Joint Report

by the Social and Economic Outlook Committee

and the Economic Entity Role Committee

--The Challenge of Structural Reform

and Purusing Dynamism in Society and Economy --

June 1998

Economic Council

Table of Contents

Foreword

Chapter 1: Pursuing Structural Reform and the Route toward Return to Growth Path 1. Responses to the Pain of Structural Reform
2. Fiscal Structural Reform and the Current Economic Slump
3. Reforming the Financial System
4. The Disposal of Bad Debt as an Urgent Problem
5. A Scenario for Return to Growth Path
Chapter 2: The Macroeconomic Outlook after Structural Reform 1. Will the Economic Growth Rate and Standard of Living Fall?
2. Can the Japanese Economy Survive the Declining an Aging Society with Fewer Children?
3. Do Global Environmental Problems Restrict Growth?
4. Will the Unemployment Rate Rise and Anxiety about Our Lives Increase?
5. Can the Japanese Economy Withstand the Tide of Globalization?
6. Will Japan Face a Current Account Deficit and Lose Its Prosperity?
Chapter 3: The Shape of the New Social and Economic System 1. The Characteristics of the Existing System
-- The Need for Reform and Its Direction --
2. Basic Principles of the New Social and Economic System
3. The Actual Shape of the New Social and Economic System (1) Corporate System
(2) Public System
(3) Social System
(4) NPOs: As New Entities on Society and Economy Conclusion

Reference Materials

Foreword

Since the beginning of the 1990s, the Japanese economy has remained generally sluggish with lacking of outlook in the future, mainly because of the after-effects of the bursting of the bubble. In 1995 and 1996, fiscal stimulation measures revived the growth rate but in 1997 such factors as the bankruptcies of several Japanese financial institutions and the descent of some Asian countries into financial and economic turmoil, following a substantial depreciation of their currencies, combined to knock the growth rate back to 0.7% on the previous year.

Anxiety about the future of the economy and unclearness over the future shape of Japanese social and economic system chilled consumer attitude and business investment. These factors are also giving overseas countries a cause for concern. To move to autonomous recovery, the Japanese economy still needs to overcome many problems.

Employment situation has recently been severer. Accompanying economic slump and structural adjustment, unemployment is increasing in many industries. In particular, the increase of unemployment is a unique character, which is the factor resulting in people's anxiety.

Additionally, today's steady decrease in the number of children and increase in the number of elderly people, accompanied by the burden of larger pension and other costs, are casting unclearness over people's lives in the future. This can be considered to be one factor that will cause many people to adopt self-protective and cautious economic activities including chilling consumer attitude and emphasizing saving.

Since July of last year the Economic Council's Social and Economic Outlook Committee and the Economic Entity Role Committee have deliberated in an effort to come up with clear proposals on how the nation can break out of the current economic slump and what kind of society and economy can be expected as a result of the structural reforms being advanced today. The Social and Economic Outlook Committee explored scenarios for growth recovery and examined the likely shape of Japanese future macro-economy, while the Economic Entity Role Committee focused on Japanese future economic system and the role in it that the each of economic entities should play. This report, based on the results of the deliberations of both Committees, offers an overall look at the future shape of Japan's society and economy.

Chapter 1: Pursuing Structural Reform and the Route toward Return to Growth Path

It is generally accepted that the removal of impediments to economic activity and creation of a new social and economic structure will produce major positive effects in the medium and long term.

However, such structural reform will be accompanied by pain in the short term, and there is a strong sense of unease that to advance the reforms amid the current economic stagnation could exacerbate the situation and squander the chance to return to growth path.

This chapter examines the relationship between the current economic situation and structural reform. We also suggest a scenario for recovery toward growth path, in addition to a mid-term perspective of the disposal of bad debts in the financial services sector that are a major impediment to the recovery.

1. Responses to the Pain of Structural Reform

The pain of structural reform is caused by two factors: the destruction of the existing structure and the inability to switch to the new structure.

a)The pain in the process of destroying the old structure includes conflicts of interests relating to vested interests, which emerge in the process of deregulation or modification of the old system, and the deflationary effects of the fiscal contraction associated with the destruction of the system. Generally, there is no way of avoiding this pain other than not proceeding with reform.

Because structural reform aims to basically restructure Japan's society and economy into the early 21st century, the reforms must advance steadily, In addition, to maintain the fundamentals of the economy throughout the reform process, reform policy must remain flexible and the reforms must follow an optimal time schedule. The consensus of the people for all this must also be clearly reaffirmed.

b) The pain of being unable to switch to the new structure results when economic activity must proceed in an environment of system mismatch because of delays in constructing the overall new system. For example, if labor mobility is not smoothly functioned under employment mismatches accompanying the reform of the industrial structure, unemployment may not be absorbed for a short period. In such a case, speeding up the pace of the reforms is essential to relieve the pain.

Currently, economic entities have lost their momentum for change, and the overall pace of the reforms has slowed. To create hope in the future, structural reform must be advanced vigorously, consumer attitude and declining reliance among private companies, must be restored, and overseas anxieties about the Japanese economy must be extinguished.

2. Fiscal Structural Reform and the Current Economic Slump

a) The Fiscal Structural Reform Act passed in November 1997 set fiscal consolidation goals. They Includes quantitative reduction targets for each principal costing in an effort to reform the appropriations structure, the abandonment of special deficit-financing bond and lowering the fiscal deficit to not more than 3% of GDP.
However, while Japan was still struggling with the structural problems of the after-effects of the bursting of the economic bubble, the economy was simultaneously hit in 1997 by jitters about Japan's financial system and the effects of the economic turmoil in Asia. These influences exceeded the existing predictions and made worse the economic prospects of households and companies, seriously affecting the actual economy. As a result, the economy has deteriorated further in 1998.

b) Under these existing severe conditions, while fiscal structural reform continued, necessary revisions were made to the Fiscal Structural Reform Act. These revisions included making the framework for issuing special deficit-financing bonds more flexible to allow the creation of a mechanism for devising appropriate fiscal measures as so-called emergency escape routes in response to the individual situations. A fiscal 1998 supplementary budget was also passed in June to support the necessary additional expenses for the implementation of the Comprehensive Economic Measures in April this year. These included improvement of social overhead capital (a total of projects worth 7.7 trillion yen) and special reductions in income tax and residential tax amounting to 4 trillion yen. Such stimulatory measures on the fiscal side were the necessary ones to respond the recent severe situation and trace the recovery path of the Japanese economy.

c) Fiscal structural reform aims at establishing more efficient and reliable government into the future and realizing the secured and affluent welfare society and the sound and vital economy, which are still highly necessary and urgent tasks. In the Conference on Fiscal Structural Reform held in April this year, the limit for reaching fiscal deficit reduction targets was deferred from the initial target of fiscal 2003, to fiscal 2005. However, fiscal structural reform must be steadily advanced according to the target achievement schedule.

3. Reforming the Financial System

a) Transactions in financial markets are built on trust. The advance of Japan's financial system reform is expected to restore worldwide trust in Japan's financial markets. In that sense, the reforms themselves contribute to the stability of the financial system. In addition, dispelling uncertainty in the financial system by rigorous information disclosure and strengthening trust both at home and abroad are important prerequisite of reform. It should be kept in mind that introducing market principles strongly into Japan's finance markets will weed out noncompetitive financial institutions in the process of the introduction.

b) As the financial system links to various markets and systems throughout the economy, reform of the financial system is expected to trigger off the fundamental reform of Japan's whole society and economy. Therefore, the financial system should be harmonized with global standards sooner and to a higher order than even the labor, goods, and service markets.

c) The government must devise powerful measures, coordinated with the reforms, to prevent systemic risk and other negative reactions occurring now and in the future.

