Follow-up and Future Schedule for Implementation of the Emergency Economic Package: Pursuing the Revitalization of the Japanese Economy

April 23, 1999

Economic Planning Agency

Preliminary Translation by EPA

I. Overall Evaluation of the Emergency Economic Package

1. Effects of the Emergency Economic Package

When the Emergency Economic Package was formulated, the Japanese economy was caught up in a "vicious cycle of recession" characterized by receding confidence in the financial system and growing insecurity in the job market.

Since its inception, the Obuchi Cabinet has made bold policy decisions and translated these into prompt action. In line with this stance, the Emergency Economic Package was announced on November 16, 1998 with the objective of overcoming the serious economic problems that beset the nation. This was followed by concentrated Diet debate, and the prompt passage of the third supplementary budget for FY 1998 on December 11. The Emergency Economic Package exceeded 17 trillion yen in projects and, including the tax cuts mandated, amounted to some 27 trillion yen. This largest-ever economic package enabled the Japanese economy to avert a deflationary spiral.

As the package was being prepared, there was widespread fear of growing financial system risks. However, a framework for promptly placing failing financial institutions under government control has been established and is functioning well. Consequently, Japan's financial system has regained the confidence of the general public and the markets, as reflected in the stabilization of the foreign exchange market and the financial and capital markets. Japan's bold and speedy economic actions have contributed to the stabilization of the Japanese financial markets, as well as to the stabilization of the global financial markets.

Japan has also actively contributed to the stabilization of Asian currencies and economies by providing various forms of assistance and support which are highly regarded by the Asian countries. It is notable that signs of economic recovery are now discernible among some of these countries.

2. Assessment of the Current Economic Situation and the Road to the Revitalization of the Japanese Economy

FY 1999 will stand as a crucial watershed point for the Japanese economy. During this period, Japan must avoid its third consecutive year of negative growth while preparing the groundwork for recovery, enabling it to embark on a solid path to recovery toward FY2000.

The economy is still in a very severe situation, as private demand remains sluggish. However, activities have been getting rid of the downward tendency with some improvement in corporate and consumer sentiment supported by the effects of various policy measures. These include measures for stabilizing the financial system, alleviating the credit crunch, expanding public investment spending, enacting permanent tax cuts, distributing "Community Promotion Vouchers," promoting various housing-related policies leading to increased housing investment, and continuing monetary easing. Another notable factor is the continued expansion of the U.S. economy. Although there are some uncertainties regarding its future, the expansion of the U.S. economy brightens the prospects for the recovery of the Japanese economy.

On the other hand, some factors continue to cast a dark shadow over the government's ability to avoid another year of negative growth and to prepare the groundwork for recovery. These include: (1) The restructuring process of employment and wage adjustment is continuing. The unemployment rate -- a lagging indicator of business conditions -- continues to climb, rising from 4.4% in November 1998 to 4.6% in February 1999. Furthermore, given the need for medium- to long-term structural reform, corporate restructuring efforts may drag on. These developments may obstruct the recovery in household consumption. (2) The expected economic growth rate is declining and is exerting renewed pressure for capital stock adjustment.

3. Future Tasks and Policy Management

In the near term, Japan will maintain a flexible stance in economic policy management to generate a moderate recovery in private demand. Measures in the Emergency Economic Package, including the 15-month government budget, will be used to bolster public-sector demand to provide support for business conditions. Monetary policies will supply ample credit by appropriate monetary adjustment measures to continuously contribute to the recovery of the Japanese economy.

To link economic recovery with stable growth over the medium to long term, Japan will also pursue various structural reforms aimed at developing social structures to support the development of the diverse knowledge-intensive potential of the 21st century. For this purpose, Japan's current economic plan will be replaced with a new blueprint entitle, "Japanese Socioeconomy in the 21st Century and Policies for Economic Rebirth." The new plan is scheduled to be ready in the summer of 1999.

Japanese industries have a long history of successfully overcoming challenges, including those presented by postwar reconstruction, the oil crises, and the appreciation of the yen. Now, in order to survive in the global marketplace, they must reinforce their competitive positions by effectively improving productivity. The government has established the Competitiveness Commission and is poised to support the self-help efforts of Japanese industries.

