ESRI International Conference

"Policy Options for Sustainable Economic Growth in Japan"

Session 1: The Role of Monetary Policy and External Adjustment in Japan's Economic Recovery

1. Presentation by Presenter
    Lars Svensson: "Monetary Policy and Japan's Liquidity Trap"

• Japan's economic slump has continued since the early 1990s. The Bank of Japan has adopted a monetary policy consisting of a very low interest rate, a zero interest rate, and finally quantitative easing. However, the policy has not ended deflation, the Bank of Japan is not in control of the price level, and Japan remains in a "liquidity trap."
• The problem in a liquidity trap is that the real interest rate is too high. In spite of a zero nominal interest rate, private-sector inflation expectations are too low. The solution is for the Bank of Japan to increase private-sector inflation expectations, to make a higher future price level credible. Quantitative easing has not succeeded in creating inflation expectations.
• The first-best policy to escape from recession and the liquidity trap is the Foolproof Way: A commitment to a price-level target, a depreciation of the yen, and an exchange-rate peg and a zero interest rate until the price level has reached the price-level target.
• A second-best policy is a commitment to a price-level target and a zero interest rate until the price level has reached the price-level target.
• A third-best policy is the current one: A commitment to a zero interest rate until inflation is nonnegative. The problem with this policy is that it is deflationary, in the sense of accommodating all deflation that occurs before inflation turns nonnegative. Hence, it does not prevent expectations of deflation and a too high real interest rate.

2. Comments by Discussants
    Kazumasa Iwata (on Svensson's presentation)

• Regarding the proposal to adopt a price-level target for overcoming deflation, the direct linkage between the current exchange rate in the presence of a zero lower bound on nominal interest rates and the future price level may be weakened by circumstances evolving around the currency. Therefore, it may be difficult to reach the price-level target through an exchange-rate target.
• Covering the gap between the price-level target and the actual CPI would require a fairly high inflation rate. However, a sharp increase in the inflation rate holds the risk of an excessive rise in the long-term interest rate, even in a transition period, immediately destabilizing the financial market, which could bring adverse effects on the effort to improve the fiscal balance.
• The implementation of the Quantitative Easing Policy is accompanied by the widening coverage of zero interest rates and lower rates of longer maturity, due to "policy duration effect". As the possibility of departing from the QEPolicy framework increases, maintaining the same reserve target level exerts an increased degree of monetary easing effects, since the excess supply of bank reserves is intensified and the short-term real interest rate decreases. The increased effects of the QEP is in line with "history dependence" that Prof. Svensson emphasizes.

3. Q&A

Svensson

• Since the Foolproof Way involves both monetary policy and exchange-rate policy, the Ministry of Finance and the Bank of Japan should cooperate on ending recession and deflation in Japan.
• A price level target has the good property that it puts a cap on accumulated inflation and long-term inflation. Hence, with a credible price-level target, long-term nominal interest rates cannot rise much. But it is real interest rate that are important, and they will fall if the Foolproof Way is implemented.
• The big problem with the current policy is that it accommodates deflation and is not effective in creating inflation expectations and lowering real interest rates.

Speaker

• Although you say that the monetary policy of the Bank of Japan (BOJ) has been a big failure in combating deflation, deflation has almost reached zero. As for the continuation of a zero-interest-rate policy, since we are close to the current target level, the BOJ must now make a stronger commitment to change the level of expectation. The zero target of the BOJ, until now, has been too low.

Speaker

• Although the Japanese economy is on its way to recovery through quantitative easing and the zero interest rate policy, it's a fact that deflation continues.
• The mechanism for transmitting confidence and the mechanism for transmitting monetarization of the fiscal deficit have not been fully applied.

Speaker

• The BOJ's policy fell short of expectations. It lacked clear communication. On the exchange rate, looking at the current situation on interest rates, to seek currency depreciation would have adverse effects.

Speaker

• Considering the actual price level, it is necessary to induce positive inflation. Furthermore, restoring low-level inflation is essential to raising inflation expectations in the future.

Speaker

• It's about managing expectations. It is important to communicate the BOJ's target. What is it going to focus on to combat deflation?

Speaker

• How can you assert that real interest rates are high?
• (Addressing Mr. Iwata) How can you assert that the Japanese economy has almost succeeded in escaping from deflation, or that deflation expectations are shifting towards moderate inflation expectations, or that monetary policy has proven effective to climb out of deflation?

