This Selected Issues paper analyzes the key features of the Japanese business cycle, and investigates whether the current recovery differs from past recoveries. In particular, this paper poses the following questions: what are the main characteristics of Japanese business cycles since 1980, and what happens to output, expenditure components, and prices over the cycle? The paper reviews the recent performance and policy issues with respect to the banking sector, insurance sector, and public financial sector in Japan. The stability of the financial sector is also assessed.


This Selected Issues paper analyzes the key features of the Japanese business cycle, and investigates whether the current recovery differs from past recoveries. In particular, this paper poses the following questions: what are the main characteristics of Japanese business cycles since 1980, and what happens to output, expenditure components, and prices over the cycle? The paper reviews the recent performance and policy issues with respect to the banking sector, insurance sector, and public financial sector in Japan. The stability of the financial sector is also assessed.

VI. Structural Reforms and Productivity Growth1

A. Introduction

1. Structural reform of the Japanese economy has been a central focus of the Koizumi administration. Against the background of a steady decline in growth and productivity during the 1990s (see figure), a program of structural reforms launched in 2001 aimed to rationalize and privatize inefficient public sector enterprises, reduce excessive business regulation, facilitate corporate restructuring and the creation of new businesses, and enhance labor market flexibility. This paper summarizes structural reform developments in these areas. Fiscal, trade, and financial sector reforms—also central to the administration’s structural reform agenda—are covered in the staff report and other chapters of this paper.


Labor Productivity and TFP Growth

(In percent per year)

Citation: IMF Staff Country Reports 2004, 247; 10.5089/9781451820577.002.A006

Source: Fitch Ratings and FSA.

B. Recent Developments in Structural Reform Policy

Public Enterprise Reforms

2. Proposals for public enterprise reforms have mainly focused on the postal corporation (Japan Post) and the public highway corporations. Japan Post is a government-financed corporation that plays a large role in Japan’s banking and insurance markets and is exempt from deposit insurance premiums. Discussions are under way on possible modalities for leveling the playing field with private financial institutions and privatizing the corporation over the medium term (see Chapter II for further details on Japan Post and government financial institutions).

3. Reforms of the four highway corporations have sought to address inefficiencies in the construction and management of Japan’s road network. The highway corporations—nonprofit firms owned by the government—construct, maintain and operate motorways and facilities such as car parks, financing this activity by collecting tolls and other fees and by borrowing.2 Construction costs have often been high, and high toll fees on highways have sometimes been used to pay for the construction of infrequently used roads. (Japan possesses a fairly dense road network, including about 7,300 kilometers of high-speed national motorways.) More generally, highway construction reforms have been seen as necessary to halt unfettered road construction, including in the context of longstanding plans for a completed highway system of more than 10,000 kilometers.

4. However, planned reforms of the highway corporations will have a limited effect on road construction. In December 2002, a council on highway reform presented a blueprint that proposed to privatize the four corporations, and repay their debts (estimated at about ¥40 trillion, or 8 percent of GDP). In June 2004, the Diet approved a bill with less ambitious aims, establishing a structure in which an administrative agency leases the publicly owned highways to six privatized corporations over a 45-year period. At the end of that period, the highways will revert back to public ownership and toll charges will be eliminated. The plan envisions construction of 9,342 kilometers of roads, little changed from the prereform target.

Deregulation and Competition

5. High levels of regulation and limited competition have been reflected in weak innovation, low productivity growth, and high prices in a number of sectors. For example, average prices in Japan are about 40 percent higher than for an average country at a comparable income level.3 Prices are particularly high in the clothing, software, energy, and services sectors.


Average Ratio of Domestic to Foreign Prices - 2002 (METI)

Citation: IMF Staff Country Reports 2004, 247; 10.5089/9781451820577.002.A006

Source: METI Survey on Domestic/Foreign Price Differences July 2003.Note: Average ratios are computed by staff as the simple average of price ratios to New York, Europe, and Singapore.

6. Steady efforts to promote competition and advance product market deregulation are beginning to bear fruit. Reforms to reduce regulation and enhance competition have focused on the following areas:

  • Special Zones for Structural Reform. These zones, in which specific regulations are relaxed on a localized basis, showcase the advantages of deregulation and pave the way for reforms at a national level. In FY2003, the first year of the program, over 300 special zones were established. For example, agricultural special reform zones have relaxed restrictions that limited the potential ownership of farmland. In education, structural reform zone exemptions have been used to establish privately owned universities offering vocational courses of study. In medicine, joint stock companies have received permission to establish health care facilities in structural reform zones (which is otherwise prohibited);

  • Energy sector liberalization. A measure passed in 2003 mandated the separation of services provided by vertically integrated utilities effective in 2005, thereby making fees more transparent. Following this and other liberalization measures taken in past years, electricity prices have been on a steady decline (although they remain well above the OECD average).4 In the natural gas market, reforms are planned through 2007 to enhance businesses’ choice of supplier and ensure that all market participants have equal access;

  • Telecommunications reform. Regulatory changes in 2003 were aimed at unbundling telecommunications services and opening the field to new entrants. As a consequence of these and other changes over past years, prices for internet access services in Japan are somewhat lower than in other countries (those for mobile phone and fixed line services are roughly similar or slightly higher).5

  • Competition policy. The Fair Trade Commission (FTC), which is charged with enforcing the Antimonopoly Act (Japan’s basic competition law), has been steadily strengthened in recent years. Steps have been taken to enhance the independence of the FTC and increase its resources. Going forward, the administration aims to strengthen the FTC further and increase its sanctions (in the past, fines for anticompetitive practices have been infrequent and small).

