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(Provisional Translation)

Guidelines for Formulation of the Fiscal 2002 Budget

Cabinet Decision of December 4, 2001

1. Promoting Structural Reform for the Rebirth of the Japanese Economy

1. Japan's Current Economic and Fiscal Conditions

(Current Economic Conditions)

Following the deceleration of the U.S. economy and the terrorist attacks of September 11, the world economy has entered a phase of general slowdown. In this environment, the Japanese economy is experiencing significant reductions in exports and output. Corporate profits and plant and equipment investment are also declining. Furthermore, labor market conditions are becoming increasingly severe, while personal consumption is showing signs of weakness. Consequently, overall economic conditions are continuing to deteriorate.

(Japanese Economy in Fiscal 2001 and 2002)

In light of current economic conditions and the deteriorating outlook under global economic slowdown, the Japanese economy is expected to register negative growth in fiscal 2001.

For fiscal 2002, while difficult economic conditions will persist, the Japanese economy is expected to begin to move toward recovery. This positive outlook is supported by such factors as the speedy and powerful implementation of structural reform initiatives, the impact of anti-deflationary policies implemented by the government and Bank of Japan, including the enactment of a second supplementary budget for fiscal 2001, and the expected improvement in U.S. economic conditions.

Projected growth rates will be indicated in the government's "Economic Outlook and Basic Policy Stance on Economic Management" to be released at the end of the year.

(Fiscal Conditions)

Since the collapse of the bubble economy, Japan's fiscal policies have been primarily focused on achieving an economic recovery. Consequently, as of the end of fiscal 2001, the combined long-term liabilities of the central and local governments are expected to reach \666 trillion, a crisis situation which places Japan below all other advanced countries.

Japan can no longer expect growth in tax revenues based on high economic growth rates. On the other hand, the rapid aging of society is raising government expenditures, while the expanding volume of outstanding government bonds is leading to an elevation of debt-servicing expenses. As a result, the government's revenue and expenditure structure is becoming increasingly rigid. Unless bold measures are taken to revise the current fiscal structure, there is a strong possibility that the very large gap between tax revenues and expenditures will continue to grow in the years ahead.

Conditions increasingly jeopardizing fiscal sustainability cannot be neglected and steady measures must be taken to promote fiscal structural reform.

2. Toward the Rebirth of the Japanese Economy -- Promoting Structural Reform --

Notwithstanding the very severe economic conditions which prevail, in order to achieve economic rebirth, Japan has no choice but to proceed with structural reform. Japan must fundamentally reform its social and economic structures, and must put in place various new systems and arrangements facilitating the full release of its potentialities. Such measures must include the prompt disposal of non-performing loans, regulatory reform and the reform of special public corporations so as to create an environment conducive to the development of private sector vitality, and the realization of fiscal responsiveness through fiscal structural reform. This series of structural reforms must be implemented in an integrated and complementary manner.

In this process of structural reform, Japan will have to bear with harsh economic conditions during a period of concentrated adjustment which will extend for approximately two years. However, by accelerating the process of structural reform for the achievement of economic revitalization, the fruits of structural reform will emerge, the current weaknesses in the economy will be rectified, and Japan will again be able to enjoy private-demand-led economic growth. Efforts will be made to minimize the "pain" engendered by these reforms by promoting structural reforms with a linkage to job creation.

The Medium-Term Economic and Fiscal Plan (provisional name) now being formulated will indicate the course of economic structural and fiscal reform to be taken over the next few years, and will also describe the vision for the rebirth of the Japanese economy. As this plan will go into action in fiscal 2002, this period will be identified as the starting point in Japan's economic rebirth.

2. Basic Principles for the Formulation of the Fiscal 2002 Budget

(Budget Committed to Reform)

The fiscal 2002 budget will stand as a "budget committed to reform" based on a fundamental review of expenditure structures, and will mark the first step toward fiscal structural reform with the goal of "keeping new government bond issuance to below \30 trillion."

Given the difficult economic conditions which prevail, it will by no means be easy to re-orient existing systems and measures and to implement necessary structural reforms. However, there is an urgent need for Japan to open new paths to the future guided by the spirit of "no gains without reform." The fiscal 2002 budget will be formulated in compliance with the principle of "reducing expenditures by \5 trillion while allocating \2 trillion in new funds to priority areas." This signifies a bold shift in budgetary allocations aimed at promoting economic structural transformation.

