1

STRUCTURAL REFORMSTRUCTURAL REFORMOF THE JAPANESE ECONOMYOF THE JAPANESE ECONOMY

August 2003 at MABE, Culalongkorn University

Prof. Shigeru T. OTSUBOGSID, Nagoya University

(w/ inputs from Prof. Akira Furukawa，Ritsumeikan Univeristy)

LONGLONG--TERM SLUMP IN THE 1990STERM SLUMP IN THE 1990S& STRATEGIES FOR THE 21ST CENTURY& STRATEGIES FOR THE 21ST CENTURY

１．１．The The ““Lost DecadeLost Decade”” after the Bubble Burstafter the Bubble Burst(1)(1) Prolonged stagnancyProlonged stagnancy Persistent low growth

REAL GDP GROWTH RATE

6.55.3 5.3

3.1

0.9 0.41.0

1.6

3.5

1.8

-1.1

0.81.5

-2

0

2

4

6

8

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

%

Source: National Account Note: 2000: Jan-Sept (change from a year earlier)

2

Background of low growth

Annual average growth

1956～60 8.8%

1961～65 9.2%

1966～70 11.1%

1971～75 4.5%

1976～80 4.4%

1981～85 3.4%

1986～90 4.6%

1991～95 1.4%

1996～97 3.3%

1998～99 －1.1%

Prolonged “excess” adjustment- excess capacity――¥60 tril.- excess employment―2.2 mil.- excess debt―nonperforming loan

Prolonged “excess” adjustment- excess capacity――¥60 tril.- excess employment―2.2 mil.- excess debt―nonperforming loan

Financial system problems- cautiousness to loan supply - lack of confidence in financial market

Financial system problems- cautiousness to loan supply - lack of confidence in financial market

Lowering of expected growth- change in industrial structure- change in Japanese system

Lowering of expected growth- change in industrial structure- change in Japanese system

Longer-run lack of confidence- aging society- massive budget deficit

Longer-run lack of confidence- aging society- massive budget deficit

Ｍａｎｕｆａｃｔｕｒｉｎｇ

0

1

2

3

4

5

6

7

86 87 88 89 90 91 92 93 94 95 96 97 98

(%)

Ｊａｐａｎ

Ｕ．Ｓ．

Ｇｅｒｍａｎｙ

Nｏｎ－Ｍａｎｕｆａｃｔｕｒｉｎｇ

-1

0

1

2

3

4

5

6

7

86 87 88 89 90 91 92 93 94 95 96 97 98

(%)

Ｊａｐａｎ

Ｕ．Ｓ．

Ｇｅｒｍａｎｙ

Manufac

Non-manufacturing

Japan

USAGermany

Germany

Japan

USA

全銀貸出残高のGDP比

0

20

40

60

80

100

120

1977

1979

1981

1983

1985

1987

1989

1991

1994

1996

1998

％

Stagnant corporate profitand banking problems

Bank loan outstanding (% of GDP)

Profit ratio on capital

3

Impact of IT on the GDP for 5 years- IT related manufacturing 0.6%- Electronic commerce 1.5%- Total (including spillover effect) 4.2%

Potential growthduring 2000 to 2010（Economic Council）around 2% annually

（contribution）Capital １％Labor some minusProductivity １％+

Decline in growth potential perceived by businesses

-1

0

1

2

3

4

5

6

1986 87 88 89 90 91 92 93 94 95 96 97 98 99

(FY)

(％)

Prospected rate of growth by firms

Actual rate of growth

※

※※※

※※

1.40.8

2.2

1.7

3.8

2.7

2000

Source: Economic Planning Agency (business survey conducted every January)

(2)(2) Collapse of Collapse of financial institutionsfinancial institutions

Confidence in household and business

30

35

40

45

50

3 6 9 12

3 6 9 12

3 6 9 12

3 6 9 12

3 6 9 12

1996 1997 1998 1999 2000

Con

sum

er

sent

iment

-60-50-40-30-20-1001020

Bus

ines

s con

ditio

n D

I

Business condition DI(major companies, manufac.)

