The Japanese economy is vulnerable to external and domestic shocks. The new government has made a commitment to turn the fiscal situation around. The new policy framework provides the Bank of Japan with the scope to ease the policy stance. A deteriorating macroeconomic environment has exposed underlying structural problems in the banking sector. Over the past year, Japan maintained its traditional emphasis on pursuing further trade liberalization through the World Trade Organization (WTO) framework, while at the same time initiating talks on bilateral free trade agreements.


The Japanese economy is vulnerable to external and domestic shocks. The new government has made a commitment to turn the fiscal situation around. The new policy framework provides the Bank of Japan with the scope to ease the policy stance. A deteriorating macroeconomic environment has exposed underlying structural problems in the banking sector. Over the past year, Japan maintained its traditional emphasis on pursuing further trade liberalization through the World Trade Organization (WTO) framework, while at the same time initiating talks on bilateral free trade agreements.

V. Structural Reform1

A. Strategic Framework2

1. The new government has provided fresh momentum to the structural reform process. Since the early 1990s, successive administrations have continued to implement structural changes with varying speed. The recent blueprint announced by the Koizumi government indicates a greater determination to address some deep-seated problems that are at the heart of the economy’s weak performance in recent years. In addition to implementing the April emergency package on bank and corporate restructuring formulated by its predecessor, the government has indicated it will focus its reform efforts on a number of key areas, including privatization of public enterprises, regulatory reform, and fiscal reform. While the details remain to be fully fleshed out, a recent report by the Council on Economic and Fiscal Policy (CEFP) has provided a blueprint for the government’s strategy to revitalize the Japanese economy.3

2. While characterizing the resolution of the NPL problem as the first essential step for Japan’s revitalization, the CEFP’s blueprint focuses on deep structural reforms to promote competition and enhance the role of market forces. The Seven Point Plan—“Structural Reform of the Japanese Economy: Basic Policies for Macroeconomic Management” approved by the Cabinet on June 26—is wide-ranging, placing particular emphasis on structural reform to rejuvenate the economy among other issues (Box V.1).

Blueprint for the Structural Reform of the Japanese Economy

A blueprint for Japan’s structural reform was approved by the Cabinet on June 26, 2001. The blueprint—“Structural Reform of the Japanese Economy: Basic Policies for Macroeconomic Management”—recognized the importance of full-fledged structural reforms across sectors for revitalizing Japan’s economy. It characterized the resolution of the NPL problem as the first essential step, and identified seven forward-looking reform programs.

  • Privatization and regulatory reform: To expand business opportunities for the private sector, the program plans to promote the privatization of public and semi-public institutions, as well as conduct studies, including on privatization of postal, savings, and life insurance businesses of the post office, while expecting an increase in private finance initiatives. Market forces will be introduced to areas of health, nursing care, social welfare and education, which have so far lacked competition.

  • Supporting challengers: To create a society that allows individuals to fulfill their potential, various measures (including in the area of taxation) will be taken to support business startups and encourage investments in capital markets rather than savings at banks. The Fair Trade Commission will be strengthened to foster competition, and wide-ranging regulatory reforms will be legislated to support the IT revolution.

  • Strengthening welfare and insurance: To ensure security and stability in the future, social security numbers and Individual Social Security Accounts will be introduced to integrate social security services. A sustainable pension system and balanced pension taxation are to be sought in a comprehensive pension system reform. A Medical Services Efficiency-Boosting Program will be formulated to achieve efficient and high-quality medical care.

  • Doubling knowledge stock: To enhance human capital development, educational support will be boosted through providing scholarships and education vouchers, while private sector donations for education and research will be encouraged including through tax concessions.

  • Lifestyle revolution: To create an infrastructure to allow individuals to pursue their own lifestyle, impediments for female workers will be reduced through reforms in the tax and social security systems and by promoting the childcare service industry. Construction of “elderly-friendly” buildings will be expanded to enhance the welfare of the elderly.

  • Local independence and revitalization: To empower local governments, the program plans to reorganize municipalities, and lessen national government involvement through a reduction in national subsidies and review of local grants and tax systems, coupled with an expansion of local taxation.

  • Fiscal reform: To create a simple, efficient, government, fiscal reforms will be undertaken, including the review of earmarking of certain revenue sources, changes in the practice of budget allocations based on the distinction between public works and non-public works, and reprioritization of public works spending.

