe]

See this: the chief problem with Japanese infrastructure spending is that marginal expenditure far exceeded marginal benefit. So transferring money away from new spending to better social services is a great idea, and good move for the Japanese government.

[J]

It's all just shuffling chairs around on the Titanic, until Japan recognizes its debt problem and takes steps to begin correcting it they'll remain stagnant.

The problem there has a lot in common with the one the US is currently experiencing, when Japan's financial markets went kablooie around 20 years ago the banks were left holding trillions in worthless loan, mortgage, and MBS products. Instead of clearing the bad debts from the system they played "extend & pretend", marking all those loans & stuff at full value and then selling it to the government, which then had to issue bonds and adopt ZIRP to allow for its effects. Their exports & high personal savings rate have allowed them to buy their own Treasuries and keep rates low for many years, avoiding a bond market dislocation and subsequent debt default.

Until that debt is paid off and/or defaulted, it will weigh upon Japan's economy like a giant millstone around the neck.

Moving some spending to social services will help, but is it enough? I rather doubt it. Unless the gains from doing so are large enough that Japan can begin running a surplus and paying down its debt, the fundamental problem remains.

[Big Orange]

How did Japan get into such deep debt, despite its highly successful manufacturing base? Why did Japan get nobbled by its property "boom" like the US and UK did?

[Surlethe]

How did Japan get into such deep debt, despite its highly successful manufacturing base? Why did Japan get nobbled by its property "boom" like the US and UK did?

AFAIU, the property bust killed the tax base and at the same time Japan ramped up its public spending to inflate its GDP. That didn't work because Japanese people as a population save instead of consuming, so GDP didn't rise. Therefore, the Japanese government ran cyclic and structural debt throughout the '90s and early '00s.

[J]

In addition to the above, the entire financial & real estate sectors had plowed countless trillions of Yen into property related investments and speculation in the stock markets. When real estate & stock markets imploded the financials were left holding many trillions worth of bad loans, MBS products, empty buildings and worthless land. It was probably enough to bring down a good portion of Japan's financial system so all these bad debts were transfered from the banks & financials to the government and the banks got bailouts so they could remain solvent. As the markets continued their long grind down, more & more bad debts were moved to and/or guaranteed by the government and the bailouts continued, adding to its debtload which impaired recovery and set off another cycle of debt transfers. So eventually they ended up with a zombie financial sector which is propped up by continual government bailouts which keeps adding to the debt.

Even though the banks are mostly ok now, or they were until the latest crisis, the government is still left holding the bag on god knows how many trillions of debts which were run up by the financial & real estate industries.