Appendix B: Political Factors and Public Investment Policy in Japan

B1 Political Pressures from Local Interest Groups

Even if the government is benevolent, it may not always pursue the most appropriate public investment policy in a political economy. When the government is politically weak, it may not conduct public work measures effectively. In reality, the political strength of a government is affected by the rent-seeking activities of interest groups. Thus, it is important to consider the role of political factors in public finance policies.

As explained in Chap. 1, since the 1990s, government deficits in Japan have increased rapidly, partly because the Japanese government has been politically weakened by the pressure of many interest groups. Such political factors contributed to increasingly wasteful public works in the 1990s (see, among others, Asako et al. 1994).

One important reason why funds for public works have not been efficiently allocated is that the government faces political pressures from local interest groups. In Japan, many local interest groups (or politicians) seek to obtain more funds from the central and local governments through a variety of lobbying activities. In particular, local interest groups living in the rural and agricultural areas have received substantial grants, mainly in the form of wasteful public works. These interest groups may be regarded as one of the most powerful political actors in Japan, a plausible explanation for which is as follows.

The ruling party (the Liberal Democratic Party, LDP) exerts influence on deciding the national budget. Providing extended grants is important for the party if it is to be re-elected. Comparatively, since the post-war period, a higher number of representatives in the ruling party, the LDP, have represented rural regions rather than urban areas. Thus, people in the rural regions have more representatives in the ruling party than their urban counterparts. Usually, a region with a higher number of representatives from the ruling party receives more subsidies from the central government throughout the period of the party’s rule. Thus, representatives of the Diet appeal to the cabinet or the central bureaucrats to allocate more funds to their own regions. The Japanese government is politically weak at implementing microeconomic measures; thus, it has failed to control fiscal privileges such as wasteful public works.

When the central government is politically weak, it may respond to political pressures by simply granting subsidies to local governments. This soft budget mechanism further stimulates rent-seeking behavior on the part of local governments and politicians. Namely, even when the economy is not in recession, the predominant focus on public investment policy by local governments results in a huge amount of wasteful public works, thereby deteriorating Japan’s fiscal situation. Local governments may free ride on subsidies from the central government without imposing sufficient taxes on their own residents. As a result, the overall government deficit may increase.

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