EBC Comments on the Election

This was already the theme in the 2005 general election. The electorate handed Koizumi a landslide victory on the promise that Postal Privatisation would be the key to reforming the system, essentially by bringing the power of the bureaucracy under control and preventing related special interests from undermining much needed changes. The hopes for “true change” were high at the time, despite a relatively poor record of the Koizumi cabinet after that. The EBC White Paper of 2005 talked about “reforms undermined in implementation”, and encouraged the Koizumi cabinet to use the public mandate for change so clearly delivered by the electorate and take control of the policy process out of the bureaucrats’ hands.

Four years have passed and EBC’s disappointment with the inability of the three post-Koizumi LDP prime ministers to implement change seems to be widely shared by the Japanese public. This does not mean that the EBC’s issues and recommendations have been embraced by the Japanese public, but their disillusionment with the ability of the LDP to turn around the post-war growth machine and deliver necessary changes was a major factor leading up to their historic defeat. Another crucial but widely overseen factor is that the DPJ, despite all its shortcomings and internal rifts, has managed to step out of the role as the “eternal opposition” by substantially boosting their policy credentials over the past couple of years. The DPJ has already shown in considerable detail what they intend to do, despite reports in the media claiming the contrary.

The DPJ’s general theme of improving political control of and transparency in the policy-making process is welcomed by the EBC and includes some interesting proposals. The DPJ plan to establish a “Strategic Headquarters”, a new policy-formulating entity within the cabinet office, is not very different from the initial intent behind Koizumi’s formation of the Council of Economic and Fiscal Policies (CEFP). The big question is how the strategic headquarters will be able to move beyond serving merely as an advisory body to really ensure that sensible guidelines and goals are also translated into laws and implemented in the same spirit. This is where the CEFP largely failed.

The DPJ is suggesting that sending more than 100 parliamentarians into the ministries at the Director General level will be the key to achieving control of the bureaucracy. Considering the background and lack of relevant experience of many newly elected parliamentarians it remains, highly questionable that this measure will work. With new parliamentarians at a great information disadvantage, the option of upfront confrontation with the entire administration is simply just as it unthinkable as it would be to allow the Ministries to continue controlling the process. The success of the DPJ in changing the rules of the game will depend on the ability of Hatoyama, Okada and other party leaders to show the way and establish a credible alternative career path for the bureaucrats, outside of the individual ministries and related industries.

The EBC has long recommended strengthened central control of the policy-making process to protect sensible policies from being undermined by special interest groups and to improve transparency. The DPJ’s suggestion of a unified policy formulation process with the parliamentarians driving the drafting of bills, could potentially serve this purpose as it would deprive industry groups the opportunity of using the ruling party to veto policies. Doing so would, however, increase rather than ease concerns about the lack of separation between legislative and executive powers and risk taking away the party review process, which currently, is the only way to challenge ministry-driven legislation,.

These concerns aside, the big question is whether the DPJ has sufficient leadership skills to turn the machine around. With the right ambitions and being new in government, the DPJ leadership deserves the benefit of the doubt, although the magnitude of the task can never be underestimated. Hopefully, the fact that the constituents of DPJ are different from the LDP and the magnitude of its victory will put the new leadership in a better position than the LDP to actually implement promised changes.

Re-building the budget-making process from scratch, as promised, could also be crucial in strengthening the DPJ’s control. Ministries have already submitted their spending plans, including “pork” for favoured groups, hoping for the usual lack of political oversight. The review – line by line – will start as soon as the new government takes charge and the outcome of the ensuing show-down with special interest groups will be a litmus test for the new government.

Though the success of the government will depend on the structural issues highlighted above, it would be a mistake for European businesses to overlook the very detailed Manifesto that the DPJ has provided. Many of the programs are very much in line with long standing EBC requests and the new party in power should provide a great opportunity.

