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

2 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

3 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

4 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)]

5 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)]

6 Important Factor behind the Acceleration Creation of the Council on Economic and Fiscal Policy (CEFP) in 2001 (The Cabinet Office serves as the secretariat for the CEFP) In addition to Strong personal commitment of the PMs Enthusiasm of the Ministers of State for Economic and Fiscal Policy

7 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

8 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.)

9 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

10 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

11 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

12 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)

13 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

14 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

15 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