Focus: Economic Rebirth

JETRO, 1221 Avenue of the Americas, NYC, NY 10020June 26 , 2001

Koizumi Government Adopts "Solid Policy Framework" to Promote Economic Rebirth of Japan

Outline of the Basic Policy on Economic/Fiscal Management and Social and Economic Structural Reforms


This morning the government of Japanese Prime Minister Junichiro Koizumi adopted a new economic reform program to initiate the technological innovation and "creative destruction" needed to propel economic growth in Japan. Containing a comprehensive framework designed to promote a rebirth of the Japanese economy, this new policy package will help to transfer human and material resources from inefficient to high-growth sectors.

The coming two to three years will stand out as a period of concentrated adjustment in the Japanese economy. Japan must therefore satisfy itself with low economic growth rates during this time. The resolution of non-performing loans and the implementation of structural reforms will be pursued as an integrated package during this period.

Thereafter, Japan will move to realize economic growth led by private sector demand. Against this backdrop, fiscal reform measures will be introduced assuring steady progress to achieve primary balance surpluses. In this way the government will not have to rely on new borrowing to finance expenditures other than the servicing of past debt. In pursuing this line of action, careful attention will be paid to macroeconomic trends and developments.

In addition, a seven-point structural reform program will be initiated. This includes comprehensive measures to promote: a) privatization and regulatory reform; b) start-up and new venture development; c) strengthening of insurance functions; c) development of Intellectual property; d) lifestyle renewal, including employment of women and the elderly; and e) autonomy of local governments; and f) fiscal reform.

The Japan External Trade Organization (JETRO) provides the following information in order to examine this program in greater detail.

I) Structural Reform and Economic Revitalization

These reforms are designed to promote the disposal of non-performing loans. Simultaneous attention will be devoted to developing an environment conducive to innovation and a framework to encourage the transfer of economic resources to growth areas.

Drastic Disposal of Non-Performing Loans (NPLs)

• Through the process of information disclosure, public pressure will be brought to bear on major banks to exercise independent judgment in the rapid disposal of NPLs. This will be accomplished in accordance with the schedule indicated in the "Emergency Economic Package."

• The condition of NPLs will be rigorously inspected on a regular basis. A series of new indicators will be developed to maintain an accurate accounting of all NPLs, including those that are newly generated.

• Efforts will be made toward the integrated resolution of NPLs and the problem of excess corporate liabilities. To develop the necessary legal framework, bankruptcy laws will be reviewed. It is hoped that the responsible parties will promptly formulate guidelines for private-sector efforts.

• The Resolution and Collection Corporation (RCC) will be asked to accept NPLs that major banks find difficult to dispose of within the two to three year target period. The functions and organization of RCC will be enhanced to enable it to accept a wide range of NPLs and to promote the rehabilitation of businesses deemed eligible for reconstruction.

• Active measures will be taken to transform NPLs and collateral real estate into securities, and to promote the development of a liquid market for claims.

• Safety nets will be enhanced to counter the impact of unemployment generated in the process of NPL disposal.

• Appropriate financial measures will be taken to prevent chain-reaction bankruptcies among small- and medium-sized enterprises, including the provision of guarantees by Credit Guarantee Associations and lending by public financial institutions. At the same time, reforms will be undertaken to help small- and medium-sized enterprises to strengthen their management capabilities.

In addition to the above, many new measures that seek to promote structural reform and the creation of new markets and jobs and employment policies are in development.

Rebirth of the Japanese Economy

1] Foundation-Building for a Science and Technology-Based Nation and Global Leadership in IT

- IT-related measures will be actively implemented, as will the Basic Plan for Science and Technology. This includes the promotion of R&D in four priority areas, including life sciences.

- Corporate R&D will be encouraged and the transfer of technologies from the public sector and universities to private corporations will be enhanced. Measures will be considered for developing a supportive environment for start-ups that create new businesses based on new technologies.

2] Creation of a Nation Rich in Human Resources

- The incorporation of national universities will be promoted. Job training systems will be upgraded through greater utilization of IT and support of self-improvement programs.

3] Developing an Environment Conducive to Private-Sector Initiatives

- Further competition will be promoted in such fields as telecommunications and energy.

- The investigative capabilities of the Fair Trade Commission will be enhanced. This includes new measures to introduce competition in the IT and telecommunications sectors ahead of schedule.

4] From Regulatory Reform to Systemic Reform

- Systemic reforms will be promoted, including reform of the judicial system and a review of special public corporations.

5] Structural Reform of the Capital Market

- The securities market will be reformed, including tax reform, to promote investment.

