Japan : 2000-2001.

159 Pages·2001·0.805 MB·English

by  OECD

Country Reviews
OECD
Economic Surveys
JAPAN
ECONOMICS
November 2001
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TABLE OF CONTENTS
ASSESSMENT AND RECOMMENDATIONS........................................................................................7
I. RECENT DEVELOPMENT: FROM A MODEST RECOVERY TO CONTRACTION.......................18
Recent economic trends and the forces at work....................................................................................20
Background of the underlying weakness – a dual economy with flagging productivity growth..............37
Short term outlook...............................................................................................................................40
II. TOWARDS A NEW OVERALL POLICY FRAMEWORK...............................................................43
The evolving policy framework...........................................................................................................43
Dealing with non-performing assets and financial sector weakness.......................................................51
The fiscal system: towards consolidation and reform............................................................................58
Monetary policy: dealing with continuing deflation and associated risks..............................................75
III. STRUCTURAL REFORM TO PROMOTE GROWTH.....................................................................81
Improving the framework for private sector activity.............................................................................87
Promoting competition and opening entry..........................................................................................107
Assessment of planned and current structural reforms........................................................................116
IV. HEALTHCARE REFORM.............................................................................................................118
Salient features of the system.............................................................................................................118
The evolving system: recent and on-going reforms.............................................................................122
Shaping a future reform.....................................................................................................................125
Conclusion........................................................................................................................................129
NOTES.................................................................................................................................................130
BIBLIOGRAPHY.................................................................................................................................140
ANNEX I. ASSESSING THE LEVEL OF NON-PERFORMING AND BAD LOANS IN THE BANKING
SECTOR...............................................................................................................................................145
The micro approach...........................................................................................................................145
The macroeconomic approach of market analysts...............................................................................151
NOTES.................................................................................................................................................152
ANNEX II. BUDGET ASSUMPTIONS AND SOME ALTERNATIVE SCENARIOS..........................153
ANNEX III. CHRONOLOGY OF MAIN ECONOMIC EVENTS........................................................156
Boxes
Box 1. The fund to purchase stocks from banks....................................................................................57
Box 2. Reform of corporate pension funds...........................................................................................97
Box 3. Why land is under-utilised in urban areas: an example of inefficient regulation.......................102
Box 4. International experience as a guide to further liberalisation of the electricity sector.................113
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Tables
1. Recent labour market indicators
2. Some structural labour market indicators
3. The rate of saving
4. The current account and external trade
5. Industrial structure and productivity
6. Impact of regulatory reform on productivity in the service sector
7. Short term outlook
8. Fiscal packages since 1992
9. The government’s recovery programme
10. Loans and discounts by interest rate
11. Profitability of the Japanese commercial banking sector
12. Budgets of central and local government
13. General government spending
14. Budgets for public works
15. Mid-term perspective of central government’s budget
16. General government deficit and debt
17. Necessary fiscal correction to achieve a zero primary balance by 2010
18. Past recommendations with respect to public expenditure and tax reform
19. Proposed social security reforms
20. Tax distribution to local governments and the demand for spending
21. Share of loans provided by public financial institutions
22. Recommendations for structural reform and assessment of progress
23. Proposed regulatory reform measures in the service sector and the labour market
24. Implementation of the government’s 1999 emergency package of employment measures
25. Government measures to revitalise the securities market
26. Share of risk assets in total assets of households and their volatility
27. Conditions for IPOs
28. Size of second hand house market
29. Policy measures to revitalise urban areas
30. Expected job creation potential
31. Estimates of the volume of health care, 1998
32. Health expenditure share by type of service, 1998
