Reforms as the Key to a Successful Growth Strategy

Three Key Areas for Regulatory Reform

With its victory in the July 2013 upper house election, the administration of Abe Shinzō may be said to have received a popular mandate for “Abenomics,” the prime minister’s package of economic policies aimed at overcoming Japan’s long-term deflation and getting the economy back on the growth path. But the success of the package in achieving these goals will depend on the content of the new growth strategy that Abe is planning to put together this autumn.

The prime minister has described Abenomics as consisting of three arrows. The first two are monetary and fiscal policies to stimulate demand at the macroeconomic level, while the third comprises structural measures working at the micro level to promote growth from the supply side. In order for the third arrow to work, however, the regulatory reforms at its core must aim not just to enhance industrial productivity but also to unleash the latent private-sector demand that has been held down for so many years.

Earlier moves to deregulate trucking and telecommunications, fields in which competition had been limited, resulted in the emergence of revolutionary new home delivery and mobile phone services. Unless regulatory reforms offer enhanced convenience in people’s everyday lives, they are not likely to promote long-term economic growth. The candidates for deregulation are countless, but here I will consider three fields in which reforms can produce quick increases in demand: agriculture, urban development, and medical and nursing care.

Agriculture: End the Acreage Reduction Program

Now that Japan is participating in the Trans-Pacific Partnership negotiations, the focus is on whether it will be able to keep its high tariffs on rice. But our country has a temperate climate, a plentiful supply of water, ample farmland, and diligent farmers. Why, then, is rice, our staple grain, so uncompetitive internationally that it needs to be protected by a high tariff wall?

Other advanced countries also protect their agricultural sectors, but the main tool they use for this purpose is income support. Few governments adopt the approach taken in Japan, where production of rice is artificially curtailed under the paddy acreage reduction program, a de facto cartel that pushes up the price of the staple grain and imposes a heavy burden on consumers. This program also takes a major toll on full-time farmers, who are required to reduce their total production of rice by 40%. Even if farmers seek to achieve the benefits of larger-scale operations by assembling pieces of farmland that are currently divided into small plots, their efforts will be in vain as long as the acreage reduction program continues. This program hurts both consumers and full-time farmers and imposes a great cost on the Japanese economy as a whole; the only reason it is maintained is to serve the interests of the nationwide network of agricultural cooperatives (the Japan Agriculture Group), which derive a major portion of their income from the commissions they collect on rice sales under the current system. Keeping rice prices high is therefore in their vital interest.

What would happen if the acreage reduction program were abolished in short order and direct payments to farmers implemented in its place? Full-time farmers would grow as much rice as they could, causing its price to fall substantially; this would make Japanese rice more competitive internationally and allow the tariff rate to be reduced. Furthermore, if Japanese agriculture transformed itself into an export industry, targeting Asian markets with better growth prospects than Japan’s, which is shrinking as the population ages, it would also result in improvement of our country’s food self-sufficiency ratio, which has become an issue in recent years.

Also, if business corporations with ample funds became involved in farming on a greater scale, farming communities would be enlivened with the presence of increased number of young people working as company employees. The provisions of the Agricultural Land Act specifying that farmland is to belong to those who till it should not be used to exclude companies seeking to get into farming as a business. If anything, the farm owners who are violating this law by leaving their plots untended—whose number is on an upward trend—ought to be fined. The rise in the number of people who have inherited farms but who are not themselves farmers, and who neither sell nor lease their land to full-time farmers, is emblematic of the contradictions in Japanese agriculture.

Urban Development: Promote Residential Rebuilding in Central Districts

By comparison with cities like London and Paris, Tokyo makes relatively little use of its precious central districts for housing. So there is a great difference between the daytime population of office workers and the nighttime population of residents. This makes it necessary for people to commute on a massive scale, resulting in congestion that places a burden on society. The population of central Tokyo could be increased greatly if, for example, a rule were adopted stipulating medium-rise buildings of five or six stories in principle for housing in the residential areas of the central districts.