The blueprint also called for a complete reform of Japan’s policy-making process. While it listed measures to reflect more directly the people’s voice in the policy process (e.g., direct popular election of the Prime Minister, national dialogues through town meetings, etc.), it proposed a new budget compilation process led by the CEFP. Annual budgets are expected to reflect medium-term economic and fiscal plans based on a medium-term outlook. The FY2002 budget will initiate the reform process listed above, including by limiting new JGB issues to ¥30 trillion.

  • Emphasis will be given to deregulation and competition policy to advance the role of market forces. Business opportunities will be opened to the private sector through the privatization of public enterprises, possibly including the services of the post office, and further use of private finance initiatives (PFIs).4 The tax system will be reviewed to support businesses, with such a review likely to include the introduction of consolidated taxation. Economic laws such as the Commercial Code as well as the judiciary system will be overhauled so as to keep pace with the changing environment, while the Fair Trade Commission will be strengthened to promote fair competition.5 Securities market reform will include measures to attract individual investors, while real estate market reform will be led by the Urban Revitalization Headquarters’ projects.6 Measures will be taken to enhance labor mobility, for example by creating an environment where gender and age do not limit opportunities.

  • The plan also emphasizes other accompanying measures to promote economic growth. Focused investment in human capital will be made and promotion of science and technology will be prioritized, especially in the areas of information technology (IT), biotechnology, and nano-technology. Measures will be taken to activate the labor market by supporting retraining programs.

3. The blueprint anticipates 2–3 years of low economic growth before the results of reform measures set the base for higher growth. The CEFP estimates the economy would post growth of 0–1 percent in the intensive reform period, while the estimates of additional unemployment from NPL disposals vary from 100,000–200,000 (by the CEFP) to 300,000–500,000 (by the private sector).7 Estimates by private sector analysts, however, suggest that additional unemployment could exceed 1 million as a result of overall structural reforms. However, the authorities expect the economy to recover to around 2 percent growth once the problems are solved in a comprehensive manner, and about 5.3 million new jobs to eventually be created as the fruit of structural reform.

B. Corporate Restructuring

4. The government’s moves to accelerate structural reform reflect the realization that, despite improvements in a number of key industries, the corporate sector as a whole suffers from low profitability and high debt (Figure V.1). The ratios of companies’ labor costs, fixed assets, and debt to sales show that the “three excesses,” especially the latter two, still remained high in 2000. Although a rising number of companies have announced major restructuring efforts, including through labor force reductions, these plans have not yet been implemented on a large scale.8 As a result, indicators continue to show a labor excess comparable to that in the mid-1990s, and capacity utilization rates have remained low.9 Meanwhile, the continued drop in the debt-to-equity ratio, which began in the latter half of the 1990s, suggests that companies have achieved some success in debt reduction, but the ratio still remains high. Behind these aggregate numbers, however, there have been major differences in the degree of excess labor, capital, and debt between some leading, mainly export-oriented, industries (especially in manufacturing, particularly electrical machineries) and lagging nonmanufacturing industries (especially, construction).10

Figure V.1.
Figure V.1.

Japan: Selected Indicators of Business Conditions, 1980–2001

Citation: IMF Staff Country Reports 2001, 221; 10.5089/9781451820621.002.A005

Sources: Nikkei Telecom; Bank of Japan; Ministry of Finance; and staff calculations.1/ Percent of excess minus percent of insufficiency.

5. Progress in corporate restructuring over the past year has been facilitated by a number of regulatory changes and other policy measures taken by previous administrations:

  • Close to 100 restructuring plans have been approved under the Industrial Revitalization Law (IRL) since its enactment in October 1999. The law provides tax incentives (e.g., an extended period of loss carry-forward and accelerated depreciation for new investments) and financial support (e.g., loan guarantees and financing from public financial institutions) to firms with credible restructuring plans. While the required approval process, involving government ministries, has so far not been based on quantitative criteria, the provisions of the law are to be further tightened to include numerical criteria in line with proposals for the bad loan disposal framework in the April emergency package.11 The law expires at the end of FY2002.