Svensson

• The proof that real interest rates are too high is the negative output gap. Monetary policy should lower the real interest rate. For that, private-sector inflation expectations must be raised. Since the interest rate is zero, the exchange-rate is the only effective instrument left. A price-level target and the use of the exchange-rate instrument is the most effective way to raise inflation expectations.

Iwata

• As for the comment that the price-level target is too low, I would like to point out that an issue of credibility always exists regarding the price-level targeting policy. I would like to recommend "step-by-step" approach to attain the final goal of price stability, e.g., aiming at zero or some positive inflation rates under the QEP, then aiming at the final goal.

4. Presentation by Presenter
    Maurice Obstfeld: "Implications for the Yen of Japanese Current Account Adjustment"

• In the past, we have looked into the situation of current accounts of the dollar, euro, and Asian currencies, but today, imbalance has spread globally. Japan has a current account surplus corresponding to 3.5 per cent of GDP; the way to reduce it is to increase spending.
• I will present a quantitative evaluation of the effect on the yen of some alternative scenarios under which Japan reaches a current account balance. The analytical framework is a global general-equilibrium model, based on Obstfeld and Rogoff (2005a, 2005b), within which relative prices clear the world markets for traded goods as well as the domestic markets for non-traded goods. Depending on assumptions about the substitution elasticities underlying the model, the yen could appreciate by as much as 10 percent for each 1 percent of GDP reduction in its current account surplus. The effect would be smaller if substitution elasticities are larger, or if adjustment is accompanied by an expansion of Japanese non-tradable output.

5. Comments by discussants
    Masahiro Kawai (on Obstfeld's presentation)"

• Regarding the current account imbalance that the global economy currently faces, rectifying it in an orderly fashion is an important issue. And as numerous policymakers as well as academics including Professor Obstfeld have pointed out, a smooth adjustment of the imbalance in a global perspective is desirable.
• The United States has a huge current deficit that exceeds 6 percent of GDP and approaches 6.5 percent. This is a high level historically and fiscal restoration is required. ASEAN requires expansion of investments, while China must expand consumption since it has excessive investment.

6. Q&A

Speaker

• Professor Svensson suggests that inflation targeting is necessary for Japan to come out of deflation and that the yen should be depreciated for that. Even if this may get Japan out of deflation, what of the effects on the global economy, for example on the American economy? On the other hand. Professor Obstfeld suggests that, to reduce Japan's current surplus, the yen should be appreciated and so, a policy to appreciate the yen is required. However, a higher yen would dampen inflation expectations, making it difficult to escape from deflation.

Speaker

• If the yen were to appreciate to the level indicated by Professor Obstfeld, companies in possession of external assets in dollar denominations would be affected considerably.

Speaker

• When rectifying Japan's current account surplus, consideration must be given to what extent Japan affects the global imbalance and to what degree Japan should contribute to rectify it.

Speaker

• Regarding why Japan and China have accumulated such a big surplus, it must be examined in an intertemporal framework.

Svensson

• Whereas I advocate a depreciation of the yen in nominal terms, Professor Obstfeld speaks about yen appreciation in real terms. Therefore, there is no contradiction between the two.

Obstfeld

• I agree with everything that Professor Kawai has said and I have no objections.
• Whereas my paper takes up the external balance, Professor Svensson's paper treats internal balance. When considering the latter, the necessary appreciation rate of the yen becomes smaller.
• Regarding the current account, it's about what position would be sustainable for Japan today, but the surplus must be smaller than it is now.
• When considering global adjustment, it is evident that the Asian economy. including Japan, must expand investment to reduce the current account surplus.

Session 2: Japan's Fiscal Sustainability

1. Presentation by Presenter
     David Weinstein: "Assessing the Impact of Japan's Fiscal Reform"

• For a long time there was a largeliterature stating that a financial crisis would occur. However, the financial reform of last June changed this situation; today there are more optimistic papers. Gross debt has increased rapidly in the past two to three years, but the view of the capital market on the possibility of a financial crisis is completely different. If the market predicts a crisis, the effects would appear in the bond market, but interest rates are low, and so it is seems that the possibility of a fiscal crisis is low.
• The financial assets of the Japanese government amount to 455 trillion yen. The issue should be examined in terms of net debt, taking this into account.
• As to the fertility rate, it will not remain low forever. There are ways to respond to the change in Japan's demographics to avoid concentration of the tax burden on a specific generation. Furthermore, on one side, fewer children means that much less expenditure.
• Japan's fiscal reform in 2004 is quite similar to the reform proposal that we had presented. The main parts of the revision related to pensions are drastically raising contributions for social welfare before 2017, carrying out a downward revision of the benefit amount, and furthermore, reducing the deduction rate for the elderly. Throughthis reform, fiscal crisis can be avoided in Japan.

