Multimedia Mania/abacus-multimedia-mania.iso/dp/0036/00364.txt

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$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.