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Annex II. Assessment of the government’s structural reform programmes

Annex II. Assessment of the government’s structural reform programmes

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OECD Economic Surveys: Japan



208



Effectiveness. This assesses to what degree reform measures are compatible with the

original policy goal. Since planned measures may change considerably during the process of

negotiation, implementation is not necessarily regarded as proof of successful reform. The

rating ranges from 0 for plans and legislation that are not compatible with original goals (all

reforms at a discussion stage are automatically rated zero) to the maximum 3 for those that

broadly meet original objectives.

To what extent has progress been made in each area of reform?

Deregulation

In the past few years, the government’s Council for Regulatory Reform (CRR) continued

to focus on promoting the entry of business into publicly regulated sectors, including

medical services, education, agriculture and employment services. However, the success in

these areas has been limited so far. The difficulty in opening up these markets on a nationwide basis, together with the aim of promoting devolution, led to the idea of establishing

“Special Zones for Structural Reform”, which allows local governments to ease specific regulations

in order to promote local business. As of August 2003, 164 plans for such zones, including

deregulation in public services, had already been approved. Another important focus of the

Council is deregulation in planning in urban areas, which has improved the efficiency of land

use in those areas. The overall initiative for promoting deregulation is currently led by the

CRR, which consists of representatives of business and academia supported by a

government secretariat. However, in the absence of strong political commitment, its power

has proven to be very weak, especially in dealing with politically sensitive areas. Another

drawback is that the scope of the CRR’s activities does not cover deregulation of network

industries. Instead, regulatory issues in these industries are discussed by their own

committees and the progress tends to be very slow, especially in energy.

Table A.4. Deregulation

Policy

design



Implementation Effectiveness



Average



Establish “special zones”



3



3



2



2.7



Allow entry into publicly regulated services



2



1



1



1.3



Ease planning and zoning in urban areas



3



3



3



3.0



Strengthen the framework for deregulation



1



2



1



1.3



2.3



2.3



1.8



2.1



Average



Financial-sector reform (non-performing loans, rehabilitation, securities markets)

The government is promoting the rehabilitation of the financial system in line with the

programme announced in October 2002 (see the postscript in the 2002 Economic Survey and

Chapter II). The government’s plan, which aims at halving the ratio of non-performing loans

to total loans by major banks by the end of FY 2004, calls for ensuring adequate provisioning

of non-performing loans, reinforcing banks’ capital base and strengthening the governance

of banks to improve their performance. Since last October, progress has been made in a

number of areas. To improve the assessment of loan quality, the Financial Services Agency

(FSA) has continued its special inspections of large borrowers, while major banks have



© OECD 2004



Annex II



209



introduced a new method based on discounted cash flow to ensure appropriate

provisioning. The assessment of the adequacy of capital has become somewhat tighter as

accounting firms now enforce rules concerning deferred tax assets more strictly. The FSA

decided to inject public funds into Resona in June 2003 and committed itself to improving

the governance at this bank by purchasing voting shares. However, a number of issues remain

unresolved. There is no explicit guideline for restricting the inclusion of deferred tax assets

in banks’ capital, leaving such judgments to accounting firms. No change is planned at

present for taxation on the deduction of provisions for doubtful loans and a loss carry-back.

With regard to the collection of non-performing loans, the measure to allow the Resolution

and Collection Corporation (RCC) to buy them at a market price has succeeded in increasing

its purchases substantially. The Industrial Revitalisation Corporation (IRC) has been

established to purchase loans classified as “requiring special attention” and to support their

rehabilitation, though it still remains at an early stage. Taxation on dividends and capital

gains from shares of listed companies has been consolidated, with lower tax rates to

encourage investment in shares. The reform of major public financial institutions and postal

saving has been effectively postponed, delaying a reduction in their large presence in

domestic financial markets.

Table A.5. Financial-sector reform

Policy

design



Implementation Effectiveness



Average



Ensure stricter assessment of loan

quality and adequate provisioning



2



2



2



2



Reinforce capital adequacy



1



1



1



1



Strengthen the governance of banks



2



2



1



1.7



Change tax system to promote

NPL resolution



2



0



0



0.7



Support rehabilitation of distressed debtors



2



2



1



1.7



Encourage the collection of NPLs



2



3



3



2.7

2.3



Change taxation related to investment

in equities



2



3



2



Consolidate public financial institutions



1



1



1



1



1.8



1.8



1.4



1.6



Average



Improving human capital and making the labour market more flexible

The government has been actively trying to introduce competition among universities

by allocating funds to better performing universities (Center of Excellence) and by

corporatising national universities, while allowing universities more flexibility in managing

courses. Universities are also encouraged to expand courses for vocational training.

