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Policy Proposals  Economic Policy, Social Security Eight Policy Challenges Awaiting Solution

January 22, 2013

Eight Policy Challenges Awaiting Solution (Summary)

Business, through the provision of goods and services, bring about economic growth and employment, thereby playing an important role in creating well-being for the people. In addition, companies are also actively undertaking social responsibilities in various fields as well as paying corporate taxes and social insurance premiums to support public finances and social security system at national and local level.

The Japanese economy has suffered from a long-term slump known as "the lost two decades." The root cause of this has been deterioration of Japan's business environment#1, which has prevented the corporate sector from playing an active part. The sectionalism of public administration has also been harmful to meet the needs of the private sector rapidly enough, for example, with regard to obtaining various permissions. If nothing is done, companies may be obliged to look overseas to find the sources of their growth, thereby spurring the hollowing-out of the domestic industry. In that event, the serious deterioration in people's livelihood by the loss of employment would damage the Japan's socioeconomic foundation.

Japan is also facing a structural problem with declining birthrate and aging society. The yearly increases in social security benefits have caused government debt to swell to double the level of nominal GDP. At the same time, an increase in the burden of social insurance costs on the current working generation would not be bearable. If fiscal reconstruction is delayed, and fiscal discipline ignored, lowering of credit ratings for Japanese government bonds and rises in interest rates will create a very serious situation for the Japanese economy.

The key to breaking out of economic stagnation lies in increasing the national wealth by achieving rapid reconstruction from the Great East Japan Earthquake, accelerating the domestic investment and innovation, and raising the productivity. Prerequisites for achieving that are to ensure the level playing field to facilitate Japanese business can compete with foreign competitors. At the same time it is necessary to attract investment from both domestic and overseas companies, invigorate the Japanese economy, and end current deflation, through bold regulatory reform and further market-opening. It is also crucial to ensure the implementation of a realistic energy policy and the reform of the social security system that is sustainable and compatible with growth.

Overseas, as a result of united efforts by public and private sectors, emerging economies in Asia and elsewhere are achieving high rates of growth, while the US economy is recovering and returning to a path of growth. As for Japan, ensuring that the public and private sectors play their respective roles to the full under the strong commander, it should aim to achieve steady growth at a nominal rate of around 3 percent.

From the above perspective, the Japanese government needs to promptly address the eight policy issues outlined below and thereby send out the message—both domestically and internationally—that Japan has changed.

1. Implementation of bold regulatory reform

The regulatory reform is an effective means to bring out private-sector initiative and attract both domestic and inward investment. It is essential to make bold reforms to help take advantage of the originality and ingenuity of the private sector, encourage competition, and create markets.

Specific measures

Examine, both exhaustively and in detail, issues affecting regulations and institutions in fields such as urban development, information and communications, medical care, nursing care, the environment, agriculture, labor, and non-Japanese human resources, under powerful implementation structure by the prime minister, while utilizing the expertise of both domestic and overseas private-sector specialists. And implement bold regulatory reforms as soon as possible.

2. Restructuring of energy and environment policy

Energy forms the foundation of the daily life and business activity. There is a need to formulate and implement a responsible energy policy that would harmonize safety, energy security (stable energy supply), economic efficiency, and environmental suitability (S+3E). In parallel with this, it is also essential to conduct a radical overhaul of climate change policy, given that it is linked inseparably with energy policy.

Specific measures
- Immediate measures
  1. (1) Clarify the electric power supply-demand forecast and countermeasures for this summer. In addition, to enable companies to draft plans for domestic production and investment with confidence, set out explicit measures and timetables for assuring the stable supply of electric power for the next three to five years.
  2. (2) Resume operations at nuclear power stations whose safety has been validated after gaining the understanding of municipal governments.
  3. (3) Conduct an urgent review of the feed-in tariff system and reexamine the global warming tax, including considering its abolition.
- Medium and long-term measures
  1. (1) With regard to matters such as energy conservation and renewable energy, make a detailed reexamination of these quantities that could be introduced and bear by nation in practice. Then, from the standpoint of maintaining a variety of energy sources, review the best energy mix unreservedly, including nuclear power, with a view to ensuring an appropriate S+3E balance.
  2. (2) With regard to new mid-term targets for greenhouse gas emissions, assess emissions on the basis of both ensuring conformity with energy policy and ensuring a level playing field internationally.

