The Japanese economy is departing on a "new voyage without a charter." The scene in front of us, however, is not the dark sea, but a bright future filled with hope and vigor.
We will see a revived Japanese economy that will be totally different from the past after bravely conducting the various structural reform policies proposed from Chapters 2 to 5. Under a small and efficient government, free and active competition is ensured. New businesses will be continuously created. Independent from protection and regulation, each individual can fully appeal his/her unlimited imagination and originality based on self responsibility and self motivation. These efforts could lead to enhance added value, which is a source of growth. Willingness and eagerness to create new value and continuous efforts toward challenging, original ideas by each individual are the source of prosperity and competitiveness. Attitudes toward bravely challenging risk with individual character and originality must be highly esteemed. And he/she will be rewarded appropriately according to results. Both young people, who will build the next generation, and the old ,who have built the current prosperity, will live in an attractive society full of hope. We are certain that such a society will be achieved.
Japanese economy and society, by and large, have tended to avoid drastic change, and have given high priority to preserving obtained rights under the name of protection of the weak. As a result, the framework of conventional order has barely changed, and the process of reform has been very slow. Patch work responses to reality, in which economic structural changes such as globalization of the economy and the aging/fewer children problem, is happening quicker than expected, and will not only discourage the vitality of the economy, but also diminish hope for the future. The U.S. economy in the first half of the 1980s suffered from the deficits, lower savings, and diminish competitiveness of enterprises. But the U.S. economy was splendidly revived in the middle of 1990s by adopting so called Reaganomics, which is characterized as realizing small government, drastic deregulation, and large-scale income and corporate tax cuts, etc. In addition to these economic policies, high profit for stock holders have been achieved on a microeconomic level, and America's flexible society supported these ideas. Although the dark side of an economic system based on the American way could become conspicuous, Japan should change its society, which has put emphasis on excessive equality, to one based on "efficiency and fairness." This society should be transparent and accountable to the public. Of course, the society we are targeting is not a disorderly and destructively competitive one in which "the winner takes all" rule holds. This society should allow individual freedom to choose, freedom to fail, and to rise to the challenge once again. By doing so, a truly stable society will be achieved.
Looking back, Japan has overcome various types of difficulties. In each case, Japan has gained to prosper to a large extent, in spite of these difficulties, which is quite unique in the world history. It is the flexibility and the wisdom of the Japanese people that have enabled them to overcome the difficulties by responding appropriately to drastic changes in the environment, and by transferring its energy to generate the next jump. Although Japan today is suffering from economic difficulties, these problems pale in comparison to those during the period of the Meiji Restoration and right after World War II. Facing such historical transformation, we should regard the current era as the excellent opportunity. The changing environment, including the arrival of an information and telecommunication networked society, the aging of the country, environmental problems, and mega-competition in today's global society, will initiate a big future jump. Therefore, reforms should be executed without delay. We should establish a new Japan by changing each person's mentality and self-innovation.
The Economic Strategy Council certainly believes that the days when Japan returns back to the track of sustained growth and revives vigorously, will be near, if politicians, the administration, and the private sector make all efforts to "create a vigorous and attractive Japan." It is emphatically requested that the necessary actions be taken as promptly as possible under the strong leadership of the government.
There are several means including laws, budgets, and ordinances, to realize recommendations. This list suggests laws relevant to recommendations of the report for reference.
