Masaya Miyoshi
President and Director General of Keidanren
Thursday, May 18, 1995
Deregulation is currently the top priority policy issue of Keidanren. On the 26th of this month (May), Keidanren will hold its annual meeting, where we will adopt a resolution. This is what we do every year. The resolution will contain a number of policy proposals - seven items. At the top of the list we are placing deregulation - at the very top - followed by other measures such as business stimulus policies, investment in infrastructure, tax cuts - particularly corporate tax cuts - and so on. We will also propose the transfer of the capital from Tokyo to elsewhere. But deregulation occupies the top position among the policy issues. Why?
Keidanren regards the decade of the 1990s, the last decade of the 20th century, as a very important period of change, of reform. Since Dr. Toyoda, the Chairman of Keidanren and the Chairman of Toyota Motor Company, assumed the chairmanship of Keidanren one year ago, we have been working on a number of reforms - political reforms, administrative reforms and economic reforms, reforms that are restructuring the Japanese economy, education and ourselves at citizens. In this process, we have discovered that deregulation, among so many reforms, can be if not the most important, the most effective tool to change the country - to change the government and to change the people - for the better. Why? Because deregulation will reduce the price differential between prices prevailing here in Japan and those outside the country. And deregulation will create new businesses. Both of those phenomena will assure us of a truly affluent society and will assure us of a vigorous economic society. Also, deregulation will lead us to other reforms, such as the reform of the central government and local government, making them smaller and slimmer, because deregulation will reduce the number of bureaucrats, of personnel in so many ministries. Also, deregulation will lift the protections accorded to unproductive businesses, big or small, which are now protected by government controls or regulation. When these protections are lifted, they will have to be stronger, they will have to be competitive. This will contribute to the further vitalization and revitalizing of the economy and for stimulating growth here. So, deregulation which has come as part of administrative reform can also be useful for achieving the economic reform of the country.
Finally, deregulation will be useful in helping promote political reform as well, because regulation, as you know very well, has given politicians good opportunities for making money. Because regulation gives government officials power, and because businesses often try to get special favors from government officials, politicians serve as go-between consultants. While doing this, they usually talk to the businesses and raise political funds. They call this structure the "iron triangle." Keidanren has been, from time to time, a part of this triangle, but thought we better not be a part of the triangle any longer. That's why Keidanren decided some time ago to put deregulation on the top of policy issue list.
Now what about the recent action programs announced by the government at the end of March, at that time called the Five-Year Action Program? Two weeks later, it was changed into a Three-Year Action Program. Don't you think this is very funny? You see, alarmed by the rapid appreciation of the yen, the government adopted a package of policies dealing with the emergency - the appreciation of the yen and then business stimulus. And the package included the acceleration of the program from a five-year program to a three-year program. If they could do it in two weeks, maybe in one month we can reduce this again from three years to one year! The Government of Japan made an announcement on 31 March and disclosed an action program which covers 11 broad areas and comprises 1,091 items for deregulation. Keidanren gave a positive appraisal of the program; the mass media and economists and professors of universities, such as Professor Shimada of Keio University, said that this was not enough, that it was only 10 percent of what it should be. However, we said that if 100 is a full mark, we'll give the program a mark of 65 or 70. If you think in terms of A, B, C, D, I think it's a B or B prime. Why does Keidanren give such a positive credit to this program which has been criticized by the mass media and university professors? There are three reasons for this.
First, Keidanren became involved in a process which started in the summer of last year. After Mr. Murayama became Prime Minister, we found ourselves with a new coalition of three parties - the LDP, the Socialist Party and the new Sakigake party - and we have worked together with them. Naturally, the LDP and Sakigake were more active, with the Socialists more reluctant. Despite this difference, I think political leaders, if not at the top but the next-level political leaders, are aware of the importance of the program. Second, they have also convinced bureaucrats, some of the high government officials, the leading members of the administration, of the importance of this program. Whatever the result, 1,091 items of deregulation is something. So, we do see it favorably.
Number two, this time the action program has been organized in line with the broader principles recommended by the Hiraiwa Commission, which was organized two years ago September, as a private advisory group of then-Prime Minister Hosokawa for studying the ways and means to restructure the Japanese economy. Of the four or five major policy items, deregulation was at the top of the list. This Hiraiwa Report made it very clear that economic regulation should be abolished - zero - and social regulation - for safety, environmental protection, health, education, etc. - should be kept to a minimum or, at least, kept at a low level, to the equal of the level of other industrialized countries like the European nations and the United States. This time, government groups and working groups worked with those principles in mind. Of course, using economic regulation at zero as the yard stick, I would say that with this new action program they have accomplished about one third or maybe 40 percent. Still, you have 60 percent to go.
The third reason why Keidanren gives credit to this program is that business views have been well heard. We sent into those working groups representatives of business organizations including Keidanren, the Chamber of Commerce, Doyukai, Nikkeiren, Kankeiren and other business organizations, plus voices of foreign business here in Japan - ACCJ, EBC and other groups have been embodied. That's why we gave a rather favorable evaluation of the deregulation action program, now the three-year program. On thing I want to add is that I think we shouldn't discourage those political leaders and bureaucrats who have now become very serious about deregulation. If you criticize too much, they get discouraged. If you do criticize, then they turn their backs on you.
I have many concrete cases; let me give one good example. Talking about economic regulations, roughly speaking there are three categories of economic regulations. One of them is regulation aimed at adjusting supply and demand. From that very point, they restrict new entry of businesses into the market. That is the first category of economic regulation. The second category is the restrictions on investment. It sounds similar to the first one, but this is different - capacity restrictions. The third category is price limitations or price restrictions, such as the price restrictions on foodstuffs, pharmaceuticals - those are the types of economic regulations.
