$Unique_ID{bob00364} $Pretitle{} $Title{Japan Fiscal policy} $Subtitle{} $Author{International Society for Educational Information, Inc.} $Affiliation{Embassy of Japan, Washington DC} $Subject{fiscal japanese government bonds japan japan's financial labor international banks see tables } $Date{1989} $Log{See Table 5.*0036401.tab See Table 6.*0036402.tab } Title: Japan Book: The Japan of Today Author: International Society for Educational Information, Inc. Affiliation: Embassy of Japan, Washington DC Date: 1989 Fiscal policy Japan's fiscal year runs from April 1 through March 31. The various government ministries and agencies submit their budget requests for the upcoming fiscal year to the Ministry of Finance by the end of August. The Ministry of Finance balances these demands against projected revenues and normally completes a draft budget by the end of December and presents it to the cabinet. After cabinet approval is secured, the Government submits a budget bill to the National Diet in January and seeks to secure its passage before the old fiscal year ends in March. The Japanese Fiscal Law of 1947 provides for the issue of government bonds only in the form of "construction bonds" to raise funds for public works projects; there is no provision for the issue of bonds to finance current expenditure. The Government accordingly refrained from issuing deficit-financing bonds through fiscal 1974. But in 1975 the decline in tax revenue triggered by the first oil crisis forced the Government to introduce special legislation providing for the floating of approximately (Y)2 trillion (about $14 billion at (Y)135 to the dollar) in deficit bonds as part of that year's supplementary budget. Expenditure has continued to grow because of the mounting cost of Japan's social welfare system, particularly pensions and medical services. As a result, deficit bonds have been issued every year since 1975. The Government increased its public works expenditure during the late 1970s in order to pull the domestic economy out of the post-oil crisis recession while at the same time contributing to global economic recovery. Construction bonds provided the funds for this increased activity, and by the end of fiscal 1978 the total national debt, including deficit bonds, had passed the (Y)10 trillion ($71.4 billion) mark. By fiscal 1979 new government bond issues were financing 34.7% of general account expenditures. This sort of growth in the volume of government bonds issued interferes with the traditional roles of fiscal policy - the allocation of resources and the adjustment of economic activity. It is liable to crowd out private investment, cause inflation, and place a heavy burden on future generations. These concerns prompted the Government to undertake a program of fiscal reconstruction. Fiscal reform has been a central theme in domestic policy in the 1980s, particularly during the administration of Nakasone Yasuhiro, who was prime minister from November 1982 until October 1987. The Government's target for fiscal reconstruction is to stop issuing deficit bonds by fiscal 1990. As a result of its efforts, the ratio of general account spending financed by government bond issues has gradually fallen, dropping to 19.4% in the initial budget for fiscal 1987. [See Table 5.: FY 1987 General Account Budget - Appropriations by Major Category] [See Table 6.: Central Government Finances of Major Industrial Countries] Japan's present tax system depends heavily on direct taxation, particularly personal and corporate income taxes. The contribution from indirect taxation amounts to less than 30%. In addition, an extremely steep marginal tax rate curve means that high income earners face one of the heaviest rates of taxation in the world. The radical tax reforms attempted by the Nakasone Cabinet were designed to achieve a more realistic level of indirect taxation and to reduce the burden on middle-income earners. These efforts led to reforms in fiscal 1987 that included tax cuts amounting to (Y)1.54 trillion and the sharp curtailment of the system of tax exemption for interest paid on small savings accounts. The initial budget for fiscal 1987 is summarized in the accompanying table. The largest expenditure item is the cost of servicing government bonds. Outstanding issues as of the end of fiscal 1987 totaled (Y)153 trillion ($1.1 billion), and the cost of servicing this debt, including interest and redemptions, came to (Y)11.3 trillion ($80.7 billion), or 20.9% of total expenditure. Despite the drive to cut back on new issues of deficit bonds, Japan still has a high debt-to-GNP ratio (51.6%) by comparison with the other major industrial nations. It is against this background that the Government has had to cope with mounting pressure at home and abroad for the expansion of domestic demand as a means of promoting sustained, inflation-free growth in the world economy and of correcting the external imbalances in the Japanese economy. During fiscal 1987 the Government responded by introducing the largest supplementary budget ever, reflecting the provisions of the emergency economic package announced in May. The aim of this move is to use fiscal policy to stimulate the expansion of domestic demand, while at the same time continuing the campaign to rebuild the nation's finances. Finance Japan's central bank is the Bank of Japan, established in 1882. Its supreme decision-making body is the seven-member Policy Board, chaired by the governor of the Bank of Japan and including representatives of private-sector financial institutions, commerce, industry, agriculture and forestry, and the Government. The greatest responsibility of the Bank of Japan, like central banks in other countries, is to maintain the value of the nation's currency through such measures as adjustment of the official discount rate, manipulation of banks' reserve requirements, and operations in bond and bill markets. Recently emphasis has been placed on the development of policies in coordination with the central banks of other nations so as to stabilize foreign exchange rates and to smooth international financial transactions. One feature of the Japanese financial sector is the division of private-sector banking institutions among different areas of activity. The categories include long-term credit banks, city and regional banks, which concentrate on short-term funds, trust banks, and mutual savings and loan banks and credit associations, which provide financial services for relatively small businesses. These categories evolved in the postwar era, when Japanese corporations had to rely heavily on borrowed funds because of their low reserves of accumulated capital. Capital supply channels were diversified according to the type of funds required in an effort to create a more efficient financial system. But today the distinctions between these different areas of specialization are becoming increasingly blurred. In the area of international finance, the revised Foreign Exchange Law of 1980 removed most restrictions regarding international capital transactions. From around this time, Japanese financial institutions began to expand and strengthen their capabilities in the field of international business, and both banks and securities companies accelerated their entry into overseas financial markets. The overseas expansion of Japanese financial institutions and the growth of their international capital transactions