Toward the Creation of More Vigorous and Attractive Japan

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.

(References, Notes, and Appendixes)

Reference 1

The List of Laws Relevant to Recommendations

There are several means including laws, budgets, and ordinances, to realize recommendations. This list suggests laws relevant to recommendations of the report for reference.

RecommendationsRelevant 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
(3) A Road Map for Restoring Sustainability
Equalizing the primary balanceSpecial Law for Promoting Fiscal Structural Reform
Sales and utilization of state propertiesNational Property Law
Local Autonomy Law
Rectification of tax basesvarious 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"
1. Initiatives for"Small Government"
(1) Reforms of Institutional System for Government Employees
Reduction of officialsLaw on the Total Number of Government Employees, etc
Introduction and utilization of early retirement---
Restraint of new recruitment---
Active outsourcingnew law
Introduction of political appointee at the director-generals levelNational Government Organization Law
Stimulating personnel exchange with the private sectorNational Government Officials Lawnew law

(2) Promoting Institutional Reform through"the Regulatory Reform Commission"
Creation of Regulatory Reform Commission to the Prime Ministernew law

(3) Improvement of the Public Accounting
Introduction of financial statements based on the principles of private company accountingAccounting
LawLaw on Finance (Art.38)
Local Autonomy Law (Art.233)
Producing a comprehensive settlement linking various accountssame as above
Shift from cash basis to accrual basissame as above
Publication of financial statements of municipal authorities based on a nationwide standard---
Strengthening outside audit, thorough disclosure of settlements---

(4) Effective Usage of State Property
Promoting sales of state property---
Disclosure of properties of government corporations and municipal authoritiesvarious laws on government corporationsLocal Autonomy Law
Effective use of state propertiesNational Property Law
Local Autonomy Law

(5) Reforms of Fiscal Investment and Loan Program (FILP)
Disclosure of balance sheet of each FILP institutionEnhancing transparencyvarious laws on each FILP institution
Application of private accounting rules to that of FILP institutions---
Fundamental reform including abolishmentvarious laws on each FILP institution
Review of management of postal businesses (mail, postal savings, and postal insurance)---

2. Establishment of Stronger Local Sovereignty
(1) Promoting Mergers of Municipal Authorities
Enhancing effective incentive system for mergersSpecial Law on Mergers of Municipal Authorities
Developing wider regional administrationUtilization of existing organizations---

(2) Fundamental Reform of Local Taxation and Finance
Fundamental reform of taxationvarious tax laws
Gradual reduction of local tax grantsLocal Tax Grant Law
Review of subsidies including publish works projects---

3. Tax Reform for a Fairer and More Rewarding System
Fundamental income tax cutsTax reduction of corporate tax, inheritance taxIncome Tax Law, Corporate Tax Law, Inheritance Tax Law, Local Tax Law
Lower top tax rate for income than effective corporate tax rateIncome 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 lossIncome Tax Law (Art.72-86, 92, 95),
Special Tax Treatment Law
Local Tax Law
Introduction of invoices, and abolishment of simplified procedures in consumption taxConsumption Tax Law
Large alleviation of inheritance tax on business succession of non-listed companies Inheritance Tax Law
Great rise in tax exemptions for donationsIncome Tax Law (Art.78)
Corporate Tax Law (Art.37)
Introduction of a taxpayers codeIncome 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 accountsvarious law on special accounts

4. Educational Reform to Build Creative Manpower
Introduction of plural choice system in compulsory education---
Admitting original curriculum to schoolsSchool 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 officialsSpecial 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 collegesSchool Education Law

II. Providing Safety Nets to Warrant Security
1. Policies to Enhance Employability and to Ensure Job Security
Offer of"training vouchers"to unemployed people wanting a new jobEmployment Insurance Law
Early liberalization in principle of private worker-dispatch and job placementWorker 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 sectorNational Government Officials Law
Making pension plans portableCorporate Tax Law, Income Tax Law, new law on corporate pension schemes
Strengthening unemployment benefitsEmployment Insurance Law

2. Judicial Reform Matching an Ex-post Rule-Governed Society
Increasing the number of successors in the bar examination to 2,000 per yearBar Examination LawCourt Law
Separation of organizations between judging and supporting servicesCourt Law
Positive utilization of legal professionals outside the judicial circleLawyers Law (Art.72)
Provisions of various methods for lawsuitsPromotion of opportunities of arbitration and mediation outside the courtPrivate Affairs Suit Law
Fundamental reorganization of the Fair Trade CommissionAnti-Monopoly Law (Art.27-76)