| Recommendations | Relevant Laws |
Chapter 1 Scenarios for Economic Recovery and a Road Map for the Sustainable Fiscal Balance
II. Government Fiscal Balances in the Medium and Long Run: a Road Map for Sustainability| Equalizing the primary balance | Special Law for Promoting Fiscal Structural Reform |
| Sales and utilization of state properties | National Property Law Local Autonomy Law |
| Rectification of tax bases | various tax laws |
| Publishing economic projections over the medium-term | --- |
| Publishing fiscal balance projections over the medium-term | --- |
| Regularizing midyear revisions of short-term economic outlook | --- |
Chapter 2 Building "A Competitive Society with Soundness and Creativity"and Preparing Safety Nets
I. Building"a Competitive Society with Soundness and Creativity"| Reduction of officials | Law on the Total Number of Government Employees, etc |
| Introduction and utilization of early retirement | --- |
| Restraint of new recruitment | --- |
| Active outsourcing | new law |
| Introduction of political appointee at the director-generals level | National Government Organization Law |
| Stimulating personnel exchange with the private sector | National Government Officials Lawnew law |
| Creation of Regulatory Reform Commission to the Prime Minister | new law |
| Introduction of financial statements based on the principles of private company accounting | Accounting LawLaw on Finance (Art.38) Local Autonomy Law (Art.233) |
| Producing a comprehensive settlement linking various accounts | same as above |
| Shift from cash basis to accrual basis | same as above |
| Publication of financial statements of municipal authorities based on a nationwide standard | --- |
| Strengthening outside audit, thorough disclosure of settlements | --- |
| Promoting sales of state property | --- |
| Disclosure of properties of government corporations and municipal authorities | various laws on government corporationsLocal Autonomy Law |
| Effective use of state properties | National Property Law Local Autonomy Law |
| Disclosure of balance sheet of each FILP institutionEnhancing transparency | various laws on each FILP institution |
| Application of private accounting rules to that of FILP institutions | --- |
| Fundamental reform including abolishment | various laws on each FILP institution |
| Review of management of postal businesses (mail, postal savings, and postal insurance) | --- |
| Enhancing effective incentive system for mergers | Special Law on Mergers of Municipal Authorities |
| Developing wider regional administrationUtilization of existing organizations | --- |
| Fundamental reform of taxation | various tax laws |
| Gradual reduction of local tax grants | Local Tax Grant Law |
| Review of subsidies including publish works projects | --- |
| Fundamental income tax cutsTax reduction of corporate tax, inheritance tax | Income Tax Law, Corporate Tax Law, Inheritance Tax Law, Local Tax Law |
| Lower top tax rate for income than effective corporate tax rate | Income Tax Law |
| Review of special tax privileges and reduced tax rates | Special Tax Treatment Law Corporate Tax Law (Art.66) |
| Reduction of minimum taxable income, taxation of enterprises with a profit loss | Income Tax Law (Art.72-86, 92, 95), Special Tax Treatment Law Local Tax Law |
| Introduction of invoices, and abolishment of simplified procedures in consumption tax | Consumption Tax Law |
| Large alleviation of inheritance tax on business succession of non-listed companies | Inheritance Tax Law |
| Great rise in tax exemptions for donations | Income Tax Law (Art.78) Corporate Tax Law (Art.37) |
| Introduction of a taxpayers code | Income Tax Law, Inheritance Tax Law, Special Tax Treatment Law, Law on Collecting National Tax, Law on Protecting Personal Information |
| Refining implementation framework on taxing private schools and religious institutions | --- |
| Review, abolishment, and significant reduction of special accounts | various law on special accounts |
| Introduction of plural choice system in compulsory education | --- |
| Admitting original curriculum to schools | School Education Law (Art.20, 21, 38, 40) |
| Establishment of a third-party evaluation organization on education and research in universities | --- |
| Allocation of government budgets to universities according to evaluations of that organization | --- |
| Liberalization of legal status of teachers and professors in national universities from that of government officials | Special Law on Government Officials in Education (Art.3, 11) National Government Officials Law (Art.96-105) |
| Institutional reform of national universities including privatization | --- |
| Promoting opening community colleges | School Education Law |
| Offer of"training vouchers"to unemployed people wanting a new job | Employment Insurance Law |
| Early liberalization in principle of private worker-dispatch and job placement | Worker Dispatch Law (Art.4, 5, 16) Job Stabilization Law (Art.4, 32, 38, 44) |