Thus, Japan's near-term objectives shall be to upgrade the social safety net, including measures to address the employment situation, and to actively implement public investment projects to provide ongoing support for the economy. In the medium to long term, greater focus will be placed on strengthening industrial competitiveness and coping with a wide range of challenges in the 21st century, such as responding to the demands of an aging society and declining birthrates and the problem of dioxin pollution. With these objectives in mind, the Emergency Economic Package has been followed up with the following actions and initiatives.

The government reaffirms its commitment to working to overcome any problem which arises and to endeavoring to achieve the revitalization of the Japanese economy.

II. Evaluation of Individual Items in the Emergency Economic Package

1. Stabilizing the Financial System and Alleviating the Credit Crunch

  • (1) Stabilizing the Financial System
    • [1] Confidence in the financial system is recovering as a result of the progress made in the implementation of various measures for the stabilization of the financial system, such as the capital injection program based on the framework of the Financial Functions Early Strengthening Law which went into effect in March.
    • [2] The fifteen banks which have applied for the injection of public funds for recapitalization have submitted management restructuring plans which are distinctive and do not follow a uniform pattern. These plans feature personnel reductions, labor cost reductions, specific and distinctive strategies for improved profitability, as well as radical organizational reforms. In the area of financial reorganization, realistic measures are being taken for improving the profitability and financial soundness of financial institutions through mergers, divestiture of businesses to subsidiaries, and capital and business tie-ups.
    • [3] The major banks basically finished disposing of their non-performing loans by the end of March 1999. Henceforth, the objective will be to effectively implement the provisions of the Financial Functions Early Strengthening Law and the Law Concerning Emergency Measures for the Revitalization of the Functions of the Financial System to establish a solid and highly competitive financial system prior to the end of March 2001 when full protection of depositors is terminated.
    • [4] To promote effective supervision of financial institutions, the "Final Report" of the Working Group on Financial Inspection Manuals was released on April 8. The recommendations in the report are scheduled to be applied to all inspections of deposit-taking institutions conducted on or after July 1, 1999.
  • (2) Alleviating the Credit Crunch and Other Issues
    • [1] Measures for Alleviating the Credit Crunch

      Compared to conditions which prevailed around November 1998, corporate concern with the lending stance of financial institutions has been mollified. At the same time, the number of bankruptcies has been significantly reduced as a result of the expansion of the government's loan guarantee facilities and other measures. However, while funding concerns have been somewhat pacified, the situation remains severe for small and medium-sized enterprises. Necessary and ample amounts of additional funds will be made available to the special loan guarantee system for small- and medium-sized enterprises. Decisions will be made on the scale of additional funds to be provided after monitoring the trends in the funding demands of small- and medium-sized enterprises. Various measures are also being implemented by the Japan Development Bank and others to alleviate the credit crunch for middle-echelon corporations, such as the provision of long-term operating funds and financing for the redemption of corporate bonds. The outstanding loans of government financial institutions are also showing a rapid rate of growth.

    • [2] Expansion and Diversification of the Route of Credit Supply

      Since the implementation of the Law on Securitization of Specified Assets by Special Purpose Companies (SPC Law), a certain amount of progress has been seen with the registration of a total of six special purpose companies. In view of this situation, measures shall be considered for promoting the further development of the system. The system for corporate-type investment trusts has only recently been introduced, and the system has not posted any results yet. Thus, the system will continue to be examined. The Non-Bank Debenture Issuance Law which was enacted on April 14 is scheduled to go into effect in May.

  • (3) Appropriate and Flexible Operation of Monetary Policy by the Bank of Japan

    On November 13, 1998, the Bank of Japan's Monetary Policy Meeting made the following decisions aimed at ensuring the smooth supply of funds for corporate financing needs: (1) active use of CP operations; (2) creation of a provisional lending system to support corporate financing needs; and (3) introduction of operations collateralized by corporate bonds and other assets. These decisions have already been put into action.

    In the February 12, 1999 Monetary Policy Meeting, the Bank of Japan decided to lower the uncollateralized overnight call rate to virtually zero. This stance has been maintained, and this interest rate continues to hover around zero. Similarly, interest rates on termed instruments and long-term interest rates have declined substantially and remain at low levels. Furthermore, the "Japan premium" has also receded to nearly zero.

    Against this background, it is necessary for the Bank of Japan to fully monitor the effects of current monetary policies and to supply ample credit funds by appropriate monetary regulatory measures to continue to contribute to the recovery of the Japanese economy until such time as the Japanese economy begins to show evidence of autonomous recovery.