4. The Disposal of Bad Debt as an Urgent Problem

(Financial Institutions' Bad Debt Problem)
a) Japan's financial institutions, burdened by huge bad debts resulting from prolonged depression in asset markets since the bursting of the bubble economy, faced a series of collapses in 1997. Subsequently, with the partial revision of the Deposit Insurance Law in February of this year, the Law Concerning Emergency Measures to Stabilizing the Financial Functions was passed. As a result, a reserve of 30 trillion yen of public funds was put aside to support and stabilize the financial system. Although this succeeded in stabilizing the system, uncertainty in the minds of the public has not been completely dispelled and is adversely affecting the economy, for example by cooling consumer attitude.

b) In the United States, where market competition is intense, financial institutions have ceaselessly sought to improve their competitiveness through such means as large-scale restructuring, including the merger of leading financial institutions, even though the U.S. economy has been strong in recent years. Japan's financial institutions, too, face the urgent tasks of vigorously advancing far-reaching restructuring, enhancing their earning capacity by bolstering their vitality through self-reform, and winning back trust in domestic and overseas financial markets.

c) The key to stabilizing Japan's financial system lies in disposing of the bad debts that are severely fettering its financial institutions. At the beginning of the 1990s, In the United States the bad debts were quickly redeemed and by 1994 the problem was largely solved. In Japan, the ratio of bad debt had still not been sufficiently reduced by the end of fiscal 1996 and the reserve ratio of bad debt (the ratio of the reserves set aside for bad debt to the amount of bad debt) was only about 50%. Since bad-debt is still on the way to be disposed, this is depressing the profitability of Japan's financial institutions. Thereof, in fiscal 1997, the problem rose that, in addition to credit crunch on the ground of the anxiety for the economic prospect, balance sheet adjustment of banks was accelerated with a view to introducing the prompt corrective action (PCA) and loan attitude of banks and other financial institutions was shrunken. (However, the implementation of the PCA capital adequacy requirement for eligible banks applying domestic criteria was postponed one year, to fiscal 1999.)

d) For the period ended March 31, 1998, city banks, long-term credit banks, and trust banks belonging to the Federation of Bankers Associations of Japan (hereinafter referred to as "the main 19 banks") posted a total of 3.9 trillion yen in losses and redeemed 10.5 trillion yen of bad debt (total amounts of write-off of loans and net transfer to specific loan loss reserves, except trust account). As a result, the announced bad debts (loans to borrowers in legal bankruptcy, post due loans over 6 months, and interest reduction loans) of the main 19 banks stood at 13.8 trillion yen at March 31, 1998, a reduction of 0.9 trillion yen from 14.7 trillion yen recorded at March 31, 1997. With the addition of (newly disclosed) post due loans over 3 months, the bad debts held by the main 19 banks totaled 21.1 trillion yen. However, as long as no new bad debts occur and banks can rationalize operations by reducing costs, the reserves for bad debt can be quickly put aside in all.

e) However, the characteristics of Japan's bad debt problem of the 1990s are different from US bad debt problems. In Japan, unlike in the United States, new bad debts continued to arise over a long period because of prolonged economic sluggishness and prolonged falls in asset prices. Although banks had put aside large reserve for possible loan losses, this will influence that the disposal of the bad debt is still on the way. The possibility remains that more bad debts will arise in the future, depending on trends in the economy and asset prices. We can only say that certain goals have now been reached for the reserve for the remaining bad debt and cannot afford to be optimistic about developments in the future.

Table 1: Fiscal Institutions' Disposal of Bad Debts (Japan-US Comparison)

(1) United States (%)

1990

1991

1992

1993

1994

1995
Ratio of bad debt

3.7

3.4

2.8

1.9

1.5

1.5
Reserve ratio of bad debt

44.1

46.8

56.3

73.7

88.7

82.4
Return on assets (ROA)

0.5

0.5

0.9

1.2

1.2

1.2
Return on equity (ROE)

7.5

7.9

13.0

15.3

14.6

14.7
(2) Japan (%)


FY1992

FY1993

FY1994

FY1995

FY1996

FY1997
Ratio of bad debt

1.9

2.1

2.0

3.2

2.4

2.4 (3.7)
Reserve ratio of bad debt

15.9

24.2

36.9

43.1

50.4

88.6 (58.1)
Return on assets (ROA)

0.1

0.1

0.0

-0.5

-0.0

-0.7
Return on equity (ROE)

2.8

2.5

0.5

-13.5

-0.3

-23.8

Sources:
United States: Statistics on Banking, Quarterly Banking Profile (Federal Deposit Insurance Corporation)
Japan: Analysis of Financial Statements of All Banks (Federation of Bankers Associations of Japan), and other materials

Notes:
United States
1.Based on commercial banks belonging to the FDIC.
2.Bad debt is the sum of loans and leases 30 days or more past due, and loans and leases in nonaccrual status.
3. Reserve ratio of bad debt = allowance for loans and leases losses / amount of bad debts

Japan
1.Figures from FY1992 to FY1994 in the ratio of bad debt and the reserve ratio of bad debt, and FY1997 in all items are based on city banks, long-term credit banks, and trust banks; other figures are based on all Japanese banks.
2.Bad debt up to FY1994 includes loans to borrowers in legal bankruptcy and post due loans over 6 months only. After FY1995, bad debt also includes interest reduction loans. The bracketed figure for FY1997 represents loans to borrowers in legal bankruptcy, post due loans over 3 months and restructured loans (interest reduction loans, loans for business-supported enterprises, etc.)
3. Reserve ratio of bad debt = specific loan loss reserves / amount of bad debts

Japan and United States
1.Ratio of bad debt = amount of bad debts / total assets
2.Return on assets (ROA) = net profit / balance of total assets (average of amount at beginning and end of period)
3.Return on equity (ROE) = net profit / balance of equity (average of amount at beginning and end of period)

The government and the Government party are now working ardently on ways to take bad debts off the balance sheets and restore the smooth functioning of the financial system.

In the future, we must ensure business recovery as quickly as possible and make effort not to raise new bad debts. If new defaults do continue to occur, banks must be further rationalized. In addition, the bad debt and the real estate securing it must be liquidated. Considering the schedule of financial system reform, it is vital to give priority to a rapid and decisive solution of the bad debt problem through these integrated policies for financial recovery.

(Liquidation of real assets held as collateral for bad debts)
f) The land acquired by banks as collateral for loans cannot be sold because of the depressed market for land, and banks therefore cannot realize the value of the collateral they hold. In particular, the rights concerned those land left bare for speculative gains during the bubble period are very complex, and the land now lies in not whole cleared and good shape for large-scale redevelopment.

Liquidation of such land is important to the overall disposal of bad debt. In liquidation of land held as collateral, the disposal of land in the marketplace should be prioritized by the disposition of complicated debt-credit concerning the bad debts with collateral of real estates, the simplification and speed up of auction formality, and the removal of impediments preventing earnings from land. If, however, it is difficult to subsequently implement the shape and combination of the property by private sectors, it will be necessary from the perspective of urban redevelopment to promote effective use of the property through the appropriate use of public institutions. To promote the effective utilization of idle and underutilized land by Housing and Urban Development Corporation, it is supposed to be examined that the Emergent Coordination Committee for Real Estate Legal Claims (provisional name) was set up as part of the Comprehensive Economic Measures announced in April this year. In addition, integrated measures including preparation of a new framework for appropriate application of temporary funding and fiscal investment and loans are to be taken. Furthermore, revitalization of the real estate sector is being pursued in order to facilitate liquidation and effective utilization of land.

The rise and fall of the bubble economy were caused in part by financial institutions, flush with excess liquidity, failing to properly screen individual loan applications and aggressively promoting loans depending excessively on the appraisal price of land as collateral. In the future, financial institutions should avoid funding centering on land as security.

