Progressing Priorities for Structural Reform; A case of Japan February 26 th, 2007 Naohiro Yashiro International Christian University and Council for Economic and Fiscal Policy, Japan

2 Speed of the aging in Japan is higher than other OECD, even accelerating recently

3 Declining population of productive age peaking at year 1995

4 Long-run stagnation of the economy is mainly due to a lack of structural adjustment to changing economic circumstances

5 A New Growth Strategy  Increase in average productivity by utilizing Information Technology  Improving competitiveness of under- developed industries through globalization  Removing obstacles for new firms entering the emerging markets in the aging society  Movement of labor force from low productive to high productive industries and regions

6 Productivity growth for offsetting the declining labor force

7 Diversion between a highly productive manufacturing sector and a low productive service sector

8 High levels of research and development expenditures Japan maintains 10% share of exporting high-technology products in the world markets

9 Large gap between inputs and outputs of research and development University management, labor markets, and competition policies need to be improved

10 Factors for low return to R&D investment  Lower mobility of researchers between firms, research institutes and government  Low ratio of foreign researchers

11 Widening gap in outward and inward foreign direct investment Leading to less competition and less employment opportunities in the domestic markets;

12 An Example; Growth prospect in health care service industries  Quality difference in health care services are not reflected in prices;  Insufficient information on quality of health care services;  Restrictive rule on combining public insurance and private insurance in the same treatment based on an egalitarian rule;  Prohibition of firm-managed hospitals makes M&A quite difficult and preventing dynamic efficiency in the medical service markets;

13 Inefficiency in agricultural protection  Japan ’ s share of agricultural production is 1.1%, but accounts for 3.4% of labor force;  Average farmland is 1% of the US and 5% of Germany and France

14 Labor-market “ Big Bang ”  Flexibility in the labor market is a key to improve labor productivity;  Shifting the labor force to high-productive sectors by lowering employment barriers;  Introducing the “white-collar exemption”  Equal treatment of workers between internal and external labor markets based on occupation;  Using private initiatives in the public employment services, despite the ILO treaty

15 Special Zones for regulatory reform  Established in 2003 as an endeavor to enhance nation-wide regulatory reforms  Regulations are eased in geographically limited areas as a testing ground, and are to be implemented to at the national level;  Due to the large degree of independence of ministries, an area-based regulatory reform and decentralization can lead to original initiatives which might take longer;  SZ is intended as a tool for speeding up of the nation-wide regulatory reform.

16 The more the region depends on public investment, the less likely it proposes SZ

17 Role of the Council on Economic and Fiscal Policy (CEFP)  Chaired by the Prime Minister and exercise of the leadership in policy making;  Reflecting the views of four private-sector experts in business and academics;  Since its creation in 2001, it has played a key role in Japan’s structural reform as well as economic and fiscal policy;  Formulating medium-term strategy combined with economic and fiscal outlook