3. Building a Sustainable, Confidence-based Social Security System (1) Pension Reform
Restructuring public pensions to cover only the basic pensionFinancing the basic pension by tax revenuesNational 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 benefitsIncome Tax Law
Complete privatization of the second tier of public pensions in 30 yearsCompany's Pension Law
Early introduction of the defined contribution pension schemenew law on corporate pension scheme
Significant rise of treating company's contribution as lossesCorporate Tax Law
Abolition of special corporate tax to corporate pension plansCorporate 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 privatizationCompany's Pension Law
Thorough disclosure of relevant data---

(2) Medical Services and Nursing Care
Front-loading of total review of nursing care insuranceNursing 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' needsHealth Insurance Law
National Health Insurance Law
Mutual Unions for National Government Officials Law
Mutual Unions for Local Government Officials Law
Introduction of competitive principlesHealth 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 PaymentsHealth Insurance Law
National Health Insurance Law
Law on Funds for Social Insurance Remuneration Payments
Introduction of Japanese-type managed careHealth 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 hospitalsMedical Service Law (Art.7, 46, 54)
Special Law on Reorganizing National Hospitals
Deregulation of advertisingMedical Service Law (Art.69)
Standardization and electric processing of medical recordsComputer-networkingLaw on Funds for Social Insurance Remuneration Payments
Liberalizing medicine prices used in health care systemHealth 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 elderlyNursing Care Insurance Law
Introduction of variety of choices by issuing vouchersNursing Care Insurance Law

(3) Measures to Cope with the Declining Birthrate
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 workersLaw on Immigration Control and Refugees
Review of legal framework for foreign immigrants and nationalityNationality 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 Commissionnew law
Establishment of the Committee to Promote Urban Restructuringnew law
Enhancement of the first category, urban renewal projectUrban Renewal Law (Art.17)
Respect to the majority votes of the unions when approving the transformation of rightsUrban Renewal Law
Utilization of the second category, urban renewal projectUrban 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 systemArchitecture Standard Law, (Urban Planning Law)
Abolishment or shrinkage of city planning zone regulationsUrban Planning Law (Art.7), (Agricultural Land Law, Agricultural Promotion Law)
Reviewing short-term rent systemCivil Law (Art.395), Civil Execution Law
Introduction of forceful management systemCivil Execution Law
Abolishment of lowest price sales systemCivil Execution Law
Prompt execution of auctionCivil Execution Law
Consolidating an environment for consensus building for creditors and debtors to reconstruct managementCorporate Tax Law
Utilization of debt equity swapCommercial Law, Anti-Monopoly Law

2. Promotion of Liquidation and Securitization of Performing Real Estate
Improvement of Special Purpose Company (SPC) LawSPC Law (Art.38,48,119, 144,151, 152), SPC Consolidation Law (Art.13,17),Corporate Tax Law
Establishment of real estate investment fundInvestment Trusts Law
Abolishment of circulation tax and review of possession taxRegistration Tax Law, Local Tax Law
Improvement in the special measure stating the purchase of commercial propertySpecial Tax Treatment Law
Establishing fixed-term housing lease rightsLand and Housing Lease Law (on Diet)
Suspension of justifiable reasons to terminate commercial real estateLand and Housing Lease Law
Consolidation of infrastructure regarding disclosure---
Execution of strategic pilot projects to liquidate real estatenew law
Effective use of public real estateNational Property Law, Local Autonomy Law

3. Establishing a New Financial Intermediary Route to Supplement Indirect Financial System
Diversification of funding routes by non-bank banksnew 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 LawServicer Law (Art.2.1,2.2,12)
Assuring protection scheme for bankruptcyServicer Law, Bankruptcy Law (Art.63), Corporate Reorganization Law (Art.103)
Protection of beneficiaries in investment trustsTrust Business Law (Art.10)
Securitization of assets held by governmental institutions---