5. A Scenario for Return to Growth Path

a) Four points are crucial for Japan to extricate itself from the prolonged stagnation that has continued since the bursting of the bubble. Japan must 1) complete the disposal of such "legacy of debt" as the bad debt problem and the accompanying financial system instability; 2) activate the economy from the supply side through structural reform; 3) stimulate aggregate demand appropriately; and 4) provide a clear glimpse of the future so that the public will undertake economic activity with confidence.

b) While the Comprehensive Economic Measures announced in April this year are expected to break the current vicious circle, the important point right now is to decisively dispose of bad debts as soon as possible; to break the vicious circle on the supply side by creating clear prospects in the future; and to switch the vicious cycle to a virtuous one that leads to medium- and long-term growth.

c)Then, Japan must make the most of the positive effects of the structural reforms. That is, the radical restructuring of existing companies must continue; new industries, including venture capital businesses, must be created; and a pattern of growth must be established in which these new industries lead the whole economy forward. To achieve this, Japan must continue to vigorously pursue the current various economic structural reform measures that focus on deregulating such sectors as information communications, welfare, medical treatment, employment, labor, finance, distribution, and transport.

By rectifying the high-cost structure, This will contribute to vitalize the economy and improve the price gaps between domestic and foreign markets as a long-term problem.

d) In pursuing structural reform, we must also pay sufficient attention to employment problems. With the Japanese economy remaining depressed, the current employment situation, which includes a continuous high rate of unemployment, is quite severe. Considering that labor demand is derived from the goods and service demands, the recovery can be expected from the effects of various policies designed to revive the economy. Thereof, employment problems must be addressed because of their particular importance, the measures required include vigorously: (1) promoting labor mobility toward industries in which demand is expected to grow over the long term (for example, information communications and the welfare industries); (2) strengthening functions for the adjustment of labor supply and demand through further deregulation of such areas as worker dispatching undertakings and fee-charging employment exchange project, based on a shake-up of rules governing the labor market; and (3) reshaping the environment for human resources development.

e) To ensure sufficient economic vitality to withstand the advance of structural reform, the restructuring of existing industries and development of new industries must be well advanced. So that the industrial restructuring and development can lead the growth of the overall economy, we must develop a tax system that reflects international standards in corporate and income taxation and encourages people to become more positive.

f) Guided by the direction of the mid- and long-term improvement of social overhead capital, public investment should be substantially revised overall to connect with the structural reform of the Japanese economy, for example by contributing to the creation of a base for new industries. In targeting public investment, businesses where sufficient benefit can be expected to justify costs should be emphasized. Those contributing to improvement of the quality of our lives should be also emphasized.

g) By around the year 2000, the bad debt problem should be fully resolved and new industries should appear as the leaders of Japan's economic growth. If the positive effects of the structural reforms are large, they will be easily offset the negative effects. Projections of the mid-term economic growth rate indicate an average annual rate for the fiscal 1998 - 2003 period of 2.5% (2 - 3%). The emergence of new demand accompanying the structural reforms and the effects of the productivity improvements are expected to boost the growth rate over the second half of this period. The budget deficit as a percentage of GDP should be 3.4% by fiscal 2003 because of the steady implementation of financial structural reform, but should fall to 3% by fiscal 2005.

Table2: Mid-Term Outlook for the Japanese Economy

(%)


 Result
For FY1997

Projections

FY1998 - FY2003

Real GDP growth rate

 -0.7

2.5

( 2 - 3 )

GDP deflator growth rate

1.0

0.2



FY2003
Unemployment rate

3.5

3.3

Current account

(% of nominal GDP)


2.6


1.5

Fiscal balance

(% of nominal GDP)


-5.9

-3.4

Notes:
1.This mid-term outlook is based on the implementation of economic, fiscal, and other structural reforms.
2.The figures within parentheses at real GDP growth rate offer a greater degree of latitude.
Source: Estimates by the Planning Bureau of the Economic Planning Agency.

 Chapter 2: The Macroeconomic Outlook after Structural Reform

After banishing such "debt legacy" as the prolonged economic depression following in the wake of the bursting of the bubble and the bad debt problems that occurred against that background, the period up to 2010 can be seen as a time for the construction of a new society and economy to be carried forward into the future.

Widespread fears that the Japanese economy is losing its vitality as a result of the increase in the burden on workers and that slower growth rate and lower standard of living are unavoidable through the decrease in the number of children and increase in the number of elderly people and the spread of globalization are eroding confidence in the future of the economy. In the Public Survey on Social Consciousness conducted by the Prime Minister's Office last December, 72.2% of respondents replied that "overall things are getting worse." This was the highest such response since the poll was first conducted.

The following section looks at six major reasons for such anxiety. Most of the fears are centered around excessive expectations relating to maintaining the economic performance Japan has achieved until now, and an over-emphasis on pessimism resulting from unclearness over the future (revealing a double gap between expectation and forecast). The following section also outlines a definite macroeconomic future for Japan and shows that after the current structural reforms Japan can realize an affluent society and economy.

1. Will the Economic Growth Rate and Standard of Living Fall?

a)In prospecting the economic growth rate, the key points are the trends in the labor force that accompany an aging society with fewer children and the trends in the rate of technological progress. Japan's working age population (aged 15 - 64) peaked in 1995 and is now declining; and it is estimated that the total population will peak in 2007, then begin declining (based on middle projections in "Population Projections for Japan," published by the Institute of Social Security and Population Problem). Therefore, unless the labor force participation rate rises significantly, Japan's labor force will peak in the early 21st century, then start falling. On the other hand, strictly speaking, as the experience of the United States and Europe demonstrates, its rate of technological progress can be expected to slow accompanying an economic maturity. However, if Japan, which has strong technical development ability by international standards, especially in manufacturing, further increases that ability and extends it to the nonmanufacturing sector, there will be some room for overall growth of the economy. Furthermore, as labor becomes scarcer, incentives will increase for more efficient production to offset the decline in labor resources there can be justification for painting a scenario of quite spectacular technological progress in the future.

In the following section, based on predictions about the labor force, the rate of technological progress, and reform of the social security system, we project indicators including real economic growth rates for the fiscal 2001 to 2010 period based on two separate scenarios.

(b) Case 1 follows the following main assumptions: (1) the future rate of technological progress will be around 1%, as achieved throughout the 1980s; (2) the labor force in 2010 will be relatively unchanged from the 1997 level because of the increased participation of women and the elderly into the labor market; (3) the implementation of certain reforms of the social security system (the age for receiving the wage-indexed portion of the old age employees' pension will be increased in stages up to age 65, and the ratio of pension to wages will be restrained by around 10% in 2025); and (4) financial structural reform will be implemented (public fixed capital formation will decrease (from around 8%, to 6%) as a percentage of nominal GDP by fiscal 2007, which falls within the period of the Basic Plan for Public Investment, and thereafter will be fixed at a percentage of 2007 nominal GDP). In this case, the real growth rate from fiscal 2001 to 2010 will be around 2%, and the per-capita growth rate will also be around 2%, which compares well with other industrialized countries (1990s: Japan, 1.4%; United States, 1.3%; Germany, 1.0%; United Kingdom, 1.6%; and France, 1.0%).

For Case 2 the assumptions are that (1) the future rate of technological progress will about 2%, double the rate of Case 1; (2) the average growth rate in the labor force from 2001 to 2010 will be about the same as during the 1990s (0.5%); (3) the social security system will be reformed as in Case 1; and (4) financial structural reform will be implemented (as in Case 1). In this case, the real growth rate from fiscal 2001 to 2010 is around 3%. Realizing this kind of high growth would require an increase in the labor force of 600,000 people each year, in comparison with the participation rate of women and the elderly remaining at current levels. (If the participation rate of female was to reach the levels of the United States, the labor force would expand by no more around 200,000 people a year.) To reconcile a high economic growth rate with a society with lower CO2 emission, considerable efforts, including technological advances, would be demanded to overcome environmental restrictions.