  • The number of mergers and acquisitions (M&As) has increased rapidly over the past year (Figure V.2). An increasing number of firms have been involved in M&A activities to strengthen core businesses and for group restructuring purposes, and the participation of foreign firms has also expanded.12 Even large firms in mature industries—such as shipbuilding, chemicals, steel, and trading—are increasingly choosing this route for reorganization. The accumulation of experience by mediators and the improved transparency of corporate operations in the context of shifting to internationally accepted accounting standards—which makes it easier to value firms—both contributed to a 40 percent increase in cases in 2000. Nevertheless, the ratio of M&A values to total market capitalization (including the financial sector) has remained low at 3½ percent compared to 13¼ and 20½ percent in the U.S. and EU, respectively. Moreover, M&A activity involves almost exclusively “friendly” agreements rather than hostile takeovers.13

  • The rate of bankruptcy has picked up in recent years, with an increasing share of corporate reorganizations under court supervision (Figure V.3). The total number of bankruptcies increased by more than 23 percent and the value by 77 percent in 2000, partly reflecting the introduction of the Civil Rehabilitation Law (CRL) in April 2000. This law allows easier access to legal procedures for debtor-in-possession reorganization (similar to Chapter 11 procedures in the U.S.).14 While the law initially targeted small and medium sized enterprises, large firms such as a retail giant Sogo also filed under the new law, attracted by the expedited process which on average takes only about six months from application to approval of the restructuring plan, compared to 12–14 months under earlier procedures. The number of bankruptcy filings under the CRL reached 754 in FY2000, more than triple the average annual number of cases filed under its predecessor, the Composition Law (Wagi-hou), and the amount of debt involved amounted to ¥6.9 trillion, or more than a quarter of the total debt held by failed firms.15 Nonetheless, the number of CRL filings in Japan is still much smaller than under Chapter 11 in the U.S.

  • The “Accounting Big Bang” has entered its last stage, with mark-to-market (MTM) standards being applied to all securities holdings. Following the introduction of consolidated accounting in FY1999 and the application of MTM standards for marketable securities held in trading accounts and employees’ retirement benefit liabilities in FY2000, securities held for investment purposes (including cross-shareholding) will have to be valued at market prices from FY2001. In addition to a general improvement in market discipline, this measure is expected to contribute to a further unwinding of cross-shareholdings, a process that has been underway during the last fiscal year.

Figure V.2.
Figure V.2.

Japan: Mergers and Acquisitions

Citation: IMF Staff Country Reports 2001, 221; 10.5089/9781451820621.002.A005

Sources: Nomura Securities Co., Ltd.; and Merril Lynch Japan, Inc.
Figure V.3.
Figure V.3.

Japan: Bankruptcies

Citation: IMF Staff Country Reports 2001, 221; 10.5089/9781451820621.002.A005

Source: Teikoku Databank, Ltd.

C. Regulatory Reform

6. The Japanese approach to regulatory reform continued to be guided mainly by the Regulatory Reform Committee, which had provided the basis for the government’s renewed comprehensive three-year deregulation agenda (FY1998–2000) in 2000.16 Overall, about three-quarters of the items in the agenda were fully implemented by the end of March 2001.17 Besides a shift in the regulatory approach from prior approval to retrospective supervision, that has gradually been implemented, a number of major reforms have been introduced.

  • The remaining agenda in the “financial Big Bang” has been mostly put into effect. The wide-ranging reform in the financial sector was largely completed with the elimination of the barrier between banking and insurance by means of using subsidiaries and holding companies (October 2000); the legislation to allow the transformation of stock exchanges into equity corporations (December 2000); the permission to let banks sell insurance products over their counters (April 2001); and the removal of restrictions on domestic insurance companies to enter “third sector insurance” which includes insurance on medical care, cancer, and nursing care (January 2001 for life insurers and July 2001 for non-life insurers).

  • The revision of the Commercial Code allowing corporate splits became effective in April 2001. Firms have started to use the scheme as a central part of their restructuring efforts, for example by creating a new corporate structure under a holding company by splitting the existing company into new firms along functional lines.

  • The section in the Antimonopoly Act exempting operations regarded as natural monopolies—such as those in the transportation, electricity, and gas industries—has been abolished (as of June 2000). The legislation followed efforts in past years to reduce the number of exemptions.