2. Comments by Discussant
     Tomoko Hayashi (on Weinstein's presentation)

• With the large-scale pension reform in 2004 that changed the calculation method for the payment standard to one that accounts for demographic change, the sustainability of Japan's finance certainly improved. Nonetheless, the issue of inter-generational fairness remains.
• Among the various assumptions given by the presenter, I have doubts on three of them.
  The first assumption is, "Japan's fertility rate will not remain at a low level; it is believed to rise at some point in the future." The grounds for this are unclear. The fertility rate has declined consistently since mid 1970s, and continues to do so.
  Second, I don't think that sufficient consideration is given to the risk of a future rise in the long-term interest rate. It should be kept in mind that in the early 1990s, along with fiscal deterioration, Canada and Italy had long-term interest rates that rose to the level higher than respective nominal growth rates, the difference reaching as much as 7 to 8 percentage points.
  Third, in Japan, the people in their late elderly years of 75 years and over will increase rapidly from now, and one out of every five people will be 75 and over in 2050. Therefore, when examining fiscal sustainability, medical and nursing expenditures must also be considered.

3. Q&A

Weinstein

• Our model also contains estimates for the case in which Japanese fertility does not recover. These tax rates are not that much higher than those in our preferred case.
• Interest rates might rise in Japan, but one needs to ask why? If it is because of inflation, then this will improve the government's ability to pay off it's debt.
• It is hard to believe that the government has the ability to solve the pension problem and not solve the much smaller healthcare problem.

Speaker

• Regarding medical fees, I don't think it's possible to keep shifting the burden to the elderly forever. Objections may be voiced through elections, for example.
• Regarding the issue of the fertility rate, I suggest making changes to the regulation on land use. In the lives of average people, the number of rooms is lacking in their homes and commuting time is long. I believe that such factors are affecting the fertility rate.

Speaker

• The prediction that the population will stabilize in 2060 may be optimistic.
• It was said that when income rises, the fertility rate will recover, but on the contrary, wouldn't the opportunity cost of having children increase, leading to a decline in the fertility rate?
• It was said that the balance would be restored by increasing the burden per capita of the younger generation, in ratio to GDP, but isn't that basically a tax increase?

Speaker

• The starting point of Professor Weinstein's argument is adequate. If Japan were to be in a serious fiscal situation, why would the interest on national government bonds remain so stable, and at such a low rate? It must be explained why deflation continues instead of inflation.

Weinstein

• There are those with pessimistic views on Japan's population, claiming that the population will fall or the fertility rate will decline radically from now, but it is hard to believe that Japan will cease to exist. Either way, even if we were to work with the assumption that the Japanese population will be reduced by half in the next 100 years, the results won't be much different.
• The government's estimate of non-performing loans to public enterprises, which is around 10 to 20 per cent of GDP, is a reasonable figure and is not something that would largely affect sustainability. There is need to be concerned about it, since it's a figure of some trillion yen, but the possibility that it will chase Japan into a fiscal crisis is extremely low.
• Regarding medical fees, although there is fear of the burden being shifted to the younger generation, it's about the degree of burden: it would be difficult to raise benefit payments endlessly. However, the situation allows considerable control over , payments for future benefits, which is a large part of benefit payments. Given that reform to this extent can be implemented with pensions, other reforms are also possible.

4. Presentation by Presenter
     Takero Doi and Tomoko Hayashi: "Toward Reform of the Local Bond System in Japan"

• Outstanding local government bonds in Japan have increased since the late 1990s. This is the result of the expansion of public works through economic measures in response to the economic downturn back then. This figure amounts to 200 trillion yen today, which is 30 percent of long-term government bonds of national and local governments combined, and corresponds to 40 percent of GDP, which is high even by international standards.
• In June 2003, the "Trinity Reform Package," a major reform of the Koizumi Administration, was launched. This is a part of the decentralization process and is a required reform in the centralized structure of Japan. However, although this reform touches upon local taxes, local allocation tax grants, and national treasury disbursements, it is unclear no the reform of local bonds.
• Against the background of the trend of global decentralization and the increase in outstanding government debt in recent years, a change is observed in the management system of local government bonds in advanced countries. Given that, under decentralization, the source of local fiscal discipline lies in the existence of differences in interest rates caused by market mechanisms, it is necessary to examine the way Japan's local government bonds and local fiscal discipline ought to be, and carry out reform so that market principles function.

