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.

Abstract

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.

V. Structural Reform and Deregulation1

A. Overview

1. Structural reform and deregulation have been actively pursued in Japan over a number of years, especially since the Hosokawa administration in 1993. Recognizing the need for structural reform to reinvigorate the economy, the authorities began developing specific action plans for deregulation, Since then, two three-year deregulation programs (FY1995–97 and FY1998–2000) have been set out and several economic stimulus packages have contained deregulation measures. In 1996, the Hashimoto administration launched a comprehensive structural reform initiative, covering six areas: government administration, economic structure, financial system, fiscal structure, social security, and education (later added), which continues to guide the reform agenda. At the same time, the Regulatory Reform Committee (RRC), the Economic Strategy Council (ESC), the Industrial Competitiveness Council (ICC), and the Economic Council (EC) have provided input into the government’s reform efforts (Box V.1).

Major Councils on Regulatory Reform

The Regulatory Reform Committee (RRC), previously the “Deregulation Committee,” was established in January 1998 as the principal vehicle for regulatory reform discussions. 12 members (originally 7) include representatives from the business, labor, and academic communities. The current government program, the “Three-Year Program for Promoting Deregulation (FY1998–2000),” was revised at the end of FY1998 and 1999, on the basis of the RRC’s recommendations. Measures taken under the current and preceding (FY1995–1997) programs include the liberalization of the mobile phone, transportation, distribution, and power industries. The financial sector measures implemented under the Big Bang initiative also were part of these programs.

The Economic Strategy Council (ESC) was established in August 1998 to formulate a comprehensive strategy to revive the economy and to build a prosperous economic society in the 21st century. The members comprised 10 business leaders and academics. The ESC report of February 1999, “Strategies for Reviving the Japanese Economy,” listed 234 proposals with indications of the necessary legislative response, in three strategic steps.

  • First step: Period for intensively dealing with the legacy of the bubble economy (FY 1999–2000). Macroeconomic policies should place priority on economic recovery and stabilization of the financial system.

  • Second step: Period for returning to growth path and regaining the health of the economy (FY2001–2002). Macro policy stance should be shifted to neutral, once the economy is back to an autonomous recovery path.

  • Third step: Period for full-fledged revival of the economy through fiscal consolidation and structural reform (by FY2003).

Many of the measures in the November 1999 stimulus package, including the early submission of bills to facilitate corporate restructuring, reflected the recommendation of the ESC.

The Industrial Competitiveness Council (ICC) was established in March 1999 to evaluate ways to enhance competitiveness of Japanese industries and productivity. The members consisted of 16 Ministers and 17 business leaders. Many ICC recommendations were reflected in the government’s policy package of June 1999 to promote employment and support corporate restructuring. In addition to the creation of 700,000 new jobs, renewed focus on job training, and revision of unemployment insurance, the June package included important legislation geared to liberalizing job placement services and worker-dispatching business, facilitating business transfers, and providing economic incentives for corporate restructuring.

The Economic Council (EC), a permanent advisory group reporting to the Prime Minister on the medium- to long-term conduct of economic policy, consists of 23 members. The EC submitted a report, “Ideal Socioeconomy and Policies for Economic Rebirth,” in July 1999. The report provided a vision of the economy in 10 years time, dealing with issues such as the establishment of a “knowledge-based” economy, change in Japan’s demographics, globalization, and environmental concerns. Its advocated policy guidelines include:

  • establishing transparent and fair markets and creating internationally attractive business environment;

  • securing variety and dynamism through acceptance of foreign labor;

  • promoting scientific technology;

  • establishing a secure and efficient social security system;

  • imposing environmental principles;

  • proactively contributing to the WTO discussion and rule-setting in the international financial market;

  • improving transparency and efficiency of government.

2. The following sections discuss recent developments in the field of structural reform and deregulation. Sections B through D describe steps taken to facilitate corporate restructuring and regulatory reform more broadly, as well as developments in government administrative reform.2 Section E draws a brief road map for further regulatory reform in Japan that would provide a foundation for sustained economic growth in the future.3

B. Corporate Restructuring

3. The main measures put in place over the past year to facilitate corporate restructuring include the following:

  • The Industrial Revitalization Law (IRL), which came into effect in October 1999, offered incentives for corporate restructuring, including through capacity cuts and the pursuit of new business lines. The law provided an extended period of loss carry-forward, accelerated depreciation for new investments, and loan guarantees to firms whose restructuring plans are approved by the authorities. Applications need to be made before the expiration of the law on March 31, 2003.

