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Japan: Japan Finance Profile 2012

2012/03/14

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Japan Finance Profile 2012

Japan: Developments in Regulatory Reform


Key features of Japan’s regulatory reform

Regulatory reform has been highlighted as a major economic policy agenda in Japan for several decades. The slowdown of trend growth in the late 1970s led to the initiation of a full-fledged deregulation programme and the privatisation of major public corporations in the transport and telecommunications sectors in the 1980s. Emphasis on regulatory reform as a tool to enhance potential growth became more pronounced in the 1990s and 2000s, as the Japanese economy faced long-lasting stagnation after the burst of the bubble economy. Intensified efforts in regulatory reform resulted in progress of deregulation in a number of areas. One of the features of regulatory reform in Japan is that the expert advisory council has traditionally played a major role in promoting reform, led by high-level political leadership. Recently the efforts have been made in introducing ex ante and ex post evaluation to improve quality of regulations.


Legislation, policy and principles

The broad direction of Japan’s regulatory reform policies is stipulated in the Basic Principle for the Promotion of Regulatory Reform. The latest basic principle was adopted in February 2007 at the Headquarters for Promotion of Regulatory Reform (Headquarters), which is headed by the Prime Minister and comprised of all ministers. Based on the Principle, specific regulatory reform measures are identified in the “Three-Year Programme for Promoting Regulatory Reform”, (TPPRR) which was adopted by the Cabinet in 2006. The Programme is revised every year.


Objectives of regulatory reform

The underlying concept of the Basic Principle for the Promotion of Regulatory Reform is to promote regulatory reform with a view to shifting society and the economy from a government-led system to one based on the market mechanism and social discipline. The Basic Principle stipulates that the government should promote regulatory reform aimed at: promoting innovation to improve productivity; increasing openness of the economy; promoting reform in the labour market and social services to ensure flexibility and security of living; encouraging the efforts of regions to build attractive and vibrant communities; and providing more efficient and better public services through encouraging public and private partnerships. The Basic Principle also pays attention to the necessity of preparing rules to secure the stability of the livelihoods of people.


Mechanisms and institutions to oversee regulatory reform
Institutions

Overall institutional framework

An overall framework of regulatory reform policy is formulated by ministries and central government bodies including the Headquarters and the Council for the Promotion of Regulatory Reform (CPRR), a government advisory body consisting of experts from the private sector. Additionally, since 2001, a minister has been continuously appointed to promote regulatory reform. The Headquarters and the CPRR take on advocacy roles including the promotion of long-term regulatory reform. The Headquarters decides the basic principle of the reform, while the CPRR investigates basic issues regarding the modalities of necessary regulations in response to the inquiries of the Prime Minister. As results of the aforementioned investigation, the CPRR makes specific recommendations of policy changes in a variety of regulatory areas as well as the development of new and improved regulatory tools.

To promote the local initiatives of regulatory reform, a new scheme for allowing regionally limited deregulation based on local proposals was introduced in 2002 (“Special Zones for Structural Reform”). The ministerial committee responsible for the special zones7 manages proposals made from local governments and businesses, and consults with relevant ministries on the feasibility of the proposals.

The gatekeeper role in controlling the quality of draft regulations, including overseeing ex ante and ex post evaluation of regulations is mainly undertaken by the Ministry of Internal Affairs and Communication (MIC). In addition to the MIC, the Legislation Bureau in the Cabinet and the Ministry of Finance also independently review new regulatory proposals from their own perspectives such as legitimacy and expected budget costs.

Key policy bodies

Expert advisory bodies have a long tradition in Japanese administration and play a key role in promoting the development and implementation of regulatory reform policy. The Provisional Commission for Administrative Reform played such a role in the 1980s in promoting deregulation and privatisation. The Deregulation Committee played a similar role from 1995 to 2001, when it was succeeded by the Council for Regulatory Reform (CRR). The CRR was established within the Cabinet Office rather than the MIC to increase its independence and to strengthen its function to provide advice directly to the Prime Minister. The CPRR was established in 2007, though its basic function is essentially the same as that of the CRR. The expert advisory council model is thought to have several advantages8: the councils are independent from the ministries and are thus free to examine many options, including those unpopular to line ministries; the recommendations of the councils could bring high-level political pressure backed by the Prime Minister’s commitment; and the council model can contribute to making the process of regulatory reform more transparent.

The CPRR consists of 15 private-sector experts designated by the Prime Minister, and are organised into 20 task forces. The members of the Council, as well as the Minister responsible for regulatory reform, can consult directly with the relevant ministries to make its proposals. The scope of the CPRR is very broad; its 20 task forces cover various areas such as agriculture, medical care, social services, labour market, environment, trade, transport, network industries, financial market, education, real estate market and so on. The establishment of the Headquarters could serve to strengthen the function of horizontal co-ordination among ministries in promoting regulatory reform. Members of the CPRR can participate in the meeting of the Headquarters and directly discuss the issues with the Prime Minister and other ministers.