  • The supply-demand adjustment clause has been eliminated in a number of transport industries to increase competition.18 The barriers to business entry and exit were removed for passenger water transport (October 2000) and port shipments (November 2000), while regulations on prices were also relaxed. Similar liberalization in the remaining industries, such as commercial bus and taxi services, will be put into effect by the end of FY2001, based on a bill approved in May 2000.

  • Measures have been taken in the telecommunications industry to allow for greater flexibility in network construction. For example, in August 2000, service providers with own lines were permitted to sell their lines to other operators.

  • To protect consumers from inappropriate marketing, the new Consumer Contract Law was established to form a general rule on economic transactions (April 2001).

  • Administrative requirements for imports have been streamlined. Measures were taken to rationalize import-related administrative procedures, including the introduction of a simplified application system in March 2001, to allow importers under certain conditions to receive shipments before tariff payments.

7. A new three-year program carrying 554 items in 15 areas was formulated at the end of the FY2000.19 The program called for a strategic and comprehensive approach to address outstanding issues. It place a renewed focus on selected areas such as IT, medical care, social welfare, education, environment, and labor. New additions to the list include:

  • Reviewing the allocation of broadband frequencies with a view to accelerating the penetration of high-speed Internet and reviewing the structure of NTT group in case competition is not enhanced;

  • Continuing the discussion on increasing the number of lawyers—at present, a ceiling of only 1,000 is set on the number of lawyers qualifying each year; and

  • Allowing banks to operate trust businesses.

8. The Council for Regulatory Reform was established under the new Cabinet Office in April 2001 to replace the former Regulatory Reform Committee so as to have greater authority in leading other government agencies in the reform process. While Japan’s past approach to reform has been characterized as piecemeal, the new organization is expected to exert sufficient authority to draw out and implement more comprehensive plans, for example in social welfare programs. It will also monitor the progress of the enforcement of the three-year program.

D. Administrative Reform

9. Following a series of legislation approved in June 1998, July 1999, and December 1999, a large-scale reorganization of the central government took place on January 6, 2001:

  • The number of principal ministries and offices has been reduced from 23 to 13 through mergers, with a view to streamlining the central government organization and to enhancing the Prime Minister’s leadership (Box V.2). The newly created Cabinet Office has been placed above other ministries in the organizational chart, with a view to giving it a better control over comprehensive policy formulation.

  • 57 government business operations have been detached as independent administrative institutions (IAIs) to reduce government involvement in economic decision-making and enhance efficiency.20

  • The number of central government employees is to be reduced by 25 percent by FY2009 following a Cabinet Decision in April 1999 that accelerated the initiative stated in the 1998 law. The scheme calls for a cut of about 550,000 central government officials over ten years, of which two-fifths will be cut through orderly reduction plans and the remainder through the separation of IAIs.21

Reorganization of Central Government

The number of the central government ministries and agencies was 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 and December 1999.

Source: Official Residence of the Prime Minister1/ Financial Services Agency was established under the Financial Reconstruction Commission on July 1, 2000, merging the Financial Supervisory Agency and the financial system planning function of the Ministry of Finance. Further, the function of the Financial Reconstruction Commission was integrated under the Financial Services Agency, which was placed under the Cabinet Office, after the abolition of the Commission in January 2001.2/ Functions of the Ministry of Post and Telecommunication and the Ministry of Home Affairs was inherited by the Ministry of Management and Coordination.

10. To propel administrative reform beyond the central government reorganization, the government is currently fleshing out further reform targets for the next 5 years. A new position was created in the Cabinet to oversee the area of administrative reform, with a new supporting office attached to the Prime Minister’s Secretariat. Special emphasis was placed on the following issues:

  • The efficiency of the public service is to be raised through changes in the remuneration structure and stepped-up training. Based on a report released in June 2001, this includes such initiatives as: introducing performance-based pay and promotion systems for public servants; enhancing personnel exchange with the private sector; and strengthening the restrictions on the re-employment of public servants at private firms.