The number of working couples continues to increase, and they do not want to commute long distances, unlike a single-earner family. Also rising is the number of households consisting of seniors requiring medical and nursing care. For such people, an apartment in an urban area offers much greater convenience than a family home with a garden in the suburbs. If those who already own homes in central districts rebuilt them as medium-rise dwellings, they would be able to accommodate three generations of family members under the same roof; they could also make efficient use of their real estate by adding rental units.

If the existing rules on residential construction were changed, such as by substantially hiking the maximum floor-area ratio and revising the “right to sunlight” provisions that limit the height of buildings, private-sector residential investment would be stimulated without any government spending. And a pickup in residential investment would lead to growth in related forms of domestic demand. Also, by making more efficient use of limited urban space, it would become possible to have more parks and other open areas, which would mean more comfortable lives for many people. Furthermore, newly built medium-rise dwellings would alleviate earthquake disasters, as well as making the city more attractive.

It is also essential to revise the existing law governing the rights of condominium owners. This law currently requires the consent of at least four-fifths of the owners to rebuild a condominium, a provision that is a major impediment to reconstruction at a time when increasing numbers of these edifices have reached the end of their expected years of use. Rebuilding the old structures would also mean greater safety for other local residents. This form of residential investment should be promoted by relaxing the current four-fifths requirement—which clearly places excessive emphasis on the rights of those who want things to stay as they are—to two-thirds, which is the level of consent required for the redevelopment of residential areas.

Back in the days when the population was growing and land prices were rising, owning a house with a garden in the suburbs was part of the standard lifestyle. But now that the population is contracting and aging, there is an increasing trend toward grouping more closely, living in central urban areas with well-developed infrastructure. We need to promote a “compact city” policy not just in provincial cities but also in the major metropolitan areas, which have rapidly aging populations.

Medical and Nursing Care: Open Up the Silver Market

The rapid growth of the elderly population represents a serious headache for public finances, requiring higher taxes and social security contributions. For the private sector, however, the growing “silver market” of seniors with money to spare offers major business opportunities. Seniors’ biggest needs are for services like high-quality medical and nursing care, but at present these fields are subject to government controls on pricing and corporate entry; in effect they are under a socialist system. If they can be turned into market industries, subject to the government’s provision of a social safety net, it will be possible to achieve considerable increases in demand and employment.

What is required for this purpose first of all is a shift to free pricing. Under the insurance plans for medical and nursing care it is only natural to set fixed levels of fees for services in line with premiums. But the fee levels set under the public insurance plans have become the official prices for the services in question, and this has resulted in mismatches between supply and demand in many areas. Also, since the fees are kept low to control costs, the supply of services does not increase, and the result is long waiting lines. For example, under the government’s Long-Term Care Insurance system, users can opt to pay out of their own pockets for more frequent services than provided by the system, but the providers of the services are not allowed to charge fees higher than those set by the system on the grounds that this would be inequitable. The result is that private-sector service providers do not come up with original approaches, and the limits on public funding lead to lower quality and a shortage of care workers.

Another problem is the prohibition on entry into these fields by ordinary business corporations. This restrains competition among service providers to meet consumers’ needs. For a business to earn profits in a market with ample competition, it needs to be chosen by customers. Current rules allow only nonprofit corporations to operate in these fields. I believe that users would benefit from the creation of a competitive market open to providers of all sorts, subject to government rules designed to ensure that the public interest is properly served.

It is the government’s responsibility to guarantee a supply of public services adequate to meet basic demands, such as the prompt provision of emergency medical care. But if this foundation were supplemented with an additional level of services provided through private-sector initiative in a market open to free competition, we would likely see the rise of a promising senior market.

Bold Reforms in Strategic Special Zones

Deregulatory moves aimed at economic revitalization are bound to generate friction with those seeking to protect vested interests. But with the “national strategic special zones” that are a major component of the Abenomics growth strategy, the administration is aiming to work in liaison with the chief executives of major metropolises like Tokyo, Osaka, and Nagoya to turn them into the world’s most business-friendly cities through a combination of bold regulatory reforms and fiscal incentives.