As to the first type of economic regulation, they have abolished the quantitative standard for opening up a gasoline stand. Formerly, to open a gasoline stand, you had to have a certain number of users, a given population in a certain area. That was checked before approval was given for the opening of a new stand. No more - you can now do this freely. However, this is not the case with bus companies, taxi companies, passenger-boat companies, and customs clearance business - they still have quantitative restrictions of one kind or another. As to price restriction, we got fed up with price restrictions on rice, wheat and many other agricultural products.
By the way, the Ministry of Agriculture, Forestry and Fishery says that when it comes to price support policy, it should not be confused with regulation. That is not a question of permit approval, it is a policy. This is a policy of the nation, they say, so it has nothing to do with deregulation. But the position taken by Keidanren is different, that this definitely falls into the category of regulation or deregulation. And we are continuing this argument with the government.
There are couple of key factors which are still hindering the progress of deregulation - two big factors. The first one is with the broader framework of economic laws we have. Professor Noguchi has counted 34 laws which were enacted around the year 1940, when the country was entering into the war period in the Pacific. A large number of new laws were enacted, and a large number of existing laws were revised. I will give you a few examples: the Foreign Exchange Control Law which was enacted in 1937, the Staple Food Control Law in 1942, and the Land and House Leasing Law in 1941. The Bank of Japan Law was revised so that the Bank of Japan could be used not for the purpose of maintaining neutrality or monetary stability but for the propose of war, accomplishing other purposes, other objectives. We still have these laws - about 34 major laws. They constitute the broad framework within which we talk about the small deregulation of 1,091 items. I don't know how much they are accounting for in this broad framework. Unless we change the total framework real deregulation is not realizable. How are we going to do that? We have to educate political leaders and let them do that job. We are going to organize study group with politicians and we will study one by one those outdated economic laws. If we reduce them - ideally totally eliminate them and replace them with new laws - or if we cut them in half, it would be a major success.
That is the number one factor, because those economic laws still give bureaucrats tremendous authority and power. Thanks to the existing outdated laws, despite deregulation at a lower level they can say, "Because we have this law, I have authority, and I should be respected." But we don't have to respect those outdated laws.
The number two factor which is hindering deregulation is employment, in two broad areas. One is in government. When deregulation makes progress, certain government officials will lose their jobs, or, if they do not lose their jobs, they will lose their work. Today the number of raw silk inspectors has declined. Japan used to be a big exporter of raw silk, and before the war there was a large number of inspectors. After the war, we still had many raw silk inspectors. But believe it or not, we still have many of these inspectors, far smaller in number but they are still there. We have a large number of rice inspectors - the Staple Food Agency of the Ministry has between 20,000 to 30,000 rice inspectors, plus inspectors of agricultural products of one type or another. So they resist change.
A recent typical case is the gasoline stand. Not just the government officials but businesses as well resisted, because they feared losing their businesses. We proposed that self-service gasoline stations be permitted. But they said this is dangerous, that the U.S. has had so many cases of incendiary accidents and so on. So they resisted. But per each sale of gasoline we have about 10 times a many personnel involved as in the U.S. So along with taxes and other things, gasoline becomes very expensive. If half of the gasoline stands in this country were replaced by self-service gasoline stands, the price of gasoline can be reduced by 20 percent, according to an estimate. By the same token, if what we call shaken, the car inspections, were simplified, it would mean the reduction of the number of government officials in the Ministry of Transport, who are checking on this and that. This will eliminate a large number of mechanics and businesses as well as garages in this country. So opposition is coming from government officials and from businesses which have been protected by regulations. This sometimes gives us a lot of headaches: we get telephone calls, and faxes, sometimes even chinjo, where the heads of associations come to see us and beg, "Please don't add those items to the list of Keidanren's recommendations." But we must do it, that is the number one priority of Keidanren, so like it or not we have to do it and we had better do it quickly. If we put off the solution to the problem until later the more difficult it becomes and the more negative an impact it will have for us.
Finally, what about the macro impact of deregulation on the Japanese economy? My conclusion is that the plusses, the positive effects, far outweigh the negative impact of deregulation. Inevitably, deregulation has its negative impact in the beginning. Deregulation will eliminate some inefficient businesses. It will also encourage imports, and an increase of imports which replace domestic production, and the elimination of inefficient businesses, will create unemployment. But given time, these will be more than compensated for by the creation of new businesses. Also, the reduction of the price differential between foreign nations and Japan will realize increase in real income and real production.
We have used two economic models for calculation and have gotten a very good figure. According to these from this fiscal year through fiscal year 2000, cumulative real GDP will increase. The magnitude of deregulation which we realistically anticipate will enable a consumer price index decline by 20 percent. This is a very drastic reduction of prices. This will increase GDP by 177 trillion yen and pluses and minuses will have a net increase of employment of 740,000, close to one million. To be added to these figures are the positive effects which will be brought out by the creation of new businesses, in multimedia, in medical services, etc. Multitudes of new businesses will surely be created; they will add up to those figures.
But as you have noticed, we will have inter-temporal mismatches. A negative effect first, which will be followed by positive effects, given time. So we will have inter-temporal and regional mismatches and those between different categories of work. The question is how to deal with those mismatches. There the government, both the national government and local governments, will have to step in because their policies and steps are needed. Often the Japanese government, both the national government and local governments, have stepped in when they didn't need to. They have intervened too much, but their intervention is needed to correct those mismatches with various means of employment policies.
That's why, coming back to my initial remarks, Keidanren gives positive credit to the action program. Because we have to flatter government officials, because they still will have new jobs to do, jobs which will replace their old jobs. And they will get those new jobs only through accelerating deregulation, not by increasing their intervention or regulation.
(Courtesy of Hotel Okura)