Proposals for Creating New Machinery for Promoting Deregulation to Prepare for the 21st Century

I. Present State of Deregulation and Problems to Address

  1. Present State of Deregulation
    1. Substantial Progress Made in Deregulation
    2. Since 1995, deregulation has made substantial progress.

      Since the Deregulation Action Program(DAP), the first-ever deregulation action plan launched in Japan, was adopted in March 1995, it has been revised at the end of each fiscal year, with the result that the number of deregulatory measures incorporated into the program has increased from 1,091 in March 1995 to 2,823 at the end of March 1997.

      Worthy of special mention is the substantiveness of commitment to deregulation. Until the government adopted the DAP, one had the feeling that the government was merely playing the "numbers game" by touching larger areas of trifling cases of deregulation in the existing regulatory regime. Since then, however, the program began to take a searching look into the hard core of the existing regulatory regime

      1. by explicitly laying down in the DAP a basic approach to deregulation and area-specific basic guidelines (basic principles),
      2. by launching the Administrative Reform Committee in December 1994, an independent body that has the power of planning, and overseeing deregulation -- the first-ever in Japan -- and
      3. by establishing Headquarters for Promoting Administrative Reform in the governing Liberal Democratic Party which tackled the problems of deregulation in earnest.

      For example, work has begun with a view to dismantling, in principle, the system restricting the entry into, and making capital investment in, the telecommunications and transportation markets from the standpoint of adjusting supply and demand in such markets. Measures are also being considered to inject greater flexibility into the approach to regulating electric and gas utility rates and airfares. Moreover, in the area of so-called social regulation -- a sanctuary such as the protection of consumers, safety and the preservation of the environment -- steps have been taken to ease the regulation in keeping with the spread of consumer knowledge about goods and services, and the advance of technology.

      In heavily regulated areas, such as finance, securities, insurance, transportation, information and telecommunications, and land and housing, marked progress has been made in deregulating these markets. And the lifting of the ban on establishing holding companies, a long pending issue, is of great significance.

    3. Economic Effects of Deregulation being Realized
    4. Economic effects of these deregulation measures are surfacing steadily.

      After the bursting of the economic bubble, the economy has been limping along. Amid such developments, deregulation has played an important role in bolstering the economy.

      For example, even during the period from fiscal 1990 to 1995 when the government had not brought to effect much deregulation yet, measures taken to deregulate the operation of large-scale retail stores, to stimulate competition in the telecommunications area and other measures have generated additional demand worth an annual average of ¥7.3 trillion (equivalent to 1.6 percent of the then nominal gross domestic product), net of negative effects, according to an estimate by the Economic Planning Agency(EPA). Considering the fact that the economy grew at an annual rate of 2.2 percent in nominal terms during these years, the contribution made to economic growth by this deregulation-generated demand is extremely large.

      Economic effects of deregulation measures taken since the launching of the DAP in March 1995 are yet to emerge. The EPA expects that when the deregulation measures are carried out as the government envisioned, the effects they generate will push up the real economic growth rate at an annual rate of 0.9 percent in fiscal years from 1998 to 2003 and that the consumer price inflation rate will drop by about 1.2 percent a year.

  2. Problems Facing Deregulation
  3. In order to carry out sweeping structural reforms of the economy in the remaining years to the 21st century, Japan must as yet deal with many deregulation problems.

    The government has established an Administrative Reform Council that is presided over by the prime minister himself, and has been seeking to strengthen the function of the Cabinet and reorganize government ministries and agencies. It plans to introduce necessary bills before the Diet (Parliament) in 1998 and start running government machinery under a new Cabinet system and administrative apparatus in 2001. The success of what might be called a peacetime revolution hinges on how effectively the government will simplify -- and improve the efficiency of -- its paperwork and its enterprises. The key to its success lies in a proper division of roles between the public and private sectors, and in drastic deregulation. The proposed reorganization of government ministries and agencies will inevitably lead to an overhaul of basic laws and business-specific laws that have been enacted along the lines of the jurisdictions of different ministries. And the slimming of administrative control will necessitate an overhaul of the legal system, including the possibility of repealing or amending some laws and regulations.

    In an effort to cope with a coming aging of the population and intensification of competition, the Cabinet adopted in May an "Action Program for Restructuring the Economy and Creating Business Opportunities," which is aimed at developing a new environment conducive to creating new industries and at overhauling the business environment into one attractive to international business communities by redressing the high cost structure of Japanese industry and other efforts. For the action program to be successful requires the implementation of comprehensive measures for the development of technology and human resources, and the key to this lies in deregulation. Given the tightness of public finance, the public sector is unlikely to make much of a contribution to economic growth. To achieve domestic demand-led growth, it is necessary to vigorously press ahead with policies guided by such principles as "economic regulations should, in principle, be removed" and shift the focus of the regulatory system from the current preventive type to a post-factum type.

    Moreover, with a view to helping the Tokyo market regain its rightful position as an international financial center along with New York and London by anticipating a worldwide liberalization of financial markets and innovation of information technology, the government is working toward the realization of a reform of the financial system by the year 2001, and is accelerating reforms of its financial regulations and the regulatory system by amending the Foreign Exchange and Foreign Trade Control Law (Gaitame-hou) and the Bank of Japan Law (Nichigin-hou), and by establishing a Financial Supervisory Agency (Kin'yu-Kantoku-Chou). Needless to say, the essence to financial system reforms lies in an overhaul of the regulatory system of the financial markets, one which impedes the normal functioning of market discipline and undermines the international integration of Japan's market system and practice.

    The foregoing shows that there still are plenty of regulatory hurdles to be surmounted in the remaining years to 2001. The agenda which are especially pressing among them are listed up in the Annex.

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