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Recommendations for the New Cabinet

(Full text)

July 30, 1998

(Japan Federation of Economic Organizations)

The new cabinet should exercise strong leadership to eliminate a sense of occlusion and anxiety prevalent among the Japanese people and overcome the current economic crisis of unprecedented scale. It is essential that the Japanese economy should be structurally reformed in order to achieve a full recovery driven by domestic demand. This is vital for the stable development of not only the Japanese economy but the Asian and global economies as well. We, in the business community, must also exert our utmost efforts to surmount these economic difficulties.
In accordance with this perspective, we urge that the following key policies should be promptly implemented.

  1. Stabilization and Strengthening of the Financial System and Quick Disposal of Non-performing Loans
  2. To prevent systemic risk, the roles and responsibilities of the Ministry of Finance, the Bank of Japan, the Financial Supervisory Agency, and the Deposit Insurance Corporation should be clarified, and cooperation among them should be strengthened. The establishment of a standing committee headed by the Minister of Finance should also be considered as a way of achieving this. Financial institutions should conduct a more detailed classification of "Category II" credit exposures by the level of risk, allocate necessary reserves, and make their best efforts to voluntarily disclose information about these loans as quickly as possible. They should also cooperate with government authorities to outline how the financial sector is likely to be realigned and strengthened in the future.
    Meanwhile, related laws should be completed to prevent moral hazards in connection with the Bridge Bank scheme, and bills related to the Temporary Council for Coordinating Real Estate-Related Rights, servicer companies, auction processes, and other measures to deal with non-performing loans should be promptly enacted during the current Diet session.

  3. Promotion of Fundamental Tax Reform
  4. To promote reform from both the demand and supply sides, an actual reduction of corporate income tax and a structural reduction of individual income tax should be implemented as a package. For individual income tax, a structural reduction of income taxes for all brackets, including a reduction of the maximum tax rate from 65% to 50%, should be implemented, and for corporate income tax, an effective tax rate should be brought down to 40% as soon as possible through a substantial tax reduction and the simplification of local corporate taxes. At the same time, a consolidated return system suited to diversifying forms of corporate management should be introduced, and the special corporate tax on reserve funds for corporate pensions which are vital to supporting business person households after retirement should be eliminated.

  5. Effective Mobilization of Fiscal Resources
  6. To contribute to the expansion of domestic demand, fiscal resources should be efficiently distributed to and should be concentrated on key policy areas, while wasteful spending in public works projects is thoroughly rooted out. Specifically, areas to be promoted include the construction of new roads in accordance with the City Planning Law, the elimination of bottlenecks in physical distribution infrastructure to help correct the high-cost structure, increased use of computers in the classroom to improve the information literacy of promising children, and increased use of information technologies by the government sector to reduce administrative costs and enhance the quality of services.
    In addition, since housing investment is a tracking force for domestic demand expansion, a housing policy that allows Japanese people to enjoy a higher quality of life, particularly through a further reduction in housing-related taxes, should be implemented.

  7. Deregulation and the Realization of a Small Government
  8. To further promote the elimination and relaxation of regulations that would contribute to domestic demand expansion, the schedule for implementation of the government's three-year Deregulation Action Program should be moved forward, and new deregulation items should be identified. It is particularly important that these efforts include deregulation that promotes urban redevelopment, a fundamental review of the Act concerning the Industry Restriction in the Built-up Area of the Metropolitan Regions, and the creation of the term housing lease rights to enhance the liquidity and effective utilization of land in large cities and revitalize urban districts. Opportunities for new services should be also increased through deregulation in areas where communications and broadcasting services are integrated.
    Meanwhile, the Basic Law for the Reform of Central Government Ministries and Agencies should be steadily and promptly implemented, and further administrative reforms should be promoted by local governments with the objective of achieving a small government at the national and local levels and thus reducing the public-sector burden shouldered by the Japanese people.

  9. Rebuilding of the Pension System
  10. With respect to the public pension system, the basic pension component should be changed to the pay-as-you-go system funded by indirect taxation in accordance with the aim of the government's providing a minimum standard of living for the elderly. The earnings-related component supplementing the basic pension component, in principle, should be transformed into the system funded through accumulated reserves with the aim of ensuring that the elderly retain a certain level of living standards they maintained during their working years.
    For the corporate pension system, a defined-contribution pension system covering both company- and employee-contributing plans should be introduced. At the same time, an "individual account (tentative name)" system should be established to ensure portability.

  11. Introduction of a Mutual Exchange System for Cross-held Shares
  12. The worsening of the supply-demand relationship due to the ongoing dissolution of cross-held shares is not only a factor behind the prolonged slump in the stock market but also is a significant drag on revitalizing the Japanese economy. To help reinvigorate the stock market by absorbing shares being released from cross-holdings and by facilitating the cancellation of stocks, a system for the mutual acquisition of own shares in direct deals between listed companies should be established along with special tax measures related to such exchanges.

  13. Formulation of Strategic Policy for Industrial Technology
  14. To open up new industry frontiers by strengthening industrial technology capabilities, a consensus on what strategic core areas are should be promptly formed and government resources should be concentrated on the development of human resources and promotion of national projects. Such incentives as tax breaks for R&D and government procurement should be expanded to promote R&D activities by private corporations which carry out the bulk of R&D in Japan. Furthermore, to support the smooth commercialization of research results, the intellectual property system should be expanded and improved, and necessary polices should be comprehensively and strategically promoted.

  15. Creation of New Employment Opportunities
  16. A further deterioration of the employment situation should not be brought about in the course of the resolute implementation of economic structural reforms. From that perspective, new industries and businesses should be cultivated through an integrated measures including the deregulation of the temporary staff business, tax reforms, and supply of risk capital, and existing industries should be restructured to be higher value-added so that new employment opportunities can be created. Enhancement of the business environment in this manner will contribute to increased employment opportunities from the expansion of direct investment in Japan from foreign countries.

  17. Response to the Asian Economic Crisis
  18. It is important that Japan encourage Asian countries to maintain their commitment to the liberalization of trade and investment to ensure their future advancement. Japan should also continue its efforts to assist structural reforms in Asian countries. At the same time, Japan should promote international use of the yen and stabilization of the yen's exchange rate.

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