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Overview of Joint Report of the Social and Economic Outlook Committee and Economic Entity Role Committee Economic Council

June 22, 1998


Submitted at the Economic Council's June 22, 1998, general meeting, with the deliberations of 13 meetings of the Council's Social and Economic Outlook Committee, 11 meetings of the Economic Entity Role Committee, and 93 meetings of 11 working groups, held since July last year.

1. Scenario for Recovery to Growth Path -- Sharing a Proper Sense of Crisis

Scenario for Recovery to Growth Path

  • Four issues for the recovery to growth path
    (1)Completion of the disposal of "debt legacy" posed by the bad debt problem
    (2)Activation of the economy from the supply side by structural reform -- Securing flexible policy and supporting the pain
    (3)Appropriate stimulation of aggregate demand -- Resolve the deflation gap
    (4)Clarity of future outlook -- In relation to the macro-economy and the new Japanese-style system
  • Disposal of bad debts
  • Even if new bad debts continue to arise in the future, it is essential to permit a swift and far-reaching disposal of bad debts, by a total plan including liquidation of the bad debts and the associated land collateral, in accordance with the financial Big Bang schedule.
  • Through the Comprehensive Economic Measures in April this year, Japan must switch tracks from the current negative environment to a growth path.
  • => Start utilizing the positive effects of the economic structural reforms (venture industries lead the overall economy)
  • In advancing the structural reforms, it is important to duly consider employment problems. It is vital to promote labor mobility to such industries as information, communications, and welfare where labor demand is expected to grow, and to strengthen the economy's labor market adjustment functions through further deregulation of employment dispatching undertakings.
  • The average annual growth rate for the period 1998 to 2003 will be 2.5% (2 - 3%). By 2003 the budget deficit will be 3.4% of GDP, but will have fallen below 3% by fiscal 2005. The unemployment rate will be around 3.5% (fiscal 2003)

2. Macroeconomic Outlook after Structural Reform Three Pillars:

  • A Clear and Fair Market System
  • A Society in Harmony with the Environment
  • Passing on Positive Assets to Future Generations

Will the Economic Growth Rate and Standard of Living Fall ?

<Case I>
(1) The future rate of technological progress will be around 1% as during the 1980s.
(2) The labor force in 2010 will be around the 1997 level (labor market reforms = Increase in labor force participation rate of women and senior citizens).
(3) Economic structural reform, fiscal structural reform, and social security system reform will advance steadily.
=> As a result:
  • The real growth rate to 2010 will be around 2%.
  • The per-capita growth rate should also be around 2%. In the future, the per-capita GDP growth rate should be focused as a main indicator for the economic performance rather than the growth rate itself. (The per-capita GDP growth rate in the 1990s was 1.4% for Japan, 1.3% for the United States, 1.0% for Germany, 1.6% for the United Kingdom, and 1.0% for France). Compared with other major industrialized countries, Japan has achieved an excellent postwar performance in such areas as economic growth and unemployment rates. Even in the future Japan's performance will be adequate compared with its developed peers.
  • While the total population will decrease from 2007, per-capita stock of public assets such as land, roads, and parks will increase. Housing space will be improved and more city-center housing will be available.
<Case II>
(1) The future rate of technological progress will be about 2%, double that of case I.
(2) The growth of labor force in 2010 will around the same rate as in the 1990s (0.5%).
(3) Various reforms will be implemented (as in case I).
=> As a result:
  • The real growth rate to 2010 will be around 3%.

Will the Japanese Economy Be Able to Withstand an Aging Society with Fewer Children ?

  • The national burden ratio and the potential national burden ratio will be no more than around 45%, based on the following premises: that the increase in public spending (government consumption) is fixed in real terms; that public fixed capital formation will decrease (from around 8%, to 6%) as a percentage of nominal GDP by fiscal 2007, and thereafter will be fixed as a percentage of fiscal 2007 nominal GDP (around 6%); that the social security system will be reformed, premised on a rise in the labor participation rate of women and senior citizens (the age for receiving the wage-indexed portion of the old age employees' pension will be raised to 65, the pension-to-wages ratio will be restrained by about 10%, and the self-liability rate of medical treatment will be around 20%). (The Economic Council's "bankruptcy scenario" of December 1996 predicted that if the fiscal and social security systems are left as they are, by 2025 the potential national burden ratio would be over 70%.)
  • While diverse methods of reforming the public pension system are being examined, the increase in subscription periods accompanying the maturation of the pension system and the wage rises caused by economic growth will help push up pension amounts.
  • With deregulation, health- and nursing-related areas will become new growth industries.

Will Global Environmental Problems Restrict Growth ?