Consumer sentiment

Lending by Financial Institutions

-8-6

-4-2

02

4

1996

1997

1998

1999

2000

Loan

(% c

hang

efr

om a

yea

r ear

lier)

-32-24

-16-8

08

16Lo

an a

cces

s DI

(sm

all b

usin

ess)Loan growth

Loan access DI

4

Real interest rates

-2-10123456

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Real long-term rate

（deflated using consumer price index）

Real short-term rate

Source: OECD “Economic Outlook” (Dec 2000)

(3)(3) Role of macroeconomic policy to support the economyRole of macroeconomic policy to support the economy

-8-6-4-2024

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Structural

cyclical

%

General government budget balance(as % of GDP)

long-term interest rate: 10-year national bond rateshort-term interest rate: overnight call rate

1999

Economic stimulus packages that boosted budget deficit

1999

(Aug.1992)　¥10.7 tril.(Apr.1993)　¥13.2 tril.(Sep. 1993)　¥6 tril.(Feb. 1994)　¥15.2 tril.Income tax cut （FY1994）(Sep. 1995)　¥14.2 tril.

(Apr. 1998）　¥10.7 tril.(Nov. 1998)　¥17 tril.＋tax cut ¥9.4 tril.(Nov. 1999)　¥18 tril.(Oct. 2000)　¥11 tril.-6.0

-7.0

-5.0

-3.3

-4.2

-3.6

-2.3

-1.6

2.9

2.9

1.5

-12 -8 -4 0 4

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

-5.8

4.9

-2.1

-9.5

7.2

0.6

2.8

14.7

14.6

3.7

4.7

-20 -10 0 10 20

General GovernmentBudget Balance (% of GDP)

Growth of Public Investment (%)

Economic policy packagesand their total expenditure

Source: OECD Source: National Account; 2000: Jan-Sep figure

5

50

55

60

65

70

75

80

85 86 87 88 89 90 91 92 93 94 95 96 97year

％

U.K. Swed Finland Japan

Real GDP (1985=100, UK, Sweden, Finland, Japan, USA) 3

90

100

110

120

130

140

150

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998(Year)

USA

UK

FinlandSweden

Japan

Background of persistent low growthDelay of adjustment for “excess”Malfunctioning of financial system“Structural” challenge

Background of Prolonged Economic SlumpBackground of Prolonged Economic Slump

Share of labor income

22．．Structural Reform Issues Facing JapanStructural Reform Issues Facing Japan(1)(1) Examples of structural problemsExamples of structural problems

Public regulations

Taxation

Employment practices

Corporate governance

6

FDI into Japan

Long-run trade relations

Financing channels

Expansion of CorporateActivity and Investment

Self-reliance of Individuals

Compact and Efficient Government

Corporate governance

Corporate accounts disclosure

Corporate restructuring

FDI into Japan IT revolution

Employment practices

Corporate pension (401k type)

Job choice society

Human capital investment

Personal income taxationCorporate taxation

Entrepreneurship promotion

Social security

Education reform

Labor market liberalization

Budget consolidationAdministrative reformFILP reformLocal gov’t autonomy

Financial system reform

Regulatory reform

Electronic government

Public investment reformInformation network

SME policy

Portfolio investment diversification

(2)(2) Structural Reform for Sustainable GrowthStructural Reform for Sustainable Growth

7

開業率19 Figure 8 Regression of business starting and inward direct investment

0%

2%

4%

6%

8%

10%

12%

14%

-1% 1% 3% 5% 7% 9% 11% 13%

(inward direct investment / domestic fixed investment)

（business starting ratio)

Japan

Germany U.S.

FinlandItaly

Austria

U.K. IrelandSpain

Portugal

GreeceDenmark

France

SwedenSwitzerland

Norway

(average 1988～1994)

y=0.3601x + 0.0694 (t=2.57) (t=6.85) R2=0.3062

Netherlands

0 500 1,000 1,500

1990

91

92

93

94

95

96

97

98

99.1st half

manufacturing sectorsfinancial ａｎｄ iｎｓｕｒａｎｃe sectors other non-manufacturing sectors

（bｉｌｌｉｏｎ　ｙｅｎ）

FDI into Japan

Foreign direct investmentinto Japan is now rapidly expanding

Relationship between inward FDIand new business starts

Ratio of new business starting

20

Conditions for new business starts and venture capital

still to be seen

23

Figure 10 Comparison between companies just after their stock's listingand average companies on the market

-100

0

100

200

300

400

500

600

(In 100 million yen)(In million dollars)

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

(In 100 million yen)(In million dollars)

