Report on the Current Surplus Reduction Plan

September 11, 1995

(Japan Federation of Economic Organizations)

Sub-Committee on Economic Analysis of
the Committee on Economic Research

  2. Although the high yen trend, which has continued since early 1995, is beginning to abate, the future course of the yen's exchange rate is still uncertain. Yen appreciation has slowed as a result of the announcement of the government's "Measures to promote overseas investments and loans aiming for correction of the yen appreciation" and the coordinated trilateral intervention in the foreign exchange market by Japan, US and Germany. But in order to stabilize the exchange rate and restore international confidence in the action's economy, Japan must correct the internal/external imbalance and reduce its current surplus.

    To accomplish this, the government should map out a current surplus reduction plan that takes steps to create an economic structure in which internal and external demands are balanced; announce its determination, at home and abroad, to realize an economic growth rate of 3%; and implement programs which can achieve these goals.

    To this end, Keidanren adopted a resolution at its General Meeting, and call to the government to prepare a current surplus reduction plan. The Sub-Committee on Economic Analysis of Keidanren's Committee on Economic Research, then followed up by compiling a report on the initiatives the government should include in developing the Plan.

    The report first reviews the basic philosophy behind the request for the Plan, then lists the concrete targets and measures that should be included, and finally, presents an analysis of the expected results.

    1. Correction of Cyclical and Structural Factors Behind Current Surplus:
    2. Although the ratio of Japan's current surplus to GDP is decreasing, it is still quite high -- 2.6% in FY 1994. This leads to structural pressure that causes yen appreciation. The basic cause of the current surplus is rooted in the cyclical factors of economic stagnation and in structural factors of chronic high savings and inadequate investment rates. Recently the cyclical surplus, due to stagnation of domestic demand, has been particularly large and this trend must be corrected promptly. However, the surplus due to structural factors is very difficult to reduce in the short-term and it must be gradually lowered by promoting private sector investment through such means as deregulation.

    3. Plan for Reform of the Economic Structure:
    4. The current surplus reduction plan should not be drafted for the purpose of merely addressing the problem of international trade friction but as its own initiative targeted to converting Japan's economic structure into one which balances internal and external demands.

    5. Expanding Trade Equilibrium Through Increased Imports:
    6. Although some hold the view that voluntary restraint of exports is an effective means of reducing the current surplus, in reality export restraint goes against the principle of free trade and harbors the potential of reducing the scale of the global economy in order to attain balance. Japan therefore, must make every effort to reduce the surplus by expanding equilibrium through increasing imports.

    7. Establishing Macro-Level Targets:
    8. The Plan must focus on macro-level targets and should not address micro-level targets such as export/import levels. Addressing such goals in the plan could lead to managed trade and to a distorted allocation of resources.

    9. International Policy Coordination is Essential
    10. Given the fact that the external trade imbalance has occurred within the context of the interdependent global economy it is not possible for Japan to correct the imbalance through unilateral action. At the same time as Japan initiates actions to reduce its current surplus, it is essential that international policy coordination be implemented by the US taking further actions to trim its twin fiscal and trade deficits.

    1. Setting Current Surplus Reduction Targets:
    2. In drafting New Economic Plan, the government must set provisional targets, such as reducing the ratio of current surplus to nominal GDP to the 1% range within three years, and aiming for an economic growth rate of 3%. To reach these targets, the government should outline the specific steps it will take, and include the following recommendations.

      It goes without saying that the targets noted are merely goals that Japan will try to reach, but may not actually attain, since the current balance is affected by many external factors over which the government has no control, such as global business conditions and the exchange rate, as well as by other domestic economic factors.

    3. Specific Measures for Reducing Current Surplus and Their Economic Effect (See Attachment)
      1. Front-Loading of the Basic Plan for Public Investment:

        With Japan moving towards the full-scale aging of its population in the 21st century, it is critical that we use the accumulation of personal savings as capital to improve the social infrastructure, while people still have sufficient savings. The economic model was assumed in which the Basic Plan for Public Program was front-loaded for three years, beginning in the current fiscal year, at an annual increase rate of 6%. An analysis of the results shows that as of FY 1997, real GDP would increase by 0.8% more than in the standard case (nominal GDP would increase by 0.9% more), while the current surplus would decrease by 9.9%. Thus the ratio of the current surplus to nominal GDP would decrease by 0.21%.

        If the government were to significantly improve the information communications, R&D and transportation distribution infrastructures, private sector investment would be stimulated and progress would be made in reforming Japan's economic structure. This, in turn, would lead to the expectation that the structural surplus attributed to high savings and insufficient investment rates, would also decrease.

      2. Reform of the Tax System:

        • Reducing the Corporate Tax Burden:

          Revitalization of the Japanese economy is being obstructed by the tax burden that corporations must bear, which is extremely heavy by international standards, as well as by the burden that land owners must shoulder.

          The economic model assumed for the Plan is one in which the effective corporation tax rate was set at about 40%, as in the US, instead of the approximately 50% rate, in Japan today. An analysis of the results showed that because of the internal demand centering on investments in private plant and equipment (Non-resi. Investment), in FY 1997 the real GDP would increase 0.4% more than in the standard case (nominal GDP would increase 0.4% more) and the ratio of the current surplus to nominal GDP would decreased by 0.15%.

        • Continuation of Income Tax Reduction:

          Under current economic conditions, stagnation of Japan's internal demand is a major cause of the external imbalance. What is needed to correct this situation is an increase in private consumption that will open the way for import expansion and an improved savings/investment balance.

          An economic model was assumed in the Plan in which the present special income tax reduction of 2 trillion yen would be continued into FY 1997. An analysis of the effects showed that domestic demand centering on personal consumption would revive and that, as of FY 1997, real GDP would increase 0.2% more than in the standard case (nominal GDP would increase by 0.2% more) and reduce the ratio of the current surplus to nominal GDP 0.06%.

      3. Improved Access to the Japanese Market to Increase Imports:

        In order to achieve the changes in Japan's trade structure necessary for international harmony, increased access to the Japanese market will hopefully be facilitated by removing import barriers and instituting new measures to assist foreign firms in exporting to Japan.

      4. Deregulation:

        Repealing and relaxing regulations is an important component in effecting Japan's conversion from an export-oriented economy to one in which there is a balance between internal and external demands. As the report of The Advisory Group for Economic Structural Reform (The Hiraiwa Report) pointed out, deregulation should be carried out aggressively. It is necessary now for the government to advance the timetable of The Deregulation Action Program and make it more substantial.

        Deregulation will lead to the creation of new businesses, open new investment frontiers and rectify domestic/overseas price disparities. It is expected to contribute to the improvement of the structural saving/investment balance by increasing private sector investment.

  6. To correct the excessive appreciation of the yen and stabilize foreign exchange rates, it is necessary for the government to enact incentives that would serve to increase overseas investment and loans, in addition to drafting and implementing the current surplus reduction plan.

    In addition to advocating that the government take immediate action on these issues, the private sector must concurrently make efforts to reduce the current surplus, including reforming corporate policies for promoting technology transfer abroad, reforming commercial practices to facilitate imports and recycling the benefits of the yen's appreciation.

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