5. Comments by discussant
     Takeo Hoshi (on Takero Doi and Tomoko Hayashi's presentation)

• The paper compares the system of local bonds management in Japan, US, and France.
• Especially focuses on the comparison between the central government controlled system (Japan) and market based system with more local autonomy (US)
• Build a simple model to analyze the welfare implication of the regime choice
• Conclude that the market system that spreads the risk more widely among investors is more desirable than the central government control that forces risk sharing among local governments
• The paper is very useful.A lot of information about the local government bond markets in various countries.
• Helps me understand what has been going on in San Diego and Osaka. (Both have been in financial trouble, but the experiences in bond markets have been different.)
• The theoretical model may not capture the most important part of the comparative analysis in the first half of the paper.
• The assumption that defaults are perfectly correlated across Type B governments is unreasonable.
• Alternative assumption: default shocks are idiosyncratic and the number of Type B governments is large enough for the law of large number to hold.
• Model under this alternative assumption yields completely different welfare implications. The "Japanese" system becomes better.
• Given the model, the result is not surprising.
• In both countries, both types of government invest in the (productive) projects, so the total amount of resources available in the 2nd period are the same.
• The only differences are cost of credit rating and cost of monitoring, which are assumed to be unnecessary in the "Japanese" system.
• May need alternative models that have more serious adverse selection and/or moral hazard problems.

6. Q&A

Speaker

• There has been discussion on numbers, circumstance and results, and countermeasures concerning local bonds, but the principle has not been discussed. The quality and content of the service provided by governments at the local and national level largely affect the welfare of the people.

Speaker

• Professor Doi's argument is valid when the functions of the national and local governments are completely separated. It is quite valid in the United States, where the functions of the government, whether at the federal, state, or local level, are clearly separated. But in Japan's case, the functions of the national government and those of local governments are not clearly separated. This is the issue of decentralization and what is giving rise to the discussion on the Trinity Reform.

Doi

• It is not a matter that concludes simply with local bonds. If it is not discussed comprehensively in consistency with overall local finance and the issue of local administration and resources, this problem will not be resolved.

Hayashi

• As I pointed out, the local bond system cannot be discussed apart from other systems. The message we want to get across is that incentives toward wrong direction should not be provided to local governments and financial institutions. Furthermore, we shouldn't feel comfortable in a situation in which market discipline hardly functions.
• "Value for money" is important. Concerning the finance of local governments, we should start with the idea that the financial resources required should correspond to the service being provided.

Session 3: New trends in Japan's Labor Market and Income Distribution

1. Presentation by Presenter
    Kiyoshi Ota: "Rise in Earnings Inequality in Japan A Sign of Bipolarization?"

• Although it has long been said that Japan is an equal society in which economic wealth is evenly distributed among individuals, in recent years the income gap has been getting larger.
• As causes for the change in the income gap, we can generally mention the following three factors: (1) changes in markets (changes in the labor market, changes in the capital market), (2) changes in demographics (changes in the number of family members, aging population, etc.), and (3) changes in public administration policy (taxes, burden shifts, regulations, etc.).
• The results of analysis for Japan show that from the late 1990s until recently, earnings inequality has been worsening, and that although the gap is increasing in all age groups, it is notable in young people. In the age group of young people, the impact of the increase in non-regular workers, as seen in the phenomenon of freeters, is large.
• From now on, a policy that materializes the following is essential: the provision of opportunities for young people to acquire occupational skills (income-earning skills), a shift from the employment of non-regular workers to regular workers in the labor market, and, in macro terms, sustainable economic growth.

