Focus:New Policy Challenges to Sustain Economic Progress

JETRO, 1221 Avenue of the Americas, NYC, NY 10020December 1, 2003

The Japanese government adopted a detailed “Action Plan for Economic and Structural Reform” (Action Plan) in late 1996. Substantial progress has since been achieved through corporate, financial and consumer deregulation. Steps have also been taken to make it easier to conduct business in Japan. In addition to helping Japanese banks to dispose of non-performing loans, this includes measures to create more efficient funding mechanisms, provide additional labor flexibility, promote industrial revival, and facilitate the growth of new businesses and entrepreneurship.

Despite many achievements, it should be understood that reform is an ongoing process and many important challenges remain. Much of the essential policy infrastructure has been put into place, yet Japan’s ultimate ability to succeed will depend on its ability to maintain consistent progress. Key issues include the need to reduce the uncertainty that impinges upon economic growth, to help younger people enter the workforce, and to maintain and expand the social consensus needed to guide Japan through this essential transition.

The Japan External Trade Organization (JETRO) provides the following information, which examines these issues in greater detail.

Diversification of financial institutions and methods

- Amend Business Trust Law to allow public institution guarantees of trust company loans.
- Deregulate Limited Partnership Act to facilitate business restructuring.
- Create policies to promote securitization and other new financing methods.
- Facilitate accounts receivable financing to help small and medium sized firms.
Diversification in risk management techniques

- Introduce new inventory collateral system to reduce need for real estate-secured financings
- Improve credit risk database to facilitate loans based on cash flow and profitability
- Improve legal framework governing personal and revolving guarantees
- Facilitate financings based on intellectual property
- Revise Bankruptcy and Civil Rehabilitation Laws to encourage management buy-outs

Promoting Deregulation and Measures to Facilitate Mid-Career Reemployment

- Successive revisions of Temporary Help Agent Worker Dispatch Law in 1999 and 2003 to expand the ability of workers to accept temporary assignments of up to three years.
- Allowing expansion of fixed-term labor contracts from one to three years.
- Expanding ability of private employment agencies to make commission-placed placements.
- Creating programs to facilitate skill development and training.
Promoting Human Resource Development Systems in the Private Sector

- Establishing industry-wide training programs. Examples include an initiative under the Japan Industry Technology Services Association and a program to allow manufacturing skill development under the sponsorship of local governments.
- Creation of specialized corporate educational institutions such as Sony University (2003), Toyota Institute (2002), NEC University (1997) and the Hitachi Institute of Management Development (1961).
- Supporting skill development through labor unions, i.e., the Electrical Industry Profession Academy under The Japan Electrical and Information Union.
Government Support to Promote Entry of Younger People and Women in the Workforce

- Expanding internship and work-training programs.
- Implementing trial employment programs and evaluation criteria to assist technical placements.
- Strengthen graduate and vocational programs as well as Japanese University system.
- Enhance employment through new businesses and start-ups.
- Facilitate labor mobility to growth sectors
- Create one-stop centers to provide counseling and training for entry- level workers.

For a more detailed analysis of current Japanese policy challenges and directions containing numerous charts and tables that depict the data highlighted above, please click here to download a PDF presentation:

ENGLISH --- JAPANESE


Focus: New Policy Challenges
JETRO, 1221 Avenue of the Americas, NYC, NY 10020December 1, 2003
Japan Identifies New Policy Challenges to Sustain its Economic Progress
The Japanese government adopted a detailed “Action Plan for Economic and Structural Reform” (Action Plan) in late 1996. Substantial progress has since been achieved through corporate, financial and consumer deregulation. Steps have also been taken to make it easier to conduct business in Japan. In addition to helping Japanese banks to dispose of non-performing loans, this includes measures to create more efficient funding mechanisms, provide additional labor flexibility, promote industrial revival, and facilitate the growth of new businesses and entrepreneurship. Despite many achievements, it should be understood that reform is an ongoing process and many important challenges remain. Much of the essential policy infrastructure has been put into place, yet Japan’s ultimate ability to succeed will depend on its ability to maintain consistent progress. Key issues include the need to reduce the uncertainty that impinges upon economic growth, to help younger people enter the workforce, and to maintain and expand the social consensus needed to guide Japan through this essential transition. The Japan External Trade Organization (JETRO) provides the following information, which examines these issues in greater detail.
Latest Economic Data Reflects Improving Fundamentals in Japan
	Data released in Tokyo this month showed that Japan’s gross domestic product (GDP) grew 0.6% -- an annualized rate of 2.2% in July-September -- the seventh consecutive quarterly increase. Importantly, this was primarily driven domestically by the private sector, rather than government spending or export growth as has been seen in the past. This is the longest period of continual growth since 1997. Coming after second-quarter growth of 0.9%, this data has surprised many analysts, leading many to believe the stagnation that has been troubling the world’s second largest economy for over a decade may now be coming to an end. Another positive sign was the recent rise of the Japanese Ministry of Economy, Trade and Industry's (METI) all-industry index by 2.2% since August. This index is widely considered to be a supply-side measure of economic growth. This improvement was much stronger increase than the 1.2% rise expected by economists, and followed August's anemic 0.3% gain and July's 1.5% decline. The ministry's tertiary industry index, a gauge of strength in the service sector, also rose by 2.2% in September from August, compared with an expected 0.6% rise. The tertiary index had fallen 0.2% in the July-September period from the previous quarter. The tertiary index reflects activity in six industries: utilities, transport and telecommunications, wholesale and retail, finance and insurance, real estate and services. The all-industry index takes a reading of activity in the six industries that comprise the tertiary index combined with construction, agricultural and fisheries industries, the public sector and industrial output. One news report, analyzing this improvement, quoted Ayako Mitsui, an economist at UBS AG in Tokyo, who stated: "On top of the further recovery in the tertiary-industry sector expected for the coming quarters, the manufacturing side is also turning bullish for quarter four in its outlook for industrial production and machinery orders.” Viewed in combination with the other improvements (see past Focus newsletters), there is certainly reason for optimism. Positive sentiment is also reflected in the Bank of Japan’s quarterly business confidence survey. It provides further evidence that backs up the METI data highlighted above, noting that large manufacturing companies are expressing a positive outlook for the first time in eleven quarters. This improvement -- accompanied by a 13.6% April-June rise in corporate profitability -- may partially explain the rise in plant and equipment spending by 6.4% over the same time frame. Manufacturing companies in particular increased their plant and equipment purchases by 28.4% on a year-over-year basis. Nippon Steel plans to spend approximately $270 million to repair blast furnaces. Similarly Toshiba plans to invest $300 to build a new semiconductor manufacturing line, while Toyota is moving to invest $2.7 billion in new domestic production facilities. Japan’s Business Outlook Survey also notes that small and medium firms increased their plant & equipment purchases by 17.3% on a year-over-year basis.
Japan Identifies New Policy Challenges Moving Forward
	After adopting the Action Plan in late 1996 the Japanese government moved to introduce the policy infrastructure that would serve to overcome the inefficiencies that had been constraining growth and business activity in Japan. The recent improvements in the Japanese economy can be seen to be the result of these efforts. With much of the initial work in place, Japanese policymakers have now moved on to identifying new challenges and directions to ensure effective implementation. This will entail careful monitoring and evaluation of financial, human resource, industrial, regulatory and corporate trends to facilitate continual movement toward a more efficient, competitive and investor-friendly Japan.
Japan Needs to Facilitate Move to More Efficient Corporate Funding Mechanisms
