Outline of the Emergency Economic Package
(Provisional and unofficial summary)
April 6, 2001
Ministerial meeting on Economic Measures
Chapter I Basic Concept
1. Current Economic Situation
Japanese economic recovery seems to be pausing. Short-term prospects involve some concerns such as signs of weaker business investment.
Under these circumstances, one cannot deny that a shift to a full-fledge economic recovery centering on private-sector demand has been delayed.
2. Issues that must be Addressed
The background to the weakness of the economy suggested by recent economic developments is the fact that balance sheet adjustments that began with the fall in stock prices and land values as a result of the collapse of the bubble economy are still underway. Financial institutions continue to be burdened with non-performing loans. This results in their decreased profitability and risks for additional disposal of such loans, which end up lowering their function as financial intermediaries between household and corporate sectors. Furthermore, the existence of excessive corporate debt means that even when profits improve, the resulting cash flows are used to repay outstanding debt, and not positively recycled into the economy in the form of corporate investment. This delay in balance sheet adjustments is a heavy burden on economic growth. Without a quick resolution of this issue, a firm progress towards economic recovery cannot be expected.
Moreover, the stagnation after the bubble economy in the securities and real estate markets have been factors extending the period required undertake balance sheet adjustments and have at the same time brought inherent structural issues to the surface. For example, financial structure centered on indirect financing and crossholding of shares among corporations have led to an insufficient development of the securities market with very limited participation by individual investors. Also the stagnation in the real estate market has prevented effective use of resources and continues to cause delay in the establishment of appropriate prices of real estate. It is critically important to solve such structural issues still present in the asset markets for the Japanese economy to achieve dynamic growth.
3. The Basic Objective of the Economic Package
This Economic Package addresses the urgent issue of structural reform mentioned above and attempts to fundamentally resolving this issue. Toward this goal, the package includes specific measures to address financial and industrial revitalization, structural reform of the securities market, revitalization of the urban area and increasing liquidity of land assets. The Government believes that through the steady implementation of these measures, it will be possible to make further progress in structural adjustments of the Japanese economy and to build a foundation for future economic growth.
At the same time, in order to promote such structural reform, the Government must continue to focus on achieving economic recovery while implementing appropriate and flexible economic and fiscal management. The Bank of Japan recently made a decision to shift to a monetary operation that targets monetary aggregates and decided to implement policies that virtually have the effects of zero interest policy until the ongoing decline in prices ends. Henceforth as well, while maintaining consistency with the basic principles of the Government's economic policies, it is necessary for the Bank of Japan to take appropriate flexible monetary policies.
Furthermore, there is a need to take into consideration the adjustments that must accompany structural reform. The Government needs to advance regulatory and systemic reforms and innovations that will give rise to long-term economic vitality. Steps must also be taken to create new markets and greater employment through such reforms and develop a safety net for the employed workers.
Finally, the Council on Economic and Fiscal Policy created at the beginning of this year has started to consider a blueprint for what Japanese economy and fiscal state should look like in the medium- to long-term. The Council is expected to compile a solid policy framework sometime in May or June of this year. Based on the deliberations within that Council, and with a view to dispelling the concerns of the people towards the future, the Government is committed to clearly indicating what Japanese economy and fiscal state should look like in the future.
Chapter II Specific Measures
1. Revitalization of the Financial and Corporate Sectors
(A) Integrated Resolution of the Problems of Non-Performing Loans of Banks and Excessive Debt of Corporations
(B) Limitation on Shareholdings of Banks
- Drastic Removal of Non-Performing Loans from the Banks'Balance Sheets
(1) In principle, the major banks will take measures to remove NPLs already classified as "in danger of bankruptcy" and below from the banks' balance sheets within the next two fiscal years. They will also take measures to remove NPLs newly classified as such within the next three fiscal years.
(2) The major banks are urged to periodically disclose the actual record of the removal of NPLs from their balance sheets. The Financial Services Agency (FSA) will conduct a follow-up survey of its progress. Furthermore, based on the importance of enhancing the removal of NPLs from the banks' balance sheets, the Government will clarity the authorities' policy stance with regard to the implementation standards for administrative measures to be taken under the Financial Function Early Strengthening Law and the guidelines of the Financial Reconstruction Commission when the banks' actual profits fall below their planned levels by 30% or more (the so-called 30 percent rule).
