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Table 24. Recommendations for structural reform and assessment of progress

Table 24. Recommendations for structural reform and assessment of progress

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Based on previous and current Surveys1

Recommendations in 2002 Survey

Action taken since the 2002 Survey

This Survey’s assessment/recommendations

II. Enhance product market


i) Accelerate deregulation

The Council on Regulatory Reform (CRR) has proposed

an action plan to ease restrictions on entry into

publicly regulated markets such as education, health,

agriculture and the labour market.

Accelerate deregulation by establishing a stronger

organisation to succeed the CRR when its mandate ends

in 2004 and legislate a basic law on regulatory reform.

ii) Move ahead with the creation

of special structural reform zones

Thus far, 164 plans have been approved as special

zones for structural reform.

Use the special zones as a first step to nation-wide reform.

Ensure that line ministries do not prevent the introduction

of effective deregulation measures in the zones.

iii) Further strengthen competition


See Chapter IV.

See Chapter IV.

iv) Take steps to encourage

competition in network sectors

See Chapter IV.

See Chapter IV.

v) Eliminate use of supply/demand

adjustment mechanisms, which

have been used to limit entry

No development.

Supply/demand adjustment mechanisms still act as entry

restrictions for port transporters, except at nine major


The corporate restructuring law (Kaisha kosei)

has been revised to accelerate the process by easing

the provisions for restructuring and by allowing some

flexibility in the restructuring measures. The Industrial

Revitalisation Corporation (IRC) was established

in April 2003 to promote restructuring of viable firms

by purchasing loans from all creditors except

for main banks.

The revision to the corporate restructuring law is a step

forward. The IRC should impose market discipline in its

loan purchases and restructuring efforts in order to avoid

moral hazard problems.

Further structural reforms to enhance growth

© OECD 2004

Table 24. Recommendations for structural reform and assessment of progress (cont.)

III.Promote industrial restructuring

and boost technology and


i) Reduce barriers to exit

Make the relationship between industry and academia

more open and transparent. Greater efforts have

to be made to internationalise universities and to open

opportunities for new staff. The process of patenting

should be accelerated effectively.


ii) Increase emphasis on basic research The Strategic Council on Intellectual Property has

and improve efficiency of public

adopted a comprehensive programme to promote

technology spending

the creation of intellectual property (IP) through giving

more incentives to universities, strengthening the

protection of IP rights and accelerating the process

of approving patent licences.


Table 24. Recommendations for structural reform and assessment of progress (cont.)

Based on previous and current Surveys1

Recommendations in 2002 Survey

Action taken since the 2002 Survey

This Survey’s assessment/recommendations

iii) Encourage more start-ups

and venture business

Minimum required capital for start-ups has been

reduced to 1 yen if certain conditions are satisfied.

Reduce regulatory barriers to entry in goods and service

markets as well as in the professions. The special zones

for structural reform could be an important step forward

to lower entry barriers.

iv) Update the commercial code

and facilitate restructuring

The committee-based governance system was adopted

by 36 listed companies immediately after its introduction

in the new commercial code in April 2003. The

government plans to draft a new code for corporate

entities by 2005, which will equalise the obligations of

corporate board members of firms with committee-based

governance systems and those with traditional systems

using auditors. To facilitate corporate realignment,

the new law will also allow the acquiring firm to pay

compensation in the form of cash rather than their shares.

The influence of outsiders should be increased further,

not simply by having more outside directors, but also

by enforcing shareholders’ rights.

Joint stock corporations are allowed to engage in

agriculture by leasing agricultural land in the approved

special zones. A provisional safeguard measure

was introduced on beef in August 2003.

The entry of corporations into agriculture should

be allowed nation-wide.

IV. Liberalise the agricultural sector

i) Promote competition and

encourage large-scale operation


© OECD 2004

The recent emphasis of policies to reduce air pollution

has been to further cut emissions from vehicular

sources. A stricter limit on the sulphur content

of diesel fuel will be introduced in 2005.

The use of road pricing, which is under consideration

by the government, would reduce congestion

as faster traffic flow reduces pollution.

Multi-year budgeting is planned to be introduced in

some pilot projects in the FY 2004 budget. The Mediumterm Fiscal and Economic Perspective has been revised.

The introduction of multi-year budgeting is a step forward.