	Japan is now moving away from the main bank system that helped to guide it to prosperity for much of the post-war era. Banks and corporations are indeed reducing the cross-shareholding structures that provided what used to admirably be called “patient capital” to provide additional flexibility and to restore the health of their balance sheets. The cross shareholdings ratio, for example, has according to the NLI Research Institute declined from 17.8% of listed shares in FY1992 to 7.4% in FY2002. That said, the move to a more efficient credit- and capital market-oriented system still has a long way to go. Japanese corporations still rely far more heavily on commercial banks than their U.S. counterparts. Over 80% of small Japanese companies and even 30% of those with over 300 employees are still required to offer personal guarantees to secure loans. Therefore, U.S.-style credit-based lending, which relies more heavily on corporate profitability and cash flow remains less prevalent and collateral, largely in the form of real estate, continues to play an extremely important role in Japanese lending practices. To rectify these deficiencies, METI presented a proposal at a September 9th ministerial meeting containing the following program components: Diversification of financial institutions and methods - Amend Business Trust Law to allow public institution guarantees of trust company loans. - Deregulate Limited Partnership Act to facilitate business restructuring. - Create policies to promote securitization and other new financing methods. - Facilitate accounts receivable financing to help small and medium sized firms. Diversification in risk management techniques - Introduce new inventory collateral system to reduce need for real estate-secured financings - Improve credit risk database to facilitate loans based on cash flow and profitability - Improve legal framework governing personal and revolving guarantees - Facilitate financings based on intellectual property - Revise Bankruptcy and Civil Rehabilitation Laws to encourage management buy-outs
Japan Needs to Reduce Unemployment and Develop More Flexible Labor Practices
	The shift away from a lifetime employment system based on seniority to one that promotes the more flexible utilization of labor has contributed to rising unemployment – particularly among the younger people who ultimately will determine the future of Japan. This is a real problem, particularly if light of current demographic trends, which are contributing to the rapid aging of Japanese society. Combined with general anxiety over Japan’s future, older workers are seeking to hang on to their positions. The percentage of younger employees holding full time positions has been decreasing dramatically, in contrast to those over 30 years of age. A similar trend can be seen looking at the average years of continuous service at one company. To help Japan meet these challenges, government policymakers are actively moving forward to strengthen Japan’s social safety net, while facilitating the entry of entry-level employees, as well as individuals in mid-career seeking reemployment in the workforce. Their actions include: Promoting Deregulation and Measures to Facilitate Mid-Career Reemployment - Successive revisions of Temporary Help Agent Worker Dispatch Law in 1999 and 2003 to expand the ability of workers to accept temporary assignments of up to three years. - Allowing expansion of fixed-term labor contracts from one to three years. - Expanding ability of private employment agencies to make commission-placed placements. - Creating programs to facilitate skill development and training. Promoting Human Resource Development Systems in the Private Sector - Establishing industry-wide training programs. Examples include an initiative under the Japan Industry Technology Services Association and a program to allow manufacturing skill development under the sponsorship of local governments. - Creation of specialized corporate educational institutions such as Sony University (2003), Toyota Institute (2002), NEC University (1997) and the Hitachi Institute of Management Development (1961). - Supporting skill development through labor unions, i.e., the Electrical Industry Profession Academy under The Japan Electrical and Information Union. Government Support to Promote Entry of Younger People and Women in the Workforce - Expanding internship and work-training programs. - Implementing trial employment programs and evaluation criteria to assist technical placements. - Strengthen graduate and vocational programs as well as Japanese University system. - Enhance employment through new businesses and start-ups. - Facilitate labor mobility to growth sectors - Create one-stop centers to provide counseling and training for entry- level workers.
Serious Progress is Being Achieved in the Revitalization of Japanese Industry
