Prepared by Ichiro Oishi and Christopher Towe.
For a discussion of these issues see Yukio Noguchi, “The 1940 System: Japan under the Wartime Economy,” and Koichi Hamada, “The Incentive Structure of a Managed Market Economy: Can it Survive the Millennium?” in American Economic Review: Papers and Proceedings, Vol. 88 No. 2 (May 1998).
The return on equity is measured as dividends plus capital gains. Data showing the relatively low return on capital in Japan are also reported in Albert Ando, John Hancock, and Gary Sawchuck, “Cost of Capital for the United States, Japan, and Canada,” NBER Reprint No. 2162 (1998), but the authors also note that data limitations mean that this conclusion is somewhat tenuous.
See OECD Economic Surveys: Japan, 1996 (Paris: Organization for Economic Cooperation and Development, 1996), Chapter V for a discussion.
See “The Cost of Capital: Concepts and Estimation,” Bank of Japan Quarterly Bulletin, Vol. 4, No. 2 (May 1996).
For a more detailed discussion of this issue see OECD Economic Surveys: Japan, 1996.
A recent survey of company executives indicates that the timing of shareholder meetings is designed to avoid “turmoil” from shareholders, including from corporate extortioners (Nikkei News Internet Edition, June 25, 1998). Up to ¥20 billion annually is estimated to be paid to sokaiya organizations in the form of bogus magazine subscriptions (The Daily Yomiuri, May 5, 1998).
Japan’s Antimonopoly Law restricts a bank’s share ownership of a company to no more than 5 percent of the company’s capital.
“The Cost of Capital,” BOJ, 1996 presents estimates suggesting that the cost of capital in Japan was considerably lower than in the United States or the United Kingdom since the 1970s, but that the gap narrowed appreciably by the early 1990s.
A little over 11 percent of the major banks’ Tier-1 capital is owned by life insurers.
For a discussion, see Economic Planning Agency, Economic Survey of Japan: 1994–1995, (Tokyo: Government of Japan, 1995), pp. 155–157.
For a discussion, see Economic Planning Agency, Economic Survey of Japan: 1996–1997, (Tokyo: Government of Japan, 1995), p. 133.
For a discussion of the shortcomings of the Japanese accounting system, see Mitsuhiro Fukao, “Japanese Financial Instability and Weakness in the Corporate Governance Structure,” International Symposium on the Role of Markets and Governments, Conference Paper 98-2-6 (March 1998). One problem is the lack of consolidated accounts, although these will be required as of April 1, 1999. Sometime in 1998, the Business Accounting Council is expected to issue a report on measures to raise Japan’s accounting practices to international standards, including requiring firms to report the value of securities at market cost. For a discussion see Jon Choy, “Japan’s Financial Market Big Bang: The First Shock Waves,” Japan Economic Institute Report No. 22A (June 12, 1998).
Off balance sheet liabilities, particularly those of related to subsidiaries, are an important source of problems. For example, the failure of Daido Concrete in February 1998 was the result of its provision of implicit guarantees (“letters of awareness” or shido nensho) to the creditors of its overseas subsidiaries. For a discussion, see Kenichi Ohmae, “Five Strong Signals of Japan’s Coming Crash,” Washington Post, June 28, 1998.
Plans have been announced to overhaul bankruptcy legislation to address some of these problems, but revisions would not be enacted until FY 2003.
Cross country studies typically confirm the high degree of correlation between saving and investment rates. For example, see Martin Feldstein and C. Y. Horioka, “Domestic Saving and International Capital Flows,” Economic Journal, Vol. 90; and Economic Planning Agency, Economic Survey of Japan: 1994–1995, pp. 276–278.
The factors that have been identified as explaining Japan’s high saving rate include demographics and the large proportion of “prime savers” (i.e., those aged 45–64), the even distribution of income, housing costs, the bonus system, the importance of bequests in Japan, and differences in national accounting methodologies. While the Japanese saving and investment behavior appears unusual compared with other industrial countries, the more rapid rate of capital accumulation may simply reflect a catch up phenomenon, versus other factors. Nor does Japan’s capital accumulation appear excessive in economic efficiency terms. For a discussion of these issues, see U. Baumgartner and G. Meredith (eds.), Saving Behavior and the Asset Price “Bubble” in Japan: Analytical Studies, Occasional Paper 124 (Washington DC: International Monetary Fund, 1995).
It is unclear how significant a constraint the restrictions on foreign portfolio investment has been, since on average investments have been well below the 30 percent limit. For example, holdings of foreign assets by investment trusts were only about 6 percent of total assets, and the ratios for life insurers and nonlife insurers were 10 percent and 15 percent, respectively.
The preferred means of reducing cross shareholdings is through buy backs (i.e., a firm’s purchase of its stock from another corporation), since sales of stocks to the market risks further depressing already weak market valuations (for a discussion of the issue, see Fuka, “Japanese Financial Instability.” However, buy backs have increased in recent years, encouraged by the changes to the tax treatment of imputed dividends, as well as legislation in June 1997 that permitted firms to buy back shares mid-fiscal year with the concurrence of their board of directors.
These institutions include the Export-Import Bank of Japan (which provides export financing), the Japan Development Bank (which finances business investment), the Japan Finance Corporation for Small Business (which provides investment financing for small businesses) and the Housing Loan Corporation (which provides mortgage loans). Other financial institutions provide loans to specific geographical regions or sectors of the economy. For a discussion, see Akihiko Suzuki, “Facts and Problems in the Administration of Government Financial Institutions,” LTCBR Monthly (March 1998).
See OECD Economic Surveys: Japan 1996, Chapter IV for a discussion of employment practices in Japan.
More recent data published by the U.S. Bureau of Labor Statistics suggests that average tenure in the United States is less than 4 years, while EPA points out that tenure at large Japanese firms is considerably higher than the average (closer to 12 years).