3. Realization of the appropriate exchange rate

An exchange rate around 80 yen to the US dollar has deviated from the US and Japanese economic fundamentals since the financial crisis#2. Too strong yen has been sapping the vitality of Japanese business. Especially, the Korean won is very low, hurting the competitiveness of the automotive, electrical machinery, steel, and other industries that underpin the Japanese economy. The government should take a necessary step to both avoid sharp fluctuations and maintain the appropriate exchange rate. Sensible exchange rate would bolster the competitiveness of Japanese companies.

Specific measures

The government and the Bank of Japan (BOJ) take concerted action by exploiting every possible measure, including active currency diplomacy and foreign bond purchases. Meanwhile, BOJ continues strong monetary easing and the government takes various measures to stimulate domestic demand.

4. Fiscal policies and tax reform to contribute growth

Amid an environment characterized by sluggishness in the European economy and the slowing growth in China and other emerging economies, the Japanese economy is getting weaker at present. As there is no expectation of a sharp recovery by the external economy, the government needs to address concern about future economic deterioration by means of continual policy responses, including the implementation of a supplementary budget.

Specific measures

It is essential to give first priority to the reconstruction of the areas devastated by the Great East Japan Earthquake, and to use that as a catalyst for building a new growth model. In addition, fiscal resources should be allocated boldly and properly to policies that promote growth and enhance competitiveness, while ensuring the fiscal discipline. The reform of the tax system is also necessary, including extending the tax credit for research and development, and eliminating double taxation in conjunction with increases in consumption tax rates.

5. Promotion of the free trade system, and meeting of demand in Asian and other emerging economies

Achieving trade and investment liberalization through the World Trade Organization (WTO) is desirable for the development of the world economy and the building of seamless global supply chains. However, given that there is no prospect of agreement in the WTO Doha Round in the immediate future, it is necessary to cooperate with the United States and other countries via the Trans-Pacific Partnership (TPP) negotiation in order to contribute to high-standard rule-making for trade liberalization and investment. Steps should also be made to promote economic partnership agreements other than the TPP. Also, from the perspective of economic security, other efforts are required to ensure stable supplies of goods vital to the Japanese economy, such as energy, foodstuffs and mineral resources.

It is also important to work actively to meet the demand in emerging economies in Asia and elsewhere.

Specific measures
  1. (1) Reenergize the WTO Doha Round and have it reach agreement quickly, and endeavor to maintain and strengthen the WTO structure.
  2. (2) Expedite the conclusion of high-standard economic partnership agreements such as the TPP, which could lead to the Free Trade Area of the Asia-Pacific (FTAAP) in 2020, and also the Regional Comprehensive Economic Partnership (RCEP),#3 the Japan-China-Korea Free Trade Agreement, and the Japan-EU Economic Partnership Agreement. With regard to the TPP in particular, expedite participation in the negotiations and achieve an outcome that serves the national interest. In this, it will be especially important to deploy economic diplomacy relating to such issues as the lowering or abolition of tariffs on products such as automobiles, steel, and chemicals; the elimination of restrictions on foreign capital and demands for technology transfers; and the assurance of nondiscriminatory and transparent government purchasing.
  3. (3) Diversify the sources of imports of goods such as energy, foodstuffs and mineral resources. And prevent export restrictions by any country through such means as economic partnership agreements. In addition, protect sea lanes by maintaining and strengthening the Japan-US alliance, and implement anti-piracy countermeasures.
  4. (4) By using high-level diplomacy, official development assistance, and other means, promote package-style infrastructure exports through joint efforts by the public and private sector and accommodate demand in emerging economies. This is to be accompanied by the active utilization of the overseas investment and lending operations of the Japan International Cooperation Agency which have been fully resumed.
  5. (5) For the purpose of tapping into private funding which is necessary for infrastructure development in Asian emerging economies, provide technical assistance for nurturing Asian bond markets and personnel involved in the markets, establish risk-hedging systems, and revitalize Tokyo as a leading international financial market.

6. Control of the public burden on the current working generation and companies

Declining birthrate and aging society is increasing social security benefits relentlessly, and the burden of social insurance costs on the current working generation (employees, business) is already reaching its limit. Amid increasingly fierce global competition, companies are left with no scope to bear a greater burden of social insurance costs. In order to maintain economic vigor and domestic employment, there is an urgent need to control this burden and achieve social security system reform that is both sustainable and compatible with growth. In parallel with this, it is essential to put a certain brake on the increases in social security benefits in order to progress with fiscal reconstruction. Moreover, to increase the number of people supporting the social security system, it will also be necessary to devise measures encouraging more women to enter the workforce and increase the national birthrate.