In line with this proposed shift of budgetary resources, a fundamental review of expenditures in general will be undertaken guided by the principle of "assigning all that can be done by the private sector to the private sector, and assigning all that can be done by local governments to local governments." Under this approach, fiscal action by the central and local governments shall be strictly limited to areas of real need. Based on the awareness that all expenditures are ultimately paid for by taxes, the impact of policy actions and administrative efficiency shall be assessed in accordance with a keen cost consciousness to eliminate waste in expenditures and to reduce whatever expenditures are reducible.

An important requirement in budgetary allocation is the development of stable systems which effectively correspond to changes in the socio-economic structure, such as the further advance of the aging of society.

At the same time, it is necessary to respond accurately to new fiscal needs while focusing on the impact of the budget on medium-term improvement of the economy's productivity and the realization of the private sector's potentialities. Likewise, in view of current labor market conditions, emphasis should be put on the budget's job-creating impact.

Furthermore, measures should be taken to involve the entire population in sharing the burden of the forthcoming reforms so as to prevent the undue concentration of "pain" on the socially vulnerable.

(Administrative Reform)

Action must be taken to create simple and efficient administrative systems based on the principle of "structural reform without any sanctuaries." For this purpose, administrative functions must be reviewed in light of current requirements, and administrative reform must be promoted through such measures as streamlining and improving the efficiency of administrative organizations and reforming special public corporations.

Regarding the number of central government employees, steady action shall be taken to streamline this workforce to achieve a 25% net reduction over the next ten years. Meanwhile, to ensure effective responses to changes in demand placed on government administration, it will be necessary to take more active steps towards promoting the reallocation of human resources among government ministries and agencies. For this purpose, during fiscal 2002, additional human resources will be assigned to priority areas as determined by urgency gauged from a government-wide perspective. In all other areas, strict measures shall be implemented to restrict any increase in the workforce and to reduce the number of mandated posts. The aim of these measures shall be to realize a more sharply modulated allocation of posts and to achieve a net reduction in the overall number of civil servants employed by the national government.

The administrative functions and organizational structures of all special public corporations shall undergo fundamental review, culminating in the Reorganization and Rationalization Plan for Special Public Corporations to be completed before the end of the year. Fiscal expenditures pertaining to special public corporations shall also be reviewed. Based on these results, bold action shall be taken to reduce general account and special account disbursements to special public corporations by a total of \1 trillion.

(Tax Reform)

Appropriate modifications shall be made in the tax system in accordance with the basic principles of fairness, neutrality and simplicity. Based on the fiscal 2002 budgetary goal of "keeping new government bond issuance to below \30 trillion," these initiatives shall take into account the ongoing changes in socio-economic conditions and shall be formulated with the objective of promoting social and economic structural reforms conducive to the realization of the full potentialities of the Japanese economy.

In accordance with this basic approach, special tax measures shall be strictly reviewed leaving no sanctuaries untouched, and shall be drastically consolidated and rationalized, and in certain instances abolished.

Every possible measures shall be taken to ensure and enhance the inflow of non-tax revenues.

Consolidated tax systems shall be considered with the goal of introducing such systems, including measures to ensure the availability of necessary fiscal resources, during fiscal 2002. The objective of this initiative shall be the establishment of a consolidated tax system which suits the needs of Japan's corporate tax system for the 21st century and compares favorably with similar systems in other countries.

3. Review of Government Expenditures and Promotion of Structural Reform

As a "budget committed to reform," the fiscal 2002 budget shall feature a rigorous review of general expenditures and bold measures for qualitative improvement. In accordance with "Structural Reform of the Japanese Economy: Basic Policies for Macroeconomic Management" (Cabinet decision of June 26, 2001; hereinafter referred to as "Basic Policies for Macroeconomic Management"), priority shall be assigned to specific areas among the following seven areas eliciting conspicuous policy impact. Moreover, social infrastructure development, social security systems and local finances shall also be reviewed from various perspectives.