Companies just afterlisting

Market AverageMarket AverageCompanies justafter listing

Net Profit（right axis）Sales

GrossAssets

Japan's over-the countermarket (FY1997) NASDAQ(1997)

－Japan and United States－

(%)

Figure 12 Desired career path by Univ. of Tokyo and Tokyo Institute ofTechnology, and MIT graduates

0 5 10 15 20 25 30 35 40 45

Promotion in a company oran organization

Foundation and developingown company

Being independenttechnologist or expert

Teaching and studyingas a professor

Univ. of Toand TokyoInstitute oTechnology

MIT

(1993)

21

8

Employment systemMain bank system

Corporate managementCross share holding

Parts supplier KeiretsuIndustrial policy/regulation

Employment systemMain bank system

Corporate managementCross share holding

Parts supplier KeiretsuIndustrial policy/regulation

Major challengeIT and globalization・

MegacompetitionAging of population

Value change

Major challengeMajor challengeIT and globalizationIT and globalization・・

MegacompetitionMegacompetitionAging of populationAging of population

Value changeValue change

LongLong--term transactionterm transactionOrganizational tradeOrganizational trade

StabilityStability--orientedoriented

3. Reform of Market Economy Japanese Style3. Reform of Market Economy Japanese Style(1) Characteristics of market economy Japanese style(1) Characteristics of market economy Japanese style

(2) (2) MainbankMainbank systemsystem

Functions of the main bank system– Saving of costs associated with asymmetry of

information• Screening and monitoring• Signaling to other financial institutions• Corporate governance

– Insurance to corporate management risks– Information exchange

9

Environmental change– Financial liberalization– Strengthening of

corporate financial basis– Larger discrepancy

between banksWeakening of mainbank function– Weakening corporate

governance and screening/monitoring during the “bubble”period

– Weakening of insurance function in the 1990s

0% 20% 40% 60% 80% 100%

不動産業

借入れ大幅増企業

借入れ増企業

Up DownUnch.Share of mainbank loans Mainbanks changed

Companies whose bank loansincreased

Companies whose bank loans largely

increased

Real estatecompanies

Banking loan share between 1985Banking loan share between 1985～～9090among companies expanding loansamong companies expanding loans

Economic white paper 1996

Weakening of main bank functions

Lack of corporate discipline during the “bubble”

(3) Cross share holding and corporate governance(3) Cross share holding and corporate governance

Weak capital market governance due to cross holding– Long-term management perspective – Weak discipline imposed by capital market

Rapid weakening of cross share holding

1987 1995 1999Shares issued by business corporations

ratio of stable holders 29.7% 28.7% 27.9%(in which) held by FIs 22.0% 20.1% 12.9%

Shares issued by banksratio of stable holders 55.7% 53.3% 45.6%(in which) held by companies 34.4% 32.9% 28.5%

1987 1995 1999Shares issued by business corporations

ratio of stable holders 29.7% 28.7% 27.9%(in which) held by FIs 22.0% 20.1% 12.9%

Shares issued by banksratio of stable holders 55.7% 53.3% 45.6%(in which) held by companies 34.4% 32.9% 28.5%

Nissei Research Institute (adjusted for change in disclosure rules)

10

(4) Japanese(4) Japanese--style employment practicesstyle employment practicesWeakening of Japanese-style employment practices– Aging of workers, leading to higher wage cost– Development of “external” labor market

• Dependence on part-time and other irregular workers• Development of temporary services

– Lowering of growth of corporate size– Changes in industry structure, globalization and IT

• Manufacturing industries: skill transfer through OJT, process innovation, and team work

• Knowledge based industries: higher speed and risk of innovation, leading to more flexible employment from external labor market and ability-based wage determination

0

20

40

60

80

100

120

140

160

～１５

１６－１７

１８－２０

２１－２４

２５－２９

３０－３４

３５－３９

４０－４４

４５－４９

５０－５４

５５－５９

６０～６５～

Japan

UKWest Germany

USA

Comparison of wage profile（production workers in manufacturing）

Japan: 1994UK: 1991Germany：1972USA： 1969

２５～２９歳＝１００

Economic Whitepaper 1996

25-29 years old=100

11

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

標準

労働

者

25歳

転職

30歳

転職

35歳

転職

40歳

転職

45歳

転職

50歳

転職

Increasing labor mobilityIncreasing labor mobility

Persistence of systemsthat assume a long-term employment

LifeLife--time time wage earningwage earning

(hundred million yen)

