Japan Economic and Financial Policy

Japan Economic and Financial Policy

In Japan, already in the nineties of the 20th century. Weak economic expansion, constant deflationary pressures, near-zero (if not negative) employment growth and a dramatic deterioration in public finances were clear signs of calling for stronger government action. At the beginning of the new century, a vast and ambitious reform program was finally launched, which included the restructuring of the banking sector and, starting in 2002, the gradual consolidation of public finances. These were the conditions deemed indispensable to regain the confidence of domestic and foreign investors.

Fiscal policy was mainly aimed at supporting the economy and employment growth, through various interventions, implemented even in the presence of a high incidence of public debt on GDP. However, in 2002 the budget law imposed stringent constraints on overall spending. Consequently, a reform of the health system was carried out which decreed an increase in the contribution to expenses by the sick, reduced the incomes of service providers (hospitals and doctors) and promoted greater competition within the sector. In order to keep the state’s expenditure unchanged while facing, at the same time, the growing social security costs due to the gradual aging of the population, the authorities were forced to reduce spending on education and to contract public investment. In view of a more accurate selection of the latter, the projects considered particularly profitable, often located in urban areas, were privileged, to the detriment of the less productive ones relating to the development of rural regions, with the aim of allowing a subsequent influx of private investments. In 2003 the State compensated for the reduction in taxes with an enlargement of the tax base, without modifying the articulated system of tax deductions and reliefs. Another important measure that allowed for a significant reduction in public spending was the gradual containment of aid granted to the agricultural sector. In particular, support for the primary sector went from 2.3% of GDP in the 1986-1988 period to 1.4% in 2001-2003. With the’ start of the process of fiscal decentralization, also local authorities were called to greater responsibility in the management of public money. Furthermore, in 2004 the social security system was subjected to a profound reform: the size of pensions was commensurate with the demographic and economic evolution of the country, social security contributions were drastically raised, while the retirement age was gradually raised from 60 to 65 years.

In the five-year period 2000-2005, the monetary policy implemented by the Japanese authorities had the objective of promoting the expansion of the economy, guaranteeing the system the necessary contribution of liquidity. In particular, very short-term interest rates were kept close to zero until the first half of 2000. Subsequently, the monetary authorities decreed that, as long as deflationary pressures were recorded within the country, they would consider it necessary to ensure abundant liquidity in order to contain the restrictive effects due to the appreciation of the yen and the reduction in the price level. In the same period, the Central Bank showed its willingness to implement measures to support public finances, the banking system and productive enterprises, mainly through the purchase of bonds and shares, where this does not prevent the achievement of its institutional objectives. The greater stability of the capital market thus achieved was not accompanied by any significant increase in bank credit. On the capital market, however, it was possible to witness, starting from 2000, after a period of decline in share prices and public bond yields, the rise in share prices, attributable not so much to the negotiation between investors but rather to the policy implemented by the Bank. central.

Beginning in 2000, the Japanese banking system underwent a profound restructuring process, after the main credit institutions had had to resort to different forms of recapitalization in 1999. The government ordered the country’s major banks to cancel all high risk of insolvency loans within two years, in order to ensure greater stability for intermediaries and clarity in their balance sheet data. While this measure pushed the banking sector out of a situation of excessive fragility on the one hand, it ensured support for productive sectors and enterprises on the other.

In order to avoid that the restructuring process of the banking system could hinder the disbursement of credit to the private sector, a state agency was also created, which was entrusted with the task of ascertaining the extent of the banks’ bad debts and contributing to the restructuring of the numerous companies in difficulty. The regional credit institutions, able to ensure the financing of local small and medium-sized enterprises, only partially suffered the effects of the banking restructuring process; in fact, they were able to enjoy less stringent measures for the management of bad debts and also benefited from greater injections of public capital.

In order to promote competition on the national market, the government put in place measures aimed at stimulating the birth of new businesses and for the first time it was willing to start the process of closing or privatizing some public companies. In 2002, the entry of new operators on the national market was favored by the implementation of a deregulation program for the services sector. The government began to collaborate with local authorities, involving them in the activity of identifying and removing the obstacles of a regulatory nature that prevented the development of the regions. From 2003 to 2005, 328 special structural reform zones were identified, in favor of which local authorities and the private sector were called upon to collaborate, also to test the effectiveness of reforms to be subsequently applied on a national scale. In these areas the entry of joint stock companies in the sectors of health, education and agriculture was allowed. The competition authority was endowed with more powers and resources. However, despite these efforts, the services market still remained uncompetitive in 2005: in fact, if the growing impulse towards liberalization in the telecommunications sector had not, until then, been able to ensure a significant reduction in prices, the electricity sectors and gas were still characterized by the presence of local monopolies which opposed the entry of new operators and the formation of prices in a competitive regime.

According to THEMOTORCYCLERS, the opening to foreign trade and the entry of foreign companies into the domestic market was another important step in the process of restructuring the national economy, which led the State to gradually remove the constraints of a regulatory nature and to promote a more extensive and complete information to operators on investment opportunities. The rice market was also partially open to imports and subject to a gradual deregulation of the distribution system. In 2002, Japan signed the first free trade agreement with Singapore.

Finally, the labor market was the subject of a reform that introduced the first elements of flexibility in employment relationships and in the conditions of dismissal, even if it did not address the fundamental problem of the dualism between permanent work and fixed-term or temporary work, whose development was strongly influenced by the strict regulation (v. tab.).

Japan Economic and Financial Policy