Japan: Economic and Policy Developments

Fiscal policy has been strongly expansionary for most of the past decade in Japan. The resulting strain on public finances has made stimulus policies more difficult to maintain. The stance of monetary policy has remained unchanged over the past year. Further progress in resolving banking problems is essential given the plan to remove blanket deposit insurance in April 2002 and to lay the foundation for sustained growth. The paper discusses recent developments in the field of structural reform and deregulation in Japan.


Fiscal policy has been strongly expansionary for most of the past decade in Japan. The resulting strain on public finances has made stimulus policies more difficult to maintain. The stance of monetary policy has remained unchanged over the past year. Further progress in resolving banking problems is essential given the plan to remove blanket deposit insurance in April 2002 and to lay the foundation for sustained growth. The paper discusses recent developments in the field of structural reform and deregulation in Japan.

II. Fiscal Policy Developments1

1. Fiscal policy has been strongly expansionary for most of the past decade. Except for a brief interruption in FY1997—when policy was tightened in response to a short-lived economic upswing—the general government deficit has expanded since the early to mid-1990s, with public works spending and tax reductions supporting aggregate demand in the face of an unprecedented economic downturn. Particularly in 1998, when the economy slipped into recession, the government passed two large stimulus packages that led to a substantial widening of both central and local government deficits in the following year. With a further package in November 1999, fiscal policy has maintained its stimulative stance, and the general government deficit excluding social security is again expected to reach above 9 percent of GDP in FY2000 (Figure II.1).2

Figure II.1.
Figure II.1.

Japan: Summary of Fiscal Indicators, FY 1975–2000 1/

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A002

Sources: Ministry of Finance; Economic Ptannlng Agency; and staff estimates.1/ The fiscal year is from April to March.2/ Excluding bank support.

2. The resulting strain on public finances has made stimulus policies more difficult to maintain. A decade of expansionary fiscal policy has resulted in an increase in net general government debt (excluding social security assets) from about 40 percent of GDP in 1990 to a projection of almost 100 percent of GDP by the end of FY2000. In addition to generating concerns about the sustainability of fiscal policy, high public debt levels have begun to hamper the implementation of stimulus measures, especially since local governments increasingly are being forced into fiscal consolidation as they approach statutory deficit ceilings. The room for the Fiscal Investment and Loan Program (FILP) to support expansionary government policies is also increasingly limited by a fall in fresh inflows from postal savings and welfare contributions, and by the maturation of a substantial amount of long-term postal savings deposits that were incurred during the high-interest period of the early 1990s.

3. The weak economy has highlighted the need for reforms in the social security system. Low income growth has translated into a rising shortfall of pension and health insurance contributions, erasing much of the surplus these schemes had in earlier years. The deteriorating financial condition of pension and health insurance systems, combined with the prospect of a dramatic aging of the Japanese population over the next decades, has prompted reform efforts with the aim of restoring the long-term viability of the social security system. The Diet passed a pension reform bill that has considerably reduced future liabilities of the public pension system, and bills to introduce private defined-contribution pension plans and curb increases in medical spending are to be reintroduced in the coming months. However, these reforms would need to be supplemented by further measures to reduce the need for a sharp increase in social security contributions and government transfers in the future.

4. These issues will be discussed in greater detail in this chapter. The following sections focus on (i) central government stimulus policies; (ii) financial difficulties of local governments; (iii) public debt dynamics and fiscal consolidation; (iv) postal savings and the FILP; and (v) fiscal reforms.

A. Central Government Stimulus Policies

5. The government’s main tool for implementing expansionary fiscal policies has been a series of large stimulus packages in recent years (Table II.1).3 Japan’s annual budget process is mainly geared toward providing financing for entitlement programs and medium- to long-term developmental plans, and initial budgets therefore tend to react less to the economic cycle than in other countries. Automatic stabilizers are also relatively small, owing to the low cyclical variability of unemployment and social welfare benefits. The government therefore responded to the economic downturn with several mid-year stimulus programs that contained spending measures for all layers of the public sector, including government financial institutions (GFIs) and the FILP. The most important components have been public works spending and tax cuts financed through supplementary budgets of central and local governments (so-called “real water” measures), but the packages have also included other elements, such as loan commitments by GFIs, especially for small and medium-sized enterprises (SMEs), public loan guarantees, employment measures, and projects for other public sector agencies that have largely been financed through the FILP.

Table II.1.

Japan: Summary of Economic Stimulus Packages, 1993–1999

(In trillions of yen, unless otherwise indicated)

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Source: Data provided by the Japanese authorities; and staff estimates.

Temporary measures.

Later increased to ¥9.3 trillion (1.9 percent of GDP).

Public investment comprises general public works (including land purchases), disaster reconstruction, buildings and equipment, and independent public works projects by local government.

Excludes land acquisition for public works projects, which is included in public spending.

Includes loans by the Pension Welfare Service Public Corporation.

Includes ¥1.3 trillion in lending by the Japan Corporation for small business.

6. The government’s stimulus efforts reached a peak in FY1998 with the announcement of two major packages (in April and November), amounting to a combined 8 percent of GDP, more than half of which was to be provided through real water measures. The implementation of these packages was mostly felt in calendar 1999, however, due to the 3–6 month gestation period for public works projects, and owing to the fact that most of the tax measures were implemented through the FY1999 initial budget. Nevertheless, the two associated supplementary budgets practically doubled the central government’s bond issue in FY1998 compared to the year before (to 7 percent of GDP), and contributed to a sharp turnaround in the overall general government deficit, following a period of consolidation in FY1997 (see Figure II.1).4 At the same time, the government signaled its commitment to maintain fiscal stimulus until the economy recovered by suspending the Fiscal Structural Reform Act (FSRA) which had prescribed a medium-term target for the general government deficit (excluding social security) of 3 percent of GDP by FY2005.

Developments in FY1999

7. Following the usual practice, the initial budget for FY1999 was formulated in relation to the initial budget of the previous year. Although the central government planned to increase public works spending by about 10 percent over the FY1998 initial budget, this was insufficient to maintain the pace of public investment after the impact of the FY1998 stimulus packages faded in mid-1999, and after accounting for cutbacks at the local government level. Moreover, the decision to front-load public works spending in FY1999, with the aim of minimizing carry-over of investment projects into FY2000, likely contributed to a sharp drop-off in public investment in the second half of the year (Figure II.2).

Figure II.2.
Figure II.2.

Japan: Public Investment Indicators, 1985–2000 1/

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A002

Sources: Economic Planning Agency; and Ministry of Constnjction.1/ Dotted tines indicate the introduction of fiscal stimutus packages.

