When should Japan’s Highways be Freeways?

Japan is always spending money building roads
Where does the money come from? Everywhere you travel in regional Japan there seem to always be new highways under construction

So after all of that rhetoric about abolishing road tolls (高速道路無料化法案), Hatoyama has decided to rethink his plan and only allocate 1/6 of the original budget detailed in their manifesto.  Until last week, I, like 65% of Japanese voters, actually wanted him to scrap the entire plan altogether.  I happened across some insightful interviews with the academics who originally proposed the policy and have since gained some insight into where the concept came from.  How does Hatoyama look at himself in the mirror after promising that Japan will cut green-house gas reductions by 25%?   It turns out that there are significant structural problems with the current toll system and even a few environmental arguments behind scrapping them. Would you believe it?

While I would have structured the policy quite differently myself, I was quite disappointed with myself for being so completely fooled by the LDP propaganda and related rhetoric from the media surrounding the issue.  As Hatoyama said when he scrapped the policy, they were thoroughly defeated by opposition propaganda in selling the concept.  Since I haven’t seen any balanced pieces in the English media either, I thought I would share “the other side” of the argument with you.

The real issues surrounding Japan’s highway tolls are surprisingly similar to those that became the catalyst for the privatisation of the post office.  Especially in the countryside, LDP cronies have bought votes from the construction industry by supporting unnecessary public works projects.  The post office is guilty as 80% of the money deposited in the Post Office bank (195 trillion yen!) is used to buy JGBs (Japanese Government Bonds).  The government then uses the cash obtained from selling the JGBs to fund this endless construction work.  If the buyers of JGBs were normal investors (i.e. economically rational) then they would require the government to spend the cash on economically viable projects and hence force the government into contemplating ROI.  Lucky for the Japanese Government, they have never had to justify the use of its cash (read: irrelevant Keynesian public works projects) to JDB investors as they have always had a “buyer of last resort” in the post office.  Privatizing the post office meant that the government/LDP could no longer manipulate the cash in the Post Office Bank for political purposes.

construction of the Tokyo Metropolitan Shuto Expressway
It cost 50 yen to use the Tokyo Shutoko Expressway back when it was opened in 1962.

So what has this got to do with road tolls?  Let’s go back about 40 years to the end of the 60s, when Japan was starting to catch up with the West.  The government was desperate to improve the efficiency of domestic logistics and began to build a highway connecting Tokyo and Kobe.  Welcome the first ever toll road in Japan.  In order to convince the populous, the government promised that they would remove the toll within 30 years as they would have repaid the entire loan necessary for the construction of the road.  Thirty years equates to 1992 for Nagoya-Kobe (名神高速, meishin kosoku) and 1999 for Tokyo-Nagoya (東名高速, toumei kosoku).

You don’t need to be a rocket scientist to work out that we are still paying tolls today despite passing those deadlines over ten years ago. Because Kakuei Tanaka (田中角栄), the Prime Minister in 1972, realized that he could use the cash generated from these two profitable highways to subsidize uneconomic road construction in the countryside (read: LDP stronghold).  He hired Dentsu (電通) to come up with the catch phrase “Revamp the Archipelago” (nihon retto kaizo ron, 日本列島改造論) in order to hide what was actually referred to as the “Sharing Around The Cash” system (ryokin puru sei, 料金プール制).  Now, thanks to Tanaka, the government has a whopping 2.5 trillion yen of cash every year to build bridges to nowhere in their regional sandpits.

International comparison of public spending on roads
Japan's annual budget for road construction runs rings around other countries in this international comparison

The debt that Japan borrowed from the World Bank to build these toll roads was fully repaid in 1990 – ten years faster than they had predicted!  However, for some reason (read: the LDP policy to “buy a vote with a road”) the public corporation managing Japan’s roads (高速道路機構, kosoku doro kiko) still has a whopping 30 trillion yen of debt.  Better yet, they also have plans (implemented by the LDP) to shoulder a further 20 trillion yen of debt between now and 2050 to build more roads in remote places.  Oh my Buddha!  Will someone please tell them that Japan has enough roads already (see chart showing Japan’s disproportionately large annual spend on roads). Think how many roads you could build with 20 trillion yen!