  • In line with fiscal consolidation and FILP reform, public enterprises with special legal status (77 tokushu-huojin and 86 ninka-houjin), which are responsible for a large share of public sector expenditures, will ultimately be closed, privatized, or transformed into IAIs.22 Several institutions, including the Honshu-Shikoku Bridge Authorities and the Japan Highway Public Corporation, have been cited as examples in need of major reform. A review of their operations (preliminary results of which were reported in June 2001) will be the basis for a consolidation plan expected by the end of the year.23 A law requiring the completion of reform by end-FY2005 passed the Diet in June 2001.

  • A comprehensive review of the operations of authorized non-profit organizations (koueki-houjin) that operate as agents for the government was completed in April 2001.24 Directions are to be formulated by the summer of 2001 to eliminate the operations that unjustifiably restrict private sector businesses or fail to use public funds efficiently. An implementation plan is to be produced by the end of FY2001.

11. The law on information disclosure by the government became effective in April 2001 to improve public access to government information. The law is expected to put increased pressure on the efficiency of government operations.

12. Finally, legislation to mandate policy reviews for individual ministries was approved by the Diet in June 2001. The law requires the evaluation of policy measures so as to improve accountability and efficiency of specific policies. Policy reviews are to be conducted at various stages of policy formulation and implementation by individual ministries (with assistance from third parties including academics), reinforced by the review of MPHPT which will further run comprehensive evaluations across ministries based on uniform and objective standards.

E. Information Technology Issues

13. In recognizing the critical role of IT in the shift to a knowledge-based economy, the promotion of IT has emerged as one of the main pillars of the government’s political agenda. A basic strategy for IT policy, released by the IT Strategy Council in November 2000, formed the basis for further policy developments in this area.25 Supported by specific legislation and the IT Strategy Headquarters led by the Prime Minister, the strategy was refined into the government’s “e-Japan Priority Policy Program” in March 2001.26 The program identified the necessary policy steps to create a society equipped with an advanced information and telecommunications network, and established a set of goals with defined the timeframes. The areas emphasized in the program include the following:

  • An advanced information network is to be provided within 5 years by promoting higher competition in the telecommunications industry and reducing the constraints in constructing optical fiber networks.

  • In order to build the skills necessary to achieve broad-based use of the Internet within 5 years, education and investment in human resource are to be upgraded. The government also plans to promote the acquisition of IT skills in schools and seminars, and the formulation of IT-related human capital is to be advanced through university reforms and imports of foreign engineers.

  • A user-friendly e-commerce market is to be established by 2003, including by adapting existing regulations; introducing new rules to cope with issues intrinsic to e-transactions; and ensuring appropriate protection of intellectual property.

  • An e-government is to be established by 2003, with many administrative processes adapted to electronic format.

  • To guarantee network safety and establish public confidence by 2005, measures will be taken to protect individuals’ private information—starting with the bill on private information currently being discussed in the Diet—and improving the technology on secure coding.

F. Priorities for the Remaining Reform Agenda

14. While the government has identified a broad reform agenda to implement in the coming years, progress in a number of areas will be crucial to boosting long-term growth prospects:

  • A reduction in telecommunications charges could be key to the expansion of IT usage in Japan.27 Although the recently approved bill has imposed new regulations on dominant operators to allow other operators’ connection to their networks and to create intra group firewalls, an advisory body’s recommendation to consider dissolution of NTT’s holding company structure unless competition intensified was not legislated. Also, while the network connection charges will be reduced by 20 percent by 2002 and 22½ percent by 2003 from the level in 2000, they will remain high by international standards.

  • Further liberalization in the power industry, especially in distribution, could contribute to a decline in production costs. Despite its initial impact of bringing down electricity prices by up to 10 percent, the partial liberalization of large-customer retail business enforced so far (March 2000) may not be sufficient to meet the current target of reducing electricity charges to an internationally comparable level by 2005.28 The next review of the current liberalization initiative planned for 2003 could be brought forward to allow a more accelerated approach to lower electricity costs.

  • Greater flexibility in the labor market could improve the efficiency of resource allocation.29 While government policy is primarily targeted at job security and re-employment support, recent measures including the relaxation of restrictions on private job placement business and job dispatching business (temporary employment service) have not had large effects on improving the flexibility in the labor market. A stronger focus on customized and specialized retraining programs could increase human capital and lead to a more mobile labor force. Moreover, despite a rather liberal legal framework, existing case law has continued to effectively impose high barriers for corporate layoffs.