- Structural reform of the real estate market will be promoted through such means as the 21st Century Urban Rejuvenation Project.

6] Structural Reform of the Labor Market

- Structural reform of the labor market will be promoted, including support for skills development, the development of diverse employment formats, and the smooth implementation of job training.

7] Tax Reform

- The tax system will be reformed to create a system neutral to corporate economic activities.

Fiscal Structural Reform

• The immediate goal in the FY2002 GOJ budget will be to keep the volume of new government bond issues to below Ç30 trillion yen. Rigorous efforts will be made to initiate administrative and fiscal reforms, including a thorough review of expenditures and related systems.

• Subsequently, it will be necessary to engage in full-fledged fiscal reconstruction, including the adoption of fiscal balance surpluses as a primary goal.

• Structural reform will not stop at the mere reduction of current expenditures, but will also include reform of the contents of expenditures and related systems.

• It will also be necessary to pay careful attention to macroeconomic trends to determine the speed by which fiscal deficits can be addressed. In other words, the pace at which programs for achieving primary balance surpluses are implemented and the rate at which the GDP ratio of outstanding government debt is controlled, must be determined in the context of evolving macroeconomic conditions.


2) Improvement of Social Infrastructure for the New Century -- Pursuing Greater Effectiveness and Efficiency

Uniformity and rigidity in public works and the scale of investment will be reviewed. A framework will be developed to create social infrastructure with a strong impact. Such investments will be based on a clearly stated vision and will be undertaken using the most efficient means available.

Overcoming Rigidity

• Efforts will be made to overcome rigidity in public works through the review of earmarked revenues and long-term sectoral plans, and a shift toward policy instruments other than public works investment.

National and Local Governments as Principal Parties in Public Works

• The relationship between the national and local governments will be reviewed. Cost-benefit relations in public works will be analyzed.

• To provide local governments with greater incentives to reduce expenditures, the use of local allocation taxes in deferring the redemption burden of local government bonds will be reviewed.

Prioritization in Social Infrastructure Development

• The following areas will be prioritized for social infrastructure development: a) Development of recycling-based social and economic systems, b) Responding to the aging of society, including development of barrier-free facilities and systems, c) Community development and the revitalization of unique local governments, d) Urban rejuvenation: development of attractive and internationally competitive cities, e) Promotion of science and technology, f) Human resources development and education.

Pursuing Greater Efficiency and Transparency in Public Works

• Projects will be selected in accordance with strict standards that reflect pre- and post-project evaluations. Extensive utilization of project finance mechanisms such as privately funded initiatives will be pursued. Concerted efforts will be made to promote competition and reduce costs in the implementation stage, and to expand the scope of electronic bidding.

Compatibility with Economic/Fiscal Conditions

• The level of Japan's public works investments exceeds those of other major countries. It is necessary to reduce the ratio of public works investments to GDP over the medium term, taking into consideration current levels in other major countries.


3) Reforming the Social Security System -- Promoting Security and Stability in Peoples' Lives

An easy-to-understand social security system will be developed that takes into account the values of "fairness," "efficiency," and "sustainability." Special importance will be attached to achieving a balance in trans-generational benefits and burdens, responding to increased diversity in employment formats and the division of responsibilities between the public and private sectors. Additional attention will be directed to the promotion of systemic and regulatory reforms.

Common Challenges in the Social Security System

• The introduction of social security serial numbers and the development of an individual social security accounting system will be examined. A review will be undertaken of the division of functions among pensions, medical and nursing care. Regulatory reform will be promoted in these three core areas.

Reforming the Medical System

• The management format of medical institutions will be reviewed, including their transition to joint-stock companies. Greater efficiency in health and medical services will be promoted through the (provisionally named) "Program to Raise the Efficiency of Medical Services". This will include a review of current remuneration systems.

• Medical costs will be reduced while maintaining an appropriate standard of quality to control total medical expenditures.

Reforming the Pension System

• The pension system will be reviewed in response to growing diversity in employment formats and lifecycles.

• Taxes on pension benefits will be reviewed in order to maintain inter-generational and intra-generational fairness.

Support for Nursing Care and Childcare

• The supply of efficient and high quality nursing care services will be maintained through the introduction of market principles.

• Regulatory reform will be promoted in the area of preschool childcare services. This includes private management of public nursery schools and the expansion of the scope of childcare services. Strategies will also be pursued to achieve zero waiting lists for nursery school admission.


4) Competition Among Unique Local Governments -- Enhanced Autonomy in National and Local Government Relations

The role of the national government in local affairs will be reviewed to minimize the possibility of excessive intervention. Steps will be taken to rectify the system to allow local governments to develop administrative services and pursue community development programs based on their own judgment and financial resources.