- Promoting Corporate Reorganization
(1) Guidelines will be established regarding the process of the reorganization of companies in financial difficulty and debt forgiveness accompanying the reorganization process through private-sector consultations in which the authorities participate.
(2) The Government will provide support to enterprises in restructuring their businesses through effective use of the Law on Special Measures for Industrial Revitalization, with clarification of the approval criteria for Business Restructuring Plans including debt forgiveness by banks.
The Government will create a favorable environment for encouraging reorganization of the construction sector.
(3) As new legislation has entered into force with regard to the splitting of corporations, those concerned in the private sector are urged to effectively use this new legislation. The Government will amend the Corporate Reorganization Law and the Civil Reorganization Law to make it more user-friendly.
- Enhancement of Debt Forgiveness by Financial Institutions
(1) The Government will request private financial institutions to pay full attention to enhancing debtor-in-possession (DIP) finance and other measures to take a more positive approach to the provision of capital. The Government will actively make use of public financial institutions in this regard.
(2) The Government will clarify implementation standards for the so-called "5% rule" limiting the shareholding of banks with regard to shares acquired through debt-equity swaps, as well as explore schemes to facilitate the sales of such equity. Furthermore, the Government will consider measures required to clarify the treatment of certain loans for the facilitation of restructuring (e.g. bank' classification of DIP finance loans, etc.).
(3) The Government will explore appropriate measures to be taken by public financial institutions in the event of debt forgiveness by banks, taking due account of the burden on the public, and ensuring a fair process of reconstruction in accordance with the Guidelines (mentioned in 2.(1) above).
- Sales of Loan Assets
The Government will enhance the function of the Resolution and Collection Corporation (RCC), standardizing contracts and transaction procedures for the trading of loans. The Government will also facilitate debt collection by enlarging the business scope of debt collection companies (servicers).
- Other Measures
The Government will activate appropriate financial measures to prevent systemic failures of small- and medium-sized enterprises (SMEs) which are counterparties to debtors of NPLs and aggressively assist their positive efforts to strengthen their business.
In order to promote structural reform in the Japanese financial system and increase trust in its stability, parallel to efforts to remove non-performing loans from balance sheets, there is a need to create framework to limit stock holdings so that the risk of share price fluctuations in banks' stock portfolios will be within the range of banks' ability to manage risk. At the same time, there is a possibility that such measures may lead to widespread sales of stock assets by banks, resulting in short-term negative impacts on the stock markets. Depending on the level of stock prices, this could have an unfavorable influence on the stability of the financial system and the overall economy. The Government will establish a temporary share purchasing scheme using public financial support to deal with this possibility.
2. Structural Reform in the Securities Market
- Introduction of a Limitation on Shareholdings of Banks
As a prerequisite for purchasing shares held by banks, the amount of shares that a bank can hold is to be limited, for example, to the equivalent of the bank's capital. The portion of shareholdings that exceeds this limit must be disposed of within a certain period.
- Outline of the Share Purchasing Scheme
(1) As a temporary measure, share held by banks are to be purchased by the Bank Equity Purchasing Corporation (BEPC, provisional name) which would be established jointly by banks and other institutions. Public-sector support such as a government guarantee to funding BEPC's share purchases will be considered. Involvement of the Deposit Insurance Corporation of Japan will be examined.
(2) Share are to be purchased from banks.
(3) Share are to be purchased at market value, and the names to be purchased are to be decided on the basis of specific rules taking into consideration the composition of exchange-traded investment trust funds (ETFs).
(4) For the sale of shares acquired by the BEPC, exchange-traded investment trust funds (ETFs), investment trusts, and defined contribution pension funds will be effectively used.
- Work Plan
A concrete plan to establish the system and operate the scheme mentioned above will be determined, and a detailed final plan including legal schemes required will be developed as soon as possible.
The current prohibition on treasury stock will be abolished under curtain conditions. This will be accompanies by revising rules prohibiting insider trading, establishing additional rules to prevent stock price manipulations, and strengthening the capacity of the Securities and Exchange Surveillance Commission.