33. Summary of recommendations concerning the healthcare system
Boxes
Table Box 3. Actual and official floor area ratio in Tokyo
Annexes
Table A1. Asset and borrower classification standard for self-assessment
Table A2. Loan classification The FSA simulation of bad debt reduction
Table A.3. Bad loan disposals by the major banks
Table A4. Budget Scenarios
Table A5. Government budget balance for FY 2001
Table A6. Government budget balance for FY 2002
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Figures
1. Recent economic indicators
2. Industrial production and ICT related products
3. Machinery orders and non-residential investment
4. Debt-turn over ratio
5. Consumption and wages
6. The increasing integration of Japan in the world economy
7. Inflation indicators
8. The nominal effective exchange rate of the yen
9. Monetary conditions index: the impact of relative prices
10. Tax revenues of central government
11. Prefectoral dependence on public investment
12. Monetary aggregates
13. Yield curves
14. The nominal exchange rate
15. Stockholding by sectors
16. Number of IPOs and amount of funds raised from markets
17. Land Prices in Tokyo
18. Urban Land Price Index
19. Difference in rent between fixed-term contracts and unfixed term contracts
20. Health expenditure and GDP per capita, 1998
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BASIC STATISTICS OF JAPAN
THE LAND
Area (1 000 sq.km), 1995 377.8 Major cities, October 2000 estimate
Cultivated agricultural land (1 000 sq.km), 1995 51.3 (10 000 inhabitants):
Forest (1 000 sq.km) 1994 251.4 Tokyo (23 wards) 813
Densely inhabited districts1 (1 000 sq.km), 1995 12.3 Yokohama 343
Osaka 260
Nagoya 217
Sapporo 182
Kobe 149
Kyoto 147
THE PEOPLE
Population, October 2000 estimate (1 000) 126 990 Labour force in per cent of total population,
Number of persons per sq. km in 2000 336 October 2000 53.3
Percentage of population living in densely Percentage distribution of employed persons,
inhabited districts in 19951 64.7 2000:
Net annual rate of population increase Agriculture and forestry 4.6
(1995-2000) 0.2 Manufacturing 20.5
Service 26.7
Other 48.2
PRODUCTION
Gross domestic product in 2000 (billion yen) 511 836 Growth of real gross fixed investment, 2000 0.6
Growth of real GDP, 2000 1.5 Net domestic product of agriculture, forestry
Gross fixed investment in 2000 (per cent of and fishery, at producer prices, in 1999
GDP 26.0 (billion yen) 5 730
Growth of industrial production, 2000 5.3
THE GOVERNMENT
Public consumption in 2000 (in per cent of GDP 16.6 House of Re- House of
Current public revenue in 1999 (in per cent of presentatives Councillors
GDP) 28.9 Composition of Parliament,
Government employees in per cent of total November 2001:
employment, 2000 8.5 Liberal Democratic Party 241 116
Outstanding long-term national bonds in per Democratic Party 126 60
cent of GDP (FY 2000) 71.4 Peace and Reform (Komei) 31 24
Liberal Party 22 8
Communist Party 20 30
Others 40 19
Total 480 247
Last elections June 2000 July 2001
FOREIGN TRADE AND PAYMENTS
(2000, billion yen)
Commodity exports (fob) 49 526 Exports Imports
Commodity imports (fob) 36 962 Percentage distribution
Services -5 134 OECD countries 58.8 45.7
Investment income 6 206 of which: North America 32.7 22.0
Current balance 12 576 Far East 34.7 36.3
Exports of goods and services Other 6.5 18.0
in per cent of GDP 10.8 Total 100.0 100.0
Imports of goods and services Crude material and fuels
in per cent of GDP 9.4 (SITC 2, 3, 4) 1.0 27.4
Semi-manufactured goods (5, 6) 17.1 16.0
Machinery and transport
equipment (7) 68.8 27.9
Other (0, 1, 8 ,9) 13.1 28.7
Total 100.0 100.0
THE CURRENCY
Monetary unit: Yen Currency unit per US $, average of daily figures
Year 2000 107.8
October 2001 121.4
1. Areas whose population density exceeds 5 000 persons per sq.km.
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This Survey is published on the responsibility of the
Economic and Development Review Committee of the
OECD, which is charged with the examination of the
economic situation of Member countries.
The economic situation and policies of Japan were
reviewed by the Committee on 26 October 2001. The
draft report was then revised in the light of the
discussions and given final approval as the agreed report
of the whole Committee on 30 November 2001.
The Secretariat’s draft report was prepared for the
Committee by Grant Kirkpatrick and Hideyuki Ibaragi
under the supervision of Yutaka Imai.
The previous Survey of Japan was issued in
December 2000.
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ASSESSMENT AND RECOMMENDATIONS
The modest recovery 1. Japan is now clearly entering its third recession in recent times
through 2000 came to a symptomatic of the failure to adequately address structural problems in the
halt as the leading ICT past. Although a slowdown was expected this year, the deceleration has been
sector contracted sharply surprisingly rapid. Industrial production and exports declined at an
annualised rate of some 15 per cent and 9 per cent, respectively, during the
first half and the rapid contraction continued during the third quarter. Key to
these developments has been the ICT sector, which not only contributed to
the rapid growth of exports in 1999 and 2000 but also underpinned
investment as capacity rapidly expanded. The sector accounted for over a half
of the decline in industrial production in the first half of 2001 and, through
reduced investment demand, weakness has been transmitted to the capital
goods sector. Employment has also started to fall in some sectors and
overtime and bonuses have been cut. Although statistics are volatile, private
consumption appears to have remained stable, price deflation of around 1 per
cent serving to offset weak growth of nominal income. Despite falling
employment, the rate of unemployment has remained around 5 per cent since
many workers without jobs have left the labour market.