2. Economic Recovery Measures Which Contribute to Building a 21st Century Society

  • (1) Implementation of Leading 21st Century Projects

    A total of 2,050 billion yen has been budgeted in the third supplementary budget for FY 1998 and 12,620 billion yen in the FY 1999 budget for the following projects: [1] two projects to configure an Advanced Electronics-Oriented Nation (FY1998 third supplementary budget: approximately 280 billion yen; 1999 budget: approximately 1,230 billion yen); [2] three projects for the Promotion of Transportation and Lifestyles for Future Cities (FY1998 third supplementary budget: approximately 680 billion yen; FY1999 budget: approximately 1,310 billion yen); [3] two projects for the Creation of Safe, Secure, and Affordable Lifestyles, including responses to the aging of society and declining birthrates, and measures to cope with dioxin pollution (FY1998 third supplementary budget: approximately 1,010 billion yen; FY1999 budget: approximately 8,900 billion yen); and [4] four projects for the Establishment of a Society with Stability in Employment based on Advanced Technologies and High Mobility (FY1998 third supplementary budget: approximately 310 billion yen; FY1999 budget: approximately 1,190 billion yen).

    The government is also using "virtual agencies" to more effectively promote projects, such as in the field of telecommunications, which overlap the jurisdictions of several ministries and agencies.

  • (2) Measures to Activate Living Space
    • [1] Adoption of the Plan to Double the Size of Living Space

      The Cabinet approved the "Plan to Double the Size of Living Space" on January 29, 1999. Approximately 30.2 trillion yen (of which 14.3 trillion yen is to be defrayed by the national government) has been budgeted for this purpose in the third supplementary budget for FY1998 and the FY1999 budget.

      A total of 205 billion yen has been budgeted for the promotion of the Regional Strategic Plan in the FY1999 budget. Regional proposals are scheduled to be submitted to the national government by the end of May.

    • [2] Increasing the Liquidity of Land and Assets

      The Resolution and Collection Corporation began operation on April 1, 1999. The Servicers Law went into effect on February 1. More than ten companies have applied for licenses, and four of them were licensed by the middle of April.

    • [3] Promotion of Housing Investment

      In order to promote housing investment, the FY1999 tax revision contains new provisions for tax cuts on housing loans. Under the newly established Emergency Lending for Doubling the Size of Living Space, the portion of housing loans subject to the standard interest rate was significantly increased. In addition, the standard interest rate for the Housing Loan Corporation's fourth allotment for FY1998 was set at 2.2%, and the application deadline for the fourth allotment was extended to March 26. The increase in the standard interest rate for FY1999 was boldly restrained and set at 2.4% from the application start date of the first FY1999 allotment. As a result, the number of condominium units sold in the Tokyo Metropolitan Area registered a record high in the month of March.

  • (3) Measures to Promote Industrial Revitalization and Employment Creation
    • [1] Adoption of the Industrial Revitalization Plan (including measures to assist small and medium-sized enterprises)

      The Cabinet approved the "Industrial Revitalization Plan" on January 29, 1999. Approximately 10.2 trillion yen has been budgeted for this purpose in the third supplementary budget for FY1998 and the FY1999 budget.

      The newly formed Industrial Competitiveness Commission started its deliberations in March. Through the cooperation of both the public and private sectors, the Council will comprehensively review the responsibilities and tasks of each sector for achieving greater industrial competitiveness through improved productivity.

      [2] Measures to Create Employment

      i. Implementation of the "Comprehensive Plan to Create Employment"

      Approximately 1 trillion yen will be spent on emergency employment creation and job stabilization, and core initiatives in the "Comprehensive Plan to Create Employment" started to be introduced in January 1999. While employment conditions remain severe, the government will endeavor to stabilize employment by implementing various measures for job creation, and by effectively promoting the plan.