Entry and Exit Policy

7. The absence of an efficient mechanism for handling the creation and destruction of firms has been a key weakness of the Japanese economy. During the 1990s, a cumbersome framework for corporate restructuring hampered the reallocation of resources to more productive uses, as evidenced by the persistence of large numbers of distressed firms. Also, Japan’s corporate startup rate was low compared with other countries, perhaps reflecting the legal requirement of ¥10 million in capital to start a new firm.

Annual Average New Company Start-up Rate, 1990–991

article image
Source: Imai and Kawagoe, 2002.

In percent of existing firms.

8. Over the last several years, enhancements to the framework for corporate restructuring have been introduced, which have been reflected in a pickup in corporate restructuring.6 By 2001, a number of improvements to the legal framework had already been made to facilitate corporate reorganization, notably the April 2000 adoption of the Civil Rehabilitation Law that included features of U.S. “Chapter 11” procedures. Subsequently, revisions to relevant laws have introduced new options for reorganization, facilitated mergers and acquisitions activity, and allowed rehabilitation procedures to be launched more quickly.

9. Also, efforts to raise the rate of business startups are beginning to bear fruit. In February 2003, a temporary exemption was introduced allowing businesses to be formed with capital of ¥1, provided that the ¥10 million standard is met within five years. To date, this measure has been credited with creating over 10,000 firms.

Labor Market Flexibility

10. Japan’s labor market is relatively rigid. Observers have pointed to a number of features that inhibit a rapid and efficient reallocation of labor market resources, including limited availability of portable pensions, restrictions on the use of temporary workers, and poor information about job opportunities. In addition, the Labor Standard Law has made it difficult for firms to dismiss regular workers.

11. Recent government initiatives have attempted to address some of these concerns. Defined contribution pension plans were introduced in October 2001, although the monthly contribution limit of ¥36,000 (about $330) is relatively low. In addition, restrictions on the operations of temporary labor supply agencies have been relaxed. Also, with unemployment among the 20-24 year-old cohort running above 9 percent, the government has instituted special programs to bring young people into the workforce, including through job brokering services and the arrangement of internships. In addition, a 2003 revision to the Labor Standard Law helped to clarify the conditions under which dismissal is allowed (although firms are still required to demonstrate the economic necessity of layoffs).

C. The Potential Impact of Structural Reform on Welfare and Output

12. A number of recent studies have attempted to estimate the potential impact of structural reforms. Some models calculate static benefits—generally one-time increases in productivity arising from a more efficient use of resources—whereas others compute dynamic gains, in the form of increased total factor productivity growth. The general approach is to estimate the welfare and efficiency gains from aligning domestic prices with world prices or developed country averages.

13. Most quantitative estimates imply substantial potential benefits from structural reforms (Table VI.1). Estimated static gains range from 2.2 percent of GDP for trade reforms to 8 percent of GDP for deregulation, whereas estimated dynamic gains range from 0.3 percent to 2.4 percent in additional GDP growth (depending on the breadth of reforms). These estimates support the view that further structural reforms would be instrumental in helping to sustain the economic expansion in the medium term.

Table: VI.1

Estimates of Gains from Structural Reform in GDP Terms

article image
Sources: METI, Sanwa Research Institute (2000); Japan Center for Economic Research (2003); Shimpo and Nishizaki (1997); Bradford (2003); OECD (2004); and Hayashi and Prescott (2002).


  • Bradford, Scott, 2003, “Paying the Price: Final Goods Protection in OECD Countries,The Review of Economics and Statistics, February 2003.

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  • Hayashi, Fumio, and Prescott, Edward, 2002, “The 1990’s in Japan: A Lost Decade,Review of Economic Dynamics, Vol. 5 (Special Issue, January)

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  • Imai, Yutaka, and Kawagoe, Masaaki, 2000, “Business Startups in Japan: Problems and Policies,Oxford Review of Economic Policy, vol. 16, no. 2.

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  • Japan Center for Economic Research, 2003, “Regulatory Reform and Demand Creation,December 2003.

  • Ministry of Economy, Trade, and Industry, 2003 “Naigai kakaku chousa houkoku sho,” July 2003.

  • Ministry of Economy, Trade, and Industry, Sanwa Research Institute, 2000, “Keizai kouzou kaikaku no kouka shisan ni tsuite,” December 2000.

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  • Ministry of Public Management, Home Affairs, Posts and Telecommunications, 2002, “Denki tsushin sabisu ni kakaru naigai kakakusa ni kansuru chousa (Survey on Price Variances between Domestic and Overseas Telecommunications Services).”

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  • Shimpo, Seiji, and Nishizaki, Fumihara, 1997, “Measuring the Effects of Regulatory Reform in Japan: A Review,Economic Planning Agency.

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  • Organization for Economic Cooperation and Development, 2004, OECD Economic Surveys: Japan, Volume 2003/18.


Prepared by Christopher Walker (OAP).


For example, in FY2003 the largest highway corporation (the Japan Highway Public Corporation) had about ¥28 trillion in fixed liabilities and about ¥2 trillion in toll collections (its primary revenue source).


OECD (2004), p.112.


Ibid. Note that the price discrepancies indicated by the OECD are generally greater than price differences shown in METI’s surveys.


See Chapter III for a discussion of developments in corporate restructuring.

Japan: Selected Issues
Author: International Monetary Fund