Establishing Self-Reliant Local Governments

• The merging of municipalities will be promoted. The functions and responsibilities of municipalities in relation to their scale will be examined with the goal of moving toward a more diverse framework.

Establishing Self-Reliant Decision-Making by Local Governments

• The national government will be responsible for providing a minimum standard of necessary support, while local governments will be responsible for providing other locally required services. In this way, the division of responsibility between the national and local governments will be more clearly defined and the relation between costs and benefits will be clarified.

Fundamental Reform of Local Finances

• To provide local governments with greater incentives to reduce expenditures, the use of local allocation taxes in deferring the redemption burden of local government bonds will be reviewed.

• The local allocation tax system should be simplified so that allocation amounts can be determined in accordance with objective and straightforward standards.

• Subsidies and local allocation taxes will be reviewed. The allocation of taxable sources between the national and local governments will be fundamentally reviewed and their current status examined, including the transfer of taxable resources.

• Introduction of a taxation system based on corporate revenues and employees will be further considered while soliciting opinions from various quarters, taking into account the previous examination of such issues as the treatment of small- and medium-sized corporations and their impact on employment. The introduction of such a system will be timed in light of prevailing economic conditions.

Establishing Sound Local Finances

• Levels and contents of local government expenditures will be reviewed in tandem with efforts to restore fiscal soundness in the national government.


5) Medium-Term Outlook for Economic/Fiscal Policies and Reforming the Policy Process

Economic growth will be suppressed during the coming two to three years while efforts are made toward the final disposal of NPLs. However, over the medium to long terms, the Japanese economy is expected to realize private-demand-led economic growth.

Formulation of Medium- to Long-Term Economic/Fiscal Plan and Revamping of the Budget Process

• The first medium-term goal to be pursued in fiscal reconstruction will be the achievement of primary balance surpluses..

• A medium- to long-term economic/fiscal plan shall be formulated and will be revised on an annual basis.

• Government ministries and agencies will formulate budget requests conforming to the basic directions established by the Council on Economic and Fiscal Policy.

• The Ministry of Finance will be responsible for formulating a concrete budget while taking into account cabinet adjustments for new areas of expenditure that straddle the jurisdictions of two or more ministries and agencies.

Reforming the Policy Process

• Government ministries and agencies will undertake the development of systemic designs in accordance with the recommendations of the Council on Economic and Fiscal Policy. The Council will monitor the progress made by the ministries and agencies in this area.

• New administrative methods will be introduced, including new public management methods.


6) Basic Principles of the FY2002 GOJ Budget

Current Economic Conditions and Outlook

• Economic conditions are deteriorating. The economic growth rate in FY2001 and FY2002 is expected to remain at low levels.

• GDP growth in FY2001 is expected to fall significantly below initial government projections.

Government of Japan FY2002 Budget

• The volume of government bond issues will be kept below ¥30 trillion.

• Priority will be assigned to initiatives that can exhibit marked positive response to policy action. These include: a) Responding to environmental problems, including the development of recycling-based systems; b) Addressing the implications of declining birth rates and the aging of the Japanese population; c) Community development and the revitalization of autonomous local governments; d) Urban rejuvenation, including the development of attractive and internationally competitive cities; e) Promotion of science and technology, including the identification of four priority areas, including life sciences; f) Human resources development and education; and g) Transforming Japan into a global leader in IT.

• The development of social infrastructure, as well as review of the social security system and local finances, will be pursued in accordance with this "Solid Policy Framework."

• To minimize increases in unemployment due to the expected impact of NPL disposal, measures will be taken to expand employment opportunities through systemic reform. This includes the creation of new jobs in service industries and other areas and the promotion of increased labor mobility. Simultaneously, safety nets will be enhanced through such measures as upgraded support for workers leaving their jobs or transferring to new ones. Furthermore, employment measures will be integrated with structural reforms that generate a strong impact on the creation of new markets and jobs.

• The Council on Economic and Fiscal Policy will continue its examination of a broad range of issues and problems. This includes core areas pertaining to fiscal structural reform, such as social infrastructure development, the social security system, and national and local government relations. Furthermore, the Council will continue to examine the implementation of measures to help achieve primary balance surpluses, including the clear formulation of a timetable. The Council will aim to present its concrete proposals concerning these matters before the end of 2001.


For additional information on the Japanese Governments new economic reform program, please contact Satoshi Miyamoto at +1-212-997-0416, Fax: 212-997-0464, E-mail:

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