4. Consolidating the Financial Infrastructure Suitable for the 21st Century
Establishing a legal framework that regulates all types of financial servicesnew law (Financial Services Act, Securitization Law)
Stating fiduciary dutynew law (Financial Services Act, etc.)
Legal framework to protect consumer creditnew law (Financial Services Act)
Consolidation of legal framework of electronic fund transfernew law (Electronic Fund Transfer Law, Electronic Money Law)
Introduction of consolidated tax systemCorporate Tax Law, etc.
Introduction of stock exchange systemCommercial Law (Ch.4.2, Art.199`)
New legal framework for commercial papernew law
Abolition of stamp duty on commercial papernew law (exemption of CP from Stamp Duty Law)
Clarification of back-up line contractsInterest Rate Restriction Law, Participation of Shares Law
Abolition of serial number management system, establishing new registration systemDebenture Registration Law (Art.2)
Establishment of unified settlement system of securitiesLaw concerning Custody and Transfer of Stocks, Debenture Registration Law
Exemption of withholding tax on all debenturesIncome Tax Law (Art.23,181,182), Special Tax Treatment Law (Art.8)
Consolidation of short-term money market---
Drastic reform of financial income taxIncome Tax Law (Art.23,25,181, 182), Securities and Exchange Tax LawEStock Exchange Law (on Diet)
Introduction of taxpayers' code systemIncome Tax Law, etc.

5. "Drastic Reform of the Public Finance and the Fiscal Investment and Loan Program" and "Financial Administration for the 21st Century"
Placing the postal savings and public pensions fund out of FILPLaw of Fund Management Bureau Fund (Art.2)
Introduction of truly market-based determination of interest rates on postal savings deposits and investmentsPostal Savings Law (Art.12)
Abolition or privatization of FILP institutionsEstablishment laws of FILP institutions
Funding by FILP institution debenturesEstablishment laws of FILP institutions
Liability guarantee and refinancingEstablishment laws of FILP institutions
Unifying financial administrationnew 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 yearsSpecial Tax Treatment Law (Art.66-12)
Carry-back period of losses up to two yearsSpecial Tax Treatment Law (Art.66-14)
Exemption of registration tax, capital gains tax in M&ASpecial 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 areasSpecial Tax Treatment Law (Art.43)
Promotion of information technology---
Consolidation of electronic commercial transactions---
Promotion of information infrastructure, deregulation---
Consolidation of bankruptcy-related codesCorporate Reorganization Law, Composition Law, Bankruptcy Law, Commercial Law
Legal framework of holding companies and separation of companiesCommercial Law (Ch.4.2, Art.199`),Corporate Tax Law etc.
Reform of system reorganizing industriesCommercial Law, Securities and Exchange Law
Enhanced independence of auditorsCommercial Law (Ch.4.3.3, Art.273`)
Assuring effectiveness of audits by accounting firms---

2.Assisting Establishment of New Businesses and Strategic Technological Development
Assistance in the tax system for entrepreneursSpecial Tax Treatment Law
Measures to vitalize OTC marketSecurities and Exchange Law (Art.67,68)
Out-source and privatization of public servicenew law (omnibus law)
Policy lending to start-up business, grants to projects---
Promotion of SBIRLaw to Promote New Business Creation
Deregulation in the field of telecommunications, medical service, welfare, employment and labor, 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 academiaNational Government Officials Law (Art.103)

3.Consolidating Human Resource Infrastructure
Self-initiative human resource development ---
Educational reform---

4.Consolidating Intellectual Infrastructure
Standards and examination assessment measure---
Collecting databases on chemical and biological materials---
Developing databases commercially viable enough to be sold---
Acquiring international standards---

5.Creatin of Leading Industries for the 21st Century
Setting national strategies---
Execution of strategic deregulationrelated 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
1.Cross-ministry Infrastructure Development Plan and Regional Revival Plans
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

2. Reforming Local Governments To Increase the Efficiency of Public Works
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 worksAccounting 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.---

3. Active Introduction of Private-Sector Dynamism
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 LawAccounting 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 PFIPFI 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 facilitiesAct for Normalization of Grants, National Property law, Local Autonomy Law, Laws for Facilities Administration

II. Strategic Projects
1. Improvement of urban lives and raising global competitiveness of Japanese cities.
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 citiesCity 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---

2. Strategic Information Infrastructure Focusing on the Internet
Drastic deregulation to enhance the Internet businessesTelecommunications 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.---