  • An overhaul of the Commercial Code could improve corporate governance as well as accelerate restructuring efforts and raise corporate profits. Recent amendments to the Commercial Code (June 2001)—which liberalized the holding of treasury stocks and shortened the process of new share issues from 4 weeks to 2 weeks by simplifying registration processes—have eased restrictions on corporate finance, but more deep-reaching measures are required. More comprehensive changes to the Code currently under discussion would lead to a greater empowerment of shareholders, aimed at improving efficiency and profitability. The issues being discussed include the introduction of mandatory external board members; clear separation of executive and auditing functions and removal of statutory auditors; further liberalization of stock options; and permission to use IT for shareholders meetings.

  • Progress with structural reform in the area of agriculture remains slow. As reflected in the imposition of preliminary safeguard measures on selected products in the spring of 2001, the competitiveness of agricultural products is losing ground to foreign imports. More generally, tariff peaks on certain agricultural products remain very high. In addition, while recent changes in land ownership regulations (enacted in March 2001) allow certain equity corporations to own farmland and price subsidies on agricultural products are being shifted to income subsidies, the consolidation of farmlands by efficient agricultural agents that is necessary to benefit from economies of scale is yet to be seen.


  • Japan Fair Trade Commission, 2000, “How the Japan Fair Trade Commission Ensures a Robust Economy,September.

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

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  • Management and Coordination Agency, 2000, Kisei Kanwa Hakusho (White Paper on Deregulation), December (in Japanese).

  • Ministry of Economy, Trade and Industry, 2001, Tsusho Hakusho 2001 (White Paper on International Trade 2001), pp. 3963, May (in Japanese; English version forthcoming).

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  • Nomura Securities Financial Research Institute, 2001, “2000 Nen no Nihon Kigyou ni Kanren suru M&A no Doukou (Development of M&A Concerning Japanese Companies in 2000),Nomura Securities Co., Ltd., January (in Japanese).

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  • Teikoku Databank, 2001, “Minji Saisei Hou Sekou 1 Nen no Shinsei Doukou Chousa (Survey on the Filings Under the Civil Rehabilitation Law After 1 Year of Enforcement),April (in Japanese).

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Prepared by Takashi Nagaoka (ext. 37613).


Reforms in fiscal and financial areas have been covered in earlier chapters.


The CEFP was established in the context of the central government reorganization in January 2001. Under the leadership of the Prime Minister, the Council develops a broad agenda for short- and medium-term economic and fiscal policies and reform initiatives which will be the basis for the annual budget formulation.


PFIs involve the private sector in building, managing and maintaining public facilities, such as roads, ports, and sewage. The private sector finances the operation, and collects payments from users or the public sector over time. Increased use of PFIs is expected to reduce the overall public works spending by the government, and increase efficiency and risk sharing through private sector involvement.


While the blueprint did not give details, a large-scale revision of the Commercial Code is being contemplated to improve corporate governance, including through expanding the role of external board members, clearly separating executive and auditing functions, extending the use of stock options, and using IT for shareholders’ meetings.


The Urban Revitalization Headquarters was established to lead the initiatives on urban revitalization based on the emergency package of April 2001. Headed by the Prime Minister, it will promote urban revitalization programs aimed at constructing recycle-oriented urban structures and introducing other measures to enhance the efficient use of land.


Assuming the labor force stays constant, estimates of the impact of NPL disposal by the CEFP and the private sector analysts imply an increase in the unemployment rate of about 0.1–0.3 percentage points and 0.4–0.7 percentage points, respectively, from 4.9 percent in May 2001. Meanwhile, private sector estimates of the impact of the overall structural reform agenda would imply a 1.5 percent increase in the unemployment rate.


For example, many restructuring plans involve reduction of workforce mainly through orderly retirement and restricting new hires over multiple years.


The vintage of the capital stock increased by 1½ years over the past decade to above 10 years.


For example, while the debt to equity ratio for the whole industrial sector was above 290 percent in FY2000 (comparable to that in Germany, but higher than the 200 percent in the U.S.), it was below 95 percent for Sony and 135 percent for Toyota, and over 1,200 percent for general contractor Kajima Corporation (all from FY2000 annual reports).


Numerical criteria are expected to include improvements in quantitative indicators such as ROE, ROA, and interest coverage ratio, and projected cash flows will need to be sufficient to eliminate excess debt within 10 years.