| Active recruitment of workers in the private sector by the public sector | National Government Officials Law |
| Making pension plans portable | Corporate Tax Law, Income Tax Law, new law on corporate pension schemes |
| Strengthening unemployment benefits | Employment Insurance Law |
| Increasing the number of successors in the bar examination to 2,000 per year | Bar Examination LawCourt Law |
| Separation of organizations between judging and supporting services | Court Law |
| Positive utilization of legal professionals outside the judicial circle | Lawyers Law (Art.72) |
| Provisions of various methods for lawsuitsPromotion of opportunities of arbitration and mediation outside the court | Private Affairs Suit Law |
| Fundamental reorganization of the Fair Trade Commission | Anti-Monopoly Law (Art.27-76) |
| Restructuring public pensions to cover only the basic pensionFinancing the basic pension by tax revenues | National Pension Scheme Law Company's Pension Law Mutual Unions for National Government Officials Law Mutual Unions for Local Government Officials Law |
| Review of income tax deductions of public pension benefits | Income Tax Law |
| Complete privatization of the second tier of public pensions in 30 years | Company's Pension Law |
| Early introduction of the defined contribution pension scheme | new law on corporate pension scheme |
| Significant rise of treating company's contribution as losses | Corporate Tax Law |
| Abolition of special corporate tax to corporate pension plans | Corporate Tax Law |
| Abolition of substitutional role by company's pension plan | Company's Pension Law (Art.81) |
| Dissolving the association of company pension plans after privatization | Company's Pension Law |
| Thorough disclosure of relevant data | --- |
| Front-loading of total review of nursing care insurance | Nursing Care Insurance Law |
| Abolition of the current health care program for the elderly | Health Care Law for Elderly |
| Redesign of health care system considering individuals' needs | Health Insurance Law National Health Insurance Law Mutual Unions for National Government Officials Law Mutual Unions for Local Government Officials Law |
| Introduction of competitive principles | Health Insurance Law National Health Insurance Law Mutual Unions for National Government Officials Law Mutual Unions for Local Government Officials Law |
| Abolition of primary examination of medical records exclusively done by the Funds for Social Insurance Remuneration Payments | Health Insurance Law National Health Insurance Law Law on Funds for Social Insurance Remuneration Payments |
| Introduction of Japanese-type managed care | Health Insurance Law National Health Insurance Law Mutual Unions for National Government Officials Law Mutual Unions for Local Government Officials Law |
| Permission of hospital management by private companiesReform of public hospitals | Medical Service Law (Art.7, 46, 54) Special Law on Reorganizing National Hospitals |
| Deregulation of advertising | Medical Service Law (Art.69) |
| Standardization and electric processing of medical recordsComputer-networking | Law on Funds for Social Insurance Remuneration Payments |
| Liberalizing medicine prices used in health care system | Health Insurance Law National Health Insurance Law |
| Review of remuneration for doctors | Health Insurance Law National Health Insurance Law |
| Permission of nursing care provided by the private sector in the publicly owned building Setting a principle of providing nursing care by the private sector | Aged Welfare Law (Art.15) |
| Compulsory care-plan for the elderly | Nursing Care Insurance Law |
| Introduction of variety of choices by issuing vouchers | Nursing Care Insurance Law |
| Building facilities for bringing children up (introduction of nursery vouchers etc.) | Child Welfare Law (Art.24, 35, 45) School Education Law Workers Welfare Law on Child-care LeaveJob Stabilization Law Worker Dispatch Law |
| Review of legal framework for foreign workers | Law on Immigration Control and Refugees |
| Review of legal framework for foreign immigrants and nationality | Nationality Law |
Chapter 3 Settling the Bubble Economy in Real Terms and Establishing a Financial System Designed for the 21st Century
1. Establishing a Scheme to Promote Disposal of Non-Performing Claims in Real Terms| Establishment of the Urban Reconstruction Commission | new law |
| Establishment of the Committee to Promote Urban Restructuring | new law |
| Enhancement of the first category, urban renewal project | Urban Renewal Law (Art.17) |
| Respect to the majority votes of the unions when approving the transformation of rights | Urban Renewal Law |
| Utilization of the second category, urban renewal project | Urban Renewal Law |
| Promotion of land readjustment projects | --- |
| Promotion of high-space utilization of land | --- |
| Flexible holding of the City Planning Council meeting | --- |
| Flexible progress of city planning decisions | --- |