The Government will draft a bill to introduce defined contribution pension schemes. Furthermore, the necessary legislation will be enacted to improve the securities settlement systems.
The Government will take necessary measures to introduce an ETF linked to stock price indices and based on investment in kinds of shares.
3. Urban Revitalization and Increasing Liquidity in Land Assets
(A) Establishment of "Headquarters for the Rejuvenation of Cities" (tentative name)
The Headquarters for the Rejuvenation of Cities (tentative name) will be established within the Cabinet, with the Prime Minister as its Chief and the relevant ministers as members. The Headquarters will comprehensively and boldly advance the following kind of measures to promote 21st century projects the revitalize urban area and steps to achieve urban revitalization such as more effective use of land.
Project to create a Wide Urban Area with Recycling Capabilities
This project will aim to build a 21st century urban area with recycling capabilities through the creation of wide-ranging and comprehensive waste processing facilities and recycling facilities in waterfront areas and other sections of the metropolitan area.
Safe Urban Area Creation Project
This project will create urban structures that can resist natural disasters through such projects as the creation of large-scale disaster prevention centers focusing on disaster prevention parks and the creation of evacuation routes.
Transportation Network Infrastructure Creation Project
This project will create a transportation network infrastructure suitable for an international city by fundamentally solving urban traffic congestion through the establishment of loop routes around urban areas, urban rail systems, an international airport hub near the Capital and the creation of international port facilities.
Urban Center Creation Project
This project will create urban centers capable of capitalizing on the potential of the IT Revolution by developing urban center areas through the use of wide-scale unused land areas and through the rebuilding of aging public housing units in order to create comfortable residential centers.
Furthermore, the Government will ensure greater flexibility in the operation of projects to make more effective use of land implemented by the Urban Development Corporation. Towards this end , necessary funds will be secured and expanded.
(B) Increasing Liquidity of Land Assets
4. Creating Jobs and Enhancing the Safety Net for the Employed Workers
- Promoting securitization of real estate.
- Promoting deregulation and systemic reform in order to realize urban revitalization and increase liquidity of land assets.
- More active utilization of private finance initiatives (PFI) and promoting redevelopment of the sites of former housing for civil servants.
- The Government will give consideration to utilizing private finance initiatives for central office buildings including integration with and new construction of central government office buildings with private-sector institutions.
- The Government will take concrete steps to redevelop land formerly used for civil servant housing in the Tokyo Waterfront Area to construct advanced urban capacities including both commercial and residential functions
(A) Regulatory Reform and Systemic Reform that will Contribute to the Development of New Markets
The Government will promote thorough deregulation of the IT sector and realize greater efficiency in medical systems. Furthermore, systemic reform will be promoted in order to expand private-sector business opportunities in preschool education and elderly care sectors and to realize a society that recycle its resources by building a waste recycling system.
(B) Prioritized Investment and Systemic Reform for Stimulating Innovation
In accordance with the Second Science and Technology Basic Plan, strategic investment in technology will be made in such areas as life sciences, telecommunications, environment, nanotechnologies and materials. At the same time, the Government will promote reforms in higher education in order to facilitate the advancement of education and research that responds to the needs of society and industry.
(C) Enhancing the Safety Net in the Labor Market
The Government will take flexible and appropriate measures in response to changes in the employment situation caused by structural reform such as efforts to remove non-performing loans from balance sheets. The Government ensure smooth implementation of the revised Employment Insurance Law that provides relatively longer period of insurance disbursements to employees forced to leave their jobs due to bankruptcies or dismissed who are mostly middle and old aged. The Government will extend and expand the Special Incentives for Emergency Employment Creation to assist the employment of middle-age and older workers who are non-voluntarily dismissed from their jobs. Moreover, the Government will promote the enhancement of training courses for middle-age and older white-collar workers who are forced to leave their jobs, and develop IT-related professional skills and human resource training.
5. Tax System
Bearing in mind the current economic situation, the Government will consider truly effective and appropriate tax system measures related to securities and land transactions, with a view to activating the direct financing market through promoting market participation by individual investors, increasing liquidity in land assets, and promoting economic structural reform. The Government will always bear in mind the need to maintain fairness in taxation and other important factors in this process. The consideration will be made as quickly as possible, and conclusion will be reached.