Awareness and support

High-level political commitment to regulatory reform can be demonstrated by the leading role of the Prime Minister in managing the Headquarters. In addition, regulatory reform programmes are revised periodically to reflect public opinion. For that purpose, the government calls for regulatory reform proposals from the public twice a year. Anyone, including people in the private sector, private groups and local governments, can submit proposals for regulatory reform to the government. Proposals are adopted by the Headquarters and are reflected in regulatory reform policy through consultation between the secretariat of the CPRR and the relevant ministries. In the most recent call in June 2008, six out of 445 proposals were adopted as regulatory reform items by the Headquarters.

[The Headquarters for Promotion of Special Zone for Structural Reform was established in 2002. It was subsequently merged with other ministerial committees and renamed the Integrated Headquarters for Invigorating Regional Economy in 2007. The management of the Headquarters was also transferred to Cabinet Secretary.
For more detail, see OECD (1999), Regulatory Reform in Japan: Government Capacity to Assure High Quality Regulation]

Transparency and predictability

The Administrative Procedure Law adopted in 1993 requires government agencies to specify and make public the standards used to evaluate applications, and to endeavour to establish standard processing periods for licenses, permissions and approvals. The No Action Letter system, which was introduced in 2001, enables firms to seek prior clarifications on how regulations will be applied in certain situations.


Improving the quality of regulation
 

Regulatory tools, systems and processes for improving the quality of new regulations
(Flow)

Regulatory Impact Analysis (RIA) was introduced on a trial basis in 2004. During the trial period from October 2004 to September 2007, RIA was conducted on 247 cases of the proposed new regulations. Based on this experiment, the revised enforcement order of the Government Policy Evaluation Act, which was implemented in October 2007, legally obliges ministries and administrative bodies to conduct an ex ante evaluation when they establish or abolish regulations or revise the content of existing regulations by modifying or eliminating laws or Cabinet orders authorised by law.

The guidelines for implementing the ex ante evaluation suggest a detailed methodology used to analyse the impact of proposed regulations. They define the concept of benefit and cost of regulation by specifying various constituting factors such as observance costs, administrative costs and other social costs. The guidelines also allow several analytical methods to be used in RIA, including costbenefit analysis and cost-effectiveness analysis, while it requires cost and benefit to be indicated quantitatively or in monetary value whenever possible.

Concerning public consultation, Japan introduced public comment procedures for new regulations and revisions or abolition of existing regulations in 1999 by Cabinet Decision, and in 2006, the Public Comment Procedure was specified in the legislation under the Administrative Procedure Act. In addition to this, the guidelines ask ministries to provide and collect information about RIA and, if possible, to conduct a hearing from experts by drawing upon the procedure of consultations in other  countries. In conducting these actions, the results must be described in the evaluation report. Progress reports regarding implementation and reflection to policies must also be given to the Diet and be publicised.


Regulatory tools, systems and processes for improving the quality of existing
regulations (Stock)

Rapid changes in Japan’s economy and society require continuous review of the existing regulations. Central regulatory bodies, including the CPRR, have been reviewing existing regulations based on the requests from the business sector and the analyses of experts. The Policy Evaluation System, introduced in 2002, requires government agencies to evaluate their own policies, including regulations with oversight of the MIC. An example of the consequences of the evaluation is the streamlining of the regulations on the allocation of medical service facilities, which used to be applied without any coordination among several different regulations.


Future challenges and lessons learned in promoting regulatory reform
 

Lessons learned in promoting regulatory reform and major progress in the past five
years

The expert advisory council model has worked well in promoting deregulation in key sectors. After the substantial deregulation in the telecommunications sector in the 1990s, postal services were privatised in 2007, and divided into four companies. This resulted in reducing the dominant power of the postal savings bank in the financial services sector. From the aspect of improving the quality of life, regulations on retail in cosmetics and alcoholic beverages, transport including aviation and taxi, energy sector, financial services and labour market were reformed substantially, enabling consumers to benefit from lower prices and more choices.


Future challenges
The policy objectives of regulatory reform have become more diverse, due to the changes in Japan’s economy and society. This calls for further regulatory reform in public services and the establishment of a regulatory system to improve the quality of regulation. The CPRR is currently trying to address some of those new issues, including reform in social regulations such as medical care, child-care and education. To improve the quality of regulations, RIA is being introduced. The government also promotes e-government policies to simplify administrative procedures through the use of the internet.