First, let me say from the very start, there is nothing original about Krugman's analysis of Japan.
In the book 'Empire', it was presciently noted that Japan and Germany, because more industrial, would have a harder time than the US to adjusting to globalization. My own theory is that the US has a hard time micromanaging its own empire and national security state while keeping the globalization bandwagon for US companies and US client states going at the same time (and this crystallizes around dollar policy and where to peg it against the other major currencies).
Second, yes indeed, Japan has passed many supplementary budgets which consisted mostly of 'public works'. It surpassed a trillion dollars (distorted in part by a way overvalued yen though) over ten years last year.
This does need further explanation.
Even if many didn't believe it would stimulate and revive the economy, many believed it would help it hold its place until things cyclically picked up--this is what Japan has always done.
Yes, there were some who didn't just want to pump it all into public works spending. But for one thing, it has been very difficult to re-direct much of the money to other categories such as R&D, or computers for schools, or worker re-training. It seems to have been legally mandated to go to certain priorities (like putting highways through mountains, rebuilding revetments along rivers, new dams, new bridges etc. etc.). Some of the money did subsidize development of things most mainstream economists like: housing developments, shopping malls, etc.
Also, it's a bit rich for Americans to be lamenting Japan's huge and now unsupportable public works budgets. Back in late, waning Bush and early Clinton 1, Japan was TOLD in no uncertain terms to spend more on such infrastructure as it would help --somehow--to balance the trade deficits. I guess the idea was that Japan still had a lack of development in infrastructure and this was keeping American companies out of Japan.
There were also American construction companies like Bechtel lining up for a guaranteed share of the contracts and a few high profile cases against bid rigging amongst the Japanese companies.
It never ceases to amaze me how American trade representatives and diplomats always expect elected governments in other countries to respond to their requests as if there wasn't at least a minority of the population that has to be consulted first. The WTO has taken 'denial of US markets' somewhat out of the equation.
Also, put it all in perspective. Yes, the Japan spends too much on wasteful pork barrel stuff, but it's defense spending is less than 1/10th of the US's per year. By the end of next year, that will probably be more like 1/15th.
Yes, the Japanese economy has had what is now called a lost decade. But put that in perspective; if you match it up against the US for the past 11 years, I believe both countries are about tied for growth. The US growth was more with its equity markets, fictional gains in productivity (oh yeah, right, like all those computers were finally paying off) and a dot.com boom and bust. The other big difference is that the US moved toward balancing its budget while Japan looks more and more like Italy.
Why has Japan languished for over a decade? Well, when the Nikkei hit its all-time high and then tanked to a level that is not that much different than what it is today, the yen had also got very strong against the dollar. On the day way back in , memory fails me, 1995 (?), when the yen hit around 79 to a dollar, the Japanese economy in dollar size had surpassed the US's! And everyone knew it meant disaster. There were balanced trade theorists on the US side saying, hey, maybe what we need is 1 yen to 1 dollar, if that is what it takes to balance trade with Japan, Inc.
So the yen settled into an intolerably high level that hurt exporters. The companies which supplied the Japanese economy did pass on savings from the high yen in terms of cheaper goods and food, etc. But this just added to the deflation. Japanese consumers could buy much more while spending considerably less.
Meanwhile, Japanese industrial exporters faced stiffer competition from S. Korea, Taiwan, and China. And Japanese companies on many fronts faced overwhelming competition from US and European corporations because US and European corporations were extremely powerful from high stock valuations.
Moreover, many of these Japanese companies were in reality kept in Japan to a large extent because of protectionist policies in both the US and Europe.
And just to make it all the more miserable, most all of those high profile investments from Japan into the US and UK (many which were done to show that Japanese companies creating jobs in America) have proven extremely unprofitable. In other words, they bought the Brooklyn bridge many times over.
A high yen. World wide industrial overproduction, commodization of what was once profitable production, lack of development in certain strategic areas (such as computer processor chips, OSes) etc. etc. It's not at all hard to account for Japan's malaise.
There is also just the reality of Japan, which you will know if you have lived here. It's population isn't increasing much from either birth or immigration (though there are now close to 2 millions 'foreigners' living in Japan). It's population is aging. It's consumerist economy is saturated with goods and services. Go to any Japanese house and you will find at least two rooms (typically former bedrooms of children who have grown up) just filled to the top with unused stuff. The Japanese are choking on their own material existence. I don't see where they are going to put anymore stuff if they do have another consumer boom.
Yours, Charles Jannuzi