European Companies may gain from renewed reform efforts

A central part of the DPJ thinking is to review all special accounts that are held by the ministries to ensure their own revenue outside the general budget, which is controlled by the Ministry of Finance. The DPJ wants to eliminate all but the very necessary accounts in order to cut wasteful spending and should be commended for putting their finger on this problem. The ministries have long denied the existence of financial reserves held within these special accounts and the LDP never challenged the explanation given. Not only do the complex accounts make it close to impossible to overview the state of public finance (no one has managed to produce a balance-sheet for Japan!), but they also bring enormously inefficient allocation of resources in the economy, as they are used by the ministries as bargaining tools to entrench their own power and protect special interest groups closely linked to the ministry.  European companies in Japan stand to benefit substantially if special accounts, such as the airport development account, were to be eliminated and so ultimately would the Japanese consumer.

Another area of importance to European Companies is procurement, on which the DPJ has promised to focus. A special entity will be set up to review all procurement decisions and policies. Notwithstanding the difficulty of confronting the interests opposing reforms, a review of all contracts and procurement policies of government agencies with a view to cutting costs would be very interesting. The DPJ plans to allow third parties to contribute views on how the procurement can be improved. The views of European companies within the fields of Aeronautics, Defense, Medical Equipment and construction would certainly help the government to find ways of eliminating much waste.


There are also several interesting DPJ proposals in the field of taxation. The DPJ plan to lower corporate tax to 11% for SMEs (probably applicable for companies with less than 100,000,000 JPY in capital) should be welcome news to many EBC members. That also goes for the abolition of the vehicle acquisition tax. In addition, the EBC welcomes the DPJ call for increased transparency. European firms continue to report cases of arbitrary and inconsistent treatment from the tax authorities, and the EBC hopes that the DPJ will take on issues such as secret comparables, a step that would be instrumental in boosting confidence.

The medical field is also up for major reform. The DPJ has pledged to prioritise and rationalise medical services. The discussion on appropriate reimbursement prices for pharmaceuticals and medical equipment has already started. This should provide an excellent opportunity to present the EBC’s recommendation to properly reward innovation as a way to both improve patient welfare and cut over-all societal costs. Within this context, streamlining the certification process by establishing mutual recognition of standards with Europe should also be an attractive alternative as it will cut costs and improve patience welfare, without compromising valid safety concerns.

Need for caution

The pledge for wide-ranging reform of the agricultural policies will provide a chance for the EBC to re-address concerns about the distorting effect of state involvement in trade, but also risks creating an even more complex and protective system. Producer interests should be properly balanced with consumer interests (including accessibility and price) and international trade implications. The DPJ pledge to move away from relying on co-operatives to distribute complex subsidies is welcome, but the protectionist rhetoric will nevertheless be a concern moving forward.

A second area where stated DPJ policies might have an adverse effect on consumers and industry alike, is the call for a renewed food labeling system, making inclusion of the country of origin of all ingredients in food mandatory. This is an unrealistic approach as a condition for providing processed food on a global basis is a flexible procurement regime. It will also likely strengthen protectionist sentiment and control by vested interests.

Finally, the DPJ language relating to revision of the postal privatisation is problematic. Though the privatisation process has been far from ideal – the EBC has expressed deep concerns about the prospects of Japan Post launching new products before a level playing field has been established – returning to the situation prior to privatisation would raise serious questions about the role of the state in the economy. Japan Post funds have played a crucial role in the stalled LDP economic growth model, financing much of the wasteful spending that the DPJ has pledged to cut. Notwithstanding the crucial role of Japan Post in many local communities, merging the units (Bank, Kampo, Deliver and Offices) back to one unit on the pre-text of improved service provision is not viable. The interest of Japan as a whole should be considered when embarking on such a journey and the risk of up-front state competition with private sector companies avoided at all costs.

New Government – New opportunities

Though it remains to seen how much of the policy changes briefly outlined above will be accomplished, the historic change of government in Japan provides a rare opportunity to address long-standing issues and provide input to the policy-making process. Whilst the LDP has shown the tendency to rely on information provided by the administration, the DPJ will have to more pro-actively look for alternative sources of recommendations if it is to take control of the process and deliver the changes we all know Japan so direly needs. The EBC is looking forward to contributing to this process and stands ready to asssist member companies in re-evauating their government relations and communcations strategy to best deal with this exiting opportunity.

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Article prepared by Jakob Edberg, EBC Policy Director