Economic Survey of Japan 2005: Removing the obstacles to faster growth

 

What are the priorities for regulatory reform?

Getting the most out of decentralisation requires complementing greater fiscal autonomy for local governments with more independence in the regulatory framework. The major initiative in this regard is the creation of special zones in which key regulations are abolished or modified on a trial basis. Since April 2003, 328 such zones have been created, based on 120 special measures. Successful reforms will be expanded nationwide following evaluation by a special committee. It is essential to make this initiative an effective tool for advancing nation-wide reform rather than simply a policy for regional development. This distinction could be reinforced by separating the responsibility for regional policy from the office in charge of special zones. In addition, reforms in the zones should be applied on a national basis as quickly as possible, avoiding extended evaluation periods. Rather than depending solely on the initiative of local governments, there should be a topdown aspect to the programme to identify districts that are suitable for certain regulatory changes.

Such an approach should help make the special zones an effective tool for accelerating regulatory reform, a government priority that has had some success during the past decade. For example, entry barriers in the trucking industry were eliminated, large consumers of electricity have been allowed to choose suppliers and price controls on petroleum products have been abolished. Moreover, urban zoning regulations have been reformed to encourage more efficient use of land and the requirements for starting new companies have been relaxed. According to the government, regulatory reform has boosted consumer surplus by an amount equal to almost 5 per cent of national income.

Regulatory reform is directed by the newly created Headquarters for the Promotion of Regulatory Reform, which is composed of all cabinet members. The new framework, which allows proposals to be discussed by all ministries, including those favouring change, should be used effectively to overcome vested interests opposed to reform. It should also help narrow the gap between the annual report prepared by the private sector council of experts and the Three-Year Plan for Promotion of Regulatory Reform, which is updated annually by the government. The 2004 version focuses on opening "government-driven markets" to the private sector. The government should make the reform of these sectors, concentrated in social welfare areas such as medical services and nursing care, a priority given rapid population ageing. A new initiative is the introduction of market testing to determine what services currently provided by the government could be produced more efficiently by the private sector. Such an approach should be used effectively to benefit consumers, promote fiscal consolidation and provide new opportunities to the business sector.

How can competition be strengthened?

Opening government-dominated markets to the private sector would enhance competition, which appears weak in Japan according to a number of indicators. Stronger competition would help lower prices that are high by international comparison and promote innovation, thus boosting consumer welfare and improving resource allocation. A priority is to upgrade competition policy by increasing surcharges on violations of the Anti-Monopoly Act. This would make firms take competition policy more seriously and allow the introduction of an effective leniency programme for firms reporting collusive activities to the competition authority. In addition, a whistleblower programme to counter widespread anti-competitive collusion should be implemented to protect individuals. Competition is also weakened by a regulatory policy framework for network industries that still needs to be improved. Most OECD countries have established sectoral regulators, independent of the government, to ensure pro-active ex ante regulation, a necessary condition for introducing competition in markets dominated by strong incumbents. Japan tries to achieve these objectives through government ministries. In the electricity and natural gas sectors, competition has been hampered by market structures characterised by local monopolies. The reforms in the past year were important steps for the establishment of physical interconnection and nondiscriminatory access charges and conditions. The vertical unbundling of activities should be considered for further enhancement of competition.

Greater openness to direct investment and trade are also keys to enhancing competition. The government has established a goal of doubling the cumulative amount of foreign direct investment in Japan in five years, building on the three-fold rise recorded between 1998 and 2003. This is to be accomplished by reducing obstacles and pro-active measures such as disseminating relevant information. Attracting more foreign direct investment, though, will likely require additional steps. First, regulatory tools, particularly the No-Action Letter system and the Public Comment Procedure, should be improved to enhance transparency and encourage greater foreign participation in the Japanese economy. Second, the mergers and acquisition market should be activated by removing discriminatory provisions governing the acquisition of Japanese firms by foreign investors. In addition to direct investment, barriers to trade should be reduced through multilateral trade negotiations, as well as Japanfs inclusion in regional free trade agreements. Both are likely to require reductions in the level of protection granted to farmers in Japan, including a further opening of the rice market. Aspects of multifunctionality in agriculture, such as protecting the environment, should be dealt with by adopting well-targeted policy measures that minimise trade distortions.

The centrepiece of the government's structural reform programme is the privatisation of Japan Post, which is the world's largest financial institution. It includes postal savings and life insurance, which dominate their respective sectors in Japan thanks to special privileges such as government guarantees and exemption from taxes. The privatisation of Japan Post offers a number of potential benefits: providing better services at a lower cost for consumers; removing government support and improving resource allocation; and shifting the flow of funds from the public to the private sector, thereby enhancing Japan's growth potential and promoting fiscal consolidation. The privatisation is to begin with the separation of Japan Post into four entities, including a Postal Savings Company and a Postal Life Insurance Company, in April 2007. However, realising the desired
benefits requires that:

  • There should be a level playing field between Postal Savings and Postal Life Insurance and private institutions, including equal treatment under the regulatory framework.
  • Postal Savings and Postal Life Insurance should not be allowed to offer new products before the establishment of equal treatment.
  • The privatisation, which is to be finished by 2017 at the latest, should aim at a complete divestiture of the government's holdings in financial services.

The management of Postal Savings and Postal Life Insurance should have the same independence as private institutions in formulating their business plans once a level playing field is achieved.

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