8. The budget included permanent tax rate cuts to replace earlier tax rebates. The final tax provisions featured ¥9¼ trillion in tax reductions, of which ¥7 trillion (1.4 percent of GDP) became effective in FY1999. The majority of the cuts consisted of permanent income tax rate cuts, particularly a reduction in the corporate income tax rate from 46 percent to 40 percent, as well as a cut in the top personal income tax rate from 65 percent to 50 percent. However, although personal income tax liabilities were reduced by close to 20 percent on average, the direct effect on household disposable income was likely small since these measures only replaced expiring temporary tax rebates from FY1998.5

9. As the incipient recovery faltered in the second half of 1999, the government reacted with another large stimulus package in November, including measures worth ¥18 trillion (3½ percent of GDP).

  • Real water spending accounted for ¥7¾ trillion (1½ percent of GDP), consisting mainly of public works measures.6

  • The remainder of the package aimed at extending support to SMEs, housing and employment, mainly through an extension of loan guarantees and steps to increase lending by GFIs. Funds were also provided to cover losses incurred by the Deposit Insurance Corporation during the nationalization of LTCB.

  • The bulk of the central government’s share of the package was implemented through a ¥7 trillion supplementary budget in December 1999, which included additional public works spending of ¥3½ trillion, as well as ¥1 trillion in funds relating to the introduction of nursing care insurance—the bulk of which was used to finance a delay in premium collection by half a year (see below).

10. The overall central government deficit for FY1999 is expected to increase to about ¥39 trillion (8 percent of GDP), or ¥8½ trillion more than envisaged in the FY1999 initial budget (Tables II.2 and II.3). Besides the large supplementary budget in December, the overshoot was also caused by a sharp increase in welfare spending (¥2 trillion), partly a result of rising unemployment. Other contributing factors included a June 1999 supplementary budget containing ¥500 billion in employment measures and support for corporate restructuring, and a tax shortfall of about ¥500 billion (net of local tax transfers).

Table II.2.

Japan: Tax Receipts of the Central Government General Account, FY1995–2000

(In billions of yen)

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Source: Data provided by the Japanese authorities.

Compared to latest available data of the previous year.

Table II.3.

Japan: Central Government General Account Budget, FY1995–2000

(In billions of yen)

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Source: Data provided by the Japanese authorities.

Includes repayments of principal and running costs.

Total expenditure excluding debt service and local allocation tax transfers.

The FY2000 Budget

11. In an effort to secure the emerging recovery, the initial budget for FY2000 was designed to extend fiscal stimulus into FY2000. However, although planned expenditure levels exceeded those of the FY1999 budget, the projected deficit for FY2000 is again sharply lower than the central government’s revised estimate for FY1999 (see Table II.3). The main elements of the budget included the following:

  • Central government general expenditure was slated to increase by 2½ percent over the initial FY1999 budget, largely on account of rising transfers to social security,7 The increase in transfer payments mostly relates to the introduction of the nursing care insurance scheme, which was budgeted to require direct central government subsidies of ¥1.2 trillion in FY2000.

  • Allocations for public works spending remained unchanged from the previous year’s initial budget. The government decided not to front-load investment spending as in FY1999, but the basic expenditure pattern—a buildup in the first half of the year, followed by a decline in the second half—is likely to be repeated.

  • The budget also included substantial measures for safeguarding the financial system. Spending limits for the Deposit Insurance Corporation were increased by ¥10 trillion in support of failed banks (of which ¥6 trillion could be used to cover depositor losses) and an additional ¥400 billion in government guarantees was provided in support of the Life Insurance Policyholder Protection Fund (Box II.1).

12. Tax revenue is expected to increase for the first time in three years, owing to a ¥4 trillion (0.8 percent of GDP) interest tax windfall for central and local governments from maturing postal savings deposits. The government’s own proposed tax measures— which extend further support to residential investment and corporate start-ups—will account for some ¥200 billion in revenue losses. The measures include an extension of special mortgage tax deductions for another six months to June 2001, and an exemption for most of the capital gains from sales of stocks in SMEs and venture businesses that are bought during a five-year term beginning in FY2000 and held for at least three years before a company goes public. To offset revenue losses, the government lowered income tax deductions for families with children by about 20 percent.8

The Fiscal Cost of Bank Support Measures

In FY1998, the government authorized a total of ¥60 trillion in public funding in support of the financial system (see the 1999 Economic and Policy Developments Paper). Most of these funds are to be used for capital injections or government guarantees to the Deposit Insurance Corporation (DIC), which are expected to be eventually recovered, but the DIC was also authorized to spend ¥7 trillion in non-recoverable funds to cover depositor losses (this limit was raised by ¥6 trillion in the FY2000 budget). At the time of authorization, the government issued special bonds to the DIC for redemption once the actual losses occurred. The redemption of these bonds implied actual government expenditure, reflected also in the fiscal deficit on a national accounts basis, which was financed by ordinary bond issues (through initial and supplementary budgets) and other means (e.g., proceeds from sales of NTT shares, and budgetary surpluses from previous years).

Compared to the authorized limit of ¥13 trillion, cumulative expenditure on depositor protection amounted to ¥4.8 trillion (1percent of GDP) through the end of FY1999. Following ¥1.2 trillion in expenditures in FY1998, mainly on resolving the case of Hokkaido Takushoku, the DIC spent a total of ¥3.6 trillion to cover depositor losses in FY1999, of which ¥3.2 trillion were related to the sale of LTCB in March 2000. Private analysts expect the sale of NCB to lead to losses of around ¥3 trillion, which would bring the total of public funds actually spent to about ¥8 trillion by the end of FY2000.

13. The budget implies a net bond issue of ¥32.6 trillion, a five-fold increase since 1990 (Table II.4). Over the same period, the amount of outstanding central government bonds has roughly doubled, and is projected to reach an estimated ¥364 trillion (73 percent of GDP) by the end of FY2000. Total central government debt, which includes borrowing from the FILP and other sources, reached ¥492 trillion (100 percent of GDP) at end-FY1999, and is slated to increase to around ¥530 trillion (106 percent of GDP) by end-FY2000.

Table II.4.

Japan-Central Government Bond Issues, FY1999–2000

(In trillions of yen)

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Source: Bank of Japan, Economic Statistics Monthly; and staff calculations.

Including subsidy, subscription, and DIC bonds, and bonds converted from JNRSC bonds.

Budget projection.