See Nomura Securities (2001). Excludes the financial sector. Cases aimed at pursuing intra-group restructuring and increasing the share in related firms’ equities are counted under group restructuring purposes.


The legal framework for takeover bids, introduced in 1971, has been used mainly as a vehicle for friendly mergers, rather than hostile takeovers. A takeover of a Japanese pharmaceutical company by a German firm in early 2000 was reported to be the first such hostile takeover (aimed at actually taking control of the company rather than reselling the shares to other incumbent equity holders for capital gains), while another widely publicized case by a Japanese consultant company ultimately failed to take over the target firm.


An overview of Japan’s bankruptcy system and recent reform is provided in Levy (2000).


The Regulatory Reform Committee provided recommendations to the government on the reform agenda each year, on which the government based its revision of the three-year program. The committee was dissolved in March 2001, at the expiration of its three-year term, after its final recommendations were reflected on the new three-year program through 2003.


A total of 95 percent of the 1,268 item agenda has been either fully or partially completed.


One of the major barriers to entry in highly regulated industries, such as transportation, power, and telecommunications, has been the so-called “supply-demand adjustment clause.” The government estimated the appropriate level of service suppliers against the estimated level of demand, and limited the number of operators accordingly through licensing. However, this restriction has been abandoned in most of the sectors in recent years.


The new three-year program integrated the recommendations of the former Regulatory Reform Committee with items from other reform initiatives such as the revised Action Plan for Economic Structure Reform (December 2000) and e-Japan Priority Program (March 2001), as well as opinions from various quarters.


IAIs were modeled after the “agencies” introduced in the United Kingdom in 1988 to streamline the government. An IAI is independent from the government and provides public services that need not be provided directly by the government, but may need some public sector involvement—e.g., museums, research institutes, and colleges. It has greater freedom in its organization and resource allocation, compared to the past when it operated as a branch of the government, which is expected to result in increased efficiency. An additional five agencies together with some national health institutions will join the list by 2004.


The total figure does not include those 300,000 employees of the postal insurance, savings, and services operations who will be transferred to a public corporation in 2003.


A tokushu-houjin is defined as a corporation with special legal purpose established through a special incorporation process (e.g., Japan Highway Public Corporation, NTT, and Japan Railway Companies). Individual ministries establish and supervise such entities with the approval by the Ministry of Public Management, Home Affairs, Posts and Telecommunications (MPHPT). A ninka-houjin, on the other hand, is defined as an institution with special legal purpose established through an ordinary incorporation process in the Commercial Code, followed by government authorization (e.g., Japanese Red Cross Society, Japanese Institute of Certified Public Accountants, etc.). Tokushu-houjin and ninkahoujin collectively received ¥24½ trillion of subsidies and handled ¥24½ trillion of FILP operations in FY2001.


The Prime Minister called for the closure of the Japan National Oil Corporation ahead of the formulation of the broader consolidation plan at the year-end, to act as a model case. Its operations include managing oil reserves and extending loans to private oil developers, and are funded by fiscal transfers (subsidies exceeded ¥360 billion in FY2001).


A koueki-houjin is a non-profit organization for public purposes. They enjoy preferential tax treatment on the non-profit operations. There are currently about 26,000 such organizations registered. About 1,000 of them operate as agents for the government based on specific laws (e.g., nationally authorized safety inspections and certified proficiency examinations), some of which receive budgetary transfers.


The IT Strategy Council consisted of 20 private sector representatives, including business leaders and leading academics.


The IT Basic Law, enacted in January 2001, identified the need for Japan to move toward an advanced information network society, and called for the formulation of an action plan. It also required the establishment of the IT Strategy Headquarters headed by the Prime Minister and composed of all cabinet members and a number of private sector representatives.


See Callen and Nagaoka, 2001, in the accompanying Selected Issues volume for a discussion on the low IT usage in Japan.


The Action Plan for Economic Structure Reform of 1997 initially aimed to meet the target by 2001, but the timeframe was extended in the revised action plan in December 2000.


See Callen and Nagaoka, 2001, in the accompanying Selected Issues volume for a discussion on the labor market rigidity.

Japan: Economic and Policy Developments
Author: International Monetary Fund