With fundamentals weak, 2. Going into the second half of this year, most indicators pointed to
activity is likely to remain significant weakness for some time to come even before the shock to the
depressed until well into world economy in September. Inventories, which have increased, will need to
next year adjust to the new circumstances and enterprises are also in the process of
lowering their expectations for profits. With balance sheets in general weak,
the revision is expected to lower markedly investment demand. Indeed,
machinery orders fell by an annualised rate of 20 per cent in the third quarter.
High levels of unused capacity in the ICT sector points to a delay before
investment activity recovers even if the world economy picks up. Public
works and construction activity are also set to continue to weaken as,
inter alia, local governments respond to severe fiscal pressure. Adding to this
generally negative picture, consumer confidence plunged by the end of the
third quarter mainly due to concern about prospects for employment and
incomes as corporate restructuring picked up. On the other hand, lower land
prices are now starting to encourage both foreign investment and re-
development of city centres. Against this generally negative background,
GDP growth is projected to decline by ¾ per cent this year and by some 1 per
cent in 2002. Exports are projected to pick up in the second half of 2002 and
with the terms of trade favourable, growth should return to positive territory
in 2003. Nevertheless, with head winds strong, GDP growth should only
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amount to some ¾ per cent. The output gap is expected to widen and with a
number of weak enterprises remaining in operation, deflation is expected to
remain significant.
Downside risks are a 3. In the current economic environment, risks are skewed to the
major concern downside. The key risks are arising in the financial markets, which were in
any case subject to pressure before September. The reduced capacity and
desire to take risk on the part of both foreign and domestic investors could
lead to important changes in asset prices with a number of potential
consequences. In the current conditions, portfolio shifts that increased JGB
interest rates would weaken the banking system via capital losses on the
banks' significant holdings of bonds. Moreover, if stock prices remain at their
current low levels (around 10 000 for the Nikkei), or even decline further, a
number of banks may have to report heavy capital losses when they prepare
their balance sheets on the basis of mark-to-market in March which would
impact negatively on confidence. Significant risks are also associated with
policy implementation. A resolute clean-up of the banking sector will be
associated with short term macroeconomic costs but a hesitant approach risks
undermining confidence and deepening recessionary forces. Loss of
confidence about budget consolidation could also prolong recession through
a rise in long term bond rates with negative consequences for banks, the
budget and the economy. With this constellation of risks, deflation might
become more of a problem and the probability of a deflationary spiral, would
be non-negligible.
The change in the 4. The Bank of Japan (BOJ) has stated on a number of occasions that
operating framework for it stands ready to take further actions to prevent deflationary dangers from
monetary policy in March developing and to this end adopted a new policy framework in March that
was an appropriate improves its room for manoeuvre. The intermediate target for monetary
response to the risks of policy is no longer the overnight rate, which was in any case about zero, but
strengthening deflation… rather the level of current accounts of the banking system at the BOJ. To
redress an important critique of the zero interest rate period, which lasted
until August 2000, the bank has adopted an inflation “guideline”. The new
policy will remain in force until the core CPI inflation rate is either stable at
around zero or increasing year-on-year, a clearer commitment than the
previous one, “until the threat of deflation subsides”. Moreover, the BOJ has
also stated that it stands ready to increase outright purchase of JGBs if
necessary to achieve its intermediate target. The initial policy settings did not
represent much of a change in comparison with the period of zero interest
rates. Nevertheless, the change in policy was successful in stabilising
expectations that expansionary policy will remain in place for at least several
years and that more will be done if necessary. As a result, by mid-year the
yield curve had shifted downwards by about 50 basis points over its entire
range.
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… and has allowed the 5. The BOJ has used the new framework to ease its policy stance on
BOJ to respond to two occasions. A relaxation took place in August, when the target for current
increased financial risks accounts at the BOJ was raised by 1 trillion yen and monthly outright bond
purchases were increased to 600 billion yen. This was preceded by several
months of public statements to the effect that further easing would not bring
much relief. Unlike in March, the yield curve steepened. In response to
potential liquidity shortages in the aftermath of September 11 and with the
end of the financial reporting period for banks approaching, the BOJ raised
the current account balances of the banking system to above 6 trillion yen
and cut its discount rate from ¼ per cent to 0.1 per cent. Moreover, it restated
its commitment to provide more liquidity to the system when needed. As a
result, excess reserves reached a peak of some 12.5 trillion yen before the
BOJ started to mop up the balances in October in line with its policy to meet
the demand for liquidity.