  • The Commercial Code was amended in May 2000 to facilitate corporate spinoffs. The amendment complemented earlier measures to provide flexible options for restructuring, such as rationalization and simplification of the merger process (FY1997) and introduction of equity swaps to facilitate reorganization under holding companies (FY1999).

  • The Civil Rehabilitation Law (CRL) replaced the former Composition (Wagi) Law on April 1, 2000, with provisions resembling those of Chapter 11 in the United States.4 The law was based on the debtor-in-possession (DIP) principle and expedited procedures to facilitate reorganization, especially among small- and medium-sized enterprises.5 The DIP principle should encourage the management of ailing firms to start the reorganization process before excessive deterioration of their business. The new law is expected to shorten the court process to around 5 months from 12–14 months previously, lowering the costs for applicants.

  • Accounting standards are being strengthened significantly. Consolidated financial statements were introduced from April 1999.6 Valuation based on fair market values (“marking-to-market”) is being phased in—on plan assets for employees’ retirement benefits, marketable securities, and held-to-maturity debt securities from April 2000, and on other securities held for cross-shareholding purposes from April 2001. These reforms will improve market discipline by enhancing transparency.

  • Labor laws have been relaxed to enhance mobility and improve the realtocation of labor. Restrictions on job categories for worker-dispatching businesses were mostly lifted in December 1999, although with a limit on the maximum work period.7 Private job placement services were also liberalized for a broader range of job categories (December 1999). Also, changes in unemployment insurance, effective April 2001, focused on discouraging voluntary unemployment while easing transitional costs on fired workers, thus making it less difficult for firms to shed excess labor.8

4. The corporate sector has begun to respond to these reform initiatives. An increasing number of announcements of restructuring plans among major enterprises reflect efforts to cut input and labor costs, focus on core businesses, and search for new profitable opportunities. About 40 applications from a wide variety of companies were made under the IRL through the end of May 2000. Filings for reorganization under the new CRL, mostly from construction and manufacturing companies, are running at an annual rate of about 600, compared to about 300 annual cases under the old Composition Law. There is also growing evidence of voluntary implementation of the improved accounting standards by some large firms, even before the rules become mandatory.

C. Regulatory Reform

5. Underlying the regulatory reform process is the principle of shifting from prior approval to retrospective supervision. The regulatory approach in the past imposed direct regulations through prior approval and related administrative actions. In contrast, the new approach will set out clear and specific rules, while conducting supervision only ex post on the compliance with the rules. The shift requires more than simply abolition of existing regulations, but also reform of the approach to regulation.

6. A number of regulatory reforms were put in place based on the “Three-Year Program for Promoting Deregulation (FY1998–2000).” As of October 1, 1999, halfway through the program’s duration, about 80 percent of the 917 reforms listed had been started, while 50 percent had been completed. Major achievements include the following:

  • NTT was split into three providers (two local and one long-distance) under a holding company structure, in July 1999. To reduce telecommunications costs more broadly, legislation in May 2000 modified the calculation method for network connection charges, which should result in reductions in access charges by over 20 percent over a 2-year period starting end-2000.

  • A number of steps have been taken to deregulate the transportation sector. The liberalization of air transport, effective April 2000, eased the requirement for opening up new air routes from prior approval to registration, and granted airlines freedom in their pricing decisions. Trucking businesses were permitted to operate in wider zones in early 1999, while the door is to be opened to smaller entrants in FY2000, by reducing minimum requirements on truck ownership. Entry into coastal shipping is to be liberalized in October 2000, while the restriction on entry to shipping by rail is to be abolished in three years time.

  • Independent power producers (IPP) were allowed to enter the large-customer retail business from March 2000. Further measures are in train to achieve the goal of bringing down electricity tariffs to internationally comparable levels by FY2001, as stipulated in the Action Plan for Economic Structure Reform of 1997. The plan called for the increase in the ratio of average load capacity to maximum load capacity and a more efficient distribution system to lower the electricity costs.