| Easing the conditions of volume restriction ratio transfer system | Architecture Standard Law, (Urban Planning Law) |
| Abolishment or shrinkage of city planning zone regulations | Urban Planning Law (Art.7), (Agricultural Land Law, Agricultural Promotion Law) |
| Reviewing short-term rent system | Civil Law (Art.395), Civil Execution Law |
| Introduction of forceful management system | Civil Execution Law |
| Abolishment of lowest price sales system | Civil Execution Law |
| Prompt execution of auction | Civil Execution Law |
| Consolidating an environment for consensus building for creditors and debtors to reconstruct management | Corporate Tax Law |
| Utilization of debt equity swap | Commercial Law, Anti-Monopoly Law |
| Improvement of Special Purpose Company (SPC) Law | SPC Law (Art.38,48,119, 144,151, 152), SPC Consolidation Law (Art.13,17),Corporate Tax Law |
| Establishment of real estate investment fund | Investment Trusts Law |
| Abolishment of circulation tax and review of possession tax | Registration Tax Law, Local Tax Law |
| Improvement in the special measure stating the purchase of commercial property | Special Tax Treatment Law |
| Establishing fixed-term housing lease rights | Land and Housing Lease Law (on Diet) |
| Suspension of justifiable reasons to terminate commercial real estate | Land and Housing Lease Law |
| Consolidation of infrastructure regarding disclosure | --- |
| Execution of strategic pilot projects to liquidate real estate | new law |
| Effective use of public real estate | National Property Law, Local Autonomy Law |
| Diversification of funding routes by non-bank banks | new law (Non-bank Banks Debenture Issuance Law, on Diet), Law of Restricting Money Lenders (Art.24) |
| Implementation of non-recourse loans | --- |
| Enlargement of factoring business | --- |
| Improvement of the so-called Servicer Law | Servicer Law (Art.2.1,2.2,12) |
| Assuring protection scheme for bankruptcy | Servicer Law, Bankruptcy Law (Art.63), Corporate Reorganization Law (Art.103) |
| Protection of beneficiaries in investment trusts | Trust Business Law (Art.10) |
| Securitization of assets held by governmental institutions | --- |
| Establishing a legal framework that regulates all types of financial services | new law (Financial Services Act, Securitization Law) |
| Stating fiduciary duty | new law (Financial Services Act, etc.) |
| Legal framework to protect consumer credit | new law (Financial Services Act) |
| Consolidation of legal framework of electronic fund transfer | new law (Electronic Fund Transfer Law, Electronic Money Law) |
| Introduction of consolidated tax system | Corporate Tax Law, etc. |
| Introduction of stock exchange system | Commercial Law (Ch.4.2, Art.199`) |
| New legal framework for commercial paper | new law |
| Abolition of stamp duty on commercial paper | new law (exemption of CP from Stamp Duty Law) |
| Clarification of back-up line contracts | Interest Rate Restriction Law, Participation of Shares Law |
| Abolition of serial number management system, establishing new registration system | Debenture Registration Law (Art.2) |
| Establishment of unified settlement system of securities | Law concerning Custody and Transfer of Stocks, Debenture Registration Law |
| Exemption of withholding tax on all debentures | Income Tax Law (Art.23,181,182), Special Tax Treatment Law (Art.8) |
| Consolidation of short-term money market | --- |
| Drastic reform of financial income tax | Income Tax Law (Art.23,25,181, 182), Securities and Exchange Tax LawEStock Exchange Law (on Diet) |
| Introduction of taxpayers' code system | Income Tax Law, etc. |
| Placing the postal savings and public pensions fund out of FILP | Law of Fund Management Bureau Fund (Art.2) |
| Introduction of truly market-based determination of interest rates on postal savings deposits and investments | Postal Savings Law (Art.12) |
| Abolition or privatization of FILP institutions | Establishment laws of FILP institutions |
| Funding by FILP institution debentures | Establishment laws of FILP institutions |
| Liability guarantee and refinancing | Establishment laws of FILP institutions |
| Unifying financial administration | new law (Establishment Law of Finance Agency) |
| Strengthening human resources in financial supervision | --- |
| Out-source of some of the businesses of financial administration | --- |
| Effective inspection and supervision | --- |
| Review of national treatment of the Basle Accord | --- |
Chapter 4 Reviving Vigorous and Competitive Industries
1.A Framework Toward Industrial Revitalization| Extension of carry-over period of losses to more than ten years | Special Tax Treatment Law (Art.66-12) |
| Carry-back period of losses up to two years | Special Tax Treatment Law (Art.66-14) |
| Exemption of registration tax, capital gains tax in M&A | Special Tax Treatment Law (Ch.5,Art.72`) |
| Liquidation and utilization of land | --- |
| Purchase of land by public | --- |
| Extremely low interest rate lending by governmental financial institutions | --- |