	As more corporate restructuring transactions are initiated to revitalize individual Japanese firms, there has been a growing recognition that Japan’s aggregate success will be dependent upon the resolution of its serious non-performing loan problem. Japan’s Resolution and Collection Corporation was established in 1998 to purchase the debt and bonds from bankrupt and sound financial institutions. Recent data reveals the RCC has purchased over $87 billion in troubled loans. To date, approximately $56 billion has been collected. In cooperation with other public sector institutions such as the Development Bank of Japan and credit guarantee corporations, the RCC has also been active in restructuring companies from which they have purchased debt. As of July, 150 restructuring cases are already underway. In addition, the government-sponsored Industrial Revitalization Corporation of Japan (IRCJ) was founded in May of this year. It was established to purchase debt from banks and other creditors and to work with stakeholders to establish and implement viable restructuring plans. With a capital base of 10 trillion yen, the IRCJ will be making purchases until the end of March 2005, and then seek to sell off these assets to new sponsors and other investors within three years. As of the end of September, six cases have been announced, including: Kyushu Industrial Transportation, Dia Kensetsu, Usui Department Store, Mitsui Mining, Matsuya Denki and Meiei Shokai. Notable restructurings in recent years include the reorganization of five major steel corporations into two entities that remain among the largest in the world. Another was the creation of Renesas Technology, a merger to rationalize semiconductor production by Hitachi and Mitsubishi Electric. These reorganizations have greatly enhanced the renewed profitability of these restructured enterprises. Other transactions sponsored by private equity firms include efforts by Unison Capital, Marubeni and Bandai to revitalize Tohato, a troubled confectionary firm. Similar deals include Victoria, a sporting goods company by JAFCO, Fukusuke, an apparel company by MKS Partners and Takarabune Corporation, a food company by Tokio Marine Capital. The success of these restructurings is also leading to major new investments by their sponsors. Examples include a $1 billion investment in the Sharp Kameyama flat panel TV assembly plant and a $.7 billion investment in the Elpida Memory DRAM production facility.
Tax Reform is Also Encouraging Revitalization and Investor Interest in Japan
	Since the adoption of the Action Plan, the Japanese government has introduced new tax policies designed to facilitate industrial revitalization, entrepreneurship and a more competitive business environment. These include reducing Japan’s corporate tax rate in FY1998 and FY1999 from 37.5 to 30%, and introducing a consolidated tax system in FY2002. In FY2003 large-scale policy-driven tax cuts totaled approximately $1.6 billion. Measures include tax exemptions of 10-12% on R&D expenses and 10% on IT investment, along with a 50% special depreciation for R&D facilities and other qualifying assets. These achievements have helped overall investment in R&D to increase this year by 5.5% (13.4% for precision equipment and 10% for pharmaceuticals). IT spending has also increased 3.3% over the same time frame (35% in the automobile and 20% in the information processing sectors). Other incentives include the suspension of an additional tax on retained earnings, expanding depreciation allowances and exempting investments into start-ups from stock transfer taxes. Estate taxes on inheritances were also reduced from 70% to 50% and other taxes were reduced to promote purchases of financial assets. Additional reforms planned for FY2004 in an effort to “restore a challenge-oriented society” include: - Extending eligibility of loss carry-forwards from 5 to 7 years. - Abolishing the consolidated surtax. - Reducing tax rate on capital gains from unlisted shares from 26% to 20%. - Expanding scope of aggregation of profits and loss through financial taxation integration. - Extending incentives to promote small and medium enterprise investment through 7% tax deductions and a 30% special depreciation. - Expanding new tax incentives governing “angel” investments to include regional taxes. - Enhancing and extending incentives to promote investments in new energies and conservation. - Strengthening and extending “green tax” system for automobiles.
Cultivation of a More Entrepreneurial Culture is Essential
	During the current difficult period of economic transition in Japan, the number of business closures (4.5%) has exceeded the number of business start-ups (3.1%) from 1999-2001. While this gap is an improvement (1.4 vs 2%) from the previous 1996-1999 period, leaders have come to recognize the important relationship between entrepreneurship and national economic growth. With this in mind, the Japanese government is moving to double the number of new businesses established from 180,000 to 360,000 annually. Japan is also seeking to establish 1,000 new university-based startups by FY2004. To achieve these objectives, Japan is now developing the policy and funding infrastructure that will help to facilitate the ability of potential entrepreneurs to realize their vision. Japan has lagged far behind the United States in the use of venture capital. To correct this deficiency, the Japanese government has announced a range of tax incentives to support the development of “angel funding” as a means to promote business start-ups. In 1997 angel investors were allowed to deduct capital losses from their gains on a carry-forward basis for up to three years. In 2000, taxable capital gains for angel investments were reduced to 25% of the real gains realized by stock transfers of recognized venture companies. In 2003, investments in venture companies became deductible