Getting rid of highway tolls means that making the plans to borrow another 20 trillion yen to build meaningless roads infeasible.  More to the point, it means getting rid of another 2.5 trillion yen that the LDP wants to use to line the pockets of regional construction companies should they ever get back into power.  That is why Ichiro Ozawa (小沢一郎, the real brains behind the Hatoyama government) was so keen to push through this legislation.  (Ironically, the same rationale should argue that it doesn’t make sense for the DPJ to halt the privatisation process of the Post Office but that is another story).  Even if the DPJ does back pedal on the size of the discounts it is vital that they abolish this system.

Perhaps a smarter solution to the problem would have been to merely change the name of the tax and dedicate the same 2.5 trillion yen to environmental issues.  I think you could make a similar argument for their recently rethought attempts to cut the current 0.6 trillion yen “temporary” tax on gasoline (ガソリン税の暫定税率の廃止, gasorin zei no zantei zeiritu no haishi) that has been in place since 1974.  Let’s not forget that a socialist party should be all about high taxes and high public spending.  The DPJ seem to think that they can achieve high public spending with reduced taxes.  I’m not so sure how sustainable that is.

empty toll roads
The vast majority of Japan's huge network of express-ways aren't being used

The other problem with both the gasoline tax and toll roads is how it impacts greenhouse gas emissions.  Interestingly, Yasuyo Yamazaki (山崎養世), ex-Goldman Sachs Asset Management CEO and the man who first proposed cutting Japan’s road tolls, claims that it could actually cut green house emissions!?  Honmakaina I hear you shout!  Here are the skin and bones of his theory:

  • Currently 65% of Japan’s highways are severely underutilised and only 5% are subject to congestion.  The primary reason for this is that they are so expensive.  (At an average of 25 yen per km, a car traveling at 100km/hr would be paying 2,500 yen per hour!)  Free highways will mean that this infrastructure doesn’t go to waste.
  • Engine idling at traffic lights is the biggest culprit when it comes to auto CO2 emissions.  A shift of traffic from the highly congested local roads (with lots of traffic lights) to the existing highways (without traffic lights) should reduce CO2 emissions by as much as 3 million tonnes.
  • The underutilised land in service areas and parking areas across the nation is said to be worth about 10 trillion yen.  With more traffic, the value of the real-estate should be substantially higher and hence create significant opportunities for profit through redevelopment.
  • Economic projections by the Ministry of Land, Infrastructure, Transport and Tourism (国土交通省, kokudokotsusho ß why is the name so much simpler in Japanese?) suggest that the economic impact of cutting tolls could be as high as 7.8 trillion yen.  The biggest beneficiaries would be trucking companies that use the nationwide infrastructure daily and ideally their clients should too as the trucking companies subsequently lower their prices.  (Note from the editor: Given that the annual revenue from tolls is only 2.5 trillion yen I guess they are assuming a Keynesian multiplier of 3! Hmmm…)
  • Many people who don’t have cars and live in big cities argue for a user-pays approach to funding Japan’s highways.  The irony is that we are all paying these tolls indirectly every time we buy meat, fruit and vegetables that were produced in other parts of the country.  Free tolls should mean lower grocery bills, especially for people living in big cities.  (This is included in the 7.8 trillion yen figure mentioned above and one of the key reasons why the Keynsian multiplier is assumed to be quite large)

The biggest flaw in this argument is that auto traffic has an uncanny ability to grow indefinitely until it meets the capacity of roads available.  Just read Ben Elton’s “Grid Lock.”    Removing the tolls will just see an increase in auto traffic greater than Japan has ever seen before.  This of course would be a huge boon to Toyota and the other Japanese auto-makers.  Maybe that is another hidden motivation for the government as they try to turn around the floundering economy.

