Annual Report on the Japanese

Economy and Public Finance

2001-2002

- No Gains without Reforms II -

November 2002

Cabinet Office

Government of Japan


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Introduction
   Japan' s economy bottomed out supported by export growth and an end to the decline in production. Thereafter, the impact of this has been gradually spreading throughout the economy, and business is now on the way to recovery. Whether or not this recovery will be a self-sustained, vigorous one depends on the developments of private demand. However, in Japan' s business cycles since the 1990s, private demand has remained sluggish and momentum for economic recovery has continued to be weak due to the downward pressure from such factors as balance sheet adjustment.
   The vital measure for eliminating the weakness of the economic conditions and bringing about sustained economic growth is to carry out structural reform. As part of such efforts, tax reform is an urgent task. The government aims to "conduct comprehensive and drastic tax reforms suitable for the 21st century" by construing the three established principles for a desirable tax system, "equity, neutrality, and simplicity," as "fairness, vitality, and simplicity" to meet the demands of the times. The tax reform has an important meaning in terms of activating the economy. Therefore, the challenge is how the tax system should actually be revised in light of this aspect.
   Vitalization of the economy must be accomplished in order to recover Japan' s dynamism and achieve sustained improvement of the national life in the medium and long terms. In particular, since the rate of productivity growth of the economy slowed down in the latter half of the 1990s, in contrast to that of the United States, it is necessary to strengthen measures for boosting this rate. The issue is closely linked with the resolution of problems in extensive fields, such as innovating corporate management, improving resource allocation, and increasing research and development activities.
   The Annual Report on the Japanese Economy and Public Finance [Report by the State Minister in Charge of Economic and Fiscal Policy] for 2001-2002 analyzes and examines the economic trend, particularly on the issues above.

Chapter 1 surveys the strength of economic recovery. First, the current state of the economy and prospects of recovery phase are reviewed, and analysis is made on the deflation observed in both general prices and asset prices, which are proceeding at pace with the recent business cycle. On that basis, analysis is conducted on the adjustments and measures the corporate, banking, and household sectors are respectively being pressed to carry out under the present circumstances and the impact the macroeconomic policies are having on the economy. Lastly, the expected scenario for the economic future and the risks involved are examined based on such circumstances.

Chapter 2 overviews the current state of tax burden as a premise for comprehensive and drastic tax reforms. Specifically, the tax burden structure is analyzed for individual income tax and for corporate income tax from a variety of viewpoints, such as macroeconomic and microeconomic approaches and country-by-country comparison. Such analysis offers essential basic material for designing a new tax system that will support the vitality of Japan' s economy.

Chapter 3 discusses the issues to be tackled for activating the economy. Firstly, the necessity of vitalizing the economy is revealed through examining the background of the frequently pointed-out concern of the "hollowing out of industry." Then, the current situation of economic vitalization and the issues that remain to be resolved are reviewed for the areas of efficiency improvement in corporate management, efficiency improvement in resource allocation, and efficiency improvement in research and development. Lastly, the future economic structure of Japan that would come to pass upon the accomplishment of structural reform is discussed.

   Through above analyses and examinations, this Annual Report aims to clarify the current conditions and problems of Japan' s economy and indicate the path that it should follow.

Column 0-1

The Council on Economic and Fiscal Policy (CEFP)

What is the Council on Economic and Fiscal Policy?

The Council is established in January 2001 in order to exercise the full leadership of the Prime Minister regarding economic and fiscal policy.

List of Members of the CEFP

Chairman: Junichiro Koizumi, Prime Minister; Yasuo Fukuda, Chief Cabinet Secretary; Heizo Takenaka, Minister of State for Economic and Fiscal Policy; Toranosuke Katayama, Minister of Management, Home Affairs, Post and Telecommunications; Masajuro Shiokawa, Minister of Finance; Takeo Hiranuma, Minister of Economy, Trade and Industry; Masaru Hayami, Governor of the Bank of Japan; Jiro Ushio, Chairman and Chief Executive Officer of USHIO INC.; Hiroshi Okuda, Chairman of Toyota Motor Corp.; Masaaki Honma, Professor, Faculty of Economics, Osaka University; Hiroshi Yoshikawa, Professor, Faculty of Economics, University of Tokyo

Recent major activities:

June, 2001
Deliberation of the "Outline of Basic Policies for Macroeconomic Management and Structural Reform of the Japanese Economy" (so-called 'Large-bone Policy' ) (Cabinet Decision, June 26))
August, 2001
Deliberation of the "Guidelines for the Estimate Budget Request
(Cabinet Agreement, August 10)
September, 2001
Deliberation of the "Reform Schedule - Main Points" (Delivered in Cabinet, September 25)
September - October, 2001
Deliberation of the "Front-Loaded Reform Program"
(CEFP Decision, October 26)
November, 2001
Deliberation of the "Guidelines for Formulation of the FY 2002 Budget" (Cabinet Decision, December 4)
November, 2001
Deliberation of the "Immediate Action Program for Structural Reform" (CEFP Decision, December 14)
November-December, 2001
Deliberation of the "Structural Reform and Medium-Term Economic and Fiscal Perspectives" (so-called `' Reform and Perspectives' ) (Cabinet Decision, January 25, 2002)
February, 2002
Deliberation of the "Emergency Countermeasures to Deflation"
May-June, 2002
Deliberation of the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002"" (so-called `Basic Policies 2002' ) (Cabinet Decision, June 25)
August, 2002
Deliberation of the "Guidelines for the Estimate Budget Request" (Cabinet Agreement, August 7)
October, 2002
Deliberation of the "Comprehensive Measures to Accelerate Reforms"
November, 2002
Deliberation of the "Guidelines for Formulation of the FY2003 Budget"
November, 2002
- January, 2003
Revision of the "Structural Reform and Medium-Term Economic and Fiscal Perspectives" (so-called ' Reform and Perspectives' )

Fore more information, please see the Website below:
http://www5.cao.go.jp/keizai-shimon/index_en.html


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