Specific measures

In the National Council on Social Security System Reform through August 2013, reach conclusions concerning the further strengthening of measures for efficiency improvement and prioritization relating to benefit provision for medical care, nursing care, pensions, and childrearing.#4 At the same time, ensure that a bill on the social security and tax number system be enacted during an ordinary session of the Diet in 2013.
Formulate measures to support persons who work and raise children at the same time, including measures to address the issue of children on daycare waiting lists and the promotion of work-life balance in people's lives.

7. Promotion of decentralization reform, and establishment of a regional government system (doushu-sei)

To enable regions to promote their growth strategies by making use of their own unique resources and strengths, and to pursue rationalization through administrative and fiscal reform, the roadmap for decentralization and the establishment of a regional government system based on that should be clarified.

Specific measures
  1. (1) Looking ahead to the introduction of a regional government system, undertake a radical shift of powers, financial resources, and personnel from the national government to prefectural governments and from prefectural governments to municipalities, and eliminate administration overlaps.
  2. (2) Enact a basic law for a regional government system and a bill concerning the transfer of administrative tasks of specific regional administrative organizations, and establish a headquarters for the promotion of regional government system.
  3. (3) As part of laying the foundations for (1) and (2) above, promote electronic administration for the purpose of bringing greater efficiency and streamlining to public administration at both the central and local government levels.

8. Educational reform to enhance human resource development

Amid the advance of economic globalization there is an urgent need to develop human resources able to participate actively in global business workplaces and to help accelerate innovation. In view of this, educational reform such as the promotion of competition among universities and the internationalization of universities is an issue that must be addressed urgently.

Specific measures
  1. (1) In order to develop human resources able to think, judge, and act for themselves, review the way of linking senior high schools with universities, including entrance examination reforms.
  2. (2) Strengthen efforts to help promote bilateral student exchanges by such means as promoting international exchanges of students and educational collaboration with overseas universities (double degrees, joint degrees, etc.), enhancing the ability of faculty members of universities to cope with globalization, expanding scholarship schemes, and switching to fall enrolment. Besides, accelerate the development of social infrastructure and company systems toward the employment of returned Japan Overseas Cooperation Volunteers and the acceptance and retention of overseas students who wish to work in Japan.
  3. (3) Enhance industry-academia collaboration in such spheres as internships, the dispatch of company personnel to give lectures, and curriculum development, and develop human resources with leadership qualities.
  4. (4) Put in place the strategic allocation of university grants based on assessments of universities' functions, and the visualization of university information.
  5. (5) Conduct the various steps spreading International Baccalaureate#5 in senior high schools.

  1. The famous examples are as follows: (i) the strong yen, (ii) the heavy burden of corporate taxes and social insurance costs, (iii) the delays in participation in economic partnership agreements, (iv) the lack of flexibility in the labor market, (v) overzealous measures against climate change, and (vi) the supply shortage and high cost of electric power.
  2. "The exchange rate has appreciated over the past year partly because of safe-haven capital inflows, and our analysis suggests that the yen is moderately overvalued from a medium-term perspective." (Extract from the Concluding Statement of the International Monetary Fund Mission, 2012 Article IV Consultation with Japan, June 12, 2012)
  3. The Regional Comprehensive Economic Partnership is a concept that calls for bringing together the five FTAs that Japan, China, South Korea, India, Australia, and New Zealand have with ASEAN, and developing them into a wide-area comprehensive economic partnership.
  4. Refer to the Keidanren proposal titled "Proposal for Reshaping the Social Security System" (November 20, 2012).
  5. The International Baccalaureate is a system for providing an internationally accepted qualification for university entry to graduates of international schools and local schools in their home countries. The qualification is granted by the International Baccalaureate Organization in Switzerland, and there are currently 16 schools in Japan where students are able to obtain this qualification. In a summary of deliberations conducted in June 2012, the Council on Promotion of Human Resource for Globalization Development at the Ministry of Education, Culture, Sports, Science and Technology has mapped out a policy of boosting the number of schools that enable students to obtain this qualification or provide commensurate education to 200 within five years.

Economic Policy, Social Security