Have the Current Generation Foot the Reconstruction Bill

Who will shoulder the costs of getting Japan back on its feet after the earthquake of March 11? Economist Nariai Osamu objects to plans to secure funds by cutting back on official development assistance and having the Bank of Japan underwrite government bonds.

Who will shoulder the costs of getting Japan back on its feet after the earthquake of March 11? Economist Nariai Osamu objects to plans to secure funds by cutting back on official development assistance and having the Bank of Japan underwrite government bonds.

Two months have passed since the disaster, but not a single new law has been enacted for recovery and reconstruction. At the time of the Great Kantō Earthquake of 1923, it took the cabinet only a week to make a response. Just as today, Japan in 1923 was led by a weak administration that was in danger of collapsing. Back then, it was the statesman Gotō Shinpei (1857–1929) who saved the day, taking control of an organization that functioned as a sort of second government, unifying the chain of command and marshaling public and private human resources on a suprapartisan basis. Gotō quickly put together a reconstruction plan and wrestled with the Imperial Diet to secure the necessary funding.

By contrast, the current administration has been overtaken by the pace of events, doing little more than react passively as the situation has unfolded. Prime Minister Kan Naoto and other political leaders have been busily pursuing their own self-interests. Among the recent spurt of public works projects for reconstruction, for example, there are some in which politicians have shamelessly manipulated the ruling coalition to secure concessions for themselves. Kan himself has not hesitated to make populist gestures in order to shore up his administration. His decision to shut down Hamaoka Nuclear Power Station on flimsy legal grounds, for example, was taken entirely for political reasons. He is reported to have spent five hours making the rounds of an evacuation center, but did he have anyone with him keeping a record of the evacuees’ complaints? His only response to the multitude of voices calling out for help and relief has been to mumble that “the government is doing everything it can.” It has been a wretched performance.

A Well-Mannered Country Disgraces Itself

In a situation where even getting regular services up and running again has taken longer than anyone expected, it is estimated that vast amounts of funding—more than ¥50 trillion in total—will be needed to complete reconstruction work over the next five to ten years. One day after the Great Kantō Earthquake, Gotō slapped together a massive master plan with a price tag of ¥3 billion (¥175 trillion in today’s prices). To be sure, the Diet refused to allocate that much money, whittling down his scheme until it was just one-fifth the original size, but at least Gotō had the guts to go public about how much money he thought was necessary.

This time, the government has approved initial spending of slightly more than ¥4 trillion in the first supplementary budget for fiscal 2011 (April 2011 to March 2012). The plan, approved by the National Diet in early May, will draw on pension reserves to cover the bulk of the expenditure (more than ¥2 trillion). An additional ¥50 billion is to be diverted from official development assistance. In effect, the government has told Africa’s poorest countries, which are now helping Japan with financial donations and material assistance, that ODA is to be slashed. Because its leader has no appreciation for international politics, a country that prides itself on its good manners has disgraced itself.

Sowing Inflation Through Underwriting by the BOJ

Work must now proceed on full-fledged plans for fiscal measures to recover from the disaster and compensate those who have lost their livelihoods. A lot of the debate about where to secure the financial resources to support these efforts has been pretty disappointing. There is a lot of support for the foolish idea of having the Bank of Japan underwrite government bonds, on the grounds that an emergency on this scale justifies drastic measures. But making Japan dependent on BOJ underwriting will achieve nothing except to spur a massive downgrading of government bonds and sow the seeds of inflation.

Even before the crisis, public finances were in such a sorry state that the situation was clearly unsustainable unless steps were taken to increase the burden on the current generation. We must not force future generations to foot the bill for reconstruction by financing everything through government bonds. We need to think seriously about the burden that each generation bears. One way to prevent the current generation from foisting its responsibilities onto its children and grandchildren would be to introduce a special consumption tax earmarked for reconstruction costs, and to increase taxation of assets. (Written on May 8, 2011.)

In This Series
An Economist’s View of the Disaster
A Fatal Lack of Urgency (July 26)
Japan’s Government of Fools: Enough is Enough (May 29)
Have the Current Generation Foot the Reconstruction Bill (May 8)
Japan Needs to Be on a “Wartime” Footing (April 22)
Four Priorities for Reconstruction (April 5)
Grasping the Nettle on Public Finance (March 23)

Nariai Osamu

Nariai Osamu

Graduated from the University of Tokyo, where he majored in economics. Served in various posts at the former Economic Planning Agency and as a senior economist at the Institute for International Policy Studies. Is now a professor at Reitaku University. Also active as an independent economist. His works include Exploring the Japanese Economy.