  • The implementation of the measures indicated by the Joint Conference could curb volumes of CO2 emissions without lowering the economic growth rate significantly.
  • Restraining the volume of CO2 emissions to the level of CO2 emissions in 1990 without implementing the Joint Conference Measures would reduce the GDP growth rate by 1.3% a year.
  • The implementation of the Joint Conference Measures would stimulate investment demand of around 3 trillion yen annually in such areas as housing and office insulation, advanced-function corporate office equipment, cars with better mileage, and energy-efficient production processes.

Will the Unemployment Rate Rise and General Anxiety Increase?

  • Increase in voluntary job switching caused by changes in awareness of workers
  • Increase in involuntary unemployment accompanying industrial structural adjustments and intensification of competition in industry
  • (The 3.6% unemployment rate in first quarter of 1998 was made up of just under 3% structural unemployment and just under 1% cyclical unemployment.)
=> As a result:

Structural unemployment will continue to increase in the future.

  • Implementation of measures to smooth labor mobility (enhancing supply-demand adjustment functions by deregulation) and the creation of new employment opportunities through the growth of new industries including venture capital businesses will absorb some unemployment.
  • The labor mobility measures, including company pensions portability, and the venture company development measures, such as stronger debt guarantees for venture companies, in the April 1998 Comprehensive Economic Measures are extremely important.

Can Japan Withstand the Tide of Globalization ?

  • The participation of overseas companies will contribute creating employment and introducing technology. Japan's international anomalies must be revised.

Will the Current Account Go into Deficit ?

  • In fiscal 2010, the current account will be roughly in balance. As of the end of fiscal 1997, Japan's net external assets were 25%. In the future, Japan will be the ordinary country in external balance.

3. The Shape of the New Social and Economic System (The Direction of Reform)

The New System Experimentation

  • The characteristics of the existing Japanese-style market system are an emphasis on and utilization of the merits of cooperation over competition, based on stable relationships between and within the economic entities.
  • With the "catch-up" phase of Japan's growth now over, the country needs to develop its own frontiers. Japan must now pursue efficiency and the principle of competition.
  • Without spoiling the merits of the existing Japanese-style system, Japan is required to experiment in upgrading to a new system so as to be capable of demonstrating the results of the future reforms.
  • Various subsystems make up Japan's overall system through mutual complementation. Individual structural reforms must be advanced simultaneously and strongly.

The Basic Principle of the New Social and Economic System

Clear and fair markets -- Basic principles--Toward a dynamic system

  • Equality of opportunity ~ In the past, ultimate equality was emphasized
  • Principle of self-responsibility
  • Diverse choice and adequate disclosure of information
  • Emphasis on rules

While seeking efficiency through market principles, Japan must create a caring, not "winner take all" society. It is essential to organize a safety net including social political consideration for the genuine poor sections of society.

The Actual Shape of the New Social and Economic System
(Employment System)
  • A diverse system under which workers and companies can choose the most desirable form of employment for them (lifetime employment, flexible employment for specialists, and informal employment)
(Corporate Governance)
  • With the abolition of cross-shareholdings, the role of shareholders in corporate governance is expanding. However, long-term, stable management is possible even with the abolition of cross-shareholdings.
  • With the functions of financial institutions diversifying and specializing, in the future corporations are expected to select their main banking relationship in accordance with the situation from among a range of financial institutions each with different functions.
(Public Sector System)
  • Where possible, provision of public services should be entrusted to the private sector, and the government should slim down its organization and administrative functions, making them more efficient and focused. It should also pursue efficiency through markets by such means as using PFIs. Government should shift its emphasis to market establishment and monitor, crisis management, and consumer protection.
(Social Security System)
  • Social Security System entails reforms so as to allow it to be sustained and managed amid an aging society with fewer children, and comprehensive design to ensure harmony of entire system and individual elements, such as pensions, medical treatment, and nursing care.
  • In relation to medical treatment and nursing, major expansion of the burden of medical expenses on the general public can be avoided by (1) injecting private-sector vigor; and (2) revising the social hospitalization problem.
(Importance of Educational Reform)
  • We should abolish unnecessary public regulations concerning education and promote the principle of competition among educational institutions, so that alternatives of content and institution can be expanded from the student's perspective.
(Social System in Which Individuals Participate -- Age-Free and Gender-Free Society)
  • Create a society in which roles are not determined by age or gender (age-free and gender-free society), in which each individual can freely participate based on desire and capability.
  • It is necessary to create systems that allow women to work while raising children concerning women's participation in society.
(NPOs -- New Core Social Economic Entities)
  • NPOs are expected to develop considerably in the context of the new diversified society and economy.
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