focused increasing attention on Tokyo as a world financial center. This was accompanied by mounting overseas demand for the deregulation and internationalization of Japan's money and capital markets. During 1984 the Government responded to this demand by abolishing regulations on the conversion of foreign funds into yen, establishing a yen-denominated banker's acceptance market, and deregulating interest rates for large-denomination time deposits. In addition, membership of the Tokyo Stock Exchange was opened to foreign securities companies, and foreign banks were allowed to engage in trust banking activities. A succession of other measures have since been implemented, including the relaxation of restrictions on Euroyen transactions. The establishment of the Tokyo offshore market late in 1986 has heightened the momentum of deregulation and internationalization in the Japanese financial sector. Today the Tokyo money and capital markets form a major global financial center, interacting with the London and New York markets around the clock. External economic relations Japan's current account showed substantial deficits for a couple of years after each of the two oil crises. But the balance of payments shifted into the black in 1981, and from 1983 on the surplus expanded at a particularly rapid pace. This was largely the result of the increasing international competitiveness of Japanese manufactured goods in terms of quality, coupled with the strength of the dollar against the yen and the expansion of the U.S. economy during this period. The Government has tried in various ways to correct this external imbalance; in July 1985 it introduced an "action program" that was designed to improve market access through such measures as revision of japan's system of standards and certification and abolition or reduction of tariffs on manufactured goods. In September 1985 the major industrial nations moved to remedy trade imbalances by correcting the excessively high value of the dollar. This triggered a series of dramatic currency adjustments that caused the yen to appreciate by more than 40% against the dollar in the space of a few months. During this time, the surplus actually grew because of the "reverse J-curve" effect, climbing to $94.1 billion in fiscal 1986. A year later, however, these exchange rate adjustments finally began to yield reductions in the current account surplus. The adjustments brought about by the strengthening of the yen and Japan's efforts to increase its imports started to become apparent early in fiscal 1987. Exports had already begun declining in volume terms during the previous year, and in May 1987 Japan's current account surplus showed a year-to-year decline in dollar value terms, marking the start of a sustained reduction in the external imbalance. Japanese industry, aware of the need to alleviate trade friction and avoid the deterioration of profits caused by the rise of the yen, is taking its own initiatives to shift away from its traditional dependence on exports. The dominant strategies employed in this context include the shift to overseas production, the procurement of components from overseas, and the promotion of the horizontal division of labor at the international level. This approach is based on the perception that direct investment is the most effective means of averting the fundamental causes of friction with Japan's trade partners. It also reflects the realization that a mutually complementary system based on the horizontal division of labor across international borders benefits all parties involved. By transferring some types of production activity to other countries, including the developing countries, Japan can concentrate on the areas in which it excels, particularly the development of new sectors of high technology. These efforts by industry boosted Japan's direct overseas investment to $10.2 billion (2,499 cases) in fiscal 1984, a 25% increase over the preceding year, making Japan the world's leader in this category. This was followed by a 20% increase to $12.2 billion (2,613 cases) in fiscal 1985, and an 83% leap to $22.3 billion (3,196 cases) in fiscal 1986. This trend is best typified by the automobile industry. Eight of the nine Japanese car manufacturers have now established or are planning operations in North America. Similarly, 66 companies in the electrical machinery industry have established overseas subsidiaries. The overseas expansion of Japanese businesses in contributing to the growth of employment in the countries concerned , as well as facilitating the transfer of technology. Employment and labor Some 90% of Japanese regard themselves as middle class, and Japanese workers are now among the best paid in the world. According to International Labor Organization statistics, in 1984 Japanese workers in the manufacturing sector were earning an average of $5.91 per hour. A comparison based on the current value of the yen reveals that Japanese workers are now earning more per hour than their American counterparts. A similar pattern emerges from the white paper on labor published in July 1987. If U.S. labor costs are set at an index of 100, the cost of labor in Japan has risen from 68 in 1985 to 116 at an exchange rate of (Y)140 to the dollar. Japan's labor costs, in other words, are 16% higher than America's. Despite improvements in both wages and other conditions of employment, Japanese workers still lag behind their American and European counterparts in terms of vacations and working hours. One example of this difference is the workweek. By 1985, 91.6% of major corporations with 1,000 or more employees had introduced the five-day week at least once a month, but the all-industry average, including small and medium-sized companies, still stood at only 49.1%. Japanese workers also have fewer days off per year. The Japanese average of 103 days, including weekends, holidays, and vacation days, is 10 days less than the European average. They work more hours per week, too. In manufacturing, the average workweek is 43.6 hours in Japan, about seven hours longer than in the Federal Republic of Germany, which boasts the world's shortest workweek. Continued efforts are being made to reduce working hours in Japan. A 1987 amendment to the Labor Standards Law reduced the statutory workweek from 48 hours to 46 hours from April 1988. A further reduction to 40 hours is planned in the near future. Unemployment in Japan remained stable at around 2% until the late 1970s but gradually increased in the 1980s, hitting 2.8%, or 1.71 million, in 1986. This is the highest level in both percentage and absolute terms since statistics were first compiled in 1953. Key factors in this increase are the Japanese economy's shift to a slower growth track and mismatches in the labor market accompanying the fast pace of restructuring toward an economy led by domestic demand rather than exports. The unemployment rate is expected to continue to rise, partly because of the growing influx of part-time workers - particularly women - into the labor force. In 1986 there were 5.03 million part-time workers, or 11.7% of the total number of people employed. Major policy priorities for the future include the creation of new sources of employment through the achievement of steady economic growth, the improvement of worker welfare through the reduction of working hours, and long-range efforts to find additional employment opportunities.