Public Policy Planning & Consulting Co. (SEISAKU-KOUBOU) is a public policy consulting firm based in Tokyo, covering broad policy areas such as economic policy, fiscal policy, regulatory policy, administrative reform, international trade and investment, etc.
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Industrial Competitiveness Bill and National Strategic Special Zones Bill Reflecting a Confrontation between ‘Industrial Policy’ and ‘Deregulation’ Schools in the Government

*This is a translation of an article by Yoichi TAKAHASHI, PPPC Chairman 
   / Kaetsu University Professor, written for Gendai Business website on October 21, 2013

What will be Prime Minister Abe’s ‘third arrow’ be like? It will be revealed by the contents of the bills submitted in the current extraordinary session of the Diet.

The effects of Abe’s ‘first arrow’ and ‘second arrow’, fiscal and monetary policy, will only be observable in 1-2 year. More precisely, the effects of fiscal policy will be seen in one year while the result of monetary policy will be evident after two years. Actually the effect the fiscal policy is getting to be evident as there was the 10 trillion yen of supplementary budget compiled in January. On the other hand, the government started the relaxing monetary policy this April and while there were certain progresses already, its real effect will be evident from around FY 2015 or so.

Meanwhile, the Cabinet announced to raise the consumption tax rate from April 2014, and its negative effects on the country’s economy will surely be apparent within the year. This is why the author has insisted a compilation of some 20 trillion yen of supplementary budget to mitigate its negative effects on the nascent economic recovery in the past column (as of Sep 23, This is because possible positive effects of the monetary seen will likely be yet to be seen in FY 2014, and some further additional relaxing measures will be late anyways if taken (additional relaxing measures should be taken, indeed).

Bureaucrats never successfully sketched the “industrial policy” in the past

While the fiscal and monetary policies have comparatively short-term effects, the effects of ‘third arrow’ growth strategy will be evident in at least five years. The calculation on ‘third arrow’ assumes at least two years in elaborating and passing necessary legislations in the Diet, and effects of such legislations will finally be observable after three years. Needless to say, it is not to say the ‘third arrow’ is unnecessary and we must go on with it.

In fact, when the author took part in the Koizumi administration, we undertook the deregulation alone without doing an industrial policy. The bureaucrats in the Economy and Trade Ministry, when they speak of growth strategy, would always bring the idea of “industrial targeting policy” that is groundless in the economic theory and “public-private fund” which would cause further wasteful spending.

From the beginning, the term “industrial targeting policy (or industrial policy)” is an incomprehensible concept in English. Some foreigners would laugh at the term saying “How would the government officials having no experience of private management know how to draft a growth strategy? Impossible.” On the contrary, ‘deregulation’ is a universally common language.

Having worked in the Ministry of Finance myself, the author has seen the failures of such industrial targeting policies. Japan Key Technology Center, for example, was established in 1985 funding 280 billion yen but it ended in recovering only 800 million yen, so the taxpayers’ money were just thrown in vain. The fifth-generation computers and sigma projects were similarly large-scale wasteful public works. The government ministries would always fail in financial investment as they are irresponsible for the results.

In this sense, Abe’s ‘third arrow’ should entail the “deregulation” alone. Still, some members of the Cabinet still prefer the “industrial policy,” it seems.

Awful media phrasing “special economic zones to make it easy to fire employees”

The 185th extraordinary Diet session convened on Oct 15 is the first full-fledged session since the ruling bloc has enjoyed a comfortable majority in both chambers. There the focus of attention has shifted from the interparty to intra-party confrontation within the ruling bloc. The Cabinet bills on the Industrial Competitiveness and National Strategic Special Zones actually depicts the confrontation between the “industrial policy” and “deregulation” schools in the ruling bloc.

The bill on Industrial Competitiveness is an industrial-promotion-plan to give specific shapes to the growth strategy of the Cabinet’s economic policy dubbed “Abenomics.” While it is more like a governmentally-led “industrial policy,” officially, it entails an aspect of “deregulation” phrased as “special economic zones for corporations.” Nonetheless, this “special zones for corporations” does not touch on the country’s ‘bedrock’ regulations such as agriculture, medical care, education and labor. It is centered on differential supporting measures to the companies such as that the companies will get benefits if they listen to the Ministry of Economy, Trade and Industry. Anyways, there is a great concern because it entails no specific reform menu so far.

On the other hand, the bill on National Strategic Special Zones aims to undertake deregulatory measures in certain local areas. It is a realistic approach to do reforms locally because there is a strong opposition of the vested interests nationally. It had entailed specific reform menus and there were certain advancements in 10 out of 15 policy fields. There will likely be certain levels of accomplishment of “deregulation” in 1) regulation on the number of beds in hospitals, 2) medical treatments not covered by public insurance, 3) new medical schools, 4) privately-managed public schools, 5) floor-area-ratio regulation, 6) area management in urban planning, 7) use of residential apartments for accommodations, 8) application of credit insurance to agriculture, 9) expansion of farmland-use, and 10) use of historical buildings. Also, there will be some progresses in themes such as admitting medical practices by foreign doctors, terminable employments and specification of labor rules for dismissing employees.

Another great concern is the very different attitude of mass media toward the bills. The media are full of articles admiring the bill on Industrial Competitiveness in line with the lectures given by the METI bureaucrats. In the meantime, it was ridiculous that they phrased the Special Zones bill’s labor part as “economic zones to make it easy to fire employees.” The actual content of the bill is just a specification of employment rules, aimed at attracting foreign companies and employees with high expertise. While the Ministry of Health and Labor, the main opposition actor, insists it is inappropriate to make differences inside and outside of the special zones, the point, then, is to make specific, nationally-uniform labor rules.

While Asahi newspaper reported that “it will be possible for companies to pledge dismissing employees if they are late, and the companies to actually fire them when they are really late,” it is against the public order and commonsense as well as the guidelines for the Special Zones. Financial Times, on the other hand, wrote the possibility of breaking through the duality of labors widely divided to regular and non-regular employees in this country, reflecting a more accurate understanding on the legislation.

Obviously it is an exposure of the fact that Japanese mass media are subordinate to the central government ministries.

Let’s watch the Diet to consider which school is more growth-oriented in a true sense

Following the twitter of the world’s top economist Barry Eichengreen, U.C. Berkeley Professor, the author of this article found an article titled “Japan Rising? Shinzo Abe’s Excellent Adventure.”

Citing a phrase of Henry Wadsworth Longfellow “I shot an arrow in the air, it fell to earth, I knew not where.” Eichengreen stresses a high expectation on the ‘third arrow’ while comprehending its difficulty. Plus, Eichengreen goes on by pointing that the ‘third arrow’ will bring disadvantageous effects to the existing vested interests at this point.

Probably Eichengreen would not think that there are two kinds of ‘third arrow’; one is the “industrial policy” which brings benefits to the vested interests; the other is the “deregulation” by which the vested interests lose the benefits. Perhaps Eichengreen’s expecting tone reflects his understanding that the ‘third arrow’ refers to ‘deregulation’ alone. Maybe the term “industrial policy” doesn’t exist in the mind of an English-speaking, American economist as a concept.

In Diet policy discussions, the opposition parties should consider and compare the differences between the contents of the Industrial Competitiveness bill of “industrial policy” and the National Strategic Special Zones bill as “deregulation” measures carefully. Looking at which parties would support which bill, we will know which political parties are more growth-oriented in a real sense.

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