14. As a result of the budget proposals, the staff projects that, on a national accounts basis, the general government deficit (excluding social security) will remain roughly unchanged at 9 percent of GDP in FY2000 (Table II.5). This projection assumes that local governments will cut back sharply on independent investment projects (see below) and that a small (¥1 trillion) supplementary budget will be passed in the autumn. Official projections show that the general government deficit (excluding social security) will fall from 10.7 percent of GDP in FY1999 to 9.4 percent of GDP in FY2000. However, these figures are based on appropriations data and do not fully adjust for the fact that much of the public works spending appropriated in FY1999 will not occur until FY2000.9 The structural deficit (including social security, but excluding bank support)—which reflects more closely the impact on aggregate demand—is projected to increase by ¼ percentage point of GDP.

Table II.5.

General Government Operations, 1997–2000

(In percent of GDP)

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Source: Staff estimates.

B. Local Government Operations

15. Reflecting the close relationship between central and local governments in Japan, local authorities have had to take on a major burden in efforts to stimulate the economy. The central government’s stimulus programs have affected local governments mainly in two ways. First, the implementation of public works occurs to a large extent at the local government level (some 80 percent of all general government public works are carried out by local authorities), and most stimulus programs have contained a substantial share of projects to be financed by local governments, either independently or jointly with the central government (Table II.6). Second, tax cuts have affected local budgets both through losses in shared taxes and reductions in local taxes.

Table II.6.

Japan: General Government Public Works Projects

(In billions of yen)

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Source: Ministry of Finance; Local Government White Paper, various issues; and staff calculations.

Calculated as total central government expenditure on public works minus central share of joint public works.

Joint projects are implemented by local governments.

16. Partly as a result, the financial situation of local governments has deteriorated since the early 1990s, which has prompted consolidation efforts that run counter to the central government’s stimulus objectives. On the basis of settlement data, the consolidated local government deficit rose from 1 percent of GDP in FY1990 to 2¾ percent of GDP in FY1998 (Table II.7), which was partly related to an increase in public investment.10 At the same time, there has been a marked rise in personnel costs, and interest payments have increased with mounting debt In recent years, efforts to contain fiscal deficits have led to large expenditure cuts, mostly in independent investment projects—a sharp contrast to projections in the Local Government Finance Plan (LGFP), which have aimed at broadly stable investment-to-GDP ratios since 1995.11

Table II.7.

Japan: Local Government Operations

(in percent of GDP)

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Source: Ministry of Home Affairs; Ministry of Finance; and staff calculations.

Using data provided by the authorities, the staff has reclassified financing items which are treated as revenues in the official statistics.

Including classification errors and omissions.

Local Government Finances—The Example of Tokyo Prefecture

The finances of the Tokyo Metropolitan region—Japan’s largest and wealthiest prefecture—have deteriorated along with those of other local governments. In FY1998, Tokyo accounted for close to 12 million inhabitants (10 percent of Japan’s population) and 12½ percent of total local government expenditures. Owing to the concentration of bank and corporate headquarters in the city, Tokyo is the richest among Japan’s prefectures, which is reflected in the fact that the Tokyo Metropolitan government (TMG) is the only local authority that does not receive local allocation tax transfers from the central government. However, the strong dependence on own tax revenues has worked against Tokyo as local government tax collections have plummeted in recent years.


Tokyo Government Finances

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A002

Faced with increasing revenue shortfalls, the initial reaction of TMG has been to sharply reduce public works spending. Investment expenditure has dropped by almost a third since its peak in FY1992, while current (or “ordinary”) spending has remained almost untouched. These cuts have brought investment spending back to its levels in the mid-1980s, eliminating much of the excess of the bubble years, when a series of large construction projects led to a tripling of investment expenditure from ¥0.7 trillion to ¥2 trillion between 1987 and 1992.

Public investment cuts alone were not sufficient, however, to prevent a dramatic increase in TMG debt. In anticipation of an economic recovery—which in the end failed to materialize—and partly as a result of central government stimulus policies, expenditure reductions did not keep pace with the decline in revenues, which implied a sharp rise in TMG bond financing. This has brought the prefecture close to the bond issuance and deficit limits prescribed by the Local Finance Law (exceeding the deficit limit would imply the imposition of direct central government control over Tokyo’s finances). The amount of outstanding bonds has roughly tripled to ¥7 trillion since 1991, and TMG’s total liabilities—as identified in its recently published balance sheet—amount to ¥17 trillion, or 2½ times annual tax revenues.

In response to its delicate financial situation, Tokyo has responded with an austerity package that is intended to generate permanent savings of ¥630 billion (two thirds in expenditure, one third in revenues) over the next four years, relative to a ¥6 trillion budget. The first ¥200 billion in measures have been incorporated in the FY2000 budget, which projects a further 20 percent investment cut, but—partly owing to additional temporary measures—also includes a 7 percent decline in ordinary expenditure. Savings are to be achieved mainly through a reduction in welfare spending, a 4 percent salary cut, and a planned 5 percent reduction in the work force (to about 180,000). The proceeds of the controversial bank tax (projected at around ¥100 million; see main text) will only boost revenue from FY2001 onwards.

While these steps have helped Tokyo to preserve fiscal independence, a return to full financial health will take considerable time. Rising debt service costs, higher welfare obligations toward the elderly, high maintenance costs on existing public infrastructure, and political resistance to further spending cuts are likely to limit expenditure reductions in the future, while the scope for investment cutbacks may also begin to narrow. In addition, TMG may need to cover liabilities arising from failed investments projects, such as those associated with “third sector corporations” (public-private partnerships) that were heavily involved, e.g., in the development of Tokyo Bay. Although asset sales could provide a temporary boost to revenues, TMG holds predominantly land-related assets that will be difficult to sell as long as the real estate market remains depressed.

17. The recent contraction in local government budgets is partly a consequence of statutory limitations on local government borrowing. Local authorities risk losing their financial independence if their fiscal deficit exceeds thresholds established in the Local Fiscal Restructuring Law.12 Some heavily indebted local authorities have indeed come close to these limits in recent years, and have embarked on severe austerity programs to avoid falling under the central government’s authority. One of the most ambitious consolidation programs has been implemented by Tokyo Prefecture, which has resorted to drastic cuts in payroll spending, social entitlements, and construction projects (Box II.2).

18. To avoid a falloff in stimulus as a result of local consolidation efforts, the government has taken steps to alleviate the financial burden on local governments. Although the amount of tax transfers to local authorities in principle depends on central government revenue collections, additional funds for local governments have been secured through loans incurred by the Special Account for Local Allocation and Transfer Tax. These loans, which are to be repaid jointly by central and local governments, have steadily increased to some ¥8 trillion (1¾ percent of GDP) in both FY1999 and FY2000. The loans were in the past provided by the Trust Fund Bureau but—owing to the anticipated outflow of postal savings deposits—will be financed from private sector financial institutions in FY2000. The outstanding liabilities of the Special Account for Local Allocation Tax are projected to amount to ¥38 trillion (7½ percent of GDP) by end-FY2000, of which ¥26 trillion will have to be repaid by local governments.

