Annual Report on
The Japanese Economy and Public Finance
- No Gains Without Reforms V -
Government of Japan
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Most of the goals raised for the intensive adjustment period imposed for four years until the end of FY2004 have been achieved. The next two-year period starting this fiscal year is positioned as the concentrated consolidation period whereby the objective is to strengthen the foundation for new economic growth. For this, one of the main factors is to construct a small and effective government, while the policy of "from the public to the private sector" serves as one of its underlying basic concepts. That is for the government to promote measures to review which operations and projects it will continue to mange, while leaving to the private sector what it can do. Whether Japan is able to construct a small government is the key to its maintenance of economic vitality when faced with a declining birthrate and aging society in the future.
A significant change is to take place starting FY2007, after the completion of the concentrated consolidation period. That is the decrease in the overall population and mass retirement of the first baby boomer generation (hereafter "Dankai generation"). Japan will be the first country out of all the developed countries that will be experiencing population decrease and at a rate much higher than any others. We must face this fact and analyze the economic impact that this change will bring upon Japan, so to promote policies to counter these effects.
Recognizing the importance of these issues, the Annual Report on the Japanese Economy and Public Finance 2004-2005 is comprised of three chapters. The analysis result for each chapter is summarized below.
Chapter 1 reflects on the economic trend and looks at the current status and future prospect of the Japanese economy. The analysis given in this chapter demonstrates that the negative legacies, which were the main factors of economic downturn in Japan since the 1990s, have been largely eliminated. In particular, as for the disposal of non-performing loans, its target level has been achieved primarily through off-balancing. Furthermore, we learned that consumption has been gradually encouraged through improvements seen in the employment situation. As a result, it is necessary for Japan to further advance the reforms and have the results achieved so far lead to sustainable growth.
Chapter 2 looks at the achievement status and future challenges of the shift from the public sector to the private sector. The policy of "from public sector to private sector" underlies the long-term development of the Japanese economy. When studying the awareness of the public, it became apparent that, under certain conditions, a small government is preferred. As for the services provided by the local governments, the Designated Management Entity System has been implemented since 2003 and study shows that the efficiency of the services provided has improved with entry of private businesses into this market. As market testing is to be put into full swing in the future, it is expected that liberalization to the private sector of businesses and operations traditionally managed by the public sector will lead to economic vitalization.
Chapter 3 examines from multiple aspects the impacts the "demographic wave" marking the beginning of decrease in the overall population and mass retirement of the Dankai generation will have on the economy. While it is possible that the pressure of increased labor costs of the Dankai generation led to suppression of youth employment after the burst of the bubble to some extent, the employment of the younger generation has been encouraged as the Dankai generation is reaching the mandatory retirement age in the near future. Furthermore, as the Dankai generation demonstrates heavy consumption of services and time, as well as high risk tolerance level upon selecting financial assets, they are thought to continue leading the Japanese economy.
During the concentrated consolidation period starting this fiscal year, it is important to gain public understanding that the Japanese economy is at its critical point of whether it will maintain its vitality or not, and that there is a need for the desirable policies to be selected. This report aims to contribute to the enhancement of structural reform for this exact purpose.
The Council on Economic and Fiscal Policy (CEFP)
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