Financial Reform and Tax Reform for Economic Revitalization

Heizo Takenaka (Minister of Economic and Fiscal Policy and Financial Services)

Four Pillars of Koizumi Reform

In order to push structural reform under the Koizumi Administration we use the words "four pillars;" that is, "spending reform," "revenue reform," "financial system reform" and "regulatory reform."

In particular, we emphasize tax reform and economic revitalization in our "Basic Plan 2002," which was announced June of this year. As a means to administer economic revitalization policy there are 30 action programs, including "special reform zones."

All we need to do is to secure the "four pillars" mentioned above, and our comprehensive measures to accelerate the speed of reform will make it faster, greater and clearer.

Financial Revival Program

At the same time we announced a "financial revival program" with six key points, which are (1) adoption of the DCF method and reclassification of debtors, (2) elimination of discrepancies between self-evaluation and official inspection of non-performing loans, (3) revision in incorporating deferred taxes into capital, (4) better governance in bank management, (5) adoption of an early warning system, and (6) creation of a new framework for corporate revival.

For those six points our achievement may be characterized as "five wins and one draw," in the sense that our initial expectations have been fulfilled on five out of the six points. The remaining point should be examined as soon as possible. This draw concerns treatment of deferred taxes in bank accounting, which is a very difficult problem to solve but which had to be tackled. On the other five points, however, we have obtained agreements from a majority of participants.

Under the present administration, our stance for macroeconomic demand-side policy is quite clear: "fine tuning" by adjusting the national budget. For business fluctuations we have decided to utilize a built-in stabilizer, just as in any advanced country. However, a difficulty in the case of Japan is the fact that monetary policy is not working too well, unlike any other country. That is because of the problem of non-performing loans in Japan.

Toward Wider and Thinner Taxes

Regarding tax reform, we are trying to make taxes on individuals "wider and thinner." This is being discussed at the Council of Economic and Fiscal Policy. Present taxes on individuals are "narrow and thin," and we need to make the tax base much wider. Regarding corporate taxes there are various opinions within the government, but we concluded in this year's White Paper on Economic and Fiscal Policy that Japan's corporate tax is too high and should be made much thinner.

In January this year we announced our "reforms and prospects," showing the future vision of the Japanese economy through 2006, and their revision incorporating policy changes from January to date is scheduled to be published at the end of this year. Under the Koizumi administration we regard 2002 and 2003 as an "intensive adjustment period," and we are in the middle of this period dealing with non-performing loans and various other problems. The current economic situation is quite severe, but the prospects for the Japanese economy should be improved by 2004, according to the revised version of our "reforms and prospects."

(This is from Mr. Takenaka's interview article that appeared in the Nov.18, 2002 issue of "Economist," published by Mainichi Newspaper Co.)