2. Comment by discussant
    Steven Davis (on Ota's presentation)

• Being employed as a regular worker entails generous legal protection, including employment security, fringe benefits, and greater opportunities for promotion. Perhaps there is some sort of legal or institutional restriction that is causing differences between regular employment and non-regular employment. Either way, the increase in non-regular employment after 1997 is the cause for expansion of the income gap.
• In Japan, the general rule is to obtain regular employment when graduating from school. Once this chance is missed, being employed as a regular worker is difficult. That is why the increase in non-regular employment is a concern. On the contrary, in the United States, the chance to obtain regular employment comes again and again.
• The reason for the rise in non-regular employment, particularly of young males, may be due to the fact that expected figures for the future growth of labor demand are low compared to the postwar period, encouraging the management and employees to cope with non-regular workers. There are other possible hypotheses and I hope you will analyze this point.
• Today, young males that could not obtain formal employment are increasing, and this is something that would adversely affect the rest of their lives. It is a grave situation. In the context of the labor market, this is completely different from the United States and the United Kingdom.

3. Q&A

Ota

• Rather than the legal system, what greatly separates insiders and outsiders is Japan's practice of long-term employment. In the background is the fact that non-regular employment is basically cheap labor that is both replaceable and flexible.
• The fact that businesses closed their doors to protect those inside is affecting the issue. Because large companies reduced new employment by half over the past 10 years, good employment posts for young people became scarce. In Europe, this occurred after the late 1970s, but in Japan it surged as a problem only recently.
• The government had paid attention to employment issues and problems of unemployment of middle-aged people, but not so for the young.
• Due to economic expansion since early 2002, the increase in non-regular employment has recently become moderate. Furthermore, the decline in the labor force may be favorable to the young.
• In comparison to Europe and the United States, in Japan, the income gap among the young was extremely small to start with; it may only be that this is changing now.

Speaker

• As observed in the phenomenon of freeters, some people choose freedom over employment, but the majority seek stable employment as regular workers.
• When considering the impact of earnings inequality on society, measures to counter poverty below a certain level as a public burden will be necessary.

Speaker

• Although the social advancement of women is making progress, the rise in non-regular employment of women is also evident, and earnings inequality is more pronounced in the case of women.

Speaker

• As accounting rules of Japan apply, today pension liabilities are also to be accounted for in corporate balance sheets. This may be a cause for holding back on hiring regular employees, in the sense of reducing or avoiding spending on payment to regular workers.

Speaker

• The welfare of non-regular workers does not form part of social welfare programs, excluding them from employment security, old-age pensions, and medical insurance. This is even more serious than earnings inequality.

Speaker

• Few men willingly become freeters. 86 per cent of men are looking for jobs as regular employees. However, it is most likely that they were unable to find such jobs due to the prolonged recession.

Ota

• Observed in a time series, those that do not seek non-regular employment are increasing. In addition, studies on women's issues with a gender perspective are important. However, since it gets difficult to understand when males and females are analyzed together, this paper limits the subject of study to males.
• Although I am not certain about the relationship between pension liabilities in terms of accounting and non-regular employment, management considers it easier to hire non-regular workers since they are not covered by social insurance.
• When looking at past cycles, inequality is reduced when the economy turns upward and the bottom rises. Conversely, inequality increases when the economy sinks. It has a tendency similar to the unemployment rate. If economic expansion continues, it may be possible to stop the current trend, if not reverse it.

4. Presentation by Presenter
    Emmanuel Saez and Chiaki Moriguchi: "Japanese Income Distribution from Comparative and Historical Perspectives"

• Japan, the world's second largest economy, has followed an extremely interesting development process. Because Japan has kept income tax statistics since the early industrialization stage, by looking at the income share of the top stratum (the top 1 percent, or the top 0.1 percent), an analysis was made on the evolution of income concentration in Japan from 1885 to 2002. The results are as follows.
  (1) The degree of income concentration was high throughout the pre-WWII period during which the nation underwent rapid industrialization.
  (2) A drastic deconcentration of income at the top had taken place during and immediately after WWII. This deconcentration was observed mainly in capital income.
  (3) The degree of income concentration has remained low throughout the post-1950 period despite the high economic growth.
  (4) The major component of the top income in Japan has shifted dramatically from capital income to employment income over the course of the 20^th century.
• We attribute the dramatic fall in income concentration primarily to the collapse of capital income due to wartime taxation, war destruction, hyperinflation, and, to a lesser extent, postwar occupational reforms. Fundamental change in the institutional structure after WWII made the one-time income deconcentration difficult to reverse.
• In contrast to the sharp increase in top wage income shares observed in the United States since 1970, in Japan this has remained stable over the recent decades. Although it is said that change in technology and the reduction in marginal tax ratesworked in favor of increasing top income shares, this was not so in Japan.

