This document is compiled by the Ministry of Foreign Affairs to provide overseas users with brief information on Japanese economy and structural reforms.

Japanese Economy

As of February 27, 2003

1. Current Situation and Outlook

(1) Current Situation

• In the midst of the socio-economic transformation in a global scale, the Japanese economy faces stagnation, not merely from cyclical changes of the economy, but due to complex structural factors.
• The presence of the "negative heritage" such as non-performing loans and fiscal deficits, as well as the continuation of a deflationary condition, which has never been experienced in the post-war period, have induced a significantly negative impact on economic activity and the lives of the people.
• By advancing bold structural reforms and forming a structure suitable for the 21st century, we can overcome the current situation and revitalize as well as further develop the Japanese economy.
• Recently, there is a concern on the weak consumer confidence. However, we can observe positive signs such as improving corporate profits and bottomed-out business investment.
• Real GDP Growth Rate for FY2002 is expected to be 0.9%.

(2) Outlook

• Real GDP Growth Rate for FY2003 is expected to be 0.6%.
• The Government regards the period until the end of FY2004 as the "intensive adjustment period," in which the Government tackles deflation. During this "intensive adjustment period," the Government accelerates the disposal of non-performing loans according to the "Program for Financial Revival," while accelerating the structural reforms, especially those which would expand the private demand and employment.
• The real GDP growth rate during the "intensive adjustment period" is expected to be approximately 1% or below, and the nominal GDP growth rate is expected to be even lower.
• With the successful accomplishment of the structural reform, the Japanese economy is expected to reach the mid-term growth path, achieving 1.5% or more in the real GDP growth rate, and 2.5% or more in the nominal GDP growth rate.

2. Concept of the Structural Reform

• The Koizumi administration will continue to advance the "Structural Reform without Sanctuaries" under the basic posture of "No Growth without Reform."
• In order to revitalize the Japanese economy, it is necessary to adopt all policy measures available. The Government will accelerate the four reforms, namely government expenditure reform, tax system reform, financial system reform and regulatory reform.
• The Government, together with the Bank of Japan, will put all efforts into curbing deflation.

(1) Government Expenditure Reform

• Government expenditure reform is inevitable for revitalizing the economy and responding to large fiscal deficit. More specifically, the following four points will be highlighted.

(2) Tax Reform

• The government promotes overall and drastic tax reform which best suits the 21st century. It aims for a broad, thin, and simple tax system. This reform is under consideration based on the following six points.

(3) Financial System Reform

• It is imperative to immediately solve the non-performing loans problem of the major banks in order to recover confidence in the Japanese financial system and in the Japanese financial administration, as well as to create a financial market that is highly appreciated from the world.
• The Government strives to normalize the non-performing loans problem by the end of FY 2004 by reducing major banks' non-performing loan ratio by about half, and intends to create a stronger financial system, which can support the structural reform.
• In order to develop a new framework of the new financial administration to facilitate the structural reform, the Government is to take the following three measures; 1) tightening the asset assessment, 2) enhancing capital adequacy, 3) strengthening governance.

(4) Regulatory Reform

• In order to revitalize the economy, it is important to implement the regulatory reform which will maximize the vitality of the private sector and expand private business.
• It is true that some sectors lag behind others in the implementation of the nation-wide regulatory reform. However, Special Zone for Structural Reform enables local governments or private firms to apply to and enjoy the special exemption of regulations, based on local attributes. The Special Zone for Structural Reform is significant since local entity can promote the structural reform on its own initiative.

3. Progress in the Structural Reform

(1) Government Expenditure Reform

• In the formulation of the FY2003 budget, the Government advanced the expenditure reform by keeping general expenditure virtually below the level of FY2002 budget.
• In FY2003 budget, the Government has given considerations to enhancement of safety nets, while boldly allocating the budget into 1) the areas that will lead to the creation of employment through revitalization of private sector, and 2) the areas, such as science and technology, that will become the foundation of future development.
• The Government has made reviews on road-related ear-marked revenue and national treasury burdens of compulsory education costs.
• By the early part of the decade beginning in 2010, the Government will aim to achieve a fiscal structure in which the Government will not rely on fresh borrowings for expenditures other than servicing the interest and principal of the past debt.

(2) Tax Reform

• The Government has been discussing the issue of the tax reform since January 2002 with a view to building a "tax system as it should be," and decided to conduct a wide range of modifications in a single package.
• The Government has announced concentrated and prioritized tax cuts on R&D and business investment for increasing the competitiveness of the Japanese industry.
• As a concrete measure to mobilize personal financial assets amounting to 1,400 trillion yen, a non-taxable ceiling will be created for donations under a new scheme encompassing inheritance and donation. This measure also makes the donation of up to 35 million yen tax-exempt when they are used to acquire houses. This measure will be retroactively applied beginning on January 1st 2003.
• In order to promote effective utilization of land, the land transaction tax will be drastically alleviated.
• In FY2003, front-loaded tax cuts of 1.8 trillion yen in net terms will be advanced, and tax revenue will be neutralized over plural fiscal years.

(3) Financial System Reform

• The Government has announced to exert all efforts to address the problem of non-performing loans, with a view to terminating the problem by the end of FY2004. The Government will establish a solid financial system through the steady implementation of the "Program for Financial Revival."
• The Government has decided to establish the Industrial Revitalization Corporation, and drastically reviews the Law on Special Measures for Industrial Revitalization, in order to further promote industrial restructuring and early revitalization of businesses, while fully utilizing the wisdom and the vitality of the private sector.
• Council of Economic and Fiscal Policy has compiled the three-step reform of the policy finance for the drastic reorganization and integration of government financial institutions.

(4) Regulatory Reform

• The Government has simplified the procedure for creating and opening new business in order to improve venture business environment.
• The Government has reviewed the fixed-term employment contract system in order to further expand the employment opportunities. The Government is also planning a legislative amendment in order to extend the period of fixed-term employment contracts.
• The government has enacted the Special Zone for Structural Reform Act, which allows the most suited regulatory reform to take place in each region, in order to revitalize local economies.
• The government has enacted the Urban Renaissance Special Measure Law and designated "priority urban redevelopment areas" (44 areas) in order to promote the creative urban development projects by private sector.
• The first Special Zones for Structural Reform will be heralded in April 2003. The Government will further enhance this system and promote the participation of the private sector in hitherto regulated markets, including the participation of joint stock companies in the education sector.
• The regulatory reform will be advanced at national level, utilizing the Special Zones as a leverage.

4. Structural Reform of the Koizumi Cabinet, Over View

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