Japan Embarks on Structural Reforms

8 MINS READJul 20, 2015 | 09:30 GMT
Japan Embarks on Structural Reforms
Japanese Prime Minister Shinzo Abe after delivering a speech in Tokyo on June 22.


  • Japan's legislature