Since 2001, the government has been advocating an indicative target of creating 5.3 million

jobs in the service sector, including publicly regulated services such as medical and

professional services. However, no visible progress has been achieved so far. On the other

hand, the flexibility of labour markets has been increased by easing restrictions on

temporary workers and fixed-term contracts, while the focus of training schemes is shifting

from firms to individuals. Explicit conditions for dismissal by firms have been legislated. The

scope of private job-placement services is also being expanded, though restrictions on



© OECD 2004



OECD Economic Surveys: Japan



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charges still remain tight. To alleviate the increase in unemployment among young people,

consultation, training and job-search functions at the public employment service is being

integrated, while the government is also promoting wider use of apprenticeships. However,

these measures remain at an early stage.

Table A.6. Human capital and the labour market

Policy

design



Implementation Effectiveness



Average



Introduce competition among universities



2



2



2



2.0



Encourage education for workers



2



2



2



2.0



Create 5.3 million jobs in service sector



2



1



1



1.3



Increase labour mobility



2



2



2



2.0



Reduce unemployment rate for youth



3



1



1



1.7



2.2



1.6



1.6



1.8



Average



Competition, openness and entrepreneurship

The government is now using Free Trade Agreements (FTAs) as an important instrument

to open up the market. An FTA with Singapore was signed at the beginning of 2002 and

negotiations to establish an FTA with Mexico began in November 2002. In addition,

preparatory discussions continue with Korea, Thailand, the Philippines, Malaysia, Indonesia

and ASEAN. However, one of the stumbling blocks is the agricultural sector, where political

pressure against liberalisation is strong. The government has also tried to promote inward

FDI by simplifying administrative procedures and by facilitating M&As. To encourage startups, the minimum requirement for capital has been tentatively reduced to 1 yen when

certain conditions are satisfied (permanently abolishing this requirement is under

consideration). Although the government’s reform programmes include commitments to

promote competition in network industries, notably energy and telecommunications, and in

publicly regulated services, the measures proposed are far from ambitious. Moreover,

progress has been very limited except for some changes in regulations for

telecommunication. The measures to strengthen the role of the Fair Trade Commission (FTC),

including an increase in staff and ensuring its independence from the line ministries, have

been implemented, though further measures are being considered.

Table A.7. Competition, openness and entrepreneurship

Policy

design



Implementation Effectiveness



Average



Promote FTAs and FDI



2



2



1



1.7



Ease barriers to start-ups



2



2



2



2



Promote competition in network industries

and other publicly regulated sectors



1



1



1



1



Strengthen the role of Fair Trade

Commission

Average



2



2



2



2



1.8



1.8



1.5



1.7



© OECD 2004



Annex II



211



Social security reform

As discussed in Chapter III, several common elements have emerged from on-going

official discussions concerning the pension reform that is planned in 2004. First, it aims to

introduce a mechanism to cap contributions at a certain proportion of income by adjusting

benefits in response to changes in demographic and economic trends. Second, it plans to

reduce distortions in work incentives for the elderly and women by removing the favourable

treatment of second earners and by reviewing benefits for elderly who are working. With

regard to health care reform, the government has already implemented some measures to

improve efficiency through standardising services, strengthening the role of insurers, and

disseminating information (see Box 3 for more details). As a next step, the government plans

to review the health insurance system and the official fee schedule over the next five years.

The objectives are to integrate health insurance funds to form a larger unit, raise the age

eligibility of insurance schemes for the elderly to above age 75 and change the official fee

schedule to reflect the costs of hospitalisation and advanced medical techniques. Although

specific measures are still being discussed, this is a step in the right direction. Finally, the

government is studying the introduction of individual social security accounts, which

integrate information about the flow of funds between individuals and social security funds.

This may produce budget savings by reducing the duplication of benefits.



Table A.8. Social security reform

Policy

design



Implementation Effectiveness



Average



Pension system reform



2



1



0



Limit contribution rate by adjusting benefits



2



2



2



1.0

2



Remove disincentives to work



2



0



0



0.7



Health care reform



2



1.0



0.7



1.2



Integrate insurers, limit the scale of elderly

insurance, and review fee schedule



2



1



0



1.0



Improve the efficiency of medical services



2



2



2



2



Introduce individual social security account



2



0



0



0.7



Average



2



1.0



0.7



1.2



Fiscal reform

The government plans to introduce some pilot projects in which programmes will be

required to aim at achieving certain identified targets rather than merely spending the

budget. Multi-year budget allocation is to be allowed for these pilot projects. The

government has revised its Medium-term Economic and Fiscal Perspective but, as discussed in

Chapter III, its effectiveness remains weak. The Council for Economic and Fiscal Policy

(CEFP) has been playing an important role in prioritising spending and changing budget

allocations. Earmarked taxes still remain, though some flexibility has been introduced.

