Governance Reform Necessary to Enact Investment Services Law

Kazuhito IKEO (Professor, Keio University)

Reform and revision of established systems do not advance just because there is economic need to do so. If necessity were sufficient to realize reform, such phenomena as deterioration of economies or downfall of systems would not occur. However, in the real world, such events often do occur.

The same could be said with regard to Japan's cross-sectional legal framework to cover capital markets. Protection of investors' legal rights has been advocated repeatedly in recent years to promote expansion of market-oriented financing, reflecting the people's recognition of the necessity of these rights in the current development stage of Japan's economy. Unless such a new framework is in place, healthy development of market-oriented financing will not be possible.

But progress toward implementation of such a new system has been very slow at best. During the "Japanese big-bang" period, enactment of a "financial services law" was much talked about, but did not materialize. Recently, as a second if not umpteenth challenge to tackle the issue, plans to introduce an "investment services law" have emerged. But realizing it seems to be facing rough seas.

It is up to policy decision-making systems to determine the sorts of frameworks implemented. Thus if appropriate measures are not taken at proper timings, there may be some problem in the policy decision-making process. In the case of Japan, the system was traditionally characterized by the expression "bureau pluralism," according to Professor Masahiko Aoki.

That said, along with other political practices there have been changes in the policy decision-making process in recent years. The limitations imposed by "bureau pluralism" were widely recognized upon the Gulf war. Japan contributed $13 billion, covering 20% of the total cost of the war for the allies, only to face adverse criticism. According to the way the political system was run at the time, however, that was the best Japan could do.

To change the policy-making system in Japan, electoral reform was put in place in 1994 (the system of single-seat constituencies coupled with proportional multi-seat representation). Then the Hashimoto administrative reform scheme of 1996-97 (government reorganization and upgrading of Prime Minister powers) was finalized in 2001 in the form of reorganization of central government ministries and agencies. This was when Prime Minister Koizumi took over, and he promoted the reform further in the direction already set.

In fact, what Mr Koizumi has been pursuing since is governance reform in the sense of transforming the traditional system of policy decision-making and its implementation. As the emphasis of reform was so heavily placed on procedures, it seemed at times as if Mr Koizumi had no interest in the policy itself; the content of what was being decided.

The governance reform in that direction, despite Mr Koizumi's efforts, is still only halfway, and "bureau pluralism" still remains. And this stubborn "pluralism" is affecting discussion on the proposed "investment services law." In short, the idea of creating a cross-sectional financial rule will face a huge wall unless the current bureaucratic framework of financial administration is reorganized.

Recently, talks on "re-reorganization" of the central government are emerging, which may seem somewhat abrupt. But this could be a sign that there are a number of serious issues Japan faces, aside from the one mentioned here, which are deemed unsolvable if possibilities of "re-reorganization" of the government were excluded in the discussions.

(The original Japanese article appeared in the February 6, 20063 issue of Weekly Toyo Keizai)