Local Government Taxes

19. Taxation issues are at the heart of the malaise of local government finances. A sustained improvement in local finances depends on the restoration of tax revenues, following their sharp decline during the recession. Local revenues, including tax transfers, depend primarily on direct taxes and are thus prone to strong cyclical swings. Own-revenue collections dropped by almost one percent of GDP in the 1990s and, following a temporary recovery subsequent to the consumption tax increase in 1997, are projected to dip again below 7 percent of GDP in FY1999 (see Table II.7). Corporate tax revenues especially have plummeted as enterprises have increasingly reported losses on their balance sheets.

20. Most local governments have tried to find alternative revenue sources, including by intensifying collection efforts, reducing tax delinquency, and exploring ways to raise existing taxes or introduce new taxes. New tax measures have fallen into two categories, depending on their legal basis:

  • A number of local governments have announced plans to introduce new taxes on the basis of a new decentralization law that came into effect in April 2000. Some types of taxation now no longer require formal approval by the central government, although local governments still have to consult with the Ministry of Home Affairs which attempts to maintain overall consistency of the local tax structure. New levies have generally been raised on very specific activities, (e.g., waste disposal, gambling, hazardous goods storage) and are unlikely to yield significant revenues.

  • The Tokyo and Osaka prefectures recently passed bills to tax the gross profit (as opposed to net income) of major financial institutions at 3 percent over five years, yielding an expected ¥100 billion per year in the case of Tokyo. This measure— implemented despite opposition by the central government—is based on a loophole in the existing tax legislation that allows local authorities to raise business taxes on a base other than profits (so-called “external” taxes) if a business activity is unique to their jurisdiction. The two governments have levied this tax on banks by claiming a unique concentration of banking headquarters in their prefectures.13

21. However, the restoration of local tax revenues requires a fundamental change in the local tax structure. The stopgap measures passed by local governments generally focus on very narrow tax bases—that appear politically easy to exploit—and carry potentially distortionary side-effects, without constituting the basis for a sustained recovery in revenues. Putting local revenues on a more stable footing would require inter alia a general review in the corporate tax structure, with a view toward shifting the tax base to criteria that are less subject to cyclical fluctuations (as has recently been suggested by the central government’s Tax Commission). More generally, local fiscal management would benefit from a reduction in the vertical imbalance in Japan’s fiscal structure, which allocates 60 percent of total tax revenue to the central government, while local governments account for 65 percent of government expenditure not related to social security.

C. Public Debt and Fiscal Consolidation

Assets and Liabilities of the General Government

22. In the latter half of the 1990s, Japan’s fiscal deficit and gross debt have surpassed that of other major industrial countries. Even adjusting for Japan’s weak cyclical position, the general government’s fiscal deficit has been far above the G-7 average for several years in a row, and Japan replaced the U.S. as the largest issuer of public debt in 1999 (Table II.8). This stands in sharp contrast to earlier periods, when Japan was known for its conservative fiscal policy that resulted in sizeable fiscal surpluses and low public debt.

Table II.8.

General Government Finances, 1999

(In percent of GDP)

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Source: IMF World Economic Outlook, April 2000; staff estimates.

Excluding social security.

23. However, the general government also holds sizeable assets that have kept net debt comparatively low. According to the Japanese national accounts, general government gross debt has reached 125 percent of GDP at the end of 1999, although net debt (at close to 40 percent of GDP) is still small by international standards. The difference—some 85 percent of GDP in asset holdings—reflects the partly funded nature of the pension system, as well as the government’s major role in financial intermediation:

  • The pension system has accumulated significant assets (50 percent of GDP) to fund benefit payments for future retirees. The bulk of these assets—together with the deposits of the postal savings system—has in the past been invested through the FILP by the Ministry of Finance’s Trust Fund Bureau. The assets therefore consist of government bonds as well as loans to central and local governments and public financial institutions (see below).

  • The remaining 35 percent of GDP in financial assets are held by the central and local governments. The exact breakdown of these holdings is difficult to determine, given the lack of information on them in the fiscal accounts, but a considerable part is likely to include foreign exchange reserves and investments in public sector enterprises (Table II.9). Some government agencies also hold government bonds that could in principle be directly offset against government liabilities.14

Table II.9.

Japan: Closing Stocks of Financial Assets and Liabilities by the Sub-sectors of General Government, 1998

(End of calendar year; in billions of yen)

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Source: Economic Planning Agency, National Account Statistics.

24. Since assets of the social security system are more than offset by future pension obligations, they are generally excluded when assessing Japan’s debt situation. At current pension contribution rates, the pension system’s asset holdings would not be sufficient to finance the gap between future pension obligations and revenues. Indeed, the projected net liabilities of the pension system—currently estimated at around 60 percent of GDP—is relatively large by major industrial-country standards, although the staff estimates that it has been reduced by about 30 percent of GDP as a result of the recent pension reform (see below).15 Therefore, the staff most frequently uses the concept of net debt excluding social security assets which—at nearly 90 percent of GDP—is significantly higher than in most other industrialized countries.

25. The general government’s net obligations—including contingent liabilities—may be somewhat higher than suggested by the net debt figures. The true value of government assets is difficult to estimate, partly because of lack of liquidity, and the possibility that some of the investments may represent soft loans that may not be repaid.16 While the default rate on loans by government financial institutions has so far been low (bad loans account for about 1–2 percent of the total loan portfolio), many large public infrastructure investments appear to generate significantly less than budgeted returns, which may imply significant contingent liabilities for the government (as happened in the case of the Japanese National Railway Settlement Corporation (JNRSC)). The government may also need to cover contingent liabilities arising from government guarantees. The total amount of outstanding government-guaranteed bonds and loans amounted to ¥52 trillion (10 percent of GDP) in March 2000, and the government may also be called on to cover losses related to ¥43 trillion in guarantees extended by regional credit guarantee associations to cover bank loans to SMEs (including ¥21 trillion in outstanding special loan guarantees that have been extended since 1998).17

Debt Stabilization: How Sensitive Is It To Interest Rates and Growth?

26. Substantial fiscal adjustment will be required over the medium-term to keep debt ratios from getting worse. To assess the extent of consolidation that may have to be undertaken, the following presents a sensitivity analysis of fiscal dynamics relative to alternative assumptions about real GDP growth and government bond yields:

  • For given growth and interest rate assumptions, the primary deficit necessary to stabilize the debt-to-GDP ratio in the year t is given by the following formula:


    where bp is the target for the primary balance in percent of GDP, d is the debt-to-GDP ratio, and r and g are the steady-state values for the nominal interest rate paid on government debt and the nominal growth rate, respectively. The amount of fiscal measures necessary to stabilize the debt-to-GDP ratio (the “required adjustment”) can then be calculated as the difference between the value of bp and the current cyclically-adjusted primary balance (estimated at -4½ percent of GDP in FY2000). This exercise assesses the required adjustment under different assumptions for r and g, based on a simulation of the resulting debt path over the next decade.