within the current year from other stock transfers. It is forecast these benefits would effect up to approximately 300 companies and 3,000 investors of funds totaling approximately $100 million. Additional proposals are now under consideration that seek to relax the recognition process and the criteria by which venture companies become eligible for these benefits. One other constraint on the formation of start-ups in Japan has been the minimum capitalization requirements prescribed in its Commercial Code. These total approximately $100,000 for a joint stock and $30,000 for a private limited company. Since February 2003, however, companies can be established with capital as low as one yen – providing the founders commit to investing the remaining amount of capital within five years of establishment. Over 7,000 applications were filed and 5,000 companies founded since this measure was enacted. These and other favorable trends, are leading to a notable increase in angel activity, as seen in the formation of national and local networks such as the Nippon Angels Forum To further facilitate the ability of emerging companies to raise funds, several new programs have been established. These include: - The National Life Finance Corporation began offering loans in early 2000 of up to $50,000 to entrepreneurs planning to start-up new businesses or for newly established enterprises. At the end of September, 6,448 cases had been handled with loans totaling $186 million.- The Japan Finance Corporation for Small Business began providing financing in early 2000 to entrepreneurs who found businesses exhibiting strong growth potential. Loans of up to $5 million are offered and no collateral is required for up to 75% of capital borrowed. At the end of August, 802 cases had been handled with loans totaling $300 million. - The Shoko Chuken Bank began providing zero-collateral loans of up to $270,000 in November 2002 to entrepreneurs who possess marketable technologies or business models, but only one to seven years of business experience. At the end of August, 310 cases had been handled with loans totaling $28 million. Perhaps the biggest obstacle to promoting new business start-ups in Japan is its lack of an entrepreneurial orientation. In an environment in which the preferred employment scenario was joining a large company or government institution, seeking a slow advance in accordance with ones seniority until retirement, most Japanese people do not yet appreciate the role entrepreneurs play in a dynamic, competitive economy. To familiarize Japanese people with the realities of entrepreneurship and to prepare them for the responsibilities of this career choice, METI and other Japanese government organizations have implemented programs including: - Venture Fairs: annual national events offering start-ups and SMEs an opportunity to develop distribution channels, partners and investors. Since FY 2000, this event has attracted 1,000 enterprises and 70,000 attendees. More than 20% of participating companies have reported some measure of success in furthering their business objectives as a result. - Start-up Seminars: intensive training to provide the knowledge and skills needed to start a business. From February 1999 to March 2002, 27,547 people were trained in 714 locations. Approximately 30% went on to start an enterprise after completing their training. - Venture Challenge Support Project: next year the Japanese government is hoping to provide resources to help venture companies to develop and implement the business plans needed to achieve success in their respective markets. - Startup Japan! DREAM GATE Project: program launched last summer to provide web-based business support services and internship projects. In little over three months approximately 100,000 people have registered with this service. - National Forum on Entrepreneurship and Venture Business: To promote public awareness and recognize the achievements of entrepreneurs in Japan, symposiums have been held throughout Japan. Six events were held in FY2002 attracting about 4,500 participants and awards were presented to three entrepreneurs and three start-up supporters. Four entrepreneurs who were recognized in FY2000 have received the Prime Minister’s award. Despite recent improvements in the Japanese economy, stronger demand is vital to maintain improving domestic growth, as well as to reduce Japan’s dependence on exports and to sustain the economic recovery that now appears to be underway. Addressing the new challenges and directions outlined above will help to restore consumer confidence and spending as well as to strengthen increasing investor interest in order to help Japan realize these important goals.
	For a more detailed analysis of current Japanese policy challenges and directions containing numerous charts and tables that depict the data highlighted above, please click here to download a PDF presentation: ENGLISH --- JAPANESE





	Data, statistics and the reference materials presented within this newsletter have been compiled by JETRO from publicly-released media and research accounts. Although these statements are believed to be reliable, JETRO does not guarantee their accuracy, and any such information should be checked independently by the reader before they are used to make any business or investment decision.

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