5. Comments by Discussant
    Toshiaki Tachibanaki(on Saez and Moriguchi's presentation)

• Prewar Japan was a class society, in the form of capitalists vs. workers or landlords vs. tenant farmers. The capitalists, who owned land, were a small rich class, while the greater poor were workers or tenant farmers.
• On the point that the degree of concentration of top income shares was extremely high already in the early phase of industrialization, please clarify when Japan's industrialization began.
• There is a limit to examining the income gap merely from top income shares.
• In the interwar period, the government held tight control over landowners, shareholders, and wages. It was claimed in the presentation that because this had a large impact, the share of top incomers was dramatically reduced after the war. However, weren't the postwar reforms implemented by the GHQ more important? I believe that (1) land reform, (2) dissolution of zaibatsu, (3) educational reform, and (4) democratization and the protection of workers' rights largely contributed to the reduction of the nation's income gap and the standardization of wages among workers. What is your opinion on this?

6. Q&A

Moriguchi

• Japan's industrialization began around 1886; our data covers the entire history of industrialization. Since the degree of concentration of top income shares was extremely high in the early stage of this industrialization, Kuznet's hypothesis does not apply.
• The degree of concentration of top income shares fell due to wartime regulation (high tax rates and reform of the inheritance system) and war destruction, rather than due to postwar reforms by occupational forces. Occupational policy had a complementary effect.

Speaker

• Regarding statistics on high income and taxes, since the very rich have income sources besides wages (interest, dividends, capital gains, etc.), it is necessary to analyze tax statistics other than withholding tax.

Speaker

• The explanation that the decline in top income shares is the result of an extremely great change that occurred in the wartime period of 1939-1944 and postwar changes after 1945 are merely an extension of that was unexpected. However, this paper does not indicate the cause of that great change.

Davis

• Isn't the recent rise in the top 1 percent wage income share in the United States due to the exercising of stock options?
• The explanation based on technology, for the comparison of the top 1 percent wage income share in Japan and the United States, is underestimated. A pure technology-based explanation cannot be entirely eliminated.

Saez

• Although we have no data on the United States, from what we can observe in Canada, the contribution of stock options is small.
• The rise in the share of the top income class due to technological progress can be observed in Anglo-Saxon countries. I am not making light of the subject of technology.

Speaker

• As numerous economic historians claim, one of the causes for the big change during wartime Japan is the reduction of capital that was concentrated in landowners, through the National Mobilization Act. Furthermore, another cause is that at one point, the government began to provide direct subsidies to small tenant farmers to encourage rice farming, and not through landowners. I support the authors' interpretation that wartime reform had a large impact.

Round Table Discussion: Tax and Spending Priorities for Sustainable Economic Growth in Japan

1. Opening Address
    Takashi Omori: "Tax and Spending Priorities for Sustainable Economic Growth in Japan"

• The Japanese economy faces two challenges. First is the huge fiscal deficit. Together with the expectation that the aging population will require increased spending for pension, medical services, etc., fiscal sustainability remains a concern. There are views that these are limiting the growth of private consumption.
• The other challenge is overcoming deflation. The Japanese economy remains in a mild deflation with the Consumer Price Index slightly below its level of the previous year, despite continued efforts to combat it through monetary policy.
• These two issues are not independent; they are interrelated through the risk premium on interest rates, the progressive structure of taxes, the conditional nature of macroeconomic indexation on public pension, loan insolvency, etc.
• As a medium-termscenario, in "Reform and Perspective," the government has made a commitment to attain a surplus in the primary balance of the national and local governments combined, at the beginning of the decade of 2010. In addition, as a long-term scenario, the picture up to FY2030 is drawn out in "21^st Century Vision."

2. Comments by Discussants
    Randall Kroszner (on Omori's presentation)

• In the United States, we are trying to limit projections to five years. Projections on a longer term are difficult and there is room for greater error. However, for social security problems and such, it is necessary to approach the issue with long-term projections of the growth rate and aging of the population.
• Assumptions for productivity are necessary.
• Social security is becoming an important issue for both Japan and the United States with the advance of the aging population. Although it is difficult to estimate medical expense and such, the cost is certain to rise greatly in the future.
• As for the privatization of national institutions, postal reform is a first step. Inefficient organizations, such as governmental financial institutions, still remain in numbers, and these must be studied.
• Regarding the tax system, although there are various alternative plans in discussion, a simple increase in revenues will not do; how that will affect growth must be thoroughly examined. For such studies, the dynamic scoring method is effective.