| Enhanced accelerating depreciation of fixed-investment in growing industrial areas | Special Tax Treatment Law (Art.43) |
| Promotion of information technology | --- |
| Consolidation of electronic commercial transactions | --- |
| Promotion of information infrastructure, deregulation | --- |
| Consolidation of bankruptcy-related codes | Corporate Reorganization Law, Composition Law, Bankruptcy Law, Commercial Law |
| Legal framework of holding companies and separation of companies | Commercial Law (Ch.4.2, Art.199`),Corporate Tax Law etc. |
| Reform of system reorganizing industries | Commercial Law, Securities and Exchange Law |
| Enhanced independence of auditors | Commercial Law (Ch.4.3.3, Art.273`) |
| Assuring effectiveness of audits by accounting firms | --- |
| Assistance in the tax system for entrepreneurs | Special Tax Treatment Law |
| Measures to vitalize OTC market | Securities and Exchange Law (Art.67,68) |
| Out-source and privatization of public service | new law (omnibus law) |
| Policy lending to start-up business, grants to projects | --- |
| Promotion of SBIR | Law to Promote New Business Creation |
| Deregulation in the field of telecommunications, medical service, welfare, employment and labor, etc. | new law (omnibus law) |
| National promotion of strategic technological development | --- |
| Strengthening incentives for technological development (intellectual property protection measures) | Patent Law, Special Tax Treatment Law |
| Fulfillment and effective utilization of technological development | --- |
| Consolidating infrastructure of R&D facilities | --- |
| Enhanced cooperation of industry, government, and academia | National Government Officials Law (Art.103) |
| Self-initiative human resource development | --- |
| Educational reform | --- |
| Standards and examination assessment measure | --- |
| Collecting databases on chemical and biological materials | --- |
| Developing databases commercially viable enough to be sold | --- |
| Acquiring international standards | --- |
| Setting national strategies | --- |
| Execution of strategic deregulation | related regulations |
| Intensive Incorporation of resources | --- |
| Fostering human resources and smooth mobility of labor | --- |
| Assuring international standards | --- |
| Execution of large-scale national projects | --- |
Chapter 5 Strategic Infrastructure Investment Toward the 21st Century and Revival of Local Economies
I. The Basic Strategy of Developing Future Infrastructure| Inaugurate an "Information Internet Committee" and an "Environment Recycling Committee" | --- |
| Working out wide-area regional strategy plan to change the "Comprehensive National Development Plan" | Comprehensive National Land Development Law |
| Reexamining long-term plans of public works | Basic laws for development plans |
| Stopping supporting measures for building investment by a single local government. | --- |
| Reexamining the historical roles of regional promotion laws and consider their future. | Regional promotion laws |
| Preventing unreasonable emphasis on dividing work into small pieces, and reexamining the ordering procedure of public works | Accounting Law, Local Autonomy Law, Law on Ensuring the Receipt of Orders from the Government and Other Public Agencies by Small and Medium Enterprise |
| Reevaluating the effectiveness of long-term public works | --- |
| Changing objects of public works flexibly to provide public works that match emerging social needs such as barrier-free facilities in urban areas. | --- |
| Taking cost-benefit analysis and announce the results in construction of roads, rivers, land improvement, airports and harbor facilities | --- |
| Simplifying contact procedures with the Ministry of Finance and changing the bid system based on the Local Autonomy Law | Accounting Law, Local Autonomy Law |
| Wide-area regions should have an evaluating organization for technology and management | --- |
| Introducing a "Value Engineering" and a "Design Build" | --- |
| Aggressive introducing PFI | PFI Law (on Diet) |
| Allowing a PFI framework only for businesses led by the private sector with contracts that clarify the roles and responsibilities of both the private and public sectors | --- |
| Flexibly changing the act for normalization of grants to promote more effective usage of public facilities | Act for Normalization of Grants, National Property law, Local Autonomy Law, Laws for Facilities Administration |
| Working out urban development plans as national projects | --- |
| Improving the weak city conditions for earthquakes and other disasters | --- |
| Shortening commuting time, and achieving a more comfortable urban life | --- |
| Promoting pilot projects for future cities | City Planning Law, and other laws regarding city development and architecture |
| 24 Hour international access to be reinforced | --- |
| Promoting construction of underground cables and common cable boxes | --- |
| Drastic deregulation to enhance the Internet businesses | Telecommunications Business Law |
