(provisional translation by the secretariat)

Summary

1 Assessment of the Japanese Economy

The Japanese economy has been in a most severe situation. It could be thought that the economy now faces the entrance of a vicious circle in which the worsening of the real economy, represented by a large decline in private demand, leads to the malfunctioning of the financial system, which then feeds back to the real economy adversely. The projection of economic growth rate for this fiscal year is forced to be revised down to almost minus 2 percent over the previous year. It would be difficult to exclude the possibility of negative growth, to a significant extent, in fiscal year 1999.
With this critical assessment in mind, the Economic Strategy Council herewith makes some urgent recommendations in order to avoid the fear of a global depression triggered by Japan and to revive the Japanese economy.

2 Outlines of the Recommendation

(1) Speedy Stabilization of the Financial System

It is inevitable to inject, as one emergency measure to stabilize the financial system as quickly as possible, public money in large quantities with a view to overcoming the historical economic downturn and to preventing a world financial crisis from breaking out.

(2) Short-term Economic Policies

(a) Perspective for Designing the Current Measures

Additional boosting measures accompanying fiscal stimulus on a large scale are required, in addition to the financial stabilization measures, in order to escape from the vicious circle of deflation and to rejuvenate the Japanese economy. Stabilization measures of the financial system and economic stimulating packages are tandem for economic recovery.

(b) Consistency with the Necessary Structural Reform in the Long Run

It should be noted that the economic measures, though aiming at short-term effects, must be consistent with the necessary structural reforms in the long run. Therefore, the short-term economic policies should be designed and implemented as to front-load the long-term structural reform.

(3) The Medium- and Long-term Projection of the Government Fiscal Balance

While it is admitted that the intended short-term economic policies will result in large government deficits, it does not mean that the long-term structure of government balance can be ignored. The plan clarifying the way for the sound fiscal structure in the long run ought to be drafted, which consequently may help boost the confidence of the Japanese economy.

Recommendations

1 The Speedy Stabilization of the Financial System

The BIS risk-asset ratio has been declining sharply because of the rapid rise of non-performing assets from economic stagnancy under ongoing deflation and the increase of capital losses from plummeting share prices.
If things were left as they are, banking behavior of slashing loans and calling in old loans would be accelerated. All this might result in not only deepening deflation but also opening the way for a financial crisis led by the global financial market.
To stop this momentum, the following temporary measure, which is valid for up to three years, is needed immediately. The capital adequacy ratio must be dramatically augmented as soon as possible by injecting public money into banks that are judged to be viable, amounting to several dozen trillion yen in a bold and prompt manner under the positive role played by the government.
It is due without question to make clear the responsibility of bank managers, whose banks are obliged to accept an injection of public money according to the results of the audits of the Financial Supervisory Agency. However, considering the emerging situation, two issues should be taken up separately; the responsibility of bank managers, and the capital injection of taxpayers' money. Furthermore, when a bank receives public money, it must draft and implement immediately a voluntary restructuring plan. If it fails to improve its banking business within three years, the relevant responsibility needs to be clarified.

2 Short-term Economic Policies

The following short-term measures, which are consistent with the necessary structural reform of the Japanese economy in the long run, and that are at the same time expected to be effective in stimulating the economy, are to be carried out without hesitation. The current economic growth rate, which is estimated at around minus 1.8 percent at annual rates, should be raised to a leveling off by the earliest possible quarter. For this purpose, it is necessary to mobilize additional fiscal measures, which amount to well over ten trillion yen by budgeting the true fiscal expenditures, the so-called the real water, as much as possible.

(1) Expanding Income Tax Cuts for Households and Corporate Business

The sustained income tax cuts for households and corporate business, which were already officially announced to be more than 6 trillion yen, are to be further expanded.

Long-term Perspective 1: For Realization of Small Government Drastic administrative reform both in the central and local governments is to be pursued. This will contribute to financing in part the expected income tax reduction. The goal is to build a creative and regulation-free society led by private initiatives, away from the one over-regulated by the government, and based on self-responsibility through enhancing administrative devolution, reviewing fundamentally the Fiscal Investment and Loan Program, and streamlining and privatizing government corporations.

Long-term Perspective 2: Toward Flattening the Progressive Structure of Tax Brackets The tax system centered on the direct tax, with its steep progressive structure, hinders the initiatives of people. Furthermore, it does not fit in the forthcoming aged society, especially with number of births shrinking. For these reasons, reforms such as cuts in personal income tax, personal residence tax, and inheritance tax, easing of the progressive structure of tax brackets, and in the long run shifting the tax burden from direct to indirect taxation, and redressing some tax privileges (for example, reviewing taxation on certain activities of non-profit organization) are unavoidable.

