Preface: Basic Concepts for Drafting the Action Plan

1. The Japanese economy is presently recovering, mostly on contributions from the corporate sector. A series of large-scale economic stimulus packages has prevented the economy from falling into a deflationary spiral, corporate profits are improving, and capital investment is expanding. Nevertheless, as employment conditions remain severe and consumption is wavering back and forth, it cannot be said that the economy has moved on to a full-fledged, self-sustaining path of recovery.

One reason for this is that individual Japanese citizens do not yet hold a bright outlook about their own future. The Japanese people suffer from a vague anxiety about the future of the nation as they witness restructuring close at hand, with the large-scale corporate bankruptcies and major employment adjustments that are being implemented to deal with the negative legacy from the collapse of the bubble economy, and consider the growing limitations that will strain the economy over the middle- to long-term including the aging of society, the declining number of children per family, and environmental and energy resource issues.

Given these conditions, there are now strong demands for a framework that can be shared with conviction by individual citizens, not only for middle- to long-term economic growth, but also to push the present economy onto a full-fledged, self-sustaining path of recovery.

2. During the 1990s, the U.S. economy enjoyed the fruits of the structural reform efforts of the 1980s to move "from regulation to liberalization," and "from monopoly to competition." The U.S. economy entered into a positive cycle by creating a favorable environment with the inducement of demand-creation centered around IT investment, improved productivity and additional technological innovations, and recorded non-inflationary sustainable growth averaging around 3-5% per year. In contrast, during the 1990s, the Japanese economy recorded negative GDP growth in two years, and expanded at an average annual rate of only about 1%. One of the reasons for this may be, as typified by Japan's high-cost structure, that while the Japanese system whereby income is in effect redistributed from certain manufacturing fields and other high-productivity sectors to low-productivity sectors has created an overall income increase and a society with minimal disparities in income between the poor and the wealthy, this same system has made individual workers and individual enterprises complacent with their positions, and gradually resulted in a loss of vitality and flexibility.

Nevertheless, Japan's competitive advantages, which have overcome limited physical resources (including the two oil crises), are still entirely sound and continue to be the source of Japan's strengths -- that is, (1) the nation's human resources which are on average excellent, with a high level of morale, (2) densely integrated industrial agglomerations centering on the manufacturing industry, and (3) the Japanese market, which is of a sufficient quality and scale to foster (high-quality) industries. The problem is that the existing systems are suffering from institutional fatigue, that Japan's allocation of labor, capital and technological resources is not necessarily appropriate, and that the nation's potential capabilities are not being sufficiently manifested.

If Japan can create a new framework whereby the nation's human and other resources can be effectively utilized and achieve their full potential, mechanisms that will give birth to numerous technological innovations and business reforms will be established and the nation will be able to form a favorable business environment in which successive innovations will create demand, boost productivity, induce further innovations, and thus expand the market. Moreover, just as the competitive disadvantages of resource and energy limitations formerly sparked the creation of energy-conserving compact cars in automobile industries, and the market for miniaturized consumer electronics, there is every possibility that the limitations imposed by the aging society with a declining number of children per family can be transformed from competitive disadvantages into factors for new growth.

3. While this report is a follow-up to the Program for Economic Structure Reform of December 1996, the Action Plan for Economic Structure Reform of May 1997, and the Industrial Rebirth Plan of January 1999, it specifies the measures for devising the framework that will be indispensable to achieve new growth through innovation and demand-creation based on the above perspective.

[I. Improving the Environment for Creative Corporate Economic Activities and the Emergence of New Business Fields]

First, this report presents the measures toward improving the environment to promote creative corporate activities and the emergence of new business fields. To create mechanisms that will generate continuous innovation and intellectual reproduction, it will be crucial to break through the organizational rigidity and closed nature of corporations and universities, and to boost flexibility and mobility. It will also be necessary to simultaneously improve the quality of human resources and prepare an environment that facilitates the smooth movement of labor. To these ends, we must implement essential changes to the corporate legal system, reform the employment system, and advance measures to develop human resources and upgrade the foundation for creative research and development. We must also promote measures to facilitate the maximum utilization of IT to induce both demand and capital investment, especially IT investment, and to raise productivity.

[II. Improving the Business Environment to Maintain International Competitiveness]

Second, this report presents measures to improve the business environment to maintain international competitiveness through restructuring the market in industrial base sectors. Through regulatory reform and promoting competitiveness in fields that are considered as fundamental sectors for the nation's industrial activities, the markets in these fields will be restructured through "government administration in accordance with transparent rules" and a movement from "monopoly to competition." These efforts will boost productivity, rectify Japan's high-cost structure, and lead to the realization of an internationally competitive business environment.

[III. Establishing a Socioeconomic System to Overcome the Aging Society and the Declining Number of Children per Family and Make Them into New Growth Factors; IV. Establishing a Socioeconomic System to Overcome Environmental Problems and Make Them into New Growth Factors]

Third, this report presents measures aimed at establishing a socioeconomic system with new growth factors that will overcome the aging of society and the declining number of children per family as well as environmental problems. To address the aging of society and the declining number of children per family, we must work toward improving the level and the efficiency of services, while giving due consideration to the division of work between the public and private sectors, including the effective utilization of private-sector vitality in the health care system, the nursing care system and all other pertinent fields, and also prepare an employment environment in which the elderly and women can easily engage in work activities. To address environmental problems, we must construct a new socioeconomic system with market mechanisms that internalize the environmental load and other external diseconomies, and thus achieve an efficient cyclical society and promote innovations and the creation of new business fields. Through such efforts, the growing environmental limitations and the accelerated trend toward the aging of society and a declining number of children per family, which have been viewed as restrictions on economic growth, can be transformed into new engines for economic growth.

[V. Rationalizing and Improving the Efficiency of the Public Sector to Maintain and Enhance Economic Vitality]

Finally, this report presents measures toward rationalizing and improving the efficiency of the public sector to maintain and enhance economic vitality. These measures will verify that the various existing systems have, in effect, functioned to redistribute income "from high-productivity sectors to low-productivity sectors," "from the center to the outlying regions" and "from youth to the elderly" and will prompt a re-examination from the perspective of future economic vitality and realizing a more appropriate division of burdens and benefits.

4. This approach to economic structure reform is not intended to destroy Japan's "wealthy society with minimal disparities between the poor and the wealthy," which is virtually unprecedented worldwide and has been built up through the assiduous efforts of individual citizens, nor to engender a clear distinction between the economic "winners" and "losers." Rather, this approach is designed to elicit the nation's potential vitality, achieve high growth, and improve the overall economic level so that all Japanese citizens can enjoy the fruits of prosperity over the long term.

The year 2001 marks a major milestone as we finally enter the new millennium. Our ability to inscribe a historical record of brilliant prosperity during the first decade of the 21^st century will depend on an accurate evaluation and reconsideration of the policies of the 1990s, and on our ability to create a framework that will manifest Japan's full potential capabilities, without exception. It is no exaggeration to say that this will be completely determined by the approach we adopt at the present time. Based on the recognition that we now stand at a critical turning-point with the advent of a new era, the government of Japan must administer appropriate fiscal policy, giving due recognition to the demands for rationalization and improved efficiency in the public sector, and this Action Plan must be resolutely advanced with the goal of achieving middle- to long-term economic growth.

5. Henceforth, the government of Japan will position this Follow-Up Report as the Action Plan with an outlook extending until around 2005, vigorously promote the various measures accordingly, and continue to review the domestic and overseas conditions, the advance of economic structure reform, and the implementation of the related policies on an annual basis, and thus actively follow up on the implementation of this New Action Plan.