Table3 : Long-Term Outlook for the Japanese Economy


CaseI

CaseII
FY1991
-FY2000		 FY2001
-FY2010		 FY2001
-FY2010

Real GDP growth rate

1.7%

Around 2%

Around 3%

Per-capita real GDP growth rate

1.4%

Around 2%

Around 3%


FY1997

FY2010

FY2010

Current account surplus

(% of nominal GDP)

2.8%

Roughly in balance

Around 1.5%

National burden ratio

36.4%
(FY1996)

Around 40%

Around 40%

Fiscal balance

(% of nominal GDP)

-5.9%

Around1%

Around1.5%

Note: This long-term outlook is based on the implementation of the economic, fiscal, and social security system reforms described on page 9.
Source: Estimates by the Planning Bureau of the Economic Planning Agency

c)Until now, because the annual growth rate has been associated with the vigor of the economy, forecasting a decline in future economic growth gives rise to anxiety that the economy is losing its vigor and that the slower growth rate will bring a fall in living standards. Even if, for example, the rate of economic growth declines, we can see from calculations in Case 1 that it will result from Japan's population shift to decreasing mode and per-capita GDP will continue to grow, meaning that living standards will steadily increase.

Comparing Japan's average annual rate of growth of per capita real consumer spending with that of the other main industrialized countries in the 1990s, Japan's level was comparatively high. This means that even during today's prolonged economic slump, Japan's standard of living is growing steadily on average. Because Japan's social and economic structures and systems are now in a period of transition, the pain felt outweighs the improvement in the standard of living. In the future, however, the improving standard of living should lead to a sense of affluence.

(The Housing and the Living Environment in 2010)
While the quality of housing in Japan has gradually improved, in large cities like Tokyo space is still insufficient. In the year 2010, such factors as the spread of houses with fixed-period land lease and the utilization of the specified system concerning building volume lot ratio will make houses noticeably cheaper than at present, and most people will be able to buy houses with study rooms and party space.

Introducing the fixed-period house lease system currently under examination will increase the amount of good quality rental housing suitable for families and will make it easy to change houses in accordance with one's life stage. It is also possible to have second houses with kitchen gardens in countryside where people can spend their weekends.

As a result of these trends, the average floor area per person in Japan will increase from the 30 square meters in 1993 to 40 square meters in 2010, a 1.3-fold increase. A doubling of living space will also be possible over the long term.

In addition, improvement of social overhead capital for improving the living environment is proceeding and the required level will be generally reached in the beginning of 21st century. For example, diffusion of draining disposal including sewage systems will exceed 90% (as against 56% in fiscal 1996), and virtually every part in Japan should have parks for recreation (Progressing rate; 55% in fiscal 1995). In all main roads where there can be pedestrians the ratio of wide footpaths that are safe and comfortable for the elderly and disabled will also rise to around 50% (as against 13% in fiscal 1995).
(Caution)The calculations relating to life in 2010 are estimates by the Economic Planning Bureau of the Economic Planning Agency.

One aspect of the decrease in population is that although the number of new dwellings started is falling, the per-capita stock of physical assets, such as land, together with roads and parks stocked in the past, are increasing.

2. Can the Japanese Economy Survive an Aging Society with Fewer Children?

a) In an aging society with fewer children, such problems as a dwindling labor force participation rate and an increasing national burden ratio will affect the economy. However, most of the currently expected problems are based on fixed ways of thinking about role allocation based on age and other criteria.

For example, if we look at Japan's labor force participation rate by age, in the 60-64 age bracket the desire to work is high at 56.7%, but drops off sharply after the age of 65, to 24.5% (in 1995). The age-based role allocation convention under which people retire from their jobs when old to make way for younger people has been unquestioned in the past. Today, however, role allocation needs to become more flexible and an age-free society where people who want to work can do so regardless of their age is required. The age-free concept should be further developed into a "recurrent-type" (custom-made) society where not just the aged, but the young and middle-aged too can spend their time in study, work, or leisure at various stages of their lives according to their own life plan.

(The Shape of Careers in 2010 )
As a result of increased employment flexibility and fewer barriers to changing jobs, the member of mature members of society who will return to university to obtain knowledge and plan their own career structure will increase. The number of mature members of society who return to university (as incoming students) is expected to climb from around 23,000 in 1997 (one university student in 27) to about 58,000 in 2010 (one university student in 11).
The number of mature members of society who return to graduate school (as incoming graduates) is also expected to climb from around 6,000 in 1997 (one graduate in 12) to about 30,000 In 2010 (one graduate in 4).

b) Promoting the participation of women in the labor market can mitigate the impact of the overall decline in the labor force. The current taxation system (which includes special deductions for dependents), corporate allowances for spouses, and the treatment of No.3 insured persons in the public pension system are pointed to create overall environmental impediments to the supply of female labor. While reforming the environment to make it conducive to the participation of females in the labor force, Japan needs to examine how women can best work in society and thus create a society where no gender bias exists (a gender-free society).

c) By creating a custom-made society where no age and gender bias exists and building a sustainable social security system, Japan can realize an aging society with fewer children that is still rich and secure. To make a longer term projection than the Case 1 scenario mentioned above on the predictions including the implementation of structural reform such as economic reform and fiscal structure reform (increasing the age at which people become eligible for public pensions from the current 60 to 65; simultaneously restraining the rate at which the pension is paid out to wages by around 10% from that of the current systems; and curbing the rise in medical fees in accordance with growth in national income), in fiscal 2025 the national budget should be roughly in balance, the national burden ratio (the burden of total taxation and total social security costs as a proportion of national income) and potential national burden ratio will be no more than around 45%, and the social security burden ratio will be around 16%. (According to a December 1996 report of the Economic Council's Fiscal and Social Security Working Group, if the public finance and social security systems are left as they were at that time, in 2025 the potential national burden ratio will exceed 70%.)

Table4: Social Security Reforms, Fiscal Balance ,and National Burden Ratio

(%)

FY1996

FY2025

(Case 1)

Fiscal Balance

-8.5

Roughly in balance

National Burden ratio

36.4

Around 45%

Notes:
1. The social security reforms of Case 1 are based on the following assumptions.
(1) The age for receiving the public pension is raised from 60 to 65.
(2) The ratio of the pension to wages is restrained by around 10%.
(3) The increase in medical costs does not exceed the growth of national income.
(4) The participation of women in the labor market is promoted.
2. Both the fiscal balance and the national burden ratio are percentages of national income.
3. The national burden ratio projections are based on projections for the national income.
Source: Estimates by the Planning Bureau of the Economic Planning Agency

d) Today, public pension system reform is being discussed, and various measures are going to be proposed. Some people have anxiety that they can't receive their pensions in the future or that the amounts of their pensions will decrease because the reduction of the level of the payment is taken to the topic. It can be said that pension system reform is to be promoted to maintain pension system sustainable as the main frame of social security system and that people have no need to have anxiety that they can't receive their pensions.
Concerning those who have already receive pensions, in principal, the level of the payment is restrained about the growth of the amount of the pension, not the current amount of the pension. Then, in the future, the base-up according to inflation is supposed and the amount of the pension will increase from the current amount. Furthermore, there is a factor that the level of the pension will increase by prolonging the period of joining the pension system accompanying its maturing. In addition, if the increase of wages by economic growth is taken into account, this can be a factor of increasing the amount of the pension.
The future amount of pensions should be prospected again by the future pension system reform, but the above shows that people doesn't have to have anxiety to no purpose.
In addition, as Chapter 3 will show, redesigning the social security system as integrated system including pensions, medical care, nursing, and adding to individuals' own efforts can result in aging society that is at ease and happy.

e) Moreover, although it is generally thought that a gray society must be economically less vital, deregulation can result in the growth of new industries such as health-related and nursing-related businesses, which will revitalize the economy overall. While populations elsewhere are currently aging, Japan is graying faster than the other major countries. If Japan can realize a vital aged society, as the first country to meet the challenge of a gray society, Japan will have made a global contribution in showing the world the way forward.