Their current proposal for changing the policy would be to only scrap the tolls on rural highways and even then to introduce pricing ceilings for daily use: 5,000 yen for trucks and 1,000 yen for cars.  If they really believed in the Keynesian multiplier effect of the cost saved in cutting infrastructure costs then surely they would be charging cars 2,000 yen and making trucks free?  This would be hard to push by voters, yes, but true to the original thesis behind the policy.  You do remember why you proposed the policy, right Yukio?

At the end of the day Japan just cannot afford to scrap existing tax revenues – especially less controversial ones.  With a whopping 200% of its GDP in gross government debt (the highest amongst G20 by a factor of almost 2x), Japan needs all of the extra income it can earn to pad its coffers.  Despite being a left-wing party, there are plenty of ex-bankers within the DPJ.  They get it and they realise the huge sacrifice they are making in scrapping road tolls.  The fact that they refuse to scrap it completely shows you just how powerful that cash was in buying votes for the LDP.  Even if they redirected the money earned from tolls to welfare, they must assume that the LDP will reverse any changes as soon as they take power again.  Abolishing tolls seems to be all about abolishing any chance for the LDP to ever reinstate another “sharing around the cash” system.

Has this article changed your view?  If so, let us know in the comments section below.

6 thoughts on “When should Japan’s Highways be Freeways?”

  1. Good article.

    Just a thought, but wouldn’t it be best to transition to freeways from tollways by only applying the levy to non-eco friendly vehicles, hence encouraging CO2 reduction and supporting (largely domestically produced) eco-vehicle production?

  2. Fascinating. Thanks for this article.I think it demonstrates in amongst other various possible changes that there is a lot to be done in Japan that could make a real impact on the direction of the country – not just simply increasing efficiency through microeconomic policies (although important).

  3. Very interesting piece.

    Many countries which opened toll funded roads and bridges found it difficult to stop charging the toll once the construction cost had been paid off.

    Japan also has the unusual situation of some local road or bridge operating companies going bankrupt because the toll road, built with pork barrel money, attracts no users owing partly to cost and partly to being in a silly place.

    An easier, greener tax is to put back the tax on petrol (gasoline.) It’s easy to collect from the oil companies, and difficult for users to evade. It is also proportional to the amount of fuel sued whether spent on motorway driving or sitting in traffic jams.

    Apart from reforming government finance Japan also needs to adjust its electoral district boundaries to reflect changing population patterns. At the moment there are districts in urban areas where it takes over two voters to elect the same number of representatives as one voter elects in a rural district.

  4. Japan is stifled with enormous costs and overheads. It is slowing down as a manufacturing economy and is collapsing under it’s own weight, as well as the sheer amount of dead-weight it has to pull. For example;

    Takkybin has 1 man running full pelt all day (average work span is 9-12 months before quitting) but does something meaningful and profitable.
    1 person has to stay in the truck to avoid the many parking tickets it would get. (annual budget for all transportation cost is 2 billion for tickets)
    2 people assigned by govment to issue parking tickets. (1 guy would get lonely)
    well we do have high employment though. . .

    How about the 96 % fail rate of local govt hotels?

    ad infinitum . . .

    As for highways, The bridge building association said outright that it is necessary to bid rig,

    So sure govt is wasteful but at least it could be wasteful in something worthwhile. 🙂

    as for tolls, the latest SNAFU was ETC. Making each vehicle pay up to 40,000 to install when abolishing tolls but raising the same amount in tax of gas would have been trillions ahead. Green house gasses would be down, journey times reduced, hey people might even be able to spend more time with their sweet hearts–perhaps even solving a problem mentioned in previous topic. Well no chance, the issuing of prepaid tickets was a massivr cash cow for some ploiticians relateive

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