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Highlights of Emergency Economic Package
(Provisional Translation)
Chapter 1: Basic Viewpoints
Problems to be dealt with
Among the background factors in the poor performance in the economy is the fact that the corporate balance sheet adjustment necessitated by the collapse of share and land prices following the collapse of the bubble economy is still in progress. There is also a problem associated with the banks' continued retention of non-performing loans on their books in that the associated reduction of profitability and secondary disposal risks are interfering with their function as intermediaries channeling large-scale household savings to the corporate sector. The existence of large-scale corporate debt is also a problem in that such profits that are made are being applied to the repayment of debt rather than to active capital investment. This ongoing balance sheet adjustment is a great impediment to economic growth, and unless something is done to resolve the problem with speed, we cannot expect the economy to make strong progress towards recovery.
The weakness of the stock and real estate markets following the burst of the bubble have prolonged the balance sheet adjustment while at the same time highlighting structural problems. In particular, the stock market, hampered by the indirect finance-oriented structure of the financial system and corporate cross share-holding of shares, has not played an adequate role, and the participation of individual investors remained severely limited. At the same time, the weakness of the real estate market is impairing the effective use of resources and delaying the formation of proper prices. If the Japanese economy is once again to deliver dynamic growth, it is extremely important to tackle these structural problems, which have a bearing on asset markets.
Basic viewpoints of the emergency economic package
The emergency economic package tackles these urgent structural problems and suggests ways in which they might be resolved. It covers the revitalization of Japan's financial and industrial systems, restructuring the securities markets, urban renewal, and promoting the development of a more active market in land. By implementing these recommendations, we will be furthering the restructuring of Japan's economy and, in so doing, laying the foundations for future economic growth.
To carry out this kind of structural reform, it goes without saying that the government must also manage economic and fiscal policy flexibly so as to enable the required recovery to take place. The Bank of Japan (BOJ) has recently adopted new procedures for money market operations that have a quantitative index as their target while at the same time committing itself to continue to implement monetary policies designed to secure the ongoing effects of a zero interest rate policy until such time as continuous price deflation comes to an end. From now on, it would be appropriate for the BOJ to implement monetary policy flexibly and in such a way as to ensure ongoing consistency with the government's own economic policy initiatives.
Given the adjustments that will inevitably accompany structural reform, we must also carry out regulatory and systemic reforms and innovation to secure the nation's long-term economic growth, develop the new markets that emerge from this process, create new jobs, and put employment-related safety nets in place.
Finally, the Council on Economic and Fiscal Policy, which was established at the beginning of this year, has already started discussing the most appropriate economic structure for Japan in the medium and long term, and will have the main framework of its policy proposals in place by May and June. The government will then attempt to dispel public concern about the future by presenting a clear picture of the nation's future economic and fiscal structure.
Chapter 2: Measures
Revitalization of financial sector and industry sector
(1) Coordinated solution to the problems of the financial institutions' non-performing loans and excessive corporate debt
[A] Active removal of non-performing loans from the balance sheet
1) Principles
(a) The major banks shall "off-balance" i.e. remove non-performing loans from their balance sheets (remove non-performing loans from the balance sheet by renouncing claims to repayment and other means) in accordance with the following principles:
Measures shall be taken that will in principle lead to the removal of loans to be categorized as "potentially bankrupt company loans" and worse from their balance sheets within three business years.
Measures shall be taken that will in principle lead to the removal of loans which have already been categorized as "potentially bankrupt company loans" and worse from their balance sheets within two business years.
Careful attention shall also be given to the following considerations when removing loans from the balance sheet.
* The decision to remove a loan from the balance sheet shall be based in each case on economic rationalization, including such risks as might be posed to the bank itself and the effects of the proposed action on the local economy.
* In the case of arrangements between interested parties for such things as private liquidations, necessary arrangements should be made quickly and smoothly in accordance with the guidelines set out in Section [2]-1) below.
(b) Even if the debtor is a small company, banks shall be required to initiate the company's reorganization and to remove the relevant non-performing loans from its balance sheet having taken the relevant circumstances into full consideration.
(c) Implementation of the above measures should enable the banks to better fulfill their social function by encouraging both main and regional banks to remove non-performing loans from their balance sheets, ensuring sound management and opening the way for the smooth supply of funds to the next generation new industries, and contribute to the restructuring of the Japanese economy as a whole.
(d) The above measures shall be put into action with effect from this business year starting from April 1.