3. Creating Environmental Business and Building Circulating Society
Promoting renewal and reconstruction of general waste disposal facilities, industrial waste disposal facilities, and construction of recycling facilitiesLaw of Waste Disposal and Cleaning
Building hybrid waste disposal facilities and recycling facilities with PFILaw 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 ---

4. Public-Private Collaboration Frameworks and Fostering New Talents
Establishing public-private collaboration centers at universitiesNational 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---

5. Creating Towns to Prepare for Rapid Population Aging
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.---

6. Initiating New Housing Policy
Activation of fixed-term land use rights, and establishing fixed-term tenant rightsLand 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 laws regarding responsibility for defect collateral
Enhancing rental houses for the purpose of taking care of aged people and reverse mortgages---

7. Developing Attractive Spots in Japan and Sending Messages to the World
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---

Reference 2

How to Understand Policies for Reviving the Japanese Economy

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 systemReforms to be taken as soon as possible with little effect on economic recoveryReforms to be implemented after full-fledged economic recovery
Basic Strategies 1. Elimination of fears about fiscal worsening
  • Five year projections of economic growth and fiscal balances to be published
2. Provisions of safety nets
  • Training vouchers to be offered
  • Fears about job insecurity to be eliminated
  • Defined contribution pension plans to be introduced
3. Settling the bubble economy in real terms
  • Establishing scheme to promote disposal of non-performing claims in real terms
  • Liquidation and securitiza- tion of performing real estate
4. Establishment of financial system designed for the 21st century
  • Establishment of new financial route
  • Diversification of financial products and services
  • Legal framework covering all financial services
  • Response to financial innovation of electronics and information
  • Establishment of new settlement system
5. Framework for industrial revitalization
  • Beneficial tax system for disposal of facilities
  • Accelerated depreciation of fixed-investment in growing areas
  • Legal framework for bankruptcy related codes
  • Fulfillment of venture assisting tax system
  • Promotion of SBIR
  • National commitment to create new industries
6. Infrastructure investment toward the 21st century
  • Future cities pilot projects
  • Information Superhighway
1. Realization of small government
  • The number of officials to be reduced
  • Institutional framework to promote deregulation to be strengthened
  • The public accounting system to be improved
  • State properties to be effectively utilized
  • Reforms of the Fiscal Investment and Loan Program to be started
  • Political appointees to be introduced at the level of director-generals in the government
2. Establishment of stronger local sovereignty
  • Mergers of municipal authorities to be promoted
  • Local taxation and finance to be fundamentally reformed
3. Fundamental reform of taxation
  • The inheritance tax on business succession of non-listed companies to be reduced
  • tax exemptions for donations to be raised
  • The minimum taxable income to be reviewed
  • Invoices to be introduced and simplified procedures to be abolished in the consumption tax
  • Taxpayers code to be introduced
  • Taxing private schools and religious institutions to be further refined
4. Bold implementation of various structural reforms
  • Fundamental reform of the Fiscal Investment and Loan Program
  • Review of management of postal businesses (mail, postal savings, and postal insurance)
  • Educational reform
  • Reforms of national universities including privatization
  • Judicial reform
  • Fundamental reform of public pensions
  • Reforms of medical services and nursing cares
  • Coping with the declining birthrate
5. Reforms of public works projects
  • Efficiency and transparency to be pursued
  • Private initiatives to be utilized
1. Clear road map for fiscal sustainability
  • Fiscal consolidation to be really pursed
2. Review of taxation pertinent to the aged society
  • The share of direct and indirect taxation to be reexamined

Note 1

Surveys on Economic and Fiscal Visions over the Medium-term


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
(2) policy case: desirable scenario with policy efforts, when the standard case is not satisfactory
(3) crisis scenario: the worst-case scenario triggered by the emergence of crises

Period of Investigation: End of November to early December 1998

[Summary of results](figures are an average)
Number of respondents : 38
of which academics 10, business circle 9, market analysts 7,
and private institutions 12.

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

On the Potential Growth Rate of the Japanese Economy

(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 percent
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%.)
It 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).

(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;
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."
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.
This theory supports the belief that steady implementation of recommended policies in this report will have desirable positive consequences on the potential growth rate.

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

On the Macroeconomic Model

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.