The program subsidizes 50 percent of eligible firms’ salaries for furloughed workers—workers that remain on a firm’s payroll but are otherwise unemployed. This system was expanded in 1995 to cover small enterprises, and for small and medium-sized firms this assistance can reach up to two-thirds of a person’s salary. For example, at the cyclical trough, roughly 30 percent of all industries received some form of adjustment aid (Monthly Labor Statistics and Research Bulletin, May 1998; for a discussion of this program, see Nikkei News, March 4, 1998). Recently, the government has introduced schemes that have aimed at promoting labor mobility, including by subsidizing moving expenses, but the take up has been small.
Masanori Hashimoto, “Aspects of Labor Market Adjustment in Japan,” Journal of Labor Economics, Vol. 1 (1987), pp. 168–94.
Douglas Ostrom, “Prospects for Economic Reform in Japan: Where is the Safety Net?” Japan Economic Institute Report No 37A (October 3, 1997), cites OECD statistics that suggest that unemployment benefits in Japan are almost 20 percent less generous than in the United States and 70 percent less generous than in the other OECD countries. OECD Economic Surveys: Japan, 1996, notes that Japan’s expenditures on active labor market policies is only about 0.1 percent of GDP, considerably below the 0.7 percent average for the G-7, even taking into account the low level of unemployment in Japan.
A number of these restrictions have been relaxed recently, or in the process of being phased out. For example, restrictions on fees were relaxed in the Labor Standards Law of 1997, and the positive list of occupations that such firms could handle was converted to a negative list, which included positions usually filled by new graduates. The new Law also eased barriers to entry for employment agencies, but still maintained a number of requirements. For a discussion see Kojima Noriaki, “Japanese Employment and Labor Laws in Transition,” Journal of Japanese Trade & Industry, No. 4, 1997, pp. 8–11; and OECD Economic Surveys: Japan, 1996.
The authorities have recently announced their intention to review the tax treatment of pensions and promote defined-contribution pension plans. There is also a need to address the significant underfunding of the corporate pension system.
Economic Planning Agency, Economic Survey of Japan, 1994–95, pp. 214–216.
For example, although manufacturing employment among OECD countries fell from around 27 percent in the early 1970s to close to 15 percent in recent years, the share of manufacturing employment in Japan has remained relatively stable at between 20–25 percent. For a discussion see the World Economic Outlook, May 1997, Chapter III. The slow adjustment of the manufacturing sector may also partly reflect the fact that the average age of Japan’s capital stock is considerably less than in other industrial countries, owing to relatively rapid rates of capital accumulation in Japan.
Robert Rowthorn and Ramana Ramaswamy, “Deindustrialization: Causes and Implications,” IMF Working Paper, WP/97/42 (April 1997). Productivity gains would be expected to cause the relative price of manufactures to fall, and encourage workers to move into the service sector. The demand for services is often considered to have a higher income elasticity, so that as income per capita rise, the demand for services rise faster than the demand for manufactured goods. For a discussion, see W. J. Baumol, S. Blackman, and E. N. Wolff, in Productivity and American Leadership: The Long View (Cambridge, MA: MIT Press, 1989).
Another example, is the governmental restriction on the number of lawyers passing the annual bar exam—although the Diet is considering raising the annual limit from 700 to 1,000, the question arises whether governmental restrictions are necessary at all.
In the new DAP, for example, the target dates for a number of commitments remain vague or unambitious. Notably, the DAP only proposes consideration of deregulation in some areas, including the home nursing care industry and the construction sector, and does not address still-burdensome resale price maintenance restrictions in the area of publishing. Moreover, reforms to the postal saving system were less extensive than originally proposed, and the DAP does not substantively address the need to reduce the public sector’s provision of loans to the private sector. Reform of bankruptcy legislation also is likely to take considerable time to complete, and the tax legislation necessary to complement the new holding company legislation has not been passed. Although the LSRS Law is to be eliminated, it is to be replaced with new legislation that would provide local governments with the authority to block stores from opening for environmental reasons.
The EPA recently examined the effect of the privatization of the public telecommunications company (NTT) and the entry of the private competitor (NCC) in 1987, as well as the privatization of Japan Airlines, and the entry of a private competitor in 1986. The EPA’s estimates suggest that roughly half the increase in the total factor productivity during 1987–95 in both the telecommunications and airlines sectors was due to the increased competition that followed deregulation. In addition, deregulation was associated with a more than 70 percent drop in the cost per telephone call, and a roughly 25 percent drop in per mile costs of air travel.
The OECD Report on Regulatory Reform, Vol. II, (Paris: Organization for Economic Cooperation and Development, 1997).
The DAP originally included 1,091 measures, and when the DAP was revised in 1996 and 1997, the number of items was revised to 1,797 and to 2,823, respectively.
See “Kisei-Kanwa no Genkyo 1997” (Progress in Deregulation) by the Management and Coordination Agency
The supply-demand adjustment system involves restrictions on licencing of new entrants when the Ministry of Transport judges that there are already sufficient suppliers in the market.
Guidelines released by the Fair Trade Commission provided detailed standards for the three cases. First, they prohibit formation of holding companies with assets exceeding ¥15 trillion or with companies having assets of more than ¥300 billion in more than five business fields. Second, they prohibit formation of a holding company with financial components having assets of more than ¥15 trillion and nonfinancial components of more than ¥300 billion. Finally, the guidelines prohibit formation of a holding company with more than five companies in related business fields, each of which holds more than 10 percent market share or lies within the top three companies in each business field.
Earlier recommendations for full prioritization were dropped owing to political resistance.
Dispatched worker agencies act as temporary employment agencies. Currently, the range of occupations they are permitted deal is restricted.