Despite the announced measure for privatisation of government corporations, it may not

lead to substantial reduction of the scope of those corporations. See Box 3 for more details

about fiscal reform.



© OECD 2004



OECD Economic Surveys: Japan



212



Table A.9. Fiscal reform

Policy

design



Implementation Effectiveness



Average



Introduce pilot projects to encourage output

oriented implementation of the budget

and to allow multi-year budget allocation



3



1



1



1.7



Ensure fiscal sustainability by introducing

a medium-term consolidation plan



1



2



1



1.3



Improve the budget process by prioritising

budget programmes



2



2



2



2



Reduce public investment to the level

of the early 1990s



2



2



2



2



Reallocate earmarked road taxes



3



0



0



1



Privatise government special status

corporations



1



1



0



0.7



Average



2



1.3



1.0



1.4



Devolution of power from central to local governments

The government has announced a plan to reform subsidies to local governments (around

4 trillion yen) over the next several years, while shifting tax sources from the central to local

level. The allocation of general grants (Local Allocation Tax) to local governments will also be

reviewed, though specific measures have not been identified. Some financial incentives are

to be given to promote the merger of local governments. The introduction of the Special Zones

for Structural Reform is expected to give local governments more responsibility in managing

regulations.



Table A.10. Devolution

Policy

design



Implementation Effectiveness



Average



Review tax allocation, subsidies and general

grants



2



1



0



1.0



Promote mergers of local governments



2



2



1



1.7



Introduce special zones for more responsible

local governments



2



2



2



2.0



Average



2



1.7



1



1.5



© OECD 2004



Annex III



213



Annex III



Chronology of main economic events

2002

November

The Free Trade Agreement (FTA) with Singapore went into effect.

December

The government drafted a supplementary budget for FY 2002, which includes measures

for strengthening the social safety net and increasing public investment, while revising

downwards the estimate of tax revenue.

The government adopted the draft initial FY 2003 budget, which limited general

expenditure (i.e. total expenditure less debt servicing and transfers to local governments) to

the level in the previous year’s initial budget, while allowing 1.8 trillion yen of tax cuts.



2003

January

The government adopted the revised Structural Reform and Medium-term Economic and Fiscal

Perspective for FY 2003 to FY 2007, which outlines a scenario of fiscal consolidation.

The Diet passed the supplementary budget for FY 2002.

February

The Council for Regulatory Reform proposed an action plan to open up publicly

regulated markets such as health, education and agriculture.

March

The Diet passed the initial budget for FY 2003.

April

The Bank of Japan (BOJ) announced a plan to purchase from banks Asset Backed

Securities (ABS) and Asset Backed Commercial Papers (ABCP), which are mainly backed by

receivables held by, or loans to, small and medium-seized enterprises. The plan went into

effect in July.



© OECD 2004



OECD Economic Surveys: Japan



214



The postal saving system was transformed into an independent corporation.

The Industrial Revitalisation Corporation (IRC) was established to support corporate

restructuring and to accelerate the disposal of non-performing loans.

The BOJ raised the target for the outstanding balance of current accounts at the BOJ by

5 trillion yen to the range of 22 to 27 trillion yen.

The Financial Services Agency announced the results of the second special inspection

of troubled borrowers of the major banks. It showed that the gap between the FSA and the

banks’ own self-assessment had narrowed compared to the first special inspection.

The Headquarters for Special Zones for Structural Reform approved the first 57 proposals

for special economic zones in response to requests from local governments, followed by

another 60 in May.

May

The BOJ raised the target for the outstanding balance of current accounts at the BOJ to

the range of 27 to 30 trillion yen.

Resona, the fifth largest financial group, requested an injection of public funds from the

government.

June

The government adopted the Basic Policy for Economic and Fiscal Policy Management and

Structural Reform 2003, to update and revise the structural reform plan adopted in

June 2001 and June 2002.

July

The Diet passed a law which allows life insurers to cut promised returns on existing

contracts before the companies fail.

August

The Ministry of Finance announced a guideline for FY 2004 budget requests, maintaining

almost the same framework as in the FY 2003 budget.

The Headquarters of the Special Zones for Structural Reform approved another

47 proposals for special economic zones, bringing the total to 164.

The IRC announced the first three companies that it will help to restructure.

September

Following his re-election as president of the Liberal Democratic Party, Prime Minister

Koizumi restruffled the Cabinet, including the Minister of Finance and the Minister of

Economy, Trade and Industry.

October

The BOJ raised the upper end of its target range for the outstanding balance of current

accounts at the BOJ from 30 to 32 trillion yen.



© OECD 2004



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