    Eiji Tajika (on Omori's presentation)

• Macroeconomic projections are compiled by the Cabinet Office. These are extremely important, for Japan's budget is determined based on them.
• I think that the growth rate is slightly high. As for the long-term interest rate, although it is assumed to fall short of the GDP growth rate until 2010, it has a significant meaning for the stabilization of the debt-to-GDP ratio. In addition, a drastic reduction of central government spending is included as an assumption. On the other hand, it barely touches the topic of local government finance.
• As a measure to cope with the aging population, an increase in the burden of social security expense is an important issue. The contribution rate must be raised, and benefits must be reduced for pensions, while spending on medical, nursery and social services needs be restrained.
• There is little explanation concerning tax increase and the mechanism for this. In particular, it lacks information about how much floating power Japanese tax revenues have in proportion to GDP, and why it lacked elasticity until now, and how it will be enhanced.
• As for local governments, the reduction of central government spending will affect them. In addition, local governments also have considerable margin for reducing spending.

3. Q&A

Omori

• When studying policy, something that lies in between two extremes must be sought. At one extreme is the placement of macro reduction rates. Although we can try it with many numbers, concern remains as to its viability. At the other extreme is the adoption of conventional approach - which means assuming an institutional change, computing estimate values of economic impact, and then further estimating indirect effects - but this requires a huge amount of work. I think that a midway approach is necessary, and would like to study the dynamic scoring method adopted inU.S..
• Medical expense is an estimate based on three factors: factors for the aging population, income elasticity, and price elasticity. Although there are uncertainties , technological progress of the future must also be taken into account.
• Regarding productivity, if possible, the calculation should take into account the effect of deregulation and postal privatization, but these are factors that are difficult to quantify.
• Tax elasticity is certainly declining, and three reasons can be given for this. First is tax cuts; second is slumping asset values; and third is stagnation of corporate taxes on a taxation-basis, which includes the effect of loan insolvency. I feel the need to consider the effect on tax revenues of the fact that we have reached the final stage of the writing off of non-performing loans.
• The decline in the savings rate in the household sector is affected bya shift in income, from earned income to pension..
• Regarding spending of local governments, moves for reform are in progress. Due to the Trinity Reform, there is higher possibility of more efficiency and saving in fiscal matters. Furthermore, greater efficiency will be brought about by the reduced number of municipalities through big-scale mergers.

Speaker

• Professor Kroszner pointed out six measures to increase the growth rate in the long run: labor market reform, agricultural reform, intellectual property rights, land use, corporate governance, and access to credit information. I hope sessions on these topics will be held next year.

Speaker

• The focus will be on reform after postal reform. First is reform of governmental financial institutions, and second is the drastic contraction of government assets.

Speaker

• We need to examine what will happen to the interest rate of national government bonds if, on the one hand, national bonds held by the domestic household sector declines and, on the other hand, overseas investors come to possess the majority of Japanese government bonds.

Speaker

• Regarding credit access, it's a matter of how important it is to the future Japanese economy. In financial reform, when considering the history of sharing debtor information, accurate credit information will be required.

Omori

• The effect of postal reform and governmental financial institutions are not explicitly included in January's projection. This is partlybecause there will be no automatic capital relationship between postal savings and governmental financial institutions. However, on governmental financial institutions, a re-examination is to begin.

Kroszner

• The provision of information on credit will become important. In addition, due to deregulation, small and medium-sized banks in the United States were a great help in spurring small and medium-sized enterprises (SME's). Information is required in that sense, and particularly, occasions to provide debtor information of SME's is extremely valuable.

Speaker

• Will the Bank of Japan be able to attain inflation and declare victory? Looking at the Bank's policy in the past 3-4 years, although there are statements with hopes to overcome deflation, this has not materialized. Professor Svensson's proposal differs completely from this, and sets a price-level target to catch up on past errors and regain what has been lost.

Speaker

• On the price level, I believe that if it is a target that incorporates positive inflation rate in a subtle form, it will be trusted.

<Q&A time for the press>

(Q) There are views that consideration of a tax increase has begun.

(A) There has been concern over a rise in the tax burden rate. It is important to obtain consensus on what to do about the tax level.

(Q) How will the Bank of Japan construct the framework for quantitative easing?

(A) That is difficult to predict.