1. Building a Cyclical Society and Other Responses to Environmental Problems

Harmony with the natural environment stands as an important requirement in the achievement of sustainable economic growth. In order to reduce the environmental impact of economic activities, research and development shall be promoted for the commercialization of environmental technologies, such as waste disposal and recycling. Furthermore, measures shall be taken to create and to expand an environmental sector based on the position that "environmental businesses" constitute a new growth area. Actions shall be taken to create a "zero waste society" by controlling the generation of waste, promoting recycling and preventing illegal dumping of waste. Moreover, in support of the Kyoto Protocol, efforts shall be made to promote a non-global warming society through the advancement of nationwide measures backed by all citizens and the nurturing of healthy forests.

For the achievement of these objectives, systems shall be created for cooperation among government research institutes, industry, universities and government agencies.

Furthermore, measures shall be taken to encourage the public's participation in responding to environmental problems, including the promotion of symbiotic relations with nature.

2. Responding to Declining Birth Rates and the Aging of Society

Given the continued decline in birth rates and the aging of society, efforts shall be made to develop sustainable social security systems and to improve the efficiency of systems for supplying nursing care and nursery school services through the utilization of PFI approaches.

To develop a more supportive environment for giving birth and raising children who will shoulder the burden of society in the future, measures shall be taken in support of working mothers, including the implementation of strategies for achieving zero-waiting lists for nursery schools and the improvement of admission procedures for after school-hour nursery care.

Moreover, measures shall be taken to promote barrier-free public spaces, including public facilities and public transportation with the aim of creating a society in which the elderly can actively participate while maintaining their dignity.

3. Town Development and Unique Approaches to the Revitalization of Local Communities

In order to promote the original intent of the policy of the "balanced development of the national land," policy measures shall focus on the "development of unique local communities" and "revitalization through the competition of ideas and innovation."

Various projects shall be implemented under the Municipal Merger Assistance Plan to promote the revitalization and autonomous development of unique local communities. Moreover, measures shall be taken to promote the prompt reorganization of municipalities.

Greater support shall be given to non-profit organizations engaged in social projects in local communities. The structural reform of agriculture, forestry and fishery industries shall be promoted by focusing support on highly motivated and capable enterprises. Efforts shall be made to develop unique towns by promoting symbiotic relations and exchanges between urban areas and agricultural, forestry and fishing villages, and by promoting the revitalization of city centers.

Moreover, in order to ensure the safety and security of residents, measures shall be taken to promote the development of communities in which people can live with peace of mind.

4. Revitalization of Urban Areas

The revitalization of urban areas is a critical issue given that a large part of all economic activities take place in cities. To increase the attractiveness and to enhance the international competitiveness of "cities," measures shall be taken to achieve the revitalization and creation of attractive cities through the implementation of urban renewal projects and the promotion of private-sector investments in urban development projects.

With this objective in mind, bold measures shall be taken for regulatory reform to facilitate private-sector initiative in re-development projects. For example, steps shall be taken to further enhance urban functions by integrating the construction of loop roads constituting a core framework for metropolitan areas with re-development projects in peripheral areas.

Given the keen interest of urban dwellers in the improvement of urban amenities, measures shall be taken to improve the environment for raising the quality of urban living through such measures as the elimination of traffic congestion and the active use of PFI in the development of public facilities, while giving due consideration to the priorities of such measures.

5. Promotion of Science and Technology

Japan shall strive to establish itself as a science and technology-based nation. For this purpose, priority shall be given to research and development activities in the following four fields. These new fields of science and technology are essential requirements for the 21st century and the development of world-class basic research, and will provide a foundation for industrial competitiveness and the improvement of the quality of life: [1] life sciences, [2] information technologies (IT), [3] the environment, and [4] nano-technologies and materials.

With "science and technology" as a key axis, the following initiatives shall be pursued for the purpose of supporting local economies and promoting new businesses and start-up companies which are internationally competitive. Support shall be given to the research and development activities of private companies; cooperative relations between industry, universities and the government shall be promoted by developing an environment conducive to the transfer of technologies from government agencies and universities to private companies; and, measures shall be taken for the promotion of local and regional science and technology.

6. Human Resources Training and Education

Priority shall be given to developing world-class universities from among Japan's national, public and private universities through investment in education and the introduction of competitive principles based on systems for third-party evaluation. Educational reform shall be implemented in the areas of primary and secondary education for the nurturing of human resources characterized by academic achievement and human warmth. Such initiatives shall be based on the "Education Reform Plan for the 21st Century" which provides the framework for structural reform in education.