3. Do Global Environmental Problems Restrict Growth?

a) The specter of restrictions on growth due to global environmental problems is often raised as a source of anxiety about the future. The third Conference of the Parties of the UN Framework Convention on Climate Change (Kyoto Conference, COP3) held in December last year set a numerical target for the level of greenhouse gases in the industrialized countries at least 5% reduction of their 1990 levels with 2008 through 2012 (Japan's target is a 6% reduction). Prior to this, the Joint Conference for the Relevant Advisory Councils on Domestic Measures Addressing the Global Warming (hereinafter "Joint Conference") examined various practical measures, from technological and economic perspectives, centering on measures for suppressing demand for energy. In November 1997, the Joint Conference packaged specific energy-saving measures ("Joint Conference Measures") designed to reduce CO2 emissions from energy sources to their fiscal 1990 levels by fiscal 2010.

b) Because the volume of CO2 emissions generally rises in proportion to the pace of economic activity, attempts to suppress CO2 emissions without adopting energy-saving measures will mean, for instance, obligatory reductions in the volume of energy used, inevitably curbing economic growth. Furthermore, it will entail adjustment of the industrial structure, at great cost to the entire economy in the short term. However, if energy can be saved through technological advances or plant and equipment investment by the implementation of the measures reported at the Joint Conference, then CO2 emissions can be restrained without any significant slowing of the economy. (For quantitative projections, refer to the report of the Social and Economic Outlook Committee and the Global Environment Working Group Report.) In order to build a society in harmony with the environment, Japan must make the necessary efforts, focusing on energy-saving measures.

(Lifestyle with Lower CO2 Emission in 2010)
By 2010, social systems will be adopted that will encourage public awareness of global warming and patterns of consumption and living that favor low CO2 emissions. Specifically, low-power-consumption electrical appliances will be on the market and vehicles with better mileage such as hybrid cars will be common. Recycling systems will also be established for many products.

c) On the other hand, the investment required to implement the Joint Conference's measures for constraining CO2 emissions are estimated at around 3 trillion per year, according to estimates given in the Global Environment Working Group Report (The figure is projected considering the effect of energy reduction by the implementation of the measures and the pay-out period of the investment for implementing such measures. This doesn't include the investments of household and public sectors for saving energy.). The additional demand would promote the development of new environment-related industries.

d) Global Environmental problems will be no doubt tackled over the whole world for a long time to come. Japan has past experience in successfully overcoming pollution problems and in making substantial energy savings in response to the oil crises of the 1970s. Japan has a high level of technological ability and human resources in these fields. By utilizing these resources, Japan can create a society in harmony with the environment as a model to be emulated by the rest of the world. We can also offer the world our know-how, including technologies, in successfully overcoming pollution and saving energy. Japan should aim, in this way, to create world standards for pollution reduction and energy saving.

4. Will the Unemployment Rate Rise and Anxiety about Our Lives Increase?

a) From an average of 2.5% in the 1980s, the rate of unemployment gradually rose in the 1990s to 3.1% in 1995, and then to 4.1% in April 1998. The rise in the unemployment rate is caused by two factors: an increase in unemployment resulting from the current economic downturn on business cycle, and an increase in structural unemployment reflecting changes in the structure of labor markets.

b) The unemployment on business cycle accompanying current economic slump has been increasing considerably, which results in the severe situation of employment. In response to this, it is important to secure employment by the quick recovery to the growth path of our economy.

c) Structural unemployment, which should be considered from a mid- and long-term viewpoint, includes both voluntary and involuntary unemployment, and will continue to increase. Voluntary unemployment results from voluntary job switching reflecting a change in consciousness of the worker, while involuntary unemployment results from adjustments in the industrial structure and from intensified competition in industry.

Because the practices of lifetime employment and employment security within companies have been common in Japan until now, employers' awareness of job changing has not been high. In the future, as the tendency to match the right person to the right job catches on, voluntary unemployment will increase. Concerning the unemployment, labor mobility must be smoothed and periods of unemployment accompanying job change must be shortened by measures including the reinforcement of the labor force adjustment function through the further deregulation of worker dispatching undertakings and a fee-charging employment exchange project.

At the same time, it is important to address the issue of involuntary unemployment accompanying the adjustment of the industrial structure and the intensified competition within industry by absorbing a certain portion of unemployment. This can be done by implementing measures to ensure smooth labor mobility, and creating venture businesses and other new industries that will generate new employment opportunities. The Comprehensive Economic Measures announced in April this year contained measures, such as encouraging rehiring of employees who have resigned and making company pensions portable to smooth labor mobility and strengthening guarantees for venture industry debt to encourage the growth of venture industries.

d) Japan's unemployment rate has been low in the past compared with the other major industrialized countries. In the future, while the level of structural unemployment could rise, it is expected to absorb unemployment by the strength of functions in labor market including the new rule-making there, the creation of new employment by raising venture businesses, and the advance of human resources development.

5. Can the Japanese Economy Withstand the Tide of Globalization?

a) As the former socialist countries embrace market economy and the emerging nations, such as the developing Asian economies, advance, the world economy is experiencing mega-competition era. The tide of globalization has gone beyond the conventional concept of "internationalization" where closed domestic economies form closer ties with the outside world. Globalization must now be seen as a phenomenon where the overall world economy is intertwined under common mechanisms operating in identical markets.

In Japan, the tide of globalization is one of the factors triggering anxiety about the future because of recognition that globalization will inevitably sweep over the economy. Unless domestic structural reform is sufficiently advanced, the negative impacts of globalization will be likely to appear. However, with efficiency improvements based on mega-competition in the world's markets feeding thoroughly into Japan's society and economy, as long as domestic structural reform is sufficiently advanced, Japan can benefit from globalization. Accordingly, Japan should not respond passively or evasively to globalization but welcome it through aggressive domestic structural reform.

b) Since the second half of the 1980s Japanese companies have been globalizing their activities by actively moving operations offshore because of increased domestic costs resulting from the appreciation of the yen. This led to suggestions of the "hollowing out" of Japanese manufacturing and to fears that Japan's economic vitality could be weakened. However, the advanced technological capacity and human resources accumulated in Japan remain affluently. In the future, improving the business environment through structural reform and furthering its technological development, Japan can develop more advanced industries.

Furthermore, it is effective that Japan will take full advantage of globalization trends and encourage overseas companies to participate in its domestic markets. In particular, the stimulation of competition mainly in non-tradable industries would be effective. New local entrants contribute to accelerating economic structural reform including expected to become a booster for organization reform of enterprise, In addition to the absorbent of employment and the technical introduction by enterprises. Looking at the new local entrants in Japan from the viewpoint of foreign direct investment, the balance of such investment made up no more than 0.7% of GDP at the end of fiscal 1996, a particularly low level even compared with the other main industrialized countries (United States, 14.1%, Germany, 3.8%, and France, 10.4%, in 1995; and United Kingdom, 24.2%, in 1996). Among the many reasons that such domestic direct investment is not increasing are public regulations, including opaque administrative guidance, and regulatory practices in the private sector within industry. It should be recognized that it is important to reform international anomalies as part of the future economic structural reforms, including Japan's corporate tax rate which is higher than that of the international average level and the practice of renewing lease agreements for short periods (generally two years) in the office building leasing market.

6. Will Japan Face a Current Account Deficit and Lose Its Prosperity?

a) Since the mid 1960s, Japan has maintained a current account surplus. In 1986 the surplus reached 4.4% of GDP. The huge current account surplus was a symbol of the strength of the Japanese economy.