| Building Information superhighway running across Japan | --- |
| Promoting CATV Internet, Community LAN, and Digital Subscriber Lines to realize flat rates for the Internet usage | --- |
| Building a Pan-pacific Peta-level network in cooperation with other countries | --- |
| Becoming an electric government | --- |
| Developing the next generation transportation system | --- |
| Development of information apparatus for elderly and disabled people should be enhanced | --- |
| Disclosure and risk management plans and organizations to deal with the "Y2K" problem. | --- |
| Promoting renewal and reconstruction of general waste disposal facilities, industrial waste disposal facilities, and construction of recycling facilities | Law of Waste Disposal and Cleaning |
| Building hybrid waste disposal facilities and recycling facilities with PFI | Law of Waste Disposal and Cleaning |
| Proceeding with deregulation to promote new entry into the waste disposal industry | --- |
| Disclosures of information about costs and management of local public organizations such as sewer system | --- |
| Making clear environmental rules on air pollution, soil pollution dioxin, etc. and tightening environmental regulation and clarify responsibility for emission. | --- |
| Establishing an international ecology right exchange | --- |
| Establishing public-private collaboration centers at universities | National Property Law, New laws for public-private collaboration |
| Getting research resources together on university campus | --- |
| Establishing venture capital offices at the collaboration centers | National Property law |
| Establishing university funds to accumulate patent fees and donations, and a free hand to operate the fund | --- |
| Allowing local governments to donate to the fund | --- |
| Connecting all schools with high-speed networks and building LAN in all schools and classrooms | --- |
| Expanding the qualification of special purpose teachers for computer education and foreign language education | --- |
| Introduction of three-dimensional design for railway stations , bus terminals, and city areas | --- |
| Promoting building railway stations , department stores and hospitals etc. with barrier-free facilities. | --- |
| Enhancing the private sector's new entrance into welfare, and applying contract welfare to provide diverse welfare services. | Social Welfare Service Law |
| Establishing public multipurpose space for welfare use around public spaces | --- |
| Aiding the private sector's construction of barrier-free residence and rental homes for the elderly. | --- |
| Activation of fixed-term land use rights, and establishing fixed-term tenant rights | Land Lease and House Lease Law |
| Performance disclosure, performance guarantees, and maintenance records of houses | new laws regarding responsibility for defect collateral |
| Establishing a neutral organization to evaluate the value of buildings. | new laws regarding responsibility for defect collateral |
| Enhancing rental houses for the purpose of taking care of aged people and reverse mortgages | --- |
| Building tourist resorts that attract vacationers from all over the world | --- |
| Maintaining infrastructure for sending information about tourism and business | --- |
| Maintaining Japanese unique cultural facilities to be attractive tourism spots. | --- |
| Supporting local movements such as "Machi-tukuri" company and NPOs to develop diverse exchange spots | --- |
This reference shows a way to understand priorities and procedures of necessary strategies for reviving the Japanese Economy.
| . | Policies with highest priority to revive economy and to stabilize financial system | Reforms to be taken as soon as possible with little effect on economic recovery | Reforms to be implemented after full-fledged economic recovery |
| Basic Strategies | 1. Elimination of fears about fiscal worsening
| 1. Realization of small government
|
1. Clear road map for fiscal sustainability
|
Note 1
Q1 What is your estimate of the potential growth rate of Japan's economy? (percent change over the previous fiscal year) Q2 When do you think it is desirable to realize that growth rate with the help of government policies? Q3 What are your projections over the next six years for real GDP growth rate, unemployment rate, and the ratio of fiscal deficit to nominal GDP in the central and local governments? (1) standard case: no policy change |
Period of Investigation: End of November to early December 1998
Q1: Potential growth rate (percent change in real GDP) 2.1%
Q2: Projected year realizing potential growth rate FY2001
Q3: Economic scenarios over the next six years
(1) standard case
(2) policy case
(3) crisis scenario real GDP growth rate -3.5%
unemployment rate 7.3%
Note 2
(Growth Accounting)
According to growth accounting (the source approach), economic growth is divided into three contributions: 1) an increase in the labor force, 2) an increase of capital stock, and 3) the residuals--a rise in productivity (so-called total factor productivity).