2) Publication by the banks of their progress in removing non-performing loans from their balance sheets and monitoring of the process by the authorities
(a)The main banks shall be requested to make the progress they are making in removing non-performing loans from their balance sheets public once a business-term.
(b) The Financial Services Agency (FSA) shall follow up the banks' progress in accordance with the principles outlined above.
3) Clarification of the viewpoints on follow-ups of banks that have strengthened their capital
The rationale for implementation of the so-called 30% rule in the event that the active removal of non-performing loans from the balance sheet leads to a decline of 30% or more in ROE or net profits below their projected levels shall be clarified by reference to the importance of removing non-performing loans from the balance sheet.
4) Conversion of potentially unsound loans to sound loans and prevention of generation of non-performing loans
All financial institutions shall be required to take steps to convert potentially unsound loans to sound loans and to prevent a generation of the non-performing loan problem.
[2] Smoothing the way for corporate restructuring
1) Establishing principles for the reconstruction of companies in difficulty and for the renunciation of associated claims
To ensure that arrangements between interested parties for the reconstruction of companies in difficulty and the renunciation of associated claims can be made fairly and smoothly, it is important that mutual understanding should be created between the parties with respect to procedures for the formulation, for example, of reconstruction plans in the case of private liquidations. To this end, and at the earliest possible opportunity, we must draw up and publish guidelines for the establishment of venues where discussions can be held with the parties concerned and where the government can also take part.
2) Active use of the Industrial Revitalization Law
We must provide support for private liquidizations by re-clarifying the standards set out in the Industrial Revitalization Law for the authorization of corporate reconstruction plans, including the renunciation of outstanding claims (for example, by restricting the amount of interest-bearing debt remaining on completion of the restructuring program to a maximum of 10 times earnings measured on a cash flow basis), by providing strategic loans to companies engaged in corporate reconstruction (by extending the lending system of the Development Bank of Japan, for example, to facilitate the ready supply of project finance, including non-capital project finance), and by establishing an advisory framework for the quick and smooth determination of how the renunciation of claims should be handled for tax purposes.
3) Promoting realignment of the construction industry
To ensure development of companies with outstanding technological and managerial resources, we must eradicate delinquent and unqualified operators under the terms of the Public Works Tender and Contract Rationalization Law and create a market environment conducive to realignment of the construction industry by providing support for mergers and other forms of realignment, and by considering measures for the placement of public works orders in accordance with market principles.
4) Use of corporate divestiture legislation
Corporate divestiture legislation and the related tax system changes came into force in April this year and the private sector is requested to make effective use of this legislation to restructure their operations and enhance managerial efficiency.
5) Improvement of the Corporate Reorganization Law and the Civil Rehabilitation Law
The Corporate Reorganization Law must be updated to make it easier to apply, and the necessary draft revisions must be presented to the Diet before the end of 2002. Similarly, as for the Civil Rehabilitation Law, we must monitor its application from here on, consider suitable improvements including establishing special capital increase procedures and increasing the prioritization of financing as part of a reconstruction plan (DIP finance), and carry out the necessary review by FY2003.
[3] Facilitating the ready renunciation of claims by financial institutions
1) Facilitating the ready provision of finance to companies engaged in corporate reconstruction (DIP finance, etc.)
[4] Other considerations
1) Dealing with small and medium firms
To ensure that in encouraging banks to remove non-performing loans from their balance sheets and promoting corporate reconstruction we do not expose small companies that have business relationships with companies targeted for reconstruction to the risk of knock-on failure and other unforeseen obstacles to the stable management of their businesses, we must respond as necessary on the financial front. At the same time, we must provide active support for such small companies to enable them to reform their management practices in such a way as to put them on a firmer footing for the future.
2) Increased use of project finance
Financial institutions are expected from here on to make active use of financing methods such as project finance that focus on the profitability of the individual projects for which finance is required.
(2) Limitation of stockholding by banks
In addition to encouraging the banks to remove non-performing loans from their balance sheets, in order to facilitate the restructuring of Japan's financial system and boost confidence in its ongoing stability, we must also redefine the limits of stockholding by the banks to ensure sound management, by confining the risk of changes in the prices of stocks held by a bank to a level commensurate with the limits imposed by that bank's risk management capacity. The limitation of bank stockholding will first encourage the restructuring and revitalization of Japan's stock market by reducing the volume of cross-held shares, and second will also contribute to regeneration of the economy by fostering improved corporate governance. On the other hand, the unwinding of cross shareholdings by the banks in response to those policy measures will adversely affect the supply and demand stock market and share price formation in the short term. Moreover, recognizing that falling share price level could have an undesirable effect on the stability of the financial system and the economy as a whole, we would also propose the establishment of a temporary stock purchase scheme with a public dimension.