Current institutional subsidization systems shall be reviewed. At the same time, scholarship programs shall be enhanced with a focus on support for highly motivated and capable individuals. Various measures shall be implemented to support individual initiative and self-helping efforts of students, including adult students, in order to provide a wider range of educational opportunities.

7. Transforming Japan into a Globally Advanced IT Nation

For the achievement of the goal of "becoming a globally advanced IT nation within five years," the following actions shall be implemented in a prioritized and strategic manner. The world's most advanced high-speed information and communication networks shall be created as advocated in the "e-Japan Priority Policy Program" (March 29, 2001) and the "e-Japan 2002 Program" (June 26, 2001); and, measures pertaining to five key areas, including the promotion of electronic government and electronic local administration, shall be prioritized. The "e! Project" shall be promoted as a showcase to be presented to the Japanese public, as well as to the world, to describe the world-leading IT-based nation that Japan is aiming to achieve by 2005.

In the course of promoting such measures, existing measures shall be subjected to a bold review with attention paid to eliminating the overlapping of policy actions. In addition to this, research and development activities shall be promoted and active measures shall be taken in support of inter-sectoral initiatives, including the promotion of international harmonization and contribution.

8. Development of Social Infrastructure

One of the key features of the fiscal 2002 budget shall be increased public investment in priority areas, combined with radical reductions in public investment in low-priority areas. This policy shall aim to achieve a 10% reduction in public-investment-related expenditures as compared to the initial fiscal 2001 budget. At the same time, strong measures shall be taken to improve the efficiency of public investment projects and to reduce related costs.

(Review of Earmarked Fiscal Resources)

The earmarking of fiscal resources for road construction and others shall be reviewed.

(Prioritization in Public Investments)

Public investments shall be shifted towards priority areas indicated in Basic Policies for Macroeconomic Management. For instance, the following areas will be given priority: development of waste disposal facilities, improvement of urban infrastructure and environment, investment in universities and other national research facilities, investment in nursery and childcare facilities, and investment in nursing homes for the elderly.

On the other hand, public investments in the following areas shall be strictly reviewed, including projects in progress. Such reviews shall take into account the following features of the pertinent infrastructure projects: [1] current level of development, [2] urgency of development, [3] population and range of users, and [4] division of responsibilities between the central and local governments.

  • Residential, commercial and industrial water supply projects shall be strictly reviewed in view of the high rate of proliferation already achieved.
  • Sewerage development projects shall be strictly reviewed in light of regional needs and problems, and shall be prioritized and rendered more efficient. Regarding small-scale sewerage projects, the expanded use of joint sewerage treatment tanks shall be considered from the perspective of economic efficiency.
  • Projects pertaining to flood control and landslide control shall be graded according to priority. A freeze shall be put on all new feasibility studies for large-scale dams. Dam projects in progress shall be undergo a selection process based on a rigorous review of the urgency of demand for water. Such reviews will also consider the possibility of more effective utilization of existing dams.
  • Regarding the development of public housing, maximum use shall be made of the existing housing stock through such means as re-modeling and bloc-leasing to the private sector.
  • New projects for the improvement of local ports shall be restricted.
  • Projects for the development of new local airports shall be restricted, excluding airports serving isolated islands.
  • Public investment projects undertaken by special public corporations, such as the construction of high-specification trunk roads, shall be strictly reviewed in light of the reform of special public corporations.
  • Public investment projects in areas related to agriculture, forestry and fisheries shall be rigorously reviewed. Efforts shall be made to make a transition from public investment-centered policy measures to other types of policy measures (transition from hardware- to software-centered policies).

(Improving the Efficiency and Transparency of Public Investment Projects)

In order to enhance efficiency and transparency in public investment projects, concrete measures shall be taken to improve project evaluation systems, promote the utilization of PFI, raise the level of competition by expanding the use of open and competitive bidding, and to review excessive restrictions on bidding. Cost reductions through improved efficiency of public investment projects, increased utilization of PFI and the concentration of budgetary allocations to truly necessary areas play an extremely important role in boosting the level of administrative services in a period when public investment budgets are being successively reduced.