A current account surplus is equivalent to a surplus of savings for domestic investment or a surplus of supply in relation to demand. In this respect, the fall in the savings rate of households along with the aging of society will reduce the domestic savings surplus and Japan's current account will shift to deficit. If this leads to a depreciated yen, some believe that the resulting increase in import prices will erode Japan's standard of living.

b) Based on above estimates, the current account surplus in 2010, which was 1.6% of GDP in 1996, will becomes roughly in balance according to Case 1 (around 1.5% according to Case 2). This decline will stem from a mechanism where contraction of the fiscal deficit would decline long-term interest rate and private investment would be stimulated while savings decline in line with aging.

The net balance of foreign assets accumulated by Japan expanded rapidly from the 1980s, jumping from 1.2% of GDP in 1980, to 11.4% in 1990, and to 24.6% in the end of 1997. Compared with other major industrialized countries, this is an extremely high level. Japan has already accumulated enough for its future. The above projection, the contraction of the current account surplus to break-even levels, indicates that Japan will be an ordinary country in external balance of payments.

Table5 : International comparison of External Net Asset Balances(as Ratio of GDP)

(%)

1980

1990

1996
Japan

1.2

11.4

19.3(24.6)
United States

9.8

-3.7

-10.9
Germany

4.1

23.2

7.8
United Kingdom

8.0

1.4

3.6
France

-

-1.8

-2.3

Note: The figure for Japan in parentheses under 1996 indicates a 1997 figure. The figure for Germany under 1996 indicates a 1995 figure.
Source: IMF's "International Financial Statistics," but compiled in the "Report on External Loans and Debts" by Japan's Ministry of Finance and other materials.

Chapter 3: The Shape of the New Social and Economic System

 The anxiety felt in Japan about the future extends beyond unclearness about the macro- economy. With major changes occurring in the social and economic system, a large part of the anxiety appears to be caused by unclearness among the various economic entities as to what principles, based on what systems, to follow. Although the postwar social and economic system has been maintained up until the present, the system has lacked the dynamism for reform and improvement. For the ordinary people, the reform of the current system reflects a historical transition that they have never experienced before.

This chapter seeks to describe, as specifically as possible, how the social and economic system in Japan is changing and how the new social and economic system should be formed, to show the prospects for facing the new society and economy with confidence.

1. The Characteristics of the Existing System -The Need for Reform and its Direction-

a) The conventional Japan-style market system is characterized by an emphasis on and utilization of the advantages of cooperation over competition, based on a stable relationship between and within the economic entities. The economic entities have typically sought their own interests based on market cooperation and have avoided fierce competition. With development made possible by the importation of technology principally from the West, in an era where goals were clear and risk was small, this approach functioned comparatively effectively. However, now that the "catch-up" phase of Japan's growth is over and Japan needs to develop its own frontiers, intensive pursuing of efficiency and strong-rooted principles of competition are essential. The traditional system that emphasized cooperative relationships now needs to be modified. This need has gathered strength since the 1980s. We must reflect on the fact that while calls have appeared to reform the system, the response to it has been inadequate in the past.

b) Today, although signs of reform have appeared in the various subsystems (such as employment, corporate governance, and public sector) that make up the whole, the reform movement has been only partial with little impetus for overall reform. On the other hand, once such impetus does arise, change toward a new system will occur in leaps and bounds.

The various subsystems make up an overall system through mutual dependency. If signs of change appear in one subsystem, that change will be thwarted so long as the other subsystems change too. The individual structural reforms must be simultaneously and strongly advanced based on a perception of the direction of the system reform as a whole.

2. Basic Principles of the New Social and Economic System

a) The basic principle of the new social and economic system aimed at is "clear and fair markets". In economies where there is limited room for overall growth, the pursuit of efficiencies through market principles is of paramount importance. This applies to all markets, including consumer goods markets, intercompany dealing markets, labor markets, and finance and capital markets. To achieve this, government regulations that are no longer appropriate for today must be loosened or scrapped, deregulation taken further, and the regulatory practices in the private sector revised or removed .

b) The following are the four pillars of clear and fair markets.
The first pillar is equality of opportunity. While it is desirable to secure some extent of "ultimate equality" for all of society, societies that pursue "ultimate equality" more than necessary invite "moral hazard" and weaken economic vitality. To avoid moral hazard as far as possible, it is better to identify equality of effort as the guiding principle rather than "ultimate equality".

Although Japan has emphasized "ultimate equality" until now, inequality has clearly existed between those enjoying vested interests based on laws and regulations and those without such vested interests. More emphasis on equality of opportunity under market principles can eliminate the causes of inequality that have existed until now while maintaining the vitality of the economy. While there may be greater disparity of income resulting from the differing abilities of individuals, providing equality of opportunity allows people second attempts and provides a chance to overcome income disparities through one's own efforts.

The second pillar of clear and fair markets is the principle of self-responsibility. Japan must break away from collusion and reliance on others, characteristics of the existing society and economy. Individuals and companies must make their own decisions and take responsibility for the results of those decisions. As long as such principles are not widely accepted, economic vitality based on market principles will remain a dream. For example, the avoidance of competition by mutual consent and practices in private sector that restrict competition are hallmarks of a collusive system. Over-reliance on the government, for example by seeking protection through regulation or palming the responsibility for problems onto the government on the grounds of deficiencies in its regulations, is an example of the practice of reliance on others. The lack of the principle of self-responsibility is incompatible with the pursuance of market principles. In this respect, a change in consciousness is urgently needed.

The third pillar of transparent and fair markets is diversity of choice and adequate disclosure of information. Because the actions of economic entities are based on self-responsibility, diversity of choice must be available. And at the same time, for appropriate decisions to be taken, easily understood information must be obtainable in a timely fashion. For example, bolder disclosure is required, including disclosure of administrative information held by the government and more information relating to current value in conformance with international practices in corporate accounting.

The fourth pillar is emphasis on rules. Market functions rest on common rules for everybody. If room for discretion creeps into these rules, market functions will be impeded and the effect on society as a whole will be negative. Rules also lead to greater clearness in society as a whole and to equality of opportunity. The government should refrain as much as possible from discretionary handling of individual cases through administrative guidance or other means and should switch to emphasizing the role of rules in such areas as market rule re-organization and reinforcement of rule-based monitoring functions.

c) It will be necessary to pursue efficiency through market principles and create a humane society in which the weak will not be devoured by the strong. This will entail setting up a safety net that provides a social response toward the genuine economically disadvantaged.

(A Japanese-Style System in 2010)
Laying the basic principles for the new society and economy will require major reform of the existing Japanese-style market system. However, the American-style market system, which has followed further market principles, is not imported as it is. By closely examining the advantages and disadvantages of the existing Japanese-style market system and the market systems used in other countries, we experimented in forming an overall system that lost the fewest advantages Japan has enjoyed up until now -- such as emphasis on order, mutual support, trust between economic entities -- and could take maximum advantage of the results of future reform. Japan must find a new system that suits its milieu but is accepted all over the world.

3.The Actual Shape of the New Social and Economic System

To dispel unclearness about the future, the various economic entities must have common as clearly as possible with the shape of the future social and economic system. The following section, which also examines the direction of irreversible changes in the principle subsystems, suggests patterns of corporate, public, and individual participation in society in an effort to create an example of what shape the future might take.

(1) Corporate System

(Employment System)
a) In a society and economy that pursues efficiency based on market principles, such employment practices as lifetime employment and employment security within corporations will change, and labor mobility via external labor markets will grow. Meanwhile, remuneration systems will change from seniority- to ability-related systems.

This does not mean that the lifetime employment system will collapse. Just as some people value high wages over employment security, others rate employment stability as more important than the size of their paycheck. Similarly, just as some companies prefer ability-oriented personnel management that offers no more employment security than necessary, other companies try to maintain to some extent a seniority wage system and continue to offer employment security. The former type of company favors division of labor in the workplace while the latter prefers sharing of information and know-how and promoting workplace cooperation.