One requirement for this purpose is to increase investment yields by lowering the corporate tax rate. Japan’s current corporation tax has various special provisions for tax deductions to serve the interests of particular industries, and these have eroded the tax base. If these deductions and other tax breaks were cleared away, it would be possible to lower the tax rate without reducing the amount of revenue collected. And if local government heads took the initiative to eliminate the local corporation tax in the strategic special zones, businesses would have a much lighter burden.

A second requirement is a set of measures to accompany the increase in maximum floor-area ratios, such as appropriate compensation for local residents and support for those who rebuild their homes as medium-rise dwellings. Municipal governments will have a major role to play in this connection. Also, to promote involvement from overseas it will be important to provide advanced hospitals that can provide services in foreign languages. And Japan should encourage the establishment of international schools of various sorts by giving them tax breaks like those received by regular private schools.

Third, we will need to take additional steps with respect to foreign workers. Even if the government retains its traditional policy of admitting only skilled workers from overseas, it needs to adopt a broader, less arbitrary interpretation of the scope of skilled labor. Professionals like doctors, nurses, and lawyers with qualifications from other advanced countries should be admitted a matter of course, and working visas should be granted in principle to talented foreign trainees at the end of their training periods and to students from abroad graduating with good marks from Japanese universities.

One of the major planks of Japan’s economic policy has been the quest for regionally balanced development. In the past, when the country was achieving rapid economic growth, the government was assumed to have ample revenues, and the policy was to prioritize infrastructure construction in the regions where development was lagging and to offer incentives for private-sector investment. But such measures were rarely successful in promoting regional development. In order to pull out of our current prolonged slump, we require a growth strategy that will attract domestic and international private-sector investment mainly to the big cities where the funds can be used most productively. The plan for strategic special zones is highly significant in this connection.

The Important Role of the CEFP

In order to promote the regulatory reforms that will be the key to a successful growth strategy, it will be important to (1) conduct thorough discussions among senior cabinet members regarding the need for the reforms, (2) fully disclose the data serving as the basis for these discussions, and (3) have the prime minister demonstrate his commitment to the reforms. The organ for doing so will be the Council on Economic and Fiscal Policy. The CEFP is chaired by the prime minister; its members consist of the chief cabinet secretary and four other senior ministers responsible for economic and fiscal policy (with other cabinet members participating on an ad hoc basis for discussions of particular issues), four private-sector representatives appointed by the prime minister, and the governor of the Bank of Japan.

When the CEFP deliberates regulatory reform, the first step is for the private-sector representatives to submit a one- or two-page paper regarding the need for each proposed reform. (These papers reflect the results of ample discussions in the Council for Regulatory Reform, a 10-member body consisting entirely of private-sector representatives.) The responsible minister may present counterarguments; the members consider these and discuss the proposal over the course of multiple meetings. At the end of this process the prime minister reveals his decision; if the reform has been approved, this decision is officially adopted by the government at a subsequent meeting of the cabinet.

In addition to the Council for Regulatory Reform, the current Abe administration has established an Industrial Competitiveness Council consisting of 7 ministers and 10 private-sector representatives. This council will also be a forum for discussing regulatory reform, but it is likely that it will ultimately serve as a source of materials for the prime minister’s reference in making his decisions at the CEFP.

During the administration of Prime Minister Koizumi Jun’ichirō (2001–6), regulatory reform became a major political issue in connection with the privatization of the postal services. This time the reforms are likely to be closely linked to the macro economy. Since the national debt is huge and still growing, the government needs to come up with a growth strategy that will not depend on fiscal outlays. It will be necessary to present this in concrete terms so as to retain the confidence of the domestic and international investors who are supporting the market for Japan’s government bonds. The working of market discipline in pushing the process is a major feature of the regulatory reform program that constitutes the main pillar of the Abenomics growth strategy.

(Originally written in Japanese in September 2013.)