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Figure 43. Labour force participation rates

Figure 43. Labour force participation rates

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Further structural reforms to enhance growth


After age 60, workers must take significant pay cuts to remain employed and the

nature of work often changes. This implies that the job assignments and wages of

older workers prior to mandatory retirement do not match their abilities. It is

important that employment practices, including the wage system, better reflect

productivity to make better use of older workers. In addition, the sudden and

sharp fall in wages after mandatory retirement make unemployment benefits

– which provide 45 to 80 per cent of the final wage – an attractive option. However,

the reduction of the benefit period from 300 days to 180 days reduces the

incentive for taking this route to retirement. In addition to changing employment

practices and the wage system, reducing employment protection for regular

workers would encourage firms to boost their retirement age in line with the hike

in the eligibility age for public pensions from 60 to 65 years.

Under-employment of young adults

With the prolonged period of low economic growth, labour market

conditions for young adults aged 15 to 34 have deteriorated markedly over the

past decade. In addition to a higher level of unemployment, the number of

so-called “freeters”, defined as young adults engaging in temporary work, has

increased from 1.8 million to 4.2 million (21 per cent of the age cohort)

between 1990 and 2001. The increase in unemployed youth and the number of

freeters largely reflects intensified restructuring efforts by firms, which tend to

reduce new recruitment rather than dismiss existing workers, and to accelerate the

replacement of regular employees with temporary workers. With job opportunities

significantly reduced, a growing proportion of youth accept temporary jobs while

searching for good jobs. However, for young people who remain in temporary work

or unemployed for extended periods, access to primary job markets is restricted

because their human capital often diminishes in the absence of good working

experiences. The limited access to job training and the absence of a public loan

scheme for such training also exacerbates the problem. Consequently, the probability

of exit from unemployment for those unemployed for one month dropped from

32.1 per cent to 19.6 per cent between 1990 and 2001, while the exit rate for those

unemployed for more than two years increased from 5.7 per cent to 10.8 per cent. The

youth under-employment problem also raises equity concerns as they have limited

access to the social security system, including unemployment benefits and private

pension schemes. To address this issue, the government has adopted measures to

improve the transfer from school to work, to strengthen the role of the public employment service and to improve opportunities for training. Specifically, the government

provides subsidies to firms that hire youth as apprentices for trial periods, although

this has not been widely adopted by firms. Job counselling capacity at the public

employment service has been expanded, while enhancing co-ordination with training.

The government is also establishing advanced vocational training courses at colleges.

Such policies point in the right direction and should be developed further.

© OECD 2004


OECD Economic Surveys: Japan

Regulatory reform

The regulatory reform movement is driven by the Council for Regulatory

Reform (CRR), which was established in the Cabinet Office in 2001. It consists of

15 private-sector experts designated by the Prime Minister, who are organised

into 13 working groups. In case of disagreements, the members of the Council, as

well as the minister responsible for the Council, negotiate directly with the relevant ministries. The CRR’s “Action Plan for Deregulation” in February 2003 focused

largely on social welfare issues, such as health care, education and labour, as well

as agriculture (Table 26). The focus on so-called “social regulations” reflects

progress in reducing economic regulations, such as demand-supply balancing provisions controlling entry, and the fact that these social regulations can significantly

reduce business opportunities.

After negotiations with the relevant ministry, the original recommendations of the CRR were modified in many cases in the report of the CEFP. For example, the CRR’s proposal that the sale of high-demand general medications should

be allowed in some retail outlets in addition to pharmacies is to be left to the

judgement of the Ministry of Health, Labour and Welfare, which argues that this

poses a threat to public health. Other recommendations were delayed, such as

the proposal to allow joint nursery schools and kindergartens, which will not be

considered at present. In other areas, the outcome is uncertain. For example, the

rules governing the establishment of new tertiary educational institutions will

remain unchanged but will be applied more flexibly. Perhaps the most significant

development was the willingness of some ministries to allow reforms in “special

structural reform zones” (see below) while delaying any decision on nation-wide


The somewhat disappointing results reflect the difficulty that an advisory

institution consisting of private-sector experts like the CRR faces in persuading

powerful government ministries to change their policies. This suggests that the

CRR, following the end of its mandate in March 2004, should be succeeded by a

stronger institution with formal legal power drawn from a basic law on regulatory

reform. Moreover, the burden of proof should be on the ministries to explain why

a proposed reform should not be accepted. Finally, the institution responsible for

regulatory reform should have the power to screen newly proposed regulations.

Special structural reform zones

The realisation that regulatory reform measures in many sectors are not

being implemented as planned led to the decision to allow the establishment of

special zones as proposed by the CRR. The objective is to relax regulations in

specific regions in order to remove obstacles to growth. In contrast to the typical

pattern of relying on central government initiatives for reform, the special zones

depend on the initiatives of local governments and private firms, which are better