Economic White Paper 1998N

o change

25 30 35 40 45 50age of job changeMale, college

graduates, manufacturing

41.887.1100.0100.0

23.40.0

100.07.5

97.3100.0

55.6

0% 20% 40% 60% 80% 100%

Total

Agriculture/Forestry/Fishery

Mining

Construction

Manufactur

Wholesale/Retail

Finance/Securities

Real estate

Transport/Telecom

Electricity/Gas supply

Service

Excessive regulationWeakening of sense of riskLess business opportunityInadequate business adjustments

Excessive regulationWeakening of sense of riskLess business opportunityInadequate business adjustments

4. Regulatory Reform4. Regulatory Reform

10,054 10,278

11,402 11,581

9,000

10,000

11,000

12,000

1985 1988 1993 1999

Number of regulations

USA1977 17%1988 6.6%

USA1977 17%1988 6.6%

JAPAN1965 47.8%1990 41.8%

JAPAN1965 47.8%1990 41.8%

Percentage of industries undergovernment regulation

Economic White Paper 1995

(1) Coverage of regulation(1) Coverage of regulation

12

(2) Costs of regulation(2) Costs of regulation

High-cost structureHigh-cost structure

Price differentialConsumer price level

NY 100 vs. Tokyo 141 (1998)

Slow adjustment toChanges in environment

Slow adjustment toChanges in environment

High cost pressure on tradable industries

Lack of innovation and new business opportunityLack of innovation and

new business opportunity

Manufacturing: Developedvarious new products

Non-manufacturing: almost no new services developed

(3) Economic effects of recent regulatory reform measures(3) Economic effects of recent regulatory reform measures

TelecomCable TVSatellite TV

RetailFarmlandElectricityTemporary

personnel svcs.

Sector Period96-9796-9796-9796-9796-9796-9796-97

AirlineTotal

96-97

Effect6.860.300.243.120.680.320.030.17

11.85 tril. yen

Demand expansionSector Period Effect

TelecomShare brokerage

Car examAirlineCBond

Oil products

ElectricityGas supply

Total

96-9796-9796-9796-9796-9796-9796-9796-97

7.100.260.490.240.081.781.070.05

11.33 tril. yenEconomic Planning Agency (1999)

“Total” includes other items other than those listed

Consumer surplus expansion（Annual average)

13

Estimation of efficiencygains if deregulated

Estimation of production factors to be unemployed

0

10

20

30

40

非効率

28%

小売業

％

銀行業

電力業

37%

22%

26%

6%

想定

-31-21

-6

59

-20-13

-50-40-30-20-10010203040506070

労働

資本

（％）

Economic White Paper 1997

Positive and negative impacts of ongoing regulatory relaxationPositive and negative impacts of ongoing regulatory relaxation

Retail Banking Electricity

Efficiency gain Retail trade

Banking

Electric power

Capital

Labor

1980sLate 1970s -- aiming at lightening paper work cost1981 -- Administrative Reform Committee, proposing privatization of NTTPC and JNRThe first half of 1980s -- US-Japan financial sector consultation, start of financial liberalization1989 -- US-Japan Structural Impediment Initiative, discussing regulatory reform, business practices, etc.

1990s1993 -- “Hiraiwa Report” proposing liberalization as a rule1995 -- Regulatory Reform 3-Year Plan1998 -- Economic Strategy Committee

(4) History of Japan(4) History of Japan’’s regulatory reforms regulatory reform

14

Japan has tended to avoid “trial and error” process– Even in the US, the airline case was exceptional– Privatization in UK lacked competition scheme– Price cap system in UK

“Bottom-up” in the USA, “top-down” in Japan/UKJapan’s regulatory body is also an administrator of industrial policies– US, UK: independent regulatory commission– Check and balance with industrial policy administration,

competition offices and local government

Empirical analyses have not been utilized

(4) Characteristics of regulatory reform process in Japan(4) Characteristics of regulatory reform process in Japanas compared to that in the USA and the UKas compared to that in the USA and the UK

STRUCTURAL REFORMSTRUCTURAL REFORMOF THE JAPANESE ECONOMYOF THE JAPANESE ECONOMY

…. END