(provisional translation by the secretariat)
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
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.
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.
|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.
|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.
|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.
|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.
|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.
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.