Acceleration of Economic Reform in Japan and the Role of the Council

on Economic and Fiscal Policy

February 26, 2007

Mitsuo HOSEN

ESRI, Cabinet Office

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Contents• Acceleration of Structural Reform

• Economic Impact of Regulatory Reform

• Important Factor behind the Acceleration

• The Council on Economic and Fiscal Policy (CEFP)

• Attributes of the CEFP

• Reform Priorities of the Abe Administration

• Economic Environment and Reform Agenda

• Challenges Ahead

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Acceleration of Structural Reform

Under the Koizumi and Abe administrations,structural reform in various areas has been accelerated. In particular,• The NPL problem resolved• Privatization of Japan Post decided• Deregulation in financial, energy, telecom and

other sectors accelerated

⇒contributed to the recent economic recovery

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Economic Impact of Regulatory Reform

• Cumulative consumer benefits between

the beginning of the 1990s and FY2002 are

approximately 3 percent of GDP

• Sectors with large benefits

-Trucking

-Electric power

-Petroleum products

-Mobile telecommunication

[Cabinet Office (2003)]

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Economic Impact of Regulatory Reform (Continued)

• Sector-wise TFP growth accelerated by 0.1 percent to 0.4 percent on average annually between 1995 and 2002

• Sectors with substantial improvement-Wholesale and retail-Electric power-Telephone and telegraph-Petroleum products-Pharmaceutical products

[Cabinet Office (2006)]

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Important Factor behind the Acceleration

• Creation of the Council on Economic and Fiscal Policy (CEFP) in 2001(The Cabinet Office serves as the secretariat f

or the CEFP)

In addition to• Strong personal commitment of the PMs• Enthusiasm of the Ministers of State for Eco

nomic and Fiscal Policy

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What is the CEFP?

• The centerpiece of a major reorganization of the central government in 2001 to, among others, strengthen the PM’s initiative and leadership in policy making

• Deliberate on a wide variety of micro-economic, macroeconomic and fiscal policy issues

• CEFP decisions become basic government policies through Cabinet Decisions

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Members of the CEFP• Prime Minister (Chair)• Minister of State for Economic and Fiscal Policy

(The Minister in charge of the CEFP)• Chief Cabinet Secretary • Minister of Finance• Minister of Economy, Trade and Industry• Minister of Internal Affairs and Communication• BOJ Governor• 4 Private sector members (including Prof.

Yashiro)(Other ministers may be asked to attend a CEFP meeting, depending on an agenda of the meeting.)

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Attributes of the CEFP

Success of the CEFP in accelerating

structural reform and in improving

economic and fiscal policy making in

general is, at lease in part, attributable

to the following virtues of the CEFP

• Transparency

• Economy-wide view

• Integrated approach

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Transparency

• Minutes of CEFP meetings made public in three days

• Press briefings by the Minister of the State for Economic and Fiscal Policy just after CEFP meetings

In sharp contrast with the decision making

process of old days, which was closed and

not transparent

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Economy-Wide View• Most of the CEFP member ministers have

a horizontal responsibility rather than a sector-specific responsibility (So does the BOJ Governor)

• Two members from academics are free from any particular interest groups, and bring objective economic analyses into policy discussion

• Two members from the business sector also have a broad perspective and cost-conscious management expertise

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Integrated Approach• The CEFP handles both economic and

fiscal policy in a coherent and consistent manner

In contrast with old days, when economic and fiscal policy not coordinated in an effective manner

(However, this is primarily related to macro-economic policy making)

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Reform Priorities of the Abe Administration

• Addressing globalization (Promoting FTA etc.)

• Labour market reform

• Improving productivity

• Tax system reform

• Decentralization

• Social security system reform

• Public sector reform

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Economic Environment and Reform Agenda

• The post-bubble era (During the long economic stagnation)-Reactive reform such as resolution of non-performing loans

• Since the economy was normalized (Since the “post-bubble” era was over)-Proactive reform to enhance economic growth potential such as those on the previous slide

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Challenges Ahead

• The CEFP is a new institutional arrangement, which is not deeply-rooted in Japanese political system yet

• Risk of complacence under improved economic conditions

Further efforts should be made to make more use

of the CEFP as a tool to improve policy making

and an engine of structural reform