Japan PM’s Maglev Decision Driven by Political Considerations Rather Than Economic Factors, Reports Reuters

By Ami Miyazaki, Izumi Nakagawa, and Kiyoshi Takenaka

TOKYO – There is little dispute about the political rationale behind Japanese Prime Minister Shinzo Abe’s decision to allocate public funds for a $90 billion high-tech "maglev" railway project. However, the economic justification for this investment is more contentious.

Supporters argue that providing government financing to Central Japan Railway Company (JR Tokai) to expedite the launch of a high-speed magnetic levitation train connecting Tokyo and Osaka will invigorate a fragile economy still recovering from three years of "Abenomics," which has involved aggressively loose monetary policy, increased spending, and commitments to structural reforms.

Conversely, critics claim that the government’s focus on this costly project raises questions about its actual economic benefits and export viability. "The government is targeting big projects out of necessity," noted Martin Schulz, an economist with the Fujitsu Research Institute. "On paper, maglev meets many criteria for future infrastructure. However, the real-world benefits might not align," he added.

Other economists echo these concerns. Hiroshi Shiraishi, senior economist at BNP Paribas Securities, stated, "It’s uncertain whether we need to accelerate this project."

The Abe administration’s support for the maglev initiative came in response to the Bank of Japan’s decision to implement a negative interest rate policy earlier this year and the endorsement from the Group of 20 for increased fiscal expenditures, as revealed through discussions with local and national officials as well as JR Tokai executives.

Abe has committed to unveil a stimulus package by the end of July, which includes utilizing the government’s Fiscal Investment and Loan Programme (FILP) to potentially advance the operational start of the maglev line from Nagoya to Osaka by as much as eight years, pushing it forward to 2037.

The government plans to lend 3 trillion yen (approximately $28 billion) over three years at a minimal interest rate of 0.3%, with repayment scheduled over two to three decades.

JR Tokai’s initial plan projected the completion of the Tokyo to Nagoya line by 2027, followed by an eight-year hiatus to manage debt before extending service to Osaka in 2045. The maglev technology, capable of achieving speeds up to 500 km/h (311 mph) and traversing through deep tunnels in mountainous regions, would significantly reduce travel time—cutting the journey to Nagoya to 40 minutes and to Osaka to 67 minutes from the previous 145 minutes.

Given the lack of a strong political advocate and with significant public works projects becoming less favorable, JR Tokai had previously abandoned its quest for government assistance nearly a decade ago, opting to begin construction of the Tokyo-Nagoya line funded privately in December 2014.

However, business leaders, governors, and lawmakers from western Japan intensified their push for the completion of the Osaka extension alongside the Nagoya line, prompting discussions on whether FILP funds could support this endeavor.

The FILP loans, financed by government bonds, technically do not contribute to Japan’s official debt figures, which already exceed twice the size of its economy. However, such project-centric loans must be reimbursed by the borrowing firm.

This lobbying effort gained traction when the government began exploring a stimulus package early this year. An advisor to Abe, Satoshi Fujii, proposed leveraging the current negative rate environment to encourage both private and public investments, arguing that expediting the project could yield economic benefits in the range of "several tens of trillions of yen."

While JR Tokai is contemplating the government’s proposal, some executives express concerns over potential political interference in the project. "If they invest, politicians will definitely get involved," one executive remarked, wishing for a decisive rejection from leadership.

JR Tokai President Koei Tsuge expressed openness to the government’s offer, provided that it maintains the company’s operational independence. A spokesperson for JR Tokai highlighted that accelerating the project by the full eight years would be challenging due to necessary assessments of environmental impacts and other logistical concerns.

Some economists remain skeptical about the overall economic stimulation that might arise from fast-tracking the maglev project. Robert Feldman, chief economist at MUFG, acknowledged the visionary aspect of the plan but questioned whether the financial figures align.

Abe has lauded the maglev system as a "dream technology," with potential applications for linking cities like New York and Washington in under an hour. Yet, experts have cast doubts on the prospective demand for such an undertaking, suggesting that the key export drivers are not speed but safety, convenience, and environmental sustainability. In their view, there may be negligible export potential for the technology.