Annual Report on the Japanese

Economy and Public Finance

2003-2004

- No Gains Without Reforms IV -

July 2004

Cabinet Office

Government of Japan


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Key Points of Chapter 2

Section 1 Regional Disparities in Economic Recovery
Inter-regional disparities in production are growing. This is a reflection of the inter-regional differences in export dependence and inter-regional differences in the sensitivity to demand growth.
Looking at regional employment trends, manufacturing and construction are declining sharply, while tertiary industry is growing. It is vital to provide support so as to enable smooth labor migration between industries.

Section 2 Economic Divergence Between Regions and Causes
Inter-regional income disparities appear to be on a contractionary trend, but a disparity remains where the region with the highest income has double the level of income of the region with the lowest income.
An analysis of the factors causing the inter-regional income disparities shows that the productivity disparities are the biggest contributor and the labor participation rate has a certain degree of contribution.
Productivity disparities depend on the situation of regional industrial specialization as well as human capital.
In the past, there was labor migration from regions with high unemployment rates to regions with low unemployment rates, which contributed to diminishing the unemployment rate disparities, but recently inter-regional labor migration has declined sharply.

Section 3 Structural Reform in the Regions
A regression analysis of the fiscal situation of municipalities nationwide using individual data shows that (i) increased employment of government officials, decreased local tax revenues, higher interest payment on public debt, advancement of the aging population are correlated with increased rigidity of finances, and (ii) it is not enough to prevent the growing rigidity of public finances solely by cutting investment spending.
A survey of the features of municipalities designated as Special Zones for Structural Reform using the same database as above shows that (i) many were relatively well-off financially, and (ii) according to certain indicators, many were highly evaluated as having adopted measures to increase transparency, convenience and efficiency. Nonetheless, there was an increasing number of municipalities, initially hesitant about reform, which received designation as special zones in the fourth round of designation (March 2004).
Over five million tourists visit Japan every year, which given that it ranks 33rd in the world is a low number. Using a model to measure the projected number of tourists visiting Japan (theoretical number), there is a possibility that the number of tourists actually visiting Japan is lower compared to the economic size and population of Japan and neighboring countries.



Chapter 2

Prospect for Regional Economic Revival

    Economic recovery has been in its third year since the beginning of 2002, but despite this continued economic recovery, some continue to argue that they "do not have a sense of economic recovery." As Chapter 1 highlighted, these disparities in business confidence in this recovery phase are greatly impacted by the fact that improvements in the business sector are not sufficiently leading to improvements in employment and wages. In addition, these disparities presumably reflect the disparities in the status of recovery of regional economies. In the 1990s, public works were vigorously used to deal with such delays in the recovery of regional economies, but given the fact that fiscal conditions of both national and local governments deteriorate, income policies undertaken to expand the scale of fiscal spending have reached their limits. Moreover, government-dependent measures to promote regional economies will cause regional economies to lose their uniqueness, and do not necessarily lead to regional economic development in the long term.
    Against this backdrop, the government has further boosted the tide of structural reform, as defined by the policies of "from public sector to private sector" and "from the state to the regions," through the efforts including those of the Headquarters for the Regional Revitalization and Special Zones for Structural Reform with a view to realizing sustainable regional revitalization. At the same time, on the regional front, some progressive local governments are actively tackling administrative reform and a number of regions are striving to expand business opportunities using Special Zones for Structural Reform and other means.
    This chapter will provide an overview of the various factors affecting regional economic trends and discuss how the current steps toward regional economic revitalization will contribute to regional sustainable development. To be specific, Section 1 explains that inter-regional disparities in economic recovery arise when regions that mainly specialize in export- and information technology (IT)-related products in terms of production recover faster than others. It also suggests that there are regions that are insensitive to demand growth in other regions due to the different degree of dependence on products traded with other regions. Section 2 illustrates that inter-regional economic disparities based on income per capita is on a contractionary trend. However, disparities still exist, with income in the region with the highest income per capita being nearly double that of the region with the lowest income per capita. The disparity itself is the result of structural factors such as the regional industrial structure and extent of human capital accumulation. Furthermore, Section 2 states that since the fundamental cause of disparities is different for each region, it is necessary to develop policies that are in line with regional initiatives rather than undertake nationally uniform policies aimed at regional revitalization. Section 3 shows that although administrative reform in local governments is advancing, their fiscal situation remains severe. In addition, Section 3 reveals that Special Zones for Structural Reform will further enhance regions' motivation and recently it has become apparent that special zones are being used not only by a handful of progressive local governments but also by a broader range of municipalities. Furthermore, Section 3 notes that in order to advance regional revitalization in the future, it is important to harness the inherent regional resources and human networks and promote tourism, intellectual technological innovation and industrial clusters, and inward direct investments.
   


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