The Perspective should spell out specific policy

requirements to guide current and future policy decisions.

VI. Boost public sector efficiency

i) Introduce multi-year budgeting

and a medium-term fiscal plan

OECD Economic Surveys: Japan

V. Use market-based instruments

to improve environmental


Reduce protection of agricultural sector to benefit

Japanese consumers, facilitate Japan’s inclusion in

regional trade agreements and to boost trade, which

will help a number of developing countries.

Based on previous and current Surveys1

Recommendations in 2002 Survey

Action taken since the 2002 Survey

This Survey’s assessment/recommendations

ii) Reduce importance

of earmarked funds

No progress.

Reduce reliance on earmarked revenues.

iii) Increase use of vouchers

and user charges

No progress.

Use more vouchers in job training and vocational


iv) Promote greater use

of cost-benefit analysis

Ex ante cost-benefit analysis has been required

for budget requests. Government corporations must

provide estimates of future operational costs

and financial statements.

Ex ante cost-benefit analysis should be based on more

realistic assumptions to prevent inefficient infrastructure

construction. The estimates of future costs should

be used in making policy decisions.

v) Improve the bidding system,

especially at the local level

A law which prevents the involvement of government

officials in bid-rigging has passed the Diet.

Clear, transparent and non-discriminatory procurement

rules should apply to all levels of government. Expand the

FTC’s responsibilities to include enforcing compliance with

competitive tendering requirements and granting it power

to declare non-conforming contracts to be null and void.

Discussions concerning the pension reform planned

in 2004 are continuing.

Lower the average level of annual pensions further and

earlier than currently programmed, while avoiding sharp

increases in contribution rates. Pension and employment

income should be taxed in the same fashion.

Further structural reforms to enhance growth

© OECD 2004

Table 24. Recommendations for structural reform and assessment of progress (cont.)

VII. Reform the pension system

i) Overhaul the public component to

put it on a sustainable basis

ii) Ensure the corporate pension system The government is considering a measure to make

is adequately funded

defined benefit pensions portable.

VIII. Reform the health care system

i) Health insurance funds should be

integrated to form a larger unit

ii) The payer role of health insurance

funds should be strengthened

The integration of insurance funds is a welcome step.

Consider reducing the scope of insurance for the elderly

and supporting poor elderly in a more efficient way.

The governance mechanisms of health insurance funds

should be strengthened to make management

accountable for its performance.


The government proposes a plan to integrate health

insurance funds and to form a unit in each prefecture. It

also proposes several options for changing the method

of supporting the elderly insurance scheme.

The service of reviewing bills submitted by doctors,

which was monopolised by a public corporation, has

been opened to private agents. An increasing number

of the bills are submitted in electronic form.

Increase the portability of corporate pensions. The

solvency of each employee pension fund, using market

interest rates to value liabilities, should be examined by

the pension regulator. Adequate information on solvency

should be sent to all fund members.


Table 24. Recommendations for structural reform and assessment of progress (cont.)

Based on previous and current Surveys1

Recommendations in 2002 Survey

Action taken since the 2002 Survey

This Survey’s assessment/recommendations

iii) Payment system needs to move

further away from fee for service

Inclusive payment type system has been introduced

in 82 hospitals with specific functions for hospitalised

patients whose illness and injuries correspond

to the approved 1 860 diagnostic related groups.

The government plans to revise the official fee

schedule to reflect the cost of hospitalisation

and advanced medical techniques.

Move further towards inclusive payments of various kinds.

iv) Regulatory reform of health

service provision is necessary

Joint-stock corporations have been allowed to run

hospitals in the approved special zones, though their

scope is limited to services not covered by national

health insurance. A public institute for hospital evaluation

is aiming at assessing 2000 hospitals by FY 2004,

with results to be publicly available on its website.

Entry restrictions should be further eased to promote

the restructuring of supply. Third-party evaluation

of hospitals should be made compulsory.

v) Balance-billing restriction should

be eased with prudence.

No progress.

A gradual expansion of the list of allowable services

should be envisaged in tandem with the formation of a

consensus on the minimum package of socially-financed

services, advances in the practice of informed consent

and the development of private health insurance.

i) Allow temporary employment

agencies to play a larger role

The ban on having workers from temporary

employment agencies (dispatched workers)

in manufacturing plants has been lifted. Maximum

contract term for dispatched workers has been

extended to three years except for those

in manufacturing plants.