      As part of these efforts, the revised Law Concerning the Promotion of Improvement of Employment Management in Smaller Enterprises for Securing Manpower was put into effect on January 1, 1999 to create good job opportunities. As of March 31, 1999, approximately 1,700 applications had been received in response to job creation measures mandated by the revised Law. The "Special Subsidy for Supporting the Mobility of Middle Aged and Older Workers" was put into effect on January 1, 1999 to promote the labor mobility of middle aged and older workers without intervening periods of unemployment. Regarding the commissioning of labor training to private educational and training institutions, training for approximately 38,000 persons had been secured as of March 31, 1999. Continued efforts will be made to secure private sector training institutions which can provide training that matches the needs of applicants. The "Special Fund for Emergency Employment Creation" was put into effect in Okinawa Prefecture on January 30, 1999.

      ii. Strengthening Labor Supply-and-Demand Adjustment Functions

      Discussions commenced in the House of Representatives on April 15 regarding bills to revise the Manpower Dispatching Business Law and the Employment Security Law in order to use private sector institutions to adjust supply and demand in the labor market.

  • (4) Focused Investment for Social Infrastructure

    The Emergency Economic Package mandates spending on social infrastructure projects valued at approximately 8.1 trillion yen (in accordance with the national government?s third supplementary budget for FY1998, prefectural governments allocated 2,060 billion yen for additional investment for social infrastructure).

    With the enactment of the original FY1999 budget [public investment spending is up 5% from the previous year's initial budget (up by more than 10% taking into account reserve funds budgeted for public investment projects)] and the passage of the third supplementary budget for FY1998, the government has put into place an uninterrupted 15-month budget. As a result, public investment projects launched in February showed a sharp increase over the previous year and are providing effective support to business conditions. A special investigation of FY1998 public investment projects has revealed the following. As of the end of February, the total value of public investment projects contracted was 18.5749 trillion yen, including the provisions of the first and third FY1998 supplementary budgets. This means that 77.6% of the budgeted amounts had been contracted. Public investment projects contracted under the provisions of the FY1998 third supplementary budget amounted to 719.8 billion yen, signifying a contracted percentage of 19.3%.

    On March 23, the Cabinet approved a resolution for taking active measures to achieve an increase of more than 10% in the value of public investments contracted during the first half of FY1999 as compared to the previous year (approximately 13.6 trillion yen was contracted during first half of FY1998). In addition, the national government has issued an appeal to local governments to actively initiate public investment projects during the first half of FY1999. An investigation shall be undertaken regarding the implementation status of public investment projects during the first half of FY1999, including projects by local governments. This investigation shall be utilized in effectively promoting project implementation.

    The government is currently conducting a study regarding private finance initiative (PFI). The purpose of the study is to develop a consensus on basic policies, implementation procedures, and responses to specific issues pertaining to PFI. Additionally, the study is designed to promote a better understanding of PFI and to support the national and local governments in the early formation and implementation of PFI projects.

  • (5) Permanent Tax Reductions and Other Measures

    The FY1999 tax revisions were implemented in April. This tax package features permanent tax cuts and a total reduction in national and local taxes of more than 9 trillion yen in an average fiscal year.

    As of April 1, all municipalities throughout Japan had commenced the distribution of "Community Promotion Vouchers." The status of the use of these vouchers and their economic impact shall be analyzed.

  • (6) Suspending the Fiscal Structural Reform Law

    The necessary legislation for the suspension of the Fiscal Structural Reform Law was enacted in December 1998.

3. Reducing the Risks to the Global Economy

The revitalization of the Japanese economy continues to be important for the global economy as well as for Asian economies. In view of the fact that Japan has a vital role to play in reducing the risks to the global economy, Japan is providing assistance (approximately 1 trillion yen) to Asian economies which are linked with Japan with close ties of interdependence. Under the specific commitments of the New Miyazawa Initiative, Japan will continue to provide assistance for achieving currency and economic stability in Asian countries.

  • (1) Measures to Assist the Nations of Asia Facing the Currency Crisis and Other Difficulties

    The steady assistance extended through loans from the Export-Import Bank of Japan, ODA yen loans, and the establishment of the Asian Currency Crisis Support Fund is contributing to the economic recovery of Asian countries.

  • (2) Assistance for Subsidiaries of Japanese Corporations in Asia

    Japan is providing assistance to Asian countries and subsidiaries of Japanese corporations in Asia through such measures as the extension of Small Business Finance Corporation loans to overseas subsidiaries via Japanese parent companies, and the implementation of financial assistance through the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund, trade insurance facilities, and grant aid. In addition, a special yen-loan facility has been created to promote economic structural reform in Asian countries, while at the same time expanding the scope of opportunities for the participation of Japanese corporations in economic activities in Asian countries.