[1] Introduction of limits on stockholding by banks
1) As a precondition for acquisition of the banks' stockholdings, we must establish a system to confine bank stockholdings to levels commensurate with each bank's risk management capacity.
2) More specifically, we would suggest, for example, that a bank's shareholdings should be kept within the limits of its equity capital and that if its shareholdings were to rise above this level, that the bank should be given a time limit within which to dispose of the surplus shareholdings.
[2] Outline of stock purchase scheme
1) Stocks will be purchased by the Bank Stockholding Purchase Institution (provisional name), which will be set up using contributions made by the banks and other institutions under the terms of the law. In this light, we will also consider the provision of public support in the form, for example, of government guarantee for the funds required to acquire bank stockholdings, along with use of the Deposit Insurance Corporation.
2) Stocks will be purchased specifically from banks (excluding shares held in trust accounts in the case of banks engaged in trust banking activities).
3) Stocks will be purchased at market prices with eligible issues being determined in accordance with rules formulated to take account of the composition of exchange traded funds (ETFs).
4) The purchasing organization will dispose of acquired shares by utilizing vehicles such as ETFs, investment trust funds, and defined-contribution pension schemes.
[3] Future action
We will draw up specific plans for establishment of the necessary systemic requirements and will make detailed arrangements, including legal arrangements, for implementation of the above scheme.
Restructuring of the securities markets
The following steps will be taken to revitalize the stock market by, for example, encouraging stable, long-term stockholding by individuals.
(1) Lift the ban on treasury stock and abolish the net asset value standard for stock investment units.
The following actions will be considered on the understanding that moves are already afoot to revise the relevant legislation during the current Diet session.
[1] Companies are currently prohibited from acquiring their own stock except under specified circumstances, and from holding their own stock except for use in stock option schemes. However, the restrictions pertaining to the acquisition of own-company stock will be abolished and companies will also be permitted to hold their own stock as "treasury stock" under certain conditions. Steps will also be taken to the restrictions on insider trading and prevent share price manipulation, as is held to be necessary if the ban on treasury stock is lifted, and at the same time to provide for more ample disclosure with respect to the acquisition and disposal of own-company stock and to strengthen the organizational structure of the Securities and Exchange Surveillance Commission itself.
[2] We will make it easier for individual investors to make small-scale investments by abolishing current regulations pertaining to the minimum size of stock investments (investment units), thereby making it possible for firms to set investment unit sizes freely.
(2) Exchange traded funds (ETFs) involving stock index-related investment in kind
We will press ahead with the establishment of ETFs, which are expected to help revitalize the stock market and give it more depth by providing investors with a new stock price index-related product that will enable them to invest with ease and flexibility by making small-scale contributions in kind.
Chapter 3: Renewal of Urban areas and the promotion of active land market
(1) Establishment of "Headquarter for Urban Renewal Project"
An "Urban Renewal Headquarters" will be set up in the Cabinet, to be headed by the Prime Minister along with other ministers as members. This body will to take comprehensive and energetic steps towards 21st Century Urban Renewal Projects, promoting urban renewal from the standpoint of the environment, disaster prevention, internationalization, as well as taking measures to encourage the most effective use of land in urban areas. The Headquarters will have its secretariat in the Cabinet Office and will be staffed by the Ministry of Land, Infrastructure and Transportation, and other ministries, as well as local governments, and the private sector.
(2) Promotion of active land market
[1] Promotion of real estate securitization
We will promote the securitization of real estate through the preparation of guidelines by 2002 for a "Real Estate Investment Index" that will provide an indication of the performance of investment properties, and also by encouraging the development of real estate investment advisory companies.
[2] Regulatory reforms and other measures to facilitate urban renewal and the establishment of a more active land market
With regard to superior projects that guarantee, for example, specified amounts of open space, with a view to making positive use of systems that enable an easing of floor space ratios and the like, in April of the current year, we will disseminate information about systems, and taking steps to promote their smooth utilization. We will call on local authorities to adopt a more flexible attitude towards the application of urban planning standards. We will also establish "Private Urban Development Project Promotion Platforms" to enable private sector project managers to call on central and local government to coordinate their approach and, in so doing, to enable conditions for the promotion of a project to be put in place quickly and flexibly.