This method is widely shared among governments, private institutions, and international organizations to estimate potential growth rates. Most of them indicate that it will be around 1 to slightly over 2 percent (the average growth rate of real GDP per annum) over the next several years.
1) contribution of labor -0.6 to 0 percentIt should be noted that the potential growth rate is a measure of sustainable trend growth. Therefore, the economy could grow more than the potential rate in the short run. Furthermore, the potential growth rate may change, depending on future economic conditions and economic policies (see below).
2) contribution of capital -0.1 to 1 percent
3) total factor productivity 0.5 to 1.2 percent
(the share of labor is assumed to be around 70%, and that of capital around 30%.)
(Surveys Collected from Intellectuals and Experts)
The estimates based on the above method are ascertained by surveys. The responses from 38 intellectuals and experts point to 2.1 percent on average as the potential growth rate (see note 1). Among them, 19 people responded in the range of 2.0 to 2.4 percent. The highest is 3.0 percent, the lowest 1.0 percent.
(Factors to Make Productivity Rise: Endogenous Growth Theory)
The magnitude of the potential growth rate will vary, as recommendations in this final report are implemented. For example:
1) the increase in the labor force would be enhanced, as more females and more elderly people are employed;The important issue regarding the potential growth rate is what policies are necessary to boost productivity. The theory of endogenous economic growth is relevant for this problem. The empirical studies to date have revealed that human resource development and social infrastructure provision, including education, information technology, and research and development, would have a significant positive effect on a rise in productivity. This suggests that the potential growth rate is not determined by exogenous factors like population increase, but is dependent on policy implementation.
2) the desirable level of capital stock would be raised, as the expected rate of economic growth is augmented;
3) productivity would be boosted, as the economic structure becomes more efficient as the result of the founding of"a competitive society with soundness and creativity."
(conclusion)
The Economic Strategy Council has judged that the Japanese economy will still be able to grow potentially by slightly over 2 percent for the moment. This judgment takes into account all of the above considerations. However, its magnitude hinges on human resource development and social infrastructure provision. It does not mean that 2 percent growth would be easily realized without effort. The important thing for this development and provision is to prioritize the investment with the highest return on productivity at the margin, and to secure flexibility and neutrality in labor relocation
Note 3
During the quantitative and comprehensive investigation of"Scenarios for Economic Recovery and a Road Map for the Sustainable Fiscal Balance,"the Medium-term Multi-sectoral Model of the Economic Planning Agency was used.
Based on the surveys collected from intellectuals and experts, Mr. Heizo Takenaka, a member of the council and head of the working group on this issue, sketched a medium-term economic path and provided policy alternatives to be examined.
In this sense, the Medium-term Multi-sectoral Model is an instrument relevant for this issue. The Economic Strategy Council is responsible for the analyses and policy implications in this report.
Period of analysis
Through FY1999: based on the economic projections of the government
After FY2000: object of analysis
Assumptions: main exogenous variables
Government consumption in real terms: leveling off from FY2000 to FY2002
Public investment in nominal terms: leveling off from FY2000 to FY2002
Eased monetary policy is continued.
Scenarios for economic revitalization and stagnation
Exogenous variables are the same in both scenarios. However, the scenario for economic stagnation incorporates a mechanism that impedes upturns in private consumption, housing investment, and business investment, because the structural reforms would be insufficiently carried out under that scenario.
Reference
The Econometric Model Analysis Committee, the Economic Council,"Multi-sectoral Model for the Economic Analyses in the Medium- and the Long-term: the 10th Committee Report,"March 1996.