Regional budgetary allocations shall be determined with due flexibility and in view of current levels of development.

The focus of projects formulated under the Long-Term Plan for Fisheries Infrastructure shall be shifted from conventional concepts of "volume of work" to outcome-oriented goals. Moreover, the Long-Term Plan for Fisheries Infrastructure shall be formulated as a "structural reform program" incorporating methodologies for efficient project implementation, such as the restriction of projects to areas where the feasibility of the achievement of goals has been verified through rigorous process of prior evaluation.

9. Social Security Systems

Social security systems constitute the safety net mechanisms which provide security to the people in their daily lives. Notwithstanding the continued stagnation of the Japanese economy and the continued decline in birth rates and the aging of society, the future security of the people can be ensured by formulating social security systems which are sustainable through the future. For this purpose, each individual must contribute to supporting the social security systems by sharing in the burden and pain.

(Medical System Reform)

In the area of medical system reform, steps shall be taken to further improve the efficiency of medical services, and the following systemic reforms shall be undertaken as the first step toward reforming the social security system and in order to preserve the system of universal health insurance coverage.

  • In view of current trends in wages and price levels, recent economic developments, and the present condition of health insurance finances, medical consultation fees shall be examined in the direction of being lowered, and appropriate measures shall be taken. Price schedules for pharmaceuticals shall be lowered as needed in line with trends in market prices. Furthermore, the medical consultation compensation system and the pharmaceuticals pricing system shall be reviewed.
  • In the area of medical services for the elderly, a system of complete fixed rate co-payment (10%) shall be adopted with provisions made for low-income persons. Persons with income exceeding a certain level shall be charged appropriately.
  • Co-payment ceiling amounts for high-cost medical services and treatments shall be reviewed.
  • Medical services for the elderly shall be reviewed from the perspective of focusing on the support of upper age groups of the elderly. (Eligible age shall be raised to 75, and public-payment ratio shall be raised.)
  • The rate of increase of medical expenses shall be lowered to appropriate levels, particularly medical expenses for the elderly which are currently increasing at a significantly higher rate than the growth of the population of the elderly. For this purpose, guidelines for restraining the rate of growth shall be established, and effective measures shall be considered and implemented to ensure compliance with the guidelines.
  • As previously scheduled, insurance premiums for government-managed health insurance systems shall be raised in fiscal 2003 under a based on calculation of total annual income. When necessary, the public-payment ratio shall be unified at 70% for all health insurance systems.

(Indexation of Pensions)

While taking into consideration current price trends and economic developments in determining the indexation of pension payments to cost of living in fiscal 2002, due attention shall be paid to preserving the soundness of the pension system.

10. Local Finances

The following actions shall be implemented in concert to establish a new relation between the central and local governments based on the principles of "self-help and autonomy:" reduction of the scope of action by the central government, strengthening of the administrative and fiscal foundations of local governments, restoring sound local finances, and implementing necessary systemic reforms.

(Review of Expenditures in Local Fiscal Plans)

Parallel to efforts made toward reviewing national expenditures, expenditures under local fiscal plans shall be reviewed and necessary local fiscal measures implemented. In the course of this line of action, expenditures under local fiscal plans shall be reviewed in line with the reduction of the scope of activity by the central government and in view of the level of administrative services which central and local governments are expected to ensure. Furthermore, efforts shall be made to reduce the size of local fiscal plans through such measures as the reduction of personnel-related expenses through a systematic cutback in the number of mandated posts, and the reduction of independently implemented local projects.

(Review of State Subsidies and Local Transfer Taxes)

State subsidized projects shall be restricted to areas in which special needs exist for intervention by the central government. State subsidies shall be predicated on due verification of costs and benefits, appropriate efforts toward restriction of project scale, and prioritization of subsidy allocations. The basic operative principle shall be the following: "The central government will restrict itself solely to determining the general direction to be taken, while anything that can be done by local governments will be assigned to local governments." From the perspective of this principle, efforts shall be made to promote autonomous and discretionary fiscal management by local governments. Specific measures to be taken shall include the further expansion of integrated subsidies, the enhancement of the discretionary powers of local governments, the review of the graded system of compensation used in the calculation of local transfer taxes and the review of the current system for public works modification.

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