* We expect the current session of the Diet to approve enactment of the Land Expropriation Law Revision Bill, which is designed, among other things, to increase the transparency of project approvals and to rationalize the related processes of expropriation in light of the changes taking place in Japan's socioeconomic conditions.
* We will make necessary improvements to the real estate auction system to make it easier to use, we will also press ahead with our examination of the potential for disclosing real estate-related information. We will also consider shortening the time restrictions currently placed on urban redevelopment project zones.
(3) Active use of PFIs and the redevelopment of public service employees' residential accommodation sites.
Chapter 4: Job creation and the "safety net"
(1) Regulatory and systemic reform for the development of new markets
[1] IT sector
We will carry out a thorough reform of the IT sector regulatory system to facilitate measures such as ensuring rights of the way and the establishment of a new competition policy. In so doing, we will make Japan one of the world's leading IT countries within the next five years, as provided for under the terms of the e-Japan Action Plan.
[2] Medical treatment sector
In addition to reviewing systems for the provision of, and payment for, medical examinations and treatment, with the aim of making the medical system more efficient we will press ahead with the formulation of a strategic grand design for the introduction of medical IT systems and the conversion of clinical records into electronic form.
[3] Nursery care and nursing care
In providing for the care of young children, we must make it entirely clear that the operation of public day nurseries may be subcontracted to private sector operators as well as public social welfare organizations, thereby providing a opening for the introduction of private sector energy.
Similarly, from the standpoint of expanding the role of the private sector in care of the elderly, we will continue to examine ways in which economically sound and adequately staffed private corporations might be encouraged to apply through their local government offices for licenses to operate "care houses" to provide the sort of nursing care for the elderly that is currently provided by special care centers for the old.
[4] Creation of a recycling society
We will press ahead with systemic reforms designed to make Japan into a recycling society by providing for the construction of systems for the disposal and/or recycling of waste products, including the possible enactment of legislation requiring the recycling of automobiles.
(2) Innovation-oriented investment prioritization and systemic reform
In addition to investing in research and development of strategic areas such as the life sciences, information and communications, the environment, and nano-technologies and materials, as provided for under the terms of the second phase of the Science and Technology Basic Plan, we will press ahead with the reform of higher education, including reviewing the authorization of educational subjects so as to ensure the provision of education and research relevant to the needs of society and industry.
(3) Provision of an employment-related safety net
We will take the following measures to ensure that we are able to respond quickly and flexibly to such changes in the employment situation as may accompany the implementation of structural reforms such as the removal of non-performing loans from the banks' balance sheets.
[1] Employment measures
We will take steps to ease the conditions of and relax worker eligibility requirements for the provision of special emergency job creation grants, which are intended to encourage employers to employ workers in middle and older age groups that have been made redundant, and to extend the system of special grants for the creation of jobs in new sectors and growth sectors.
We will seek to extend the scope of retraining courses for jobless white-collar workers in middle and older age groups and to promote the development of their IT-related and other personal skills.
In the case of unemployed workers in middle and older age groups who have lost their jobs for reasons such as the bankruptcy of their company, we will seek to ensure the smooth enforcement of the Revised Employment Insurance Law, which provides for the payment of unemployment benefits for a longer period than in the case of ordinary unemployed people. If it is known that a large number of workers are due to be made redundant, we will provide them with the support they need while they are still in work, and furthermore, we will also seek to ensure early establishment of the "work information net," an employment information system for the use of both public and private sector personnel.
To promote the smooth re-employment of unemployed people and to ensure that people are employed securely throughout their working lives, we expect to place revisions to the Employment Measures Law and related legislation on the statute books during the current Diet session to provide for systematic implementation of re-employment support and encourage the easing of age restrictions when taking on new recruits.
[2] Regulatory reform to reinforce adjustment function
We will examine the way in which employment agency operations are regulated with respect to types of work, periods of employment, and the like, and take such steps as may be necessary bearing in mind the way in which the revised Labor Services Temporary Assignment Law is currently enforced. We will also carry out a review in 2001 of the requirement that payments of grants such as the special job seekers employment and development grant should be paid through the offices of the public employment securities office.
Chapter 5: The tax system
In view of the current state of Japan's economy, we will urgently review the tax system, taking special account of matters such as fairness, and publish our conclusions as soon as possible. As part of our review we will look into such things as revitalization of the nation's direct financial markets through encouragement of the participation of individual investors in those markets, promotion of active land market, and in order to promote continued reform of the economic structure, we will consider the implementation of effective and appropriate measures for reform of the securities and land-related tax systems, such as lifting the ban on the holding of own-company shares.
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