Japan's Many Failed Stimulus Plans

In Wednesday's Washington Post, Amity Shlaes chronicles the failure of Japan's attempt to stimulate its economy during the 1990s by heavy government investments in infrastructure.

The situation in Japan then was similar in some ways to that in the United States today. A dramatic market crash and a plunge in real estate prices shook what had been a confident nation. Japan turned inward; economists talked earnestly about paradigm shifts. The obsession with exporting no longer seemed to be serving the country well. Leaders cast aside their previous concerns about budget deficits. The then-Ministry of International Trade and Industry sorrowfully let it be known that there were "areas in which Japan lags behind major developed nations."...

The projects were similar to some infrastructure plans under discussion here today. Bridges? Japan put up the longest suspension bridge in the world. Airports? Kansai International, yes, on an artificial island, but also local fields such as Ibaraki Airport near Mito. Roads? Japan built new streets and highways, including the famous New Tomei Expressway. For biotech and telecommunications, Japan poured out the subsidies.

When one plan proved insufficient, another was begun.... Between 1992 and 2000, the Japanese launched 10 stimulus packages that included public works. The Land of the Rising Sun became the Construction State. Other worthy issues, such as consistent tax reform, lagged. In fact, fiscal reform overall was postponed. After the 1995 Kobe earthquake claimed thousands of lives, the focus on infrastructure was reinforced....

"The construction state is in some respects akin to the military-industrial complex in cold-war America (or the Soviet Union), sucking in the country's wealth, consuming it inefficiently, growing like a cancer and bequeathing both fiscal crisis and environmental devastation," commented Gavan McCormack, a professor at the Australian National University. The stimulus plans had the opposite effect of what was expected. Appalled at the country's new deficits, Japanese consumers closed their wallets.

Worst, though, was the failure on jobs. Unemployment fell in many nations in the 1990s. In Japan, the '90s were a lost decade: The unemployment rate more than doubled and surpassed the U.S. rate -- an unthinkable occurrence just a few years earlier.