  • On agriculture, legislation was enacted to allow private sector entry into the inspection of agricultural products (effective April 2001). A proposal to permit corporations to own agricultural land was submitted to the Diet, but has not yet been legislated. In the future, efforts are expected to focus on replacing price subsidies with direct income aid, based on the principles stipulated in the Basic Law on Food, Agriculture and Rural Areas (July 1999).

  • A new regulatory scheme on large-scale retail stores came into effect in June 2000. The new law, which replaced the Large Scale Retail Store Law, transferred the regulatory authority regarding large scale retailers to local governments. Depending on local preferences, the new law has the potential to expand the number of large-scale retail sellers in Japan.

  • To deal with an incipient shortage of lawyers, the cap on the number of prospective lawyers passing the bar exam each year was increased to 1,000 in FY1999, from 800 in FY1998 and 700 before that.

7. The government expanded the current deregulation program at the end of March 2000, increasing the number of items from 917 to 1,268. The newly added items included:

  • Establishing clear and objective criteria for the allocation of flight slots in overcrowded airports;

  • Reviewing recent legislation to enhance labor mobility and restrictions on employee discharges;

  • Further encouraging private sector entry into the nursing care business;

  • Relaxation of various conditions for qualifying examinations, and subsequent increase in the number of qualified practitioners, including accountants; and

  • Liberalizing the management of schools, and facilitating the hiring of foreign language trainers.

D. Administrative Reform

8. The reform of government administration is on track following plans laid out in legislation in June 1998:

  • Preparations are underway for the reorganization of the central government to slim down the bureaucracy. Legislation in December 1999 completed the legal arrangements for the reorganization, supplementing prior legislation. The number of ministries and agencies will be reduced from 23 to 13 by January 6, 2001 (Box V.2). Some governmental business operations, such as the management of museums and hospitals, will be separated into 56 independent administrative corporations in April 2001 to trim down the government’s role while securing independence and enhancing efficiency.

  • A 25 percent reduction of the number of civil servants is planned by FY2008. A 10 percent cut will be achieved through limiting recruitment, while the remainder will be secured through the creation of independent administrative corporations. The implied increase in workload on the already small government workforce relative to population size would be addressed by reducing government responsibilities through deregulation and administrative reform. Japan already has many fewer government employees per capita than other G7 countries.9

  • In line with the central government reorganization, the number of public corporations with special legal status has been reduced through mergers and closures. As of October 1, 1999, such entities amounted to 78, down from 92 in 1995, including as a result ofthe merger that established the Japan Bank for International Cooperation and the Development Bank of Japan.10 Among the remaining corporations, 24 are expected to downsize their operations.

  • Transparency of government operations will be improved by allowing public access to information held by government from April 2001. The Law Concerning Access to Information Held by Administrative Organs, legislated in May 1999, established a process for the public to request the disclosure of administrative documents, thereby improving the transparency of government operations.

Reorganization of Central Government

The number of the central government ministries and agencies will be reduced from 23 to 13 on January 6, 2001, following the agenda stipulated in the Basic Law for Government Reform in June 1998 and succeeding laws on the specifics in July 1999.

ua01fig3
Source: Nihon Keizai shimbun, and Mainichi Shimbun.

E. Remaining Agenda

9. The need for comprehensive reform plans has been voiced by a variety of observers, including in the 1999 OECD report on deregulation.11 The priorities are:

  • Further liberalization of the distribution network could help to improve efficiency in the power sector. The action plan of 1997 targeted a reduction in electricity tariffs from among the highest levels in the OECD to internationally comparable levels by FY2001, in order to enhance competitiveness of Japanese firms. Nevertheless, the price of electricity in Tokyo (for households) is reported to be about 40–60 percent higher than in New York, London, or Paris. As the differences owe to high costs of distribution rather than power generation, liberalization of the distribution network to new entrants, in addition to allowing IPP’s entry into the large-lot retail market, has the clear potential to reduce power costs.