Employment style can be roughly classified into three types: (1) lifetime employment where employees learn specialized abilities within the company, (2) mobile employment where employees learn specialized abilities recognized on the external labor market, and (3) informal employment focusing on generic tasks or business. One direction Japan's future employment system can take is a diverse model that allows workers and employers to select from among these the most desirable system for themselves. Public sector employment, too, could offer choices between these three models of employment.

(The Style of Employment in 2010)
As individuals tend to choose jobs that suit their abilities and property, corporations' employment strategies will also change, resulting in a higher proportion on mobile employers and informal employers. Employers will place greater value on securing personnel who require no training and who offer greater specialization.

Specifically, in 2010 companies mainly offering employment without long-term prospects will make up nearly half of all companies (as against a mere 5% in 1997). Companies requiring mostly people who need no training or are highly specialized are also expected to make up more than 60% of all companies (20% in 1997). The proportion of employees offering part-time, casual, and other short-term work is expected to exceed 20% (17% in 1997).

(Corporate Governance)
b) With moves toward greater funding efficiency and the abolition of cross-shareholdings between companies, the role of shareholders through market is larger.
The relationship between companies and financial institutions has been main bank-oriented. In the future, with the functions of financial institutions diversifying and specializing, corporations are expected to select their main banking relationship in accordance with their particular situation from among a range of financial institutions, each with different functions.

Coupled with more active role by shareholders, this will produce, under diversified financial markets, a highly clear type of corporate governance. And advantages derived from a stable relationship between corporations and financial institutions as the member of the same group will be taken in an environment where financial institutions have been reorganized under a holding company.

Under Japanese-style employment practices, Japanese corporations are characterized by cooperation based on sharing of information and know-how among workers and the system of consultation via circular based on proposals from the workplace. In such a corporation, a major function of company directors is to act as coordinators between the its different sections. Directors promoted up through the closed ranks with detailed inside knowledge have consequently occupied a strong position in Japanese-style corporations.

In the future, however, mobile employment will play a major role. With a stronger demand for efficiency from shareholders and other outsiders, numbers of outside directors will be appointed, external opinions and information will be adopted, and companies will switch to more highly clear corporate management.

(Will the Dismantling of Cross-Shareholdings Make Long-Term Stable Management Impossible in 2010?)
There are fears that if intercompany cross-shareholdings are abolished, Japan could see, like the United States during the 1980s, an increase in hostile takeovers, post-takeover carving up of businesses, and destabilization of corporate management and employment. Even if hostile takeovers do not occur, concerns have arisen that the fear of such takeovers could motivate managers to emphasize short-term profits and make it difficult for long-term corporate strategies to take root.

The takeover of companies whose share value has dropped in stock markets and the improvement of their management from the outside should be considered basically desirable. Also, the rational evaluation of companies by the stock market is based on their long-term profitability rather than their near-term gains or losses. Through the aggressive selling of a company's own long-term strategy to investors (investor relations, or "IR" activities), profitability can coexist with long-term management strategies. Moreover, institutional investors including pension or investment fund, whose role in the stock market should grow in the future, are expected to play a role instead of cross-shareholding corporations.

(Formation and Withdrawal of Companies)
c) If clear and fair markets function properly, a dynamic economic system should emerge, and new businesses, including groundbreaking innovators and venture businesses, should appear. Accordingly, it is important to promote deregulation and develop an environment that encourages people with entrepreneurial spirit to take bold risks and raise the incentive to develop new businesses. It is also important to create a financial system that can actively fund promising fields while managing the risk.

On the other hand, existing corporations must respond flexibly to changes in market needs. If a company must unavoidably withdraw from the market, the mergers and acquisitions market is expected to be function effectively. A smoothly functioning bankruptcy system must also be established.

In such an economy, the following mechanisms, which allow enterprises to be reborn, will be activated: company establishment => development => withdrawal => conception => re-establishment

(2) Public Systems

(Administration Participation System)
a) In the provision of its public services, a society that promotes market principles should entrust as much of its services as possible to the private sector wherever feasible. There is a strong need for the government to slim its administrative structure and content, make the public sector efficient, and shift public spending to important areas. The social overhead capital and public services that can be suitable to supply through the market should be exposed to market efficiencies while being privately funded through private finance initiatives (PFIs).

Discretionary public administrative participation in economic activity should be eliminated as far as possible and the weight of the role of the government should be shifted to such areas as market establishment and monitoring, and crisis management.

The public services that remain within the government should be made more efficient by shifting powers and responsibilities away from the regions. Those services should be provided at as close a level to the people as possible.

(The Functions of the Slimmed Public Sector in 2010)
As the economy is deregulated and market principles are achieved, new policy functions will be required to allow re-organization of market rules, including disclosure rules; monitoring functions and crisis management; consumer protection; and the recovery of those defeated by market competition and support for the weaker sections of society. The weight of government resources should be quickly shifted to these kinds of roles and functions.

(Finance by Public Sector)
a) It has been pointed that the usual problems surrounding finance by public sector are problems including the ratcheting up of public spending because of the passivity of its funding, the pressure on private-sector industry that this causes, and the financial nondiscipline of the unseen burden on the public. In particular, the scale of public funds, such as postal savings, postal life insurance, and pension funds -- all of which are sources of public funds -- will expand year by year. It should be noted that the amount of such funds at fiscal 1996 year-end was about as large as Japan's GDP.

This year was the start of Japan's Big Bang financial reforms. To carry through market principles and achieve efficient fund allocation through the Big Bang reforms, finance by public sector must be used only to complement private finance, public spending must be slimmed and directed to important areas, and the finance system by public sector must be substantially reformed.

Under this direction, in areas such as funding for small and medium-sized enterprises that cannot be adequately addressed by market mechanisms, finance by public sector should focus on strengthening guarantees for small and medium-sized enterprises and on qualitatively complementing private sector finance in coordination with the development of financial and capital markets.

To reform the finance system by public sector so that market and fiscal discipline play a larger role, we should examine the introduction of cost analysis measures, the diversification of debt guarantee measures, and fund raising in tune with market principles to make those systems more efficient.

(Will the increase in risk resulting from the liberalization of financial and capital markets prevent asset formation that individuals can rely on?)
The liberalization of finance and capital markets will lead to the appearance of high-risk financial products. However, these products are predicated on a high level of disclosure of content and assume judgment based on self-responsibility and the content of the disclosure. People can still choose low-risk financial products, and there is no compulsion to choose high-risk ones. In the past, individuals had only the choice of a low-risk, low-return combination. In the future, by combining various financial products individuals will be able to actively create portfolios with a risk-return combination tailored to their needs.

Average per-household financial assets are forecast to expand to 40 million yen in 2010 (currently 27 million yen), and to this end effective management of such assets will assume major significance in the context of family accounting. Currently, time deposits account for around 45% of assets managed. Enabled by financial Big Bang reforms, however, a number of financial products offering good return and certain risk will appear, and the portion of assets managed occupied by investment trusts and securities is expected to grow accordingly. Furthermore, advancing financial Big Bang, profitability-oriented management of financial institutions will reflect the return of financial products including the deposit interest rate. Thus, the products of good return will be chosen with the former change of the portfolios, and it is estimated to raise the return rate of individual financial asset.

Changes in Individual Financial Asset Portfolios in Japan (fluctuation ratios based on U.S. case studies)

Year

Checkable deposits

Time deposits

Insurance

Securities

(stocks)

(bonds)

(investment trusts)

(other trusts)

Total

1995

10.0

45.2

25.4

19.5

7.0

3.1

2.7

6.6

100.0

2010

8.1

22.5

37.5

32.0

8.9

3.5

15.1

4.6

100.0

(Social Security System)
a) The social security system must be comprehensively designed to make it sustainable and manageable in the face of an aging society with fewer children and each system including pension, medical care, and nursing harmonized into an overall system.