Liberalise the use of dispatched workers in the remaining

areas, notably health care, construction and ports.

ii) Make corporate pensions portable

See the reform in corporate pension.

Reform is important to promote labour mobility.

iii) Permit private job-placement firms

to play a more important role

Government approval is no longer been required to

establish certain categories of private job-placement

agencies. The government is considering a measure to

lower the existing income threshold for job seekers,

who can be charged by such agencies.

Further relax restrictions on private job-placement

agencies and use more private agencies. The exclusion

of port and construction workers from their services

is not justified.

IX. Increase the flexibility

of employment and improve

active labour market policies

OECD Economic Surveys: Japan

© OECD 2004

Based on previous and current Surveys1

Recommendations in 2002 Survey

Action taken since the 2002 Survey

This Survey’s assessment/recommendations

iv) Evaluate the effectiveness of all

active labour market policies

Eligibility conditions for employment subsidies have

been eased by accepting applicants not only from

public job-placement services but also from private


Need to evaluate the efficiency and effectiveness

of the projects using public employment and the

improvement in the employability due to training

programmes. Subsidies for employment need to be

reviewed for displacement effects and dead-weight costs.

Ex post performance evaluation is poor and needs

to be improved.


Conditions for dismissal, which were indicated only

by case law, have been spelled out in law.

This increases transparency, though employment

protection remains strong and should be reduced.


The period of fixed-term contract has been extended

from one to three years.

This is a welcome step for allowing flexible working


X. Increase labour force skills

i) Improve the quality and availability Due to budget constraints, the subsidy for training

of training outside of firms

to individuals contributing to the Employment

Insurance System has been cut by limiting the amount

and the period of the benefit.

Consider reducing employment subsidies in order to

support training, particularly that outside of firms. Making

the loan programme for training available to a larger

proportion of the labour force should be considered.

ii) Improve the education system

More funds are being allocated to universities that

have been selected as a Center of Excellence (COE)

to enhance competition in research in higher education.

Monitor how this is implemented and whether selection

of CEOs is made at arm’s length.


The entry of joint-stock corporations and NPOs into

formal education, together with eased requirements for

schools to own land, has been allowed in the approved

special structural reform zones.

Extend such deregulations nation-wide.

Further structural reforms to enhance growth

© OECD 2004

Table 24. Recommendations for structural reform and assessment of progress (cont.)

1. Recommendations related to competition policy and network industries are reported in Table 23.

Source: OECD.



OECD Economic Surveys: Japan

based on age, a lack of information about jobs and the non-portability of corporate

pensions have tended to reduce labour mobility. The payment of wages based on

age, rather than performance, also discourages the labour force participation of

older workers once they reach the mandatory retirement age of 60. In addition,

certain aspects of labour market policies contribute to the problems cited above.

In particular, strict employment protection for regular workers tends to limit labour

flexibility, forcing downsizing firms to curtail recruitment, with a negative impact

on younger persons. The need for new employees is increasingly met by temporary

workers, whose share of the labour force is increasing despite the limits on fixedterm contracts and the use of workers from temporary employment agencies

(dispatched workers). In addition, regulations limiting the operations of

private-sector job placement agencies have a negative effect on mobility.

Enhancing labour-market flexibility

The existence of labour markets external to firms helps to enhance

flexibility. However, such markets appear underdeveloped in Japan, perhaps as a

result of the traditional seniority-based wage system, which tends to discourage

workers from changing firms. Indeed, a male employee with thirty years of tenure

would lose nearly of a third of his income if he were to move to a different

company. There appear to have been a few changes during the past two decades

in the age-earnings profile in Japan (Figure 42), which nonetheless remains relatively steep compared to some other OECD countries.125 The main changes are

that the peak wage level occurs five years later – in the 50 to 54-age category – and

the fall in wages for older workers is somewhat steeper.

However, Japan’s difficult economic conditions have put downward

pressure on real wages, which have declined in five of the last six years. Achieving

falling real wages in the context of deflation requires cutting nominal wages, which

labour unions have accepted in order to limit reductions in employment.

Until 2002, this was accomplished primarily through cuts in bonus payments,

keeping the annual wage hikes based on years of service off the bargaining table.