Monetary policy can and 6. Monetary policy will remain constrained in the future by the
should be eased further absence of a credit channel and by the difficulty in setting appropriate
with potential operational targets and associated instruments. Bank lending is continuing to
consequences for the decline at a rate of around 1½ per cent after adjustment is made for loan
exchange rate, but this write-offs. However, with the economy weakening and a major programme
must be accompanied by a of structural reforms and fiscal consolidation expected to get underway, the
more ambitious clean-up BOJ can and must ease monetary policy further. In order for such an easing
of bad debts to be fully effective, measures to solve the bad debt problems of the banking
sector should be implemented promptly. These measures will eventually help
to restore the credit channel but disruption might be encountered in the
interim. At an operational level, easing will involve lifting the target for
current accounts at the BOJ from the 6 trillion yen at present. The adequacy
of the target will need to be assessed by the impact on financial flows (such
as the change in money supply) and on asset prices, in particular, the
exchange rate. Recent experience indicates that meeting a higher target will
not be easy to achieve so that the BOJ will need to increase its outright
purchases of JGBs, particularly medium-term maturities. The disadvantage of
this strategy, however, is that it could further drive up bond prices, making
the market vulnerable to subsequent instability, and the transmission effects
to the real economy could be limited. From this perspective, it would be
preferable to broaden the range of asset purchases by the BOJ to include
foreign assets, although the decision to purchase foreign assets to maintain
exchange rate stability is in the hands of the Ministry of Finance. The
challenge for policy will be to convey the message that future purchases are
related to further monetary easing rather than an exchange rate objective,
even though the latter is one of the few transmission channels left for
monetary policy. At the end of September the BOJ intervened in the foreign
exchange market on a number of occasions to weaken upward pressure on the
yen exchange rate but did not appear, for a while, to have sterilised the
associated rise in yen balances. This was a move in the right direction and it
will need to remain a policy instrument in the future.
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The government intends to 7. The new government of Prime Minister Koizumi has quite correctly
implement a wide-ranging put a top priority on structural reforms and budgetary discipline to revitalise
reform programme, the Japanese economy. Weak growth and new concerns about the soundness
breaking the past reliance of the banking system led the government to decide a new policy package in
on fiscal stimulus the middle of the year comprising three elements. First, bad debts of most
measures major banks will be written-off over the next two years, and new bad debts
over three years. Second, a start will be made on fiscal consolidation by
limiting new borrowing by the central government’s general account to
30 trillion yen in FY 2002, with the primary budget deficit of around 5 per
cent being brought into surplus over the medium term. Third, budgetary
efficiency is to be improved by the cabinet setting expenditure priorities, for
the first time in FY 2002, and by a reallocation of public expenditures from
low productivity projects, mainly in the rural areas, to high return ones, often
in the urban areas. Such projects should also open the way for further private
expenditure by establishing essential pre-conditions such as infrastructure:
this “crowding-in” differs quite markedly from the normal multiplier concept.
In addition, the programme now includes wide-ranging structural reforms,
some of which will be presented to the Diet this year for early
implementation, which is welcome. As part of the wider review of policy, the
government has accepted a Financial Sector Assessment Programme by the
IMF.
It is essential to ensure 8. The important break of the government with the 1990’s in
that the search for an eschewing further fiscal stimulus packages and in proceeding with structural
elusive consensus does not reform even with low growth has meant that a consensus has proved difficult
lead to policy inaction to find. One line of criticism finding expression in the Diet is that the
problem in Japan is essentially a matter of deficient demand to be resolved by
an aggressive monetary policy and by an inflation target. To this end there
have been some proposals to limit the independence of the BOJ. While such a
narrowly-based view is not widespread, there is a clear consensus that
monetary policy will need to support the programme. Others fear the ability
of the economy to absorb any shock and are opposed to fiscal consolidation
at this time; indeed, there have been calls to implement a large stimulus
package this fiscal year. For these critics, the proposed government
programme looks to be dangerously pro-cyclical. Finally, opinions differ
widely about how fast non-performing loans of the banking sector need to be
resolved. Some argue for a rapid resolution even with finance from the
budget while others, fearing a deflationary shock, wish to extend the
programme over time with a focus on restructuring and debt forgiveness. It is
crucial that this debate does not lead to either policy inaction or to partial and
ineffective reforms.
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