First of all, the public pensions that have been traditionally the core of the social security system for the elderly will continue to play the fundamental role in the overall social security system. However, as described in Chapter 2, to make the system sustainable and manageable into the future, it will be necessary to lower the level of benefits compared with the current system.

At the same time, as nursing needs rise in the future, a new long-term care insurance system will be introduced from the fiscal 2000. This will cover most of the financial costs in cases where nursing is required.

In public health insurance, benefits will also need to be restrained compared with their level under the current system. However, because of such factors as (1) and (2) below, the high cost structure of medical care will tend to resolve itself and a substantial increase in the burden of medical costs on the public will be avoided.
(1) Such measures as eliminating regulations, which cause asymmetry postulate of information and inefficient resource allocation in medical service, will foster emergence of an environment where private vitality can be introduced and efficiency-inducing incentives can work effectively.
(2) The need to supply nursing services through medical institutions because of the current lack of supply of nursing services will cause "social hospitalization," which will lead to the inefficient utilization of medical-related resources. However, with the future development of the nursing services market, such inefficiencies will be corrected.

Thus, while public pensions will guarantee a basic standard of living in old age, various public insurance systems will provide security for needs relating to such unpredictable problems as nursing and medical care. In other words, individual systems meeting their respective objectives can, as a whole, adequately manage individuals' risk in an aging society with fewer children. And for people who want a higher standard of living in their old age, individually tailored corporate pensions, private pensions, and other schemes will provide a wide range of choice.

The current unclearness of the future shape of the public social security system increases anxiety and encourages a defensive, excessively restrained pattern of spending. If a social security system like the model outlined above can be established, it will be easy for individuals to plan for the future and appropriate spending and savings patterns will be encouraged.

(3) Social System

(Restoration of Social Discipline and Trust)
a) Along with the central issues of this report -- activating the economy and making it more efficient -- it is also vital for today's Japan to recover its social discipline and the trust between its various economic entities.

In the future, the strong emphasis on market principles on the economic side will create a society with more winners and losers. To restore social discipline, from the perspective of fairness sufficient consideration must be taken into policies to protect the weak in social policies. In this light, with the market rules in the new system serving as a basis for people's behavior, it is important to try to recover social discipline and mutual trust. If, as a result of economic reforms, "organization man" change their focus from the workplace to the home and the regional community, this may foster a social system that recovers its discipline and trust.

(The Importance of Educational Reform)
b) Education problems are among the most important issues for the future of Japan. The traditional education that focuses on standard scores and emphasizes uniform progress must be reformed, and young people of individuality who will support a vigorous society and economy must be fostered in the long-term by realizing the education raising originality, challenge spirit, and creativity, depending on their talent and property. From this perspective, unnecessary public regulations relating to education should be abolished and reforms that encourage the functioning of market principles among education institutions must be introduced. In these ways, it is becoming necessary to institute reforms that encourage increased options among curriculums and institutions from students.

(Participation of Individuals in Society: An Age-Free, Gender-Free Society)
c) As noted in Chapter 2, in the new society and economy we should create an age-free and gender-free society where the roles of individuals are not fixed and where individuals can fully participate in society in accordance with their desires and abilities. This means fully transcending age and gender differences in implementing the equality of opportunity mentioned as the first basic pillar of the new society and economy.

This social reform direction is also tied to reform of the employment system and the public sector. The traditional Japanese employment system -- characterized by lifetime employment, internal advancement, and seniority-based remuneration -- encourages a corporate culture that prioritizes the workplace, in which the majority of people remain devoted to their jobs until retirement, whereupon they could are free to enjoy leisure. Moreover, the system excluded women from the workplace - childbearing and rearing kept them from working continuously- while ensuring that women remained devoted to such duties as housework, child rearing, and later nursing the elderly, the system bound men to the workplace and kept them from playing a significant role in the home. This tendency was criticized for perhaps being furthered by the taxation and social security systems, and so these systems need to be examined. Furthermore, as working environments that women find comfortable are created, if employment mobility progresses and individual working patterns diversify, then fixed age and gender roles will also become a thing of the past. People should once again recognize the importance of the home and the role they can play in it.

(The Employment Environment for the Women and the Aged in 2010)
While the elderly in Japan have always been willing to work, their labor participation rate in the future will likely increase further. For example, the labor participation rate for the 60-65 age bracket is expected to rise from 57% in 1997 to 62% in 2010.

While the labor participation rate of women in their 30s was only 59% in 1997 because of the demands of child bearing and child raising, this rate is expected to climb to 64% in 2010 owing to the expansion and enhancement of day nurseries and the spread of variable working hours system and flex-time. With the development of computerization, the number of people working at home will also increase.

(4) NPOs: As New Entities on Society and Economy

a) In the new diversified society and economy, nonprofit organizations (NPOs) are expected to develop considerably. As a result, NPOs will reinforce functions that existing economic entities can no longer fulfill. For example, (1) NPOs can represent the views of ordinary people in areas where those views are not heard by the government, and can appeal to the government. (2) In addition to providing accurate corporate information to consumers, NPOs can create a new system of feeding back consumer evaluation to corporations. (3) As well as representing the interests of ordinary people in monitoring the public sector, NPOs can help stimulate economic activity by providing welfare and other public services that cannot efficiently be provided by government or corporations. NPOs can provide a platform where individuals will contribute to society within regional communities and other groups, while playing a full role in business under market principles, thus promoting the diversification of individual lifestyles.

b) In March of this year the Law to Promote Specified Nonprofit Activities was passed to facilitate and promote the activities of organizations performing certain nonprofit activities such as welfare, environmental, disaster relief, and international cooperation, by allowing the incorporation of such organizations through simple and swift procedures. This act reduced the government's supervision of such organizations to the necessary minimum, leaving the evaluation of their activities to the public based on disclosure of information on the organizations.

(The Spread of Volunteer Activities by 2010)
People participating in NPO activities, which have become popular in recent years, are estimated at around 10 million today (one adult in ten). But if we include those who would participate given the opportunity, this figure grows to nearly 60% of the adult population. By creating the conditions to facilitate such participation in the future -- by implementing an NPO Law for example ? in 2010 at least one adult in three will be participating in such volunteer activities as regional enhancement, welfare work, and international cooperation.

Conclusion

General anxiety, caused by unclearness about the future, is deep rooted in Japan today. This anxiety is a major cause of the current economic slump. The new society and economy following in the wake of structural reform will not produce a gloomy environment either at macro-economy or systems levels. On the contrary, if Japan responds proactively to the new order, it can create a more affluent, efficient, and brighter society than it has now. Furthermore, countries all over the world are experiencing population aging or environmental problems. As the first country in the world to successfully cope with these problems, Japan can offer the world "Japan-style" global standards for dealing with them.

While structural reform is accompanied by pain, it is not difficult to cope with individual policies or with reform of the macroeconomic environment or social and economic system, as long as these policies and reforms are accepted positively. We must face the current severe economic conditions and participate in a proper and shared sense of urgency.

For this, we require a clear view of the future. Sharing such a view will enable us to see the path of structural reform that we should follow. The impetus for realizing the new society and economy will surely come when the people of Japan as a whole share the same view of the road to structural reform. This report is one attempt at a view of the future, and the view described here will hopefully be of some assistance in dispelling uncertainty toward the future.

In the society and economy to be created at the dawn of the 21st century, a clear and fair market system and a society in harmony with the environment will become Japanese new assets. It is also important that we pass on to future generations, as "positive assets," the human resources, technologies, culture, and other tangible and intangible resources that we have accumulated. With this in mind, the people of Japan should overcome the temporary pain and work together to positively advance the structural reform of their society and economy in an effort to build a platform for the nation's long-term development.