Appendix 1
Appendix 2
Appendix 3
Working Group 1 (Chief: Heizo Takenaka)
"Scenarios for Economic Recovery and Government Fiscal Balances in the Middle and Long-term"
| Date | 11/17/98 |
| Subject | Scenarios for Economic Recovery |
| Date | 12/1/98 |
| Subject | Scenarios for Economic Recovery |
| Date | 12/2/98 |
| Subject | Economic Conditions and Government Fiscal Balances |
| Guest Speaker- | Hiroshi Kato President, Chiba University of Commerce |
| Date | 12/8/98 |
| Subject | Prospects for Japanese Economic |
| Guest Speaker- | Yutaka Kousai Chairman, Japan Center for Economic Research |
| Date | 12/14/98 |
| Subject | Overall discussion |
Working Group 2 (Chief: Iwao Nakatani)
"Building a New Competitive Society and Preparing Safety Nets"
| Date | 11/13/98 |
| Subject | Pension System |
| Guest Speaker- | Noriyuki Takayama Professor, Hitotsubashi University Yoshio Nakamura Managing Director, Japan Federation of Economic Organizations |
| Date | 11/17/98 |
| Subject | Deregulation, Judicial Reform |
| Guest Speaker- | Yoshihiko Miyauchi President and Group CEO, ORIX Corporation Hideki Kanda Professor, University of Tokyo |
| Date | 11/17/98 |
| Subject | Medical Services |
| Guest Speaker- | Hirobumi Kawakita President and CEO, Kawakita General Hospital Yoshinori Hiroi Associate Professor, The University of Chiba |
| Date | 11/23/98 |
| Subject | Reform of Fiscal Investment and Loan Program |
| Guest Speaker- | Atsushi Miyawaki Professor, Hokkaido University |
| Date | 12/1/98 |
| Subject | Employment |
| Guest Speaker- | Eiko Kono President, Recruit Co., Ltd. |
Working Group 3 (Chief: Sawako Takeuchi)
"Strategic Infrastructure Investment and Public-Private Partnership"
| Date | 11/23/98 |
| Subject | PFI |
| Guest Speaker- | Atsushi Miyawaki Professor, Hokkaido University |
| Date | 11/23/98 |
| Subject | Information Infrastructure |
| Guest Speaker- | Syunpei Kumon Executive Director, Center for Global Communications International University of Japan |
| Date | 12/2/98 |
| Subject | Information Infrastructure |
| Guest Speaker- | Jun Murai Professor, Keio University |
| Date | 12/2/98 |
| Subject | Environment |
| Guest Speaker- | Takaaki Moroto Corporate Auditor, Itochu Corporation |
| Date | 12/2/98 |
| Subject | Public Work System |
| Guest Speaker- | Masahiko Kunishima Professor, University of Tokyo |
| Date | 12/14/98 |
| Subject | Transportation |
| Guest Speaker- | Hironao Kawashima Professor, Keio University Shigeru Morichi Professor, University of Tokyo |
Working Group 4 (Chief : Motoshige Ito)
" Setting the Bubble Economy in Real Terms and Activating New Industries"
| Date | 11/8/98 |
| Subject | Financial System |
| Guest Speaker- | Kazuhiko Ikeo Professor, Keio University |
| Date | 11/26/98 |
| Subject | Supporting New Businesses |
| Guest Speaker- | Masao Horiba Chairman, Horiba, Ltd. Yoshihiro Ohtaki Special Adviser, Jafco Co.,Ltd. Visiting Professor, University of Tsukuba |
| Date | 11/26/98 |
| Subject | Financial System |
| Guest Speaker- | Yoshinobu Yamada Managing Director/Senior Analyst, Merrill Lynch Japan Incorporation Asahiko Isobe President, Hitachi Research Institute |
| Date | 11/29/98 |
| Subject | Financial System, Financial Industry |
| Guest Speaker- | Toshikatsu Fukuma Executive Vice President, Mitsui & Co.,Ltd. |
| Date | 12/1/98 |
| Subject | Financial System, Economic condition |
| Guest Speaker- | Robert Alan Feldman Managing Director, Morgan Stanley Japan Limited |
| Date | 12/10/98 |
| Subject | Financial System |
| Guest Speaker- | Yuri Okina Chief Researcher, The Japan Research Institute Limited |
Tohoku Economic Federation, Osaka Chamber of Commerce and Industry, Kansai Economic Federation, Kansai Association of Corporate Executives, The Japan Chamber of Commerce and Industry, Japan Association of Corporate Executives, Japan Federation of Economic Organizations, Hokuriku Economic Federation, Shikoku Economic Federation, Chubu Economic Federation, and others.Proposals from People