(2) Introduction of Interest Payment Deduction from the Income Tax Base Related Housing Loans

As for the introduction of interest payment deduction from the taxable income of those who have housing loans, no conditions are to be required for the number of floor areas and for an upper limit on income of an applicant. Furthermore, this deduction is to be allowed to land acquisition and to people who own a second home in addition to their first residence. The tax deduction privilege associated with the amount of loan outstanding, which is currently in place, will remain for a while. So that, applicants of owner housing are free to choose either of two types of privileges. In addition, rent payments of rental housing residents are to be given some benefits, concrete measures of which will be studied. The Economic Strategy Council unanimously supported the view that expansion of housing investment has a significant effect on stimulating private consumption.

Long-term Perspective: For Realizing Housing of High Quality with Various Choices Based on the Strategic Plan for Doubling Space for Life, a housing-rich society will be realized, which warrants satisfaction in housing of high quality and of a wide variety of choices.

(3) Promotion of Public Works Designed for the 21st Century

While the conventional practice of allocating budgets for public works needs to be eliminated, a process that tends to be fixed by governmental ministries and agencies, and by type of projects, new type of public works should be promoted. They should be concentrated on such areas as urban development, information infrastructure, education and human resource development, welfare infrastructure, and environment, all of which are essential to Japanese society in the 21st century. In doing so, establishing the following three basic rules is necessary. Rule 1: Efficiency, Rule 2: Transparency, Rule 3: Assessment.

Long-term Perspective: Investment into Five Stressed Areas Such as Urban Development, Information Infrastructure, Education and Human Resource Development, Welfare Infrastructure, and Environment The five areas above are essential to Japanese society in the 21st century. It is essential to eliminate administrative turf and establish a system that allows a consolidated strategic plan. It is also important that shares of public works obtained by past practice should be corrected, and that deregulation and preferred tax measures should be implemented to enhance investments into those five areas.

(4) Measures for Unemployment and Flexible Job Placement

Measures to support vocational training and technical skill acquisition for unemployed people, as well as those to assist the creation of new businesses should be extended. Investment toward self-education, including buying information-related hardware by using expenses necessary for self-training, should be exempted from taxable income. In addition, deregulation to facilitate job change should be further enhanced. Defined contribution pension plan should be implemented as early as possible, not to impede flexible job change. The Industrial Revitalization Plan should be promoted to develop new industry and to create new employment opportunities.

Long-term Perspective: Establishing Business Infrastructure to Foster Further Competition An internationally competitive system should be established by reviewing legal and economic regulations that hamper competition. A labor force should be made more flexible and optimal human resource allocation should be realized, thus introducing measures to fully support new business. In doing so, a shift from indirect to direct financing is to be realized by vitalizing capital markets.

(5) Freezing a Hike in the Social Security Contributions

In the recalculation of public pension finance starting next year, the government should avoid increasing burden on people by freezing a hike in the social security contributions for the moment, considering its negative effects on household spending, in particular private consumption.

Long-term Perspective: Pension Reform Offering Options To eliminate people's distrust of the public pension system, the government should study a new pension system in which the basic pension will be financed through indirect tax revenue, and in which the supplementary pension will offer various programs from which people can choose depending on his/her needs.

(6) Emergency Measures to Be Utilized Temporarily

(a) For the purpose of promoting property transactions, the Tax Commission and other related bodies will promptly examine the implementation of a two-year freeze on the property purchase tax, registration license tax, and stamp duties.

(b) A measure will be enacted to allow housing loan payers, who become unemployed or who suffer from a sharp drop in annual income, to postpone payment for the time being.

(c) Considering the current economic environment, the duration of unemployment benefits will be extended as a temporary measure.

(d) Complete depreciation of a hundred percent within a single year will be allowed for investments of information related infrastructures only for the next two years.

(e) Special tax exemption on selling off bilaterally the cross-holding of shares (permitting companies to account for the company's own wiped-out stock shares as a loss within the limit of capital gains when sold) will be established and only be effective for the next two years as one method to facilitate the steady weakening of cross-share-holding.

(f) Measures to mitigate a credit crunch for medium- and small-sized companies will be further strengthened.

3 The Medium- and Long-term Projection of the Government Fiscal Balance

In order to overcome the ongoing economic crisis, fiscal stimulus, to a significant amount, is required in the short run. However, without a commitment to restore the sound fiscal balance over the medium and the long run, the Japanese economy will not be able to obtain confidence in the global market. If it were not for market confidence, the effects of the short-term economic policies would be limited.
A lean and efficient government needs to be established by creating a small government, including local authorities, by reducing government debt by selling off national properties, and by reexamining thoroughly its expenditure structure. After making these efforts, the government fiscal balance should be rectified in the medium and the long run through tax reform encompassing the tax burden shift from direct to indirect taxation with a view to preparing for rapid population aging and sharply shrinking number of births.
Taking all these factors into consideration, the Economic Strategy Council will publish the medium- and long-term projection of government fiscal balance by next several months in order to convince Japanese people of their sound, fiscal future.

(The End)