  • There is further room for price reductions in the telecommunications sector. Overall residential telephone service charges in Tokyo are about 20–30 percent higher than in major European cities, and even higher for private high-speed digital lines and internet access compared to U.S. and European cities. Given that the high network connection fees imposed by NTT are one of the major causes, further reductions in NTT’s network access charges are critical for bringing down telecommunications costs to international levels by FY2001 (Action Plan of 1997), and to nurture the IT-based economy.

  • On agriculture, the Basic Law on Food, Agriculture and Rural Areas emphasizes the need to secure a stable food supply as well as to improve agricultural productivity. Passage of legislation to permit corporations to own agricultural land would help introduce much needed economies of scale in farming.

  • Further liberalization of the labor market to promote flexibility would provide firms with broader options in their efforts to restructure. While the authorities have passed a revised law governing dispatched workers, the new law still has a number of restrictions, for example the limits it places on the maximum work period for such workers and the range of sectors. Also, while the current Labor Standards Law does not impose severe restrictions on labor shedding, judicial precedents suggest substantial difficulties on the part of companies to lay off workers as part of restructuring.

References

  • Economic Planning Agency, “Price Report, 1999,” December 1999.

  • Gitlin, Richard, “The New Civil Rehabilitation Law of Japan—Will It Work?” Finance Asia, 2000.

  • Levy, Joaquim, “Reorganization and Corporate Restructuring in Japan,”Post Bubble Blues — How Japan Responded to the Asset Price Collapse, IMF, 2000a.

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  • Levy, Joaquim, “Reform of Japan’s Insolvency Laws,” Post Bubble Blues—How Japan Responded to the Asset Price Collapse, IMF, 2000b.

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  • Management and Coordination Agency, “Kisei Kanwa Suishin 3 ka Nen Keikaku no Followup Kekka (The Results of the Follow-ups on the Three-Year Program for Promoting Deregulation),” November 1999 (in Japanese).

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  • Management and Coordination Agency,“Kisei Kanwa Hakusho (White Paper on Deregulation),” August 1999 (in Japanese).

  • Ministry of International Trade and Industry, “Tsusho Hakusho (White Paper on International Trade and Industry), 2000,” May 2000 (in Japanese)

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  • Organization of Economic Cooperation and Development, Economic Survey of Japan, November 1999.

  • Organization of Economic Cooperation and Development, Regulatory Reform in Japan, July 1999.

  • Yamamoto, Akio and Mikio Ueno “Shinpan Tousan Hou Nyuumon (Introduction to Bankruptcy Laws—Amended Version),” Tokyo Nunoi Shuppan, September 1999 (in Japanese).

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1

Prepared by Takashi Nagaoka (ext. 37613).

2

Reforms in the fiscal area and financial system are covered in chapters II and IV, respectively.

3

A rough estimate by the Economic Planning Agency in 1999 suggested that deregulation over FY1990–97 had expanded demand by ¥8.2 trillion per year on average and allowed consumers to save ¥6.6 trillion over 8 years due to lower prices.

4

Levy (2000b) discusses bankruptcy reform in Japan.

5

Larger firms tended to file under the Corporate Reorganization (Kaisha-Kosei) Law, but this was too costly for smaller firms in terms of money and time.

6

Accounting standards introduced in April of a particular year are reflected in financial statements released after the closing of that financial year (i.e., after March 31 of the following calendar year).

7

Exceptions included harbor transportation, construction, security, manufacturing, and medical-care.

8

The maximum duration of unemployment benefits was increased by 30 days for the involuntarily unemployed, although it was reduced from 300 days to 180 days for the voluntarily unemployed.

9

According to a study by the Management and Coordination Agency, Japan’s government employees (including national and local civil servants and employees in government corporations, but excluding those in the military) per 1,000 population was 36, compared to 87, 59, 76, and 67 for France, Germany, the United Kingdom, and the United States, respectively, as of FY1998.

10

The Export and Import Bank of Japan and Overseas Economic Cooperation Fund merged into Japan Bank of International Cooperation, and the Japan Development Bank and the Hokkaido-Tohoku Development Finance Corporation merged into Development Bank of Japan, both on October 1, 1999.

11

For a summary of the OECD report, see Chapter V on Structural Reforms and Deregulation in the 1999 Economic and Policy Developments Paper (IMF Staff Country Report No. 99/114).