However, this element of employee compensation, which forms the basis of the

seniority-based wage system, will become subject to negotiations in future wage

rounds. In sum, the need to reduce nominal wages is putting the seniority-based

wage system under increasing pressure, which could accelerate the shift to more

performance-based wage systems. Such an approach, according to some observers,

is necessary to unleash the hidden talents of Japanese workers. However, a performance-based system requires that workers have clearly defined tasks and that

there be an effective evaluation system, thus requiring a major change in management practices. There is evidence that firms that have adopted performancebased pay have wider wage dispersion within age groups and a higher separation

rate for young workers (Rebick, 2001). This suggests that linking pay more closely

© OECD 2004

Further structural reforms to enhance growth

Figure 42.


The evolution of the age-earnings profile

20 to 24-age group = 100






































over 65


Source: Ministry of Health, Labour and Welfare.

to performance tends to increase labour market turnover. However, as noted

above, external labour markets are weak in Japan, which may tend to make performance-based pay less attractive. Consequently, the use of performance-based

pay is likely to develop in tandem with external labour markets.

Another factor contributing to low labour market flexibility is the high

level of employment protection for regular workers, which was ranked as the

seventh strictest in the OECD area. While the law was similar to that in the United

States – allowing employment at will and firing without cause – case law from the

judicial system established restrictions on dismissing workers for economic

reasons.126 As a result, firms had no way of knowing ex ante if efforts to rationalise

their labour force would be accepted by judges, who were generally sympathetic to

workers. To establish more transparency, the Ministry of Health, Labour and Welfare,

in response to a request from the Regulatory Reform Committee, has reformed the

Labour Standards Law to establish clear and general rules governing dismissals for

economic or other reasons. Although the criteria are essentially the same as those

established by court cases, the enhanced transparency should help firms and also

facilitate any changes in employment protection, which remains restrictive.

Restrictions imposed on the use of temporary workers are another factor

that tends to limit labour market flexibility. Until recently, only indefinite contracts

© OECD 2004


OECD Economic Surveys: Japan

or fixed-term contracts of less than one year have been allowed. The maximum

length has now been extended to three years and five years in the case of workers

over the age of 60. This change also applies to dispatched workers. Moreover, such

workers have been allowed to work on one-year contracts in manufacturing plants,

although no decision has been reached regarding the other sectors where they

remain prohibited, notably health care, construction and ports.

Since labour market flexibility is fostered by information, job-placement

agencies have an important role to play. The controls on private agencies have

been eased only gradually due to concerns about equity (see 2002 Survey). The

past year has seen a few more marginal changes, such as allowing entry to specified

non-profit agencies on the basis of notification and granting approval for other

non-profit and fee-charging firms in one step rather than for each individual office.

The proposal by the Council for Regulatory Reform to allow the outsourcing of

public employment services to private-sector firms should be implemented. The

need for better placement services is illustrated by the fact that the rise in the job

offer/job seeker ratio from 0.5 to 0.6 in 2002 was not followed by a decline in

unemployment. The problem of mismatch may also suggest the need for better

training to develop general human capital that is transferable between firms.

Indeed, global competition and the development of a more information-based

economy is likely to boost demand for specialised skills. In May 2003, the scheme

that allowed participants in the Employment Insurance System to draw up to

300 000 yen to cover 80 per cent of training costs was scaled back to 200 000 to

cover 40 per cent and the number of eligible courses was reduced. The downsizing

reflects the fact that the high rate of unemployment has reduced the available

resources for training. Unfortunately, this programme continues to exclude people

outside the Employment Insurance System, such as new graduates. Rather than a

subsidy limited to a subset of the labour force, it would be better to make loans

available to finance training for a broader range of people. Moreover, the longterm training necessary to obtain specialised skills would be better supported by

a loan programme than by the relatively small subsidy now offered.

These factors suggest devoting greater resources for training, which could

be financed by reducing subsidies for employment. Indeed, Japan spends more

than twice as much on subsidies as on training. Approximately 125 000 persons

were included in such schemes, a figure far lower than envisioned (Table 25).

However, low participation may be desirable, given that the dead-weight costs

associated with wage subsidies tend to be high, reaching 90 per cent in some

other OECD countries (Martin, 2000). However, no assessment of these schemes

has been conducted in Japan. It is essential to determine their effectiveness,

given the growing resources devoted to wage subsidies.

© OECD 2004

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