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

The Members of the Economic Strategy Council

Hirotaro Higuchi
Honorary Chairman
Asahi Breweries, Ltd.
Deputy Chairman
Iwao Nakatani
Professor Faculty of Commerce
Hitotsubashi University

Masataka Ide
Chairman of the Board of Directors West Japan Railway Company

Motoshige Itoh
Professor Faculty of Economics
University of Tokyo

Minoru Mori
President and Mori Building Co., Ltd.
Chief Executive Officer

Hiroshi Okuda
President Toyota Motor Corporation

Toshifumi Suzuki
President and Ito-Yokado Co., Ltd.
Chief Executive Chairman

Heizo Takenaka
Professor Faculty of Policy Management
Keio University

Sawako Takeuchi
Associate Professor The Graduate School of Engineering
University of Tokyo

Chiyono Terada
President Art Corporation

Appendix 2

Records of Official Meetings

1st Meeting (8/24/98) 2nd Meeting (9/10/98) 3rd Meeting (9/25/98) 4th Meeting (10/1/98) 5th Meeting (10/7/98) 6th Meeting (10/14/98) 7th Meeting (10/23/98) 8th Meeting (11/6/98) 9th Meeting (11/19/98) 10th Meeting (11/30/98) 11th Meeting (12/13/98) 12th Meeting (12/23/98) 13th Meeting (1/20/99) 14th Meeting (2/26/99)

Appendix 3

Records of Working Group Activities

Working Group 1 (Chief: Heizo Takenaka)
"Scenarios for Economic Recovery and Government Fiscal Balances in the Middle and Long-term"

SubjectScenarios for Economic Recovery

SubjectScenarios for Economic Recovery

SubjectEconomic Conditions and Government Fiscal Balances
Guest Speaker-Hiroshi Kato President, Chiba University of Commerce

SubjectProspects for Japanese Economic
Guest Speaker-Yutaka Kousai Chairman, Japan Center for Economic Research

SubjectOverall discussion

Working Group 2 (Chief: Iwao Nakatani)
"Building a New Competitive Society and Preparing Safety Nets"

SubjectPension System
Guest Speaker-Noriyuki Takayama Professor, Hitotsubashi University
Yoshio Nakamura Managing Director, Japan Federation of Economic Organizations

SubjectDeregulation, Judicial Reform
Guest Speaker-Yoshihiko Miyauchi President and Group CEO, ORIX Corporation
Hideki Kanda Professor, University of Tokyo

SubjectMedical Services
Guest Speaker-Hirobumi Kawakita President and CEO, Kawakita General Hospital
Yoshinori Hiroi Associate Professor, The University of Chiba

SubjectReform of Fiscal Investment and Loan Program
Guest Speaker-Atsushi Miyawaki Professor, Hokkaido University

Guest Speaker-Eiko Kono President, Recruit Co., Ltd.

Working Group 3 (Chief: Sawako Takeuchi)
"Strategic Infrastructure Investment and Public-Private Partnership"

Guest Speaker-Atsushi Miyawaki Professor, Hokkaido University

SubjectInformation Infrastructure
Guest Speaker-Syunpei Kumon Executive Director, Center for Global Communications International University of Japan

SubjectInformation Infrastructure
Guest Speaker-Jun Murai Professor, Keio University

Guest Speaker-Takaaki Moroto Corporate Auditor, Itochu Corporation

SubjectPublic Work System
Guest Speaker-Masahiko Kunishima Professor, University of Tokyo

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"

SubjectFinancial System
Guest Speaker-Kazuhiko Ikeo Professor, Keio University

SubjectSupporting New Businesses
Guest Speaker-Masao Horiba Chairman, Horiba, Ltd.
Yoshihiro Ohtaki Special Adviser, Jafco Co.,Ltd.
Visiting Professor, University of Tsukuba

SubjectFinancial System
Guest Speaker-Yoshinobu Yamada Managing Director/Senior Analyst, Merrill Lynch Japan Incorporation
Asahiko Isobe President, Hitachi Research Institute

SubjectFinancial System, Financial Industry
Guest Speaker-Toshikatsu Fukuma Executive Vice President, Mitsui & Co.,Ltd.

SubjectFinancial System, Economic condition
Guest Speaker-Robert Alan Feldman Managing Director, Morgan Stanley Japan Limited

SubjectFinancial System
Guest Speaker-Yuri Okina Chief Researcher, The Japan Research Institute Limited

Other Opinion Exchange
The Council exchanged opinions with the following organizations:
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
The Council received 915 proposals from people through letters, electric mails and facsimile.