Stabilising the financial market and improving its efficiency. Emergency measures to steady the financial market and promote credit flows are proving effective. As an economic recovery takes hold, these measures should be phased out to limit their distortionary effects while improving the regulatory architecture to further reduce banks’ equity holdings, enhance the transparency of securitised products and markets and improve the quality and fairness in the rating process of credit rating agencies. Reforms to increase efficiency and overcome chronic problems, notably the low profitability in the banking sector, particularly in regional institutions, are a priority to support Japan’s growth potential.
Achieving progress in fiscal consolidation.[/] The crisis and the stimulus packages are projected to boost the budget deficit to 10% of GDP in 2010 and gross public debt to 200%, calling for a detailed and credible medium-term fiscal consolidation plan to sustain the confidence of financial markets. Once a recovery is in place, such a plan should be implemented to put the public debt ratio on a downward path. This will require reversing the upward trend in spending, focusing on cuts in public investment. Additional revenues are also necessary, in part to finance the planned improvement in social welfare programmes. Revenue should be increased through a comprehensive tax reform that also limits the negative impact on economic growth.
[b]Reforming health and long-term care. The health-care system has contributed to outstanding health outcomes in Japan while keeping expenditures below the OECD average. However, rapid population ageing and the plan to improve social welfare programmes will put upward pressure on health spending. It is important, particularly in light of the difficult fiscal situation, to introduce efficiency-enhancing reforms to shift long-term care out of hospitals to less expensive institutions and home-based care, expand the use of generic drugs and promote healthy ageing. Efficiency gains should be accompanied by measures to promote higher quality to address growing public dissatisfaction with health care. The keys are to improve access to new drugs, medical devices and advanced medical treatments, in part by allowing more mixed billing. Imbalances and shortages in the system reflect shortcomings in the current fee-setting system, which should adopt a more scientific approach. Finally, universal coverage requires improving compliance in paying premiums.
Addressing global warming. Japan has introduced a wide range of policies aimed at achieving its Kyoto Protocol target of reducing greenhouse gas emissions. Nevertheless, emissions have risen, indicating the need to introduce more binding, market-based mechanisms to achieve its targets for 2020 and 2050 in a cost-effective manner. Japan should shift from its voluntary emissions trading system to a mandatory system that covers the entire economy, including transport, drawing on the lessons from other countries and Japan’s voluntary system. In addition, the emissions trading system should be linked to those in other countries and Japan should make greater use of a well-functioning Clean Development Mechanism as it is already relatively energy-efficient. Policies to promote the development of renewable energy sources in the short run should be based on transparent and efficient instruments.
