TOKYO (Nikkei)–Massive government spending is starting to funnel into efforts to rebuild areas that were devastated by the March 11, 2011 disaster, providing much-needed support for shattered communities and sending a powerful jolt through the weakened, deflation-plagued domestic economy.
There are already clear signs that the government’s 18 trillion yen spending package to facilitate reconstruction in the Tohoku region is starting to have a positive impact on local economies. As construction workers throughout the nation rush to the three prefectures that were most affected by the disaster — Iwate, Miyagi and Fukushima — to work on reconstruction projects, sales are rising at many area retailers and restaurants. Sales at Yoshinoya Holdings Co.’s (9861) gyudon beef bowl restaurants in Miyagi Prefecture, for example, have spiked 20% on the year recently.
As projects to rebuild ports, repair roads and construct new housing proceed at a breakneck pace, major construction companies such as Shimizu Corp. (1803) have been working on plans to expand the number of employees they have in the Tohoku region by 10% to 20%.
The reconstruction boom in Japan’s disaster-hit Tohoku region is causing traffic jams along major highways such as the Sanriku Expressway, partly due to the high number of large trucks using such roadways to transport construction materials.
However, the construction industry is now facing a labor shortage. The monthly wages of construction workers in Miyagi Prefecture have risen by between 10,000 and 30,000 yen from the previous average.
The 18 trillion yen earmarked for reconstruction in the fiscal 2011 supplementary and fiscal 2012 budgets, the latter of which goes into effect in April, is equal to seven years worth of combined spending by the Iwate, Miyagi and Fukushima prefectural governments. It is even larger than the amount that the government of former Prime Minister Taro Aso budgeted for what it referred to as “the biggest-ever fiscal stimulus package,” in response to the global financial crisis triggered by the 2008 collapse of U.S. investment bank Lehman Brothers Holdings Inc.
People, goods and money are now flowing into the Tohoku region, where the government’s spending drive is spurring demand. Investment to rebuild the region’s infrastructure will create 570,000 jobs, according to an estimate by the Ministry of Land, Infrastructure, Transport and Tourism.
In Iwate, Miyagi and Fukushima, the ratio of employment offers to job seekers reached 0.73 in November, above the national average of 0.69. Sales at large retail stores in the Tohoku region, meanwhile, rose 4.3% on the year in November, and the number of new car registrations surged 40% in December.
Huge outlays for post-disaster reconstruction are now trickling down to households in the affected areas, which is supporting consumer spending. The taxpayer funds now pouring into northeastern Japan will also help to revive the nation’s sagging economy.
The fiscal 2011 extra budget alone will push up Japan’s gross domestic product by 12 trillion yen through its total multiplier effects, according to Itochu Economic Research Institute. That means that the spending increase will fill a big portion of the Japanese economy’s supply-demand gap, which now stands at 15 trillion yen.
The impact of public works spending, of course, will eventually wear off. The largest portion of the reconstruction budget will be spent in fiscal 2012.
Importance of investment
Following the massive 1995 earthquake that flattened the city of Kobe, 80% of the reconstruction budget was spent within the first five years. While the scale of the rebuilding effort is much larger this time, the impact of reconstruction spending will nevertheless be temporary.
In other words, growth momentum will not be sustainable unless private-sector investment starts to pour into Tohoku to support key industries. However, private-sector capital spending is not showing signs of growth.
As of December, businesses throughout the Tohoku region were planning to ramp up investment by 8.1%, down 6.7 points from September, according to a survey by the Bank of Japan’s Sendai branch. Delays in efforts to repair damaged infrastructure are weighing on capital investment growth.
Train services remain suspended along a portion of East Japan Railway Co.’s (9020) Senseki Line, which links the city of Sendai with the city of Ishinomaki, both in Miyagi Prefecture. This is seriously inconveniencing businesspeople who live along the line and is affecting personnel recruitment by local companies. Yet the fiscal 2012 budget does not include funding to rebuild the line.
Meanwhile, the government has decided to shell out 1.4 trillion yen over 10 years to build a network of roads connecting disaster-hit towns and villages, including settlements in sparsely populated rural areas. Motoshige Itoh, a professor at the University of Tokyo, said strategic infrastructure investment should be prioritized as a way to develop new growth industries.