© OECD 2004

Further structural reforms to enhance growth


Table 26. Regulatory reform

Recommendations by Council for Regulatory Reform1

Decision by Council on Economic and Fiscal Policy2

I. Health care

Allow sales of certain drugs at general retail


Ministry of Health, Labour and Welfare will draw

up a list of products after safety checks

Allow entry of joint-stock companies into

hospital management

Results in special structural reform zones

will be reviewed

Allow entry of joint-stock companies into

the nursing home business

Results in special structural reform zones

will be reviewed

Allow hospitals offering treatment covered by

public health insurance to provide non-covered


Only “state of the art” treatment is allowed

along side covered treatment

II. Education

Allow entry of joint-stock companies into school


Government panel to review this issue

Allow the unification of nursery schools

and kindergartens

To be considered by FY 2006 as part of

a new system for child rearing

Liberalise rules on establishing new colleges

and universities

Issue to be dealt with in a flexible manner

under existing legal framework

III. Agriculture

Allow joint-stock companies to operate farms


Results in special structural reform zones

will be reviewed

Allow joint-stock companies to own farms

Restrictions on corporations in agriculture

to be relaxed

IV. Labour

Review the role of the public employment


Allow more outsourcing of job-placement services

to the private sector

Allow dispatched workers in the health care field

Such workers are allowed on condition

that hospitals pre-screen candidates

V. Other

Deregulate floor area ratio standards in high-rise


Issue to be dealt with in a flexible manner

under existing legal framework

1. These recommendations were initially announced in the Action Plan for Deregulation in February 2003.

2. Established by the new government in 2001. It is chaired by the prime minister and includes several senior

ministers. These guidelines for regulatory reform were included in the economic management programme for 2003

released in June.

Source: Cabinet Office.

placed to identify precisely the problems that limit growth.129 These zones allow

social experiments in limited geographical areas, thus establishing the principle

that regulations are allowed to vary between regions based on local characteristics.

This has the potential to promote the development of clusters of businesses

within zones. Although reducing regulations in special zones is a second-best

© OECD 2004

OECD Economic Surveys: Japan


approach relative to nation-wide reform, competition between regions should

ensure that successful reforms spread to other areas anxious to realise the same

benefits. Moreover, the central government will evaluate the results in special

zones and then decide whether they should be extended nation-wide. In sum, the

authorities hope that the special zones act as a trigger to accelerate regulatory

reform across Japan.

The creation of special zones was allowed beginning in April 2003, following the passage of legislation at the end of 2002. The process is initiated by local

authorities, who submit proposals to the Headquarters for Special Zones for Structural Reform, where they are examined by committees that include private-sector

experts. Proposals accepted by the Headquarters must then gain the approval of

the relevant ministry.130 It is encouraging that some ministries have shown a willingness to allow certain reforms in limited areas, even though they reject their

introduction on a nation-wide basis. The discussion with the relevant ministry is

open to the public, thus putting pressure on special interest groups that oppose

the creation of special zones. This process has also added transparency to the regulatory framework since it has been revealed that some of the requests from local

authorities were already permitted. Once a proposal is approved, other local

governments are allowed to adopt it as well, as long as they notify the authorities

and agree to accept responsibility for the results. Rejected proposals can be resubmitted to the government, thus initiating a consultative process. The creation of

special zones does not involve government subsidies or tax concessions.

A total of 117 special zones were approved in April and May, with an

additional 47 in August (Table 27). One of the most popular categories has been

the promotion of links between business and academia. A special zone in Sendai,

Table 27. Special zones for structural reform

Number of proposals accepted

First round

Proposals by topic

International transport

Business-academic links

Revitalisation of industry



Links between urban and rural areas



Social welfare




























Second round
























Headquarters for Special Zones for Structural Reform.

© OECD 2004

Further structural reforms to enhance growth


for example, allows private companies to use the facilities of national universities.

Some of the zones authorise new types of businesses, such as the production of

ethanol from cotton for use as automotive fuel. The success of the firm beginning

this activity will depend on how quickly this liberalisation is extended nationwide. Many of the proposals accepted thus far relate to social welfare, such as

allowing joint-stock companies to run hospitals and open schools in special zones.

Agricultural special zones, in which joint-stock companies have been

allowed to engage in farming on agricultural land leased from municipalities, are

also popular, with 16 created thus far.131 The Ministry of Agriculture, Forestry and

Fisheries allowed this proposal in the hope of improving the efficiency of the

agricultural sector and reducing the amount of idle farmland. According to one

survey, unused farmland increased by 50 per cent between 1995 and 2000, to

account for about 10 per cent of total arable land. A number of companies, including

food stores and restaurant chains, have already leased farmland in the zones,

although some have complained that the type of land that they want is not available

in the zones. The cancellation of contracts requires the approval of prefectural

governments. Farm groups predictably oppose this liberalisation and the ban on

allowing joint-stock companies to purchase agricultural land remains in force. Nevertheless, the government has announced that it would consider extending the right of

joint-stock companies to lease land throughout the country by the end of 2004,

demonstrating the potential for special zones to trigger nation-wide reform.

Openness to international competition

The Japanese economy is surprisingly closed even after taking into

account transportation costs and per capita income (Figure 33). This may reflect

the fact that, except for the Free Trade Agreement (FTA) with Singapore that went

into effect in November 2002, Japan has not been included in the surge of regional

trade agreements. The disadvantage for Japanese firms is illustrated by the case

of Mexico, an important trading country that has FTAs with 31 countries. As a

result, imports from the United States and Canada enter duty free, while duties on

EU goods will be eliminated in 2007. In contrast, Japanese products face a 16 per

cent average tariff, resulting in a significant negative effect on exports.132 While the

multilateral approach under the World Trade Organisation (WTO) remains the

priority, FTAs are an important secondary strategy to achieve liberalisation

beyond the levels possible under the WTO.

Building on the agreement reached with Singapore last year, the Prime

Minister has made FTAs an important strategy complementing multilateral trade

liberalisation under the WTO. The immediate objective is to conclude, in

substance, FTA negotiations with Mexico, which were launched in the fall of 2002.

In addition, Japan has been having discussions with Thailand, the Philippines,

Malaysia, Korea and Indonesia. Japan has also been working with ASEAN, which

© OECD 2004

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Figure 43. Labour force participation rates

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