  • Since social security assets should be excluded in net debt calculations (see above), the relevant variables bp and d refer to net debt and primary balance for the general government excluding social security, respectively. The interest paid on government debt is an implied interest rate that reflects past debt contracted at different maturities and interest rates. As interest rates have generally been declining in recent years, the value of r at present is higher (at roughly 3½ percent) than the current 10-year JGB yield (about 1¾ percent). With an average debt maturity of about 5–6 years, future changes in JGB yields will affect the average interest rate only gradually—a fact that is taken into account in the following calculations.

  • The results of the analysis are presented in Table II.10. The table shows the required change in the general government’s structural primary deficit to achieve debt stabilization by 2010, given combinations of real growth rates and real JGB yields in that year.18 For simplicity, it is assumed that growth and interest rates increase in a linear fashion to their steady-state values by 2005, while the adjustment in the structural balance would be linear over the full 10-year period, except for FY2001 when large support measures for failed banks expire.19

Table II.10.

Change in General Government Primary Structural Balance (Excluding Social Security) Needed to Achieve Debt Stabilization by 2010

(In percent of GDP)

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Source: Staff calculations.Note: The table shows the change in the general government’s primary structural balance required to stabilize debt relative to GDP by FY2010 under a gradual consolidation process, starting from a structural primary deficit of 4.6 percent of GDP in FY2000. GDP growth and JGB yields are assumed to increase in a linear fashion to their steady-state values by 2005. The central cell refers to the staff’s baseline scenario.

27. The results highlight the importance of growth for fiscal consolidation. The staff’s current WEO forecast corresponds to the scenario in which growth converges to its medium-term potential of about 2 percent, and real JGB yields rise to 3½ percent by 2005. In this case, a reduction of 5½ percentage points of GDP in the general government’s structural primary deficit would stabilize net debt (excluding social security assets) at around 118 percent of GDP, compared to an estimated 97 percent of GDP in 2000. The required fiscal adjustment would be ¼ percentage points of GDP smaller, however, were the potential growth rate to increase to 3 percent, and it would be higher by the same amount if the growth rate fell to 1 percent. Variations in JGB yields also affect the required adjustment. For example, if real interest rates remained at present levels, the needed adjustment would be 1 percentage point of GDP smaller than in the baseline scenario.

28. What would be the payoff for public debt of faster consolidation? A simulation using the same underlying growth and interest rate path as in the WEO scenario—an admittedly implausible assumption given the short-term impact of consolidation on growth— suggests that to stabilize the net debt ratio by 2005, the required improvement in the structural primary balance would be 5 percent of GDP over 5 years, compared to the WEO baseline of 5½ percent of GDP over 10 years. Faster adjustment would also result in a lower (stable) net debt ratio of 108 percent of GDP.

D. Postal Savings and the FILP

29. The FILP has evolved into an important tool for financial management and quasi-fiscal operations. About one third of Japanese savings are held by public institutions, including the postal savings and public pension systems. Most of these funds are invested through the FILP, which is run by the Ministry of Finance’s Trust Fund Bureau (TFB). Although the FILP is not formally part of the general government sector, its annual investment plan is formulated in close coordination with the budget process, and is submitted to the Diet together with the regular government budget. Indeed, owing to its size, the FILP is often referred to as the “second budget”.

30. In recent years, the FILP has been used to support the government’s stimulus efforts, but this has become more difficult as deposit inflows have slowed. Measures announced as part of the 1998 and 1999 stimulus packages have included substantial additional FILP loans, mainly to improve credit conditions in the economy and extend financial support to local governments. At the same time, however, inflows of funds into the TFB from the postal savings and pension systems began to decline in FY1999, largely in response to weak income growth. The shortfall in deposit inflows was offset by reductions in government bond holdings of almost ¥20 trillion during FY1999, achieved by not rolling over maturing securities (Figure II.3).

Figure II.3.
Figure II.3.

Japan: Trust Fund Bureau Operations

(12-month change in assets and liabilities; in billions of yen)

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A002

31. For FY2000, the expected withdrawal of funds from the postal savings system— related to the maturation of some ¥106 trillion in postal savings deposits over the next two years—leaves little room for further FILP stimulus. The postal savings system holds roughly ¥250 trillion (50 percent of GDP) in deposits, largely in 10-year fixed-term savings instruments (teigaku), which have been fully invested in the FILP. About 40 percent of these funds were deposited between April 1990 and March 1992, when teigaku interest rates were at their peak, and are now about to mature. On the assumption that deposit holders would retain about 70 percent of deposits eligible for roll-over, the Ministry of Post and Telecommunication (MPT) has estimated that about ¥50 trillion in funds would flow out of the postal savings system by March 2002.20


Estimated Maturation Profile or Teigaku Deposits

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A002

32. Although the expected outflow of funds has led to sharp cutbacks in the FILP’s overall size, its general lending program will be largely preserved. Overall FILP spending in FY2000 is budgeted to decline to ¥43.7 trillion (8¾ percent of GDP), a 20 percent reduction compared to the revised outcome for FY1999, but most of the cuts will affect investment in financial instruments (Table II.11). General FILP spending—loans to special accounts of the central government, local governments, and government financial institutions—is expected to shrink by only about 8 percent, as the Postal Ministry has agreed to a reduction in funds for portfolio investment of more than ¥6 trillion.21

Table II.11

Japan: Fiscal Investment and Loan Program (FILP), FY1995–2000

(In trillions of yen)

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Source: Ministry of Finance.

Reflects the funding of the “lend-back” system under which the postal savings system, public pension funds, and the postal life insurance fund receive funds for portfolio management on their own account.

Compared to latest available data of the previous year.

Liquidity Management

33. In anticipation of increased liquidity needs, the TFB has now completely withdrawn from the primary government bond market, and has begun to raise cash through a series of repo auctions:

  • The TFB decided in late 1998 to shift its securities portfolio toward shorter-term maturities, including through a halt of fresh purchases of long-term government bonds (JGBs). For FY2000, the TFB announced that it would also cease to replace maturing JGB holdings, although it would continue to acquire ¥200 billion in 10-year JGBs in the secondary market every month to contribute to market stability. Unlike in the previous year, this was well anticipated by market participants, and did not result in a sudden rise in yields.

