05/26/2016 04:53 EDT | Updated 05/27/2017 05:12 EDT

When It Comes To Fiscal Policy, Japan Is No Role Model

Anadolu Agency via Getty Images
ISE, JAPAN - MAY 26: Japanese Prime Minister Shinzo Abe (R) and Canadian Prime Minister Justin Trudeau (L) shake hands prior to G7 leaders summit at the Ise Jingu (Shrine) on May 26, 2016 in Ise, Mie Prefecture, Japan. (Photo by Ministry of Foreign Affairs of Japan / Handout /Anadolu Agency/Getty Images)

Prime Minister Justin Trudeau is in Tokyo this week for a bilateral visit with Japanese Prime Minister Shinzo Abe, as well a G7 leaders summit in nearby Ise-Shima. While increasing trade is a major focus of the prime minister's visit (Japan is Canada's fifth largest trading partner), Canadians should cross their fingers that Trudeau doesn't ask his Japanese counterpart for advice on fiscal policy and the virtues of massive infrastructure spending.

Japan's economy, which is now the world's third largest, developed into a powerhouse following the Second World War. From the 1960s to the 1980s, Japan's economy grew rapidly, transforming Japan from a poor country into a very wealthy one. But in 1991, real estate and stock market prices crashed and Japan's economy has been struggling ever since. Public debt is a staggering 229 per cent of GDP -- in other words, more than double the size of the entire Japanese economy. Broken down, it means every man, woman and child in Japan now owes nearly $100,000 CDN.

How did Japan dig itself into such a big hole? Look no further than a fatal conceit in the power of government deficits to "stimulate" the economy. Year after year, the Japanese government has sought to spend the country into prosperity. Infrastructure, of course, featured very prominently. The result has been that the Japanese government has run deficits every year since 1992, with no end in sight.

In the 1990s alone, Japan spent around $2 trillion on building new infrastructure, including highways, roads, bridges and tunnels, many on wasteful white elephant projects now dubbed "roads to nowhere." By some estimates, as much as 70 per cent of Japan's coast is covered in concrete.

But what is most troubling in the Japanese government case is its refusal to acknowledge its own policy failures, choosing instead to double down on deficit spending.

And what did all that borrowed money buy? Since 1992 annual economic growth in Japan has averaged just 0.8 per cent (compared to 2.6 per cent in Canada). In other words, if the policy objective was a boost to the Japanese economy, it was a complete failure.

It is true that Japan faces some unique challenges (for example, the population is shrinking due to a low birth rate and very low levels of immigration) which make it difficult to compare directly to Canada's situation. Yet there are obvious parallels between the Japanese approach and the Trudeau government's faith in the power of deficit-financed "investments" in "infrastructure" to transform the Canadian economy.

True, the amounts pledged by the Trudeau government are nowhere near the astronomical levels seen in Japan. But what is most troubling in the Japanese government case is its refusal to acknowledge its own policy failures, choosing instead to double down on deficit spending. Prime Minister Abe even plans to use the G7 summit as a platform to sell his counterparts on the need for yet more government stimulus spendingld, apparently in defiance of the well-known maxim about the wisdom of doing the same thing over and over while expecting different results.

Hopefully Prime Minister Trudeau views his Japanese visit as a useful exercise in information gathering. He and his ministers have regularly claimed to be disciples of "evidence-based" decision making -- and based on a quarter century of evidence from Japan, they should think twice about repeating that country's costly mistakes.

Follow HuffPost Canada Blogs on Facebook


Trudeaus In Japan, G7 Summit