  • To avoid the need for extensive sales of its bond holdings—which could provoke adverse market reactions—the TFB has embarked on reverse repo auctions to raise liquidity for redemptions of postal savings deposits. The TFB has so far raised ¥900 billion in three auctions, which were heavily oversubscribed.

In view of the risk that unanticipated deposit outflows could prompt a liquidity crisis, the TFB has concluded an agreement with the Bank of Japan regarding possible BoJ interventions during repo auctions. Over a period of two years, the BoJ would stand ready to inject liquidity in the event that the TFB could not secure necessary funds through regular auctions. However, in order to avoid market perceptions that the BoJ was effectively underwriting government debt, the agreement specified that the BoJ would only intervene in two distinct circumstances, either if the sum of bids fell short of the total auction amount, or if rapid withdrawals of postal savings required the TFB to seek liquidity significantly in excess of average auction amounts. The actual amount of liquidity provided and the related interest rate would reflect market conditions. The repos are of a maturity of up to 3 months and can be rolled over. However, rollovers that would extend the maturity of a repo to more than 3 months are subject to BoJ approval, and the outstanding amount of such rollovers can not exceed ¥7.8 trillion (an amount equivalent to cumulative JGB purchases by the TFB in secondary markets).

34. Based on the experience of the first three months, the Postal Ministry has so far been successful in retaining the bulk of maturing deposits. During April-June, slightly less than 60 percent of ¥11 trillion in maturing funds were redeposited in the postal savings system. Once interest tax on maturing deposits and funds in excess of the ¥10 million deposit limit are excluded, the redeposit rate was around 75 percent, indicating that the marketing effort of the postal authorities has so far paid off. However, the postal savings system could still face large outflows when interest rates pick up. A large part of maturing funds have been parked in ordinary postal savings which can be withdrawn at any time. Moreover, the interest penalties for premature withdrawals of teigaku deposits are negligible, and savers therefore have the option of shifting investments at short notice.

The Quality of FILP Assets

36. The historic default rate on FILP loans has been low. The FILP currently does not carry bad loans on its portfolio, and default among FILP agencies has been rare. At the end of 1997, a special account relating to the National Forestry Service was unwound, with outstanding FILP loans of ¥3½ trillion that had to be partly covered by the central government. However, the more spectacular ¥27 trillion failure of the JNRSC mostly reflected a funding gap at the time of the privatization of Japanese Railways that was temporarily covered by FILP funds.

37. The low default rate reflects the fact that most FILP investments and loans are directed to public sector institutions. Indeed, more than 50 percent of FILP assets—which currently amount to some ¥440 trillion (90 percent of GDP)—are directly backed by central or local governments, including government securities, loans to general and special accounts of the central government, and loans to local governments (Table II.12). While these assets are regarded as carrying minimal default risk, market observers have raised concerns about the quality of the ¥195 trillion (40 percent of GDP) in loans to GFIs and public enterprises (which are jointly referred to as FILP agencies):

  • The bulk of funds lent to FILP agencies has gone to government financial institutions (some ¥140 trillion as of end-FY1999), which have so far not reported significant financial difficulties. The finances of GFIs (including, e.g., the Housing Loan Corporation, the Development Bank of Japan, and the Japan Bank for International Cooperation) have reportedly been less affected by the recession than those of private sector banks, Despite a sharp increase in FY1999, the amount of officially reported bad loans has so far remained at around 1–2 percent of the total loan portfolio, which may reflect the long-term developmental nature of GFI lending. However, GFIs generally operate with much lower capital than private institutions, and thus remain vulnerable to loan defaults.

  • Larger problems are likely to exist among non-financial FILP agencies which account for the remaining ¥55 trillion in FILP loans. There are numerous examples of large infrastructure investments by FILP agencies (e.g., the Japan Highway Public Corporation) that appear not to generate sufficient profits to cover future debt payments. While it is unclear to what extent such investments will be protected against default, the government will likely need to provide additional funds to cover losses of some of these projects in the future.

Table II.12.

Japan: Trust Fund Bureau Operations

(In trillions of yen)

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Source: Ministry of Finance.

FILP Reform

38. A bill to increase the effectiveness of the FILP and align its activities to a greater degree with market principles will take effect as of April 2001. In May 2000, the Diet approved a reform bill which abolishes the compulsory deposit of postal savings and pension reserves with the TFB, but also provides the institutional framework for bond issues that will become necessary to sustain FILP operations from FY2001. The reform includes the following components;

  • The compulsory transfer of deposits from the postal savings and pension systems to the TFB will be abolished. Fresh deposits are henceforth to be managed by the respective ministries themselves.22 The ministries have agreed to continue to fund existing FILP loan obligations and underwrite about half of fresh FILP bonds in FY2001. The amount of bond underwriting will then be gradually reduced to zero over a transition period of 7 years. Principles for prudential portfolio management by the MPT and the Ministry of Health and Welfare are currently being worked out.

  • To ensure continued funding for the FILP, the government will be authorized to issue additional government bonds (zaito bonds) and financing bills. In addition, individual FILP agencies are encouraged to issue individual agency bonds. While the government may guarantee such bond issues in limited circumstances, the bulk of agency bonds is expected to be issued without guarantees.

  • In order to prepare for agency bond issues and facilitate stronger Diet supervision over the FILP, the government has begun to conduct subsidy cost analyses that are intended to assess the long-term viability of agency activities, including by identifying future government subsidies required to maintain financial balance.23

39. While the legal framework for the reforms has been established, details regarding their implementation have not yet been released. The government’s proposals contain a clear commitment to reduce the need for government funding of the FILP, but future efficiency gains will be linked to the degree to which FILP agencies have to genuinely compete for market funds. Some GFIs with an easily marketable loan portfolio (e.g., the Housing Loan Corporation) appear on course to increasingly tap markets through asset-backed securities in the near nature, but most other FILP agencies have not yet announced plans to issue substantial amounts of unguaranteed bonds in FY2001.

E. Fiscal Reforms

Public Pension Reform

40. In March 2000, the Diet approved a far-reaching pension reform bill. The bill contained provisions to cut lifetime pension benefits by around 20 percent for future retirees, sufficient to limit future increases in pension contribution rates in both the (basic) National Pension and (earnings-related) Employee Pension Insurance (EPI) schemes by a substantial margin.24 The impact of the bill can be assessed against the actuarial calculations conducted by the government. Prior to the pension reform, the contribution rate required to maintain the solvency of the EPI was calculated at 34½ percent of monthly wages by 2025 (compared to today’s level of 17.35 percent, paid equally by employer and employee). Following the reforms, this rate is now estimated at 25¼ percent. For the National Pension, the corresponding numbers are ¥26,400 in monthly flat-rate contributions by 2025 prior to the reform, compared to ¥18,200 after the reform (the current rate is ¥13,300).25

41. The main provisions of the bill are the following:

  • Earnings-related benefits will be cut by 5 percent for new retirees from April 1,2000. However, a grace period will effectively delay the actual reduction until FY2004.

  • Increases in earnings-related pension payments will be indexed to the CPI instead of disposable income.

  • The age of eligibility for earnings-related pensions will be gradually increased from 60 to 65 between 2013 and 2025 (for men) and 2018 and 2030 for women. The age of eligibility for a (reduced) basic pension will also be raised gradually from 60 to 65, beginning in FY2001, and the reduction in monthly benefits will be 30 percent.

  • Similar to the regulations for those aged 60 to 64, employees between 65 and 70 will have to pay pension contributions from April 2002, and will receive a reduction in benefits if their combined income from pension and salary exceeds certain limits.

  • Beginning in April 2003, a uniform pension contribution rate will be applied to both monthly wages and bonuses. Under the current system, the contribution rate applied to bonuses is 1 percent. The change is designed to be revenue-neutral, with an initial combined rate of 13.58 percent.

42. The bill will also raise transfers to the basic pension scheme from one third to one half of benefits from FY2004 (at a cost to the government of ½ percent of GDP per year). This will take some of the burden off current employees, whose earnings-related contributions are partly used to subsidize general basic pension benefits. The government also formally decided to keep pension premiums at present levels for the time being, owing to the fragile state of the recovery. Other relief measures include the halving of national pension contributions by persons in lower income brackets from April 2002.

Private Defined-Contribution Pension Plans

43. The planned introduction of private defined-contribution pension plans would offer employees an alternative to existing corporate pension plans. The current pension system allows companies to establish privately-run pension plans that benefit from favorable tax treatment (Employees’ Pension Funds and Tax-Qualified Pension Plans). These plans are on a defined-benefits basis, and have been managed by company-selected fund managers. In recent years, many such plans have accumulated large unfunded liabilities, mainly a result of sagging returns on pension assets. To offer companies the possibility of capping their pension exposure, and allow individuals the possibility to take greater responsibility in determining their future retirement income, the government decided in 1999 to establish private defined-contribution pensions. Besides generating higher returns, defined-contribution plans could also favor labor mobility, since existing private pension plans encourage workers to remain with a single employer in order to maximize ultimate benefit payments.

44. In the context of the FY2000 budget, the government forwarded legislation to the Diet regarding the tax treatment of such pension plans. The government’s proposals would make contributions to defined-contribution schemes tax-deductible subject to specified limits, and pension benefits would practically be tax-exempt if they were to be paid out as annuities. Tax deductions differ, however, across the following categories:

  • Subscribers to defined-contribution pension plans would be able to deduct up to ¥180,000 in contributions from income tax each year.

  • Contributions to pension plans would only be tax-deductible for workers whose companies have no corporate pension funds, and salaried workers would not be allowed to add defined-contribution plans to their existing corporate pension.

  • Contributions by employers of up to ¥432,000 per employee would be tax-deductible, provided the company had no other corporate pension funds. Otherwise, the maximum deductible would be ¥216,000.

  • Self-employed subscribers would be able to deduct up to ¥816,000 in annual contributions from taxable income.

45. The bill has not yet passed the Diet. The government’s initial plan was to introduce defined-contribution pensions in the fall 2000, but this date has already been moved to 2001.

Health Care Reform

46. Compared to other major industrial countries, health expenditure in Japan has been fairly low in relation to GDP (Table II.13). Although the system exerts only limited control on demand, and private suppliers have incentives to provide excessive quantities of some services, health spending is on a level comparable to countries with nationalized health services, such as the U.K. While underlying factors that have contributed to Japanese longevity probably also imply less need for medical services, strict price controls and increases in co-payments in recent years have also been effective in keeping overall expenditure low.26 This is likely to change, however, as the Japanese population grows older.

Table II.13.

Public Health Expenditure, 1995

(in percent of GDP)

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Source: OECD Health Data, 1997.

47. The health care reform debate in Japan has therefore centered around the question of the extent to which costs of old-age medical care can be contained. Old-age medical care is financed through government transfers (at 30 percent) and cross-transfers from other health insurance schemes, as well as small patient contributions. Owing to low copayments and intensive treatment, the costs of old-age medical care have recently skyrocketed: the average annual increase of old-age medical costs over the past decade was about 8½ percent, compared to 2 percent for other medical expenditure. Persons over 65 consume roughly four to five times as much in health services as younger persons, putting upward pressure on contribution rates and raising concerns over the future of the system once a larger share of the population retires.27

48. The introduction of nursing care insurance (from April 2000) could lead to some savings in medical costs. Besides providing an additional safety net for families with elderly relatives, the new scheme has been designed to cut costs in old-age medical care which has so far provided partial nursing services (mainly through extended hospital stays). Half of the estimated annual cost of ¥4.3 trillion for the nursing care scheme are to be financed by additional health insurance contributions (from workers above the age of 40 and residents aged 65 or more), beginning in FY2001. Individual contributions will be around ¥1,500 per month (US$14) for workers, and somewhat larger on average for residents older than 65, depending on the available level of service in a particular region.28 The remaining half of the costs is to be borne by central and local governments (25 percent each).

49. A recently introduced reform bill that envisages higher co-payments by elderly patients is still under debate in the Diet.29 The bill’s main provision is a rise in copayments by the elderly to 10 percent (compared to 20–30 percent for younger persons) from a flat rate of at most ¥1000 per hospital day, which would however be subject to monthly limits between ¥3000 and ¥5000, depending on the nature of treatment, but would exclude co-payments for Pharmaceuticals. Moreover, co-payments for high-cost medical treatments would be raised for all patients, albeit by relatively small amounts.

Fiscal Transparency

50. The complex arrangement of Japanese fiscal accounts is not well suited to generating the flow of data and projections on fiscal operations needed for an adequate macroeconomic assessment of fiscal policy. Fiscal policy operates under well established principles of fiscal responsibility, but it is extremely difficult for outside observers to monitor fiscal developments, gauge the current stance of fiscal policy, and assess the need for corrective measures during the fiscal year. The main problems relate to the following:

  • Important fiscal information is presented with a significant time lag and not in a format that lends itself easily to macroeconomic analysis. The authorities report consolidated fiscal accounts for general government with a 12-month lag, which is related to a delay in data reporting by some 3,200 local authorities. The information is provided only in the context of the national income accounts, in a classification that is not compatible with GFS standards.

  • The budget process suffers from a confusing distinction between initial and supplementary budgets. The implementation of counter-cyclical fiscal policy through large supplementary budgets has implied volatile quarterly swings in public works spending—c.f. the decline in output caused by the sharp fall in public works spending in the second half of 1999. The diminished role of initial budgets also creates uncertainty about the immediate path of fiscal policy. For example, while the government indicated that it plans to maintain a “neutral” budget in FY2001, the fiscal stance in 2001 will depend crucially on decisions yet to be made on the FY2000 supplementary budget.

  • The absence of a clear medium-term fiscal policy framework invites speculation about future public deficit and debt levels, and may contribute to instability in bond and foreign exchange markets. Although the authorities regularly publish a five-year fiscal forecast, this is based on a linear extrapolation of recent trends rather than a detailed assessment of factors likely affecting revenue and expenditure in the future or indications about the authorities’ future fiscal plans.

51. The government has taken steps to improve transparency in selected areas. The government is currently working on a national balance sheet that would provide information on the consolidated assets and liabilities of the central government’s General and Special Accounts. Publication of a pilot version is expected for this fiscal year. At the same time, guidelines for the compilation of balance sheets by local governments have recently been drawn up, and the Tokyo prefecture independently published its first consolidated balance sheet in May 2000 (see Box II.2). The government also intends to improve transparency in the annual budget formulation process, including by publication of the guidelines for evaluating budget requests, and by introducing a policy review system, whereby the performance of government agencies would be evaluated against policy targets. Possibilities for linking the outcome of policy reviews to budget allocations in coming years are also being studied.


  • Chand, S.K., and A. Jaeger, Aging Populations and Public Pension Schemes, Occasional Paper 147, International Monetary Fund, Washington, D.C., 1996.

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  • Mühleisen M. “Too Much of a Good Thing? The Effectiveness of Fiscal Stimulus” in: T. Bayoumi and C. Collyns (eds.), Post-Bubble Blues: How Japan Responded to Asset Price Collapse, International Monetary Fund, Washington, D.C., 2000.

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Prepared by Martin Miihleisen (ext. 38686).


The fiscal year starts on April 1.


A detailed examination of the composition and impact of stimulus programs is contained in Mühleisen (2000).


A separate supplementary budget, passed in October 1998, authorized bond issues and public guarantees worth ¥65 trillion (13 percent of GDP) for resolving problems in the domestic banking system. The government also authorized ¥20 trillion in special loan guarantees extended by regional credit-guarantee associations through March 2000.


Other measures in the FY1999 budget included an extension of the period for which mortgage holders qualified for special tax deductions from six to 15 years (for house purchases taking place by December 2000). Moreover, the securities transactions tax was repealed as of April 1999, withholding taxes were suspended for Finance Bills and Treasury Bills (if registered with the Bank of Japan), and nonresidents were being exempted from withholding tax on government bonds from September 1999.


Public works orders increased sharply in early 2000 in response to the package, but the impact on the national income accounts has yet to be felt (see Figure II.2).


General expenditure excludes debt service payments and transfers of local allocation tax.


The government also introduced a bill on the tax treatment of contributions to private defmed-contribution pension plans, which has however not yet passed the Diet (see below).


The staff’s lower cumulative deficit over the two years reflects an expected shortfall in local government spending, discussed further below.


Under the official classification, bond issues and borrowing are counted among revenues, and the deficit reflects only changes in financial reserves. Based on information in the White Paper on Local Government Finance, the deficit reported here reflects the definition in the guidelines for Government Finance Statistics.


The LGFP is an indicative initial budget plan for the local government sector—compiled jointly with the central government—that forms the basis for the allocation of tax transfers.


Two fiscal indicators in particular trigger central government intervention: (i) a local authority’s bond issues are restricted if its ratio of debt service to local tax revenues exceeds 20 percent; and (ii) a prefecture is mandated to undertake fiscal restructuring under direct national control if its fiscal deficit exceeds 5 percent of a standardized expenditure measure (20 percent in the case of municipalities).


Had the governments levied the tax on all enterprises doing business in their prefectures, they would not have been able to claim unique circumstances, and would thus have had to obtain permission from the Ministry of Home Affairs.


For example, non-profit corporations run by the Postal and Welfare Ministries use FILP funds for portfolio investments that mostly involve government bonds.


These results have been obtained from the model described by Mühleisen in this year’s Selected Issues paper. They are roughly consistent with Chand and Jaeger (1996), who obtained an estimate of 108 percent of GDP for the pension system’s net projected liabilities, taking account of information relating to the 1994 pension reform.


See OECD, Gross and Net Debt Measures in Japan, 1998.


The regional credit guarantee associations paid out ¥801 billion in guarantees during FY1999. Government losses from the special guarantee scheme—which expires in March 2001—have amounted to ¥200 billion so far, implying a 1 percent loss rate.


Inflation is assumed to be flat at 1 percent a year throughout.


Variations in the paths of interest rates and growth towards their endpoints have only small effects on the required adjustment.


Maturing deposits will be subject to ¥9 trillion in taxes, while accumulated interest in excess of the ¥10 million deposit cap accounts for ¥16 trillion, leaving ¥81 trillion in deposits eligible for rollover.


The FILP consists of the “general” FILP and portfolio investments. Portfolio investments are managed by non-profit institutions run by the Postal and Welfare Ministries, which gives the two ministries some role in allocating the funds collected by their respective postal savings and welfare systems.


The TFB itself is to be replaced by a yet-to-be established government agency.


A pilot study has identified the need for subsidies worth ¥5 trillion over the next 20–30 years for five major agencies that account for a combined ¥110 trillion of FILP loans.


The Ministry of Health and Welfare estimates that an average household with 40 years of contributions to an employee-pension plan will be paid ¥418,000 in FY2025, ¥10,000 less than if they were receiving benefits today. The estimated total lifetime pension payment to a, salaried worker who is currently 40 years old will fall from ¥61 million to ¥51 million under the current system.


Critics have pointed out that the need for future contribution increases could be higher, if the fertility rate does not recover as currently projected in the official populations models.


In the WHO’s World Health Report 2000, Japan’s health care system obtained the highest performance rating, and ranked among the 10 most cost-efficient health care systems.


The National Health Insurance scheme posted a ¥100 billion deficit in FY1998, likely to be followed by a similar deficit in FY1999. The combined deficit of corporate health plans was ¥210 billion in FY1999.


The elderly are exempt from premiums for the first 6 months of FY2000, and pay only half the premium for one more year. Worker contributions have been reduced for one year.


Spending on medical care is expected to drop by 4 percent in FY2000, with a substantial chunk of services being taken over by nursing care providers. However, the overall uptrend in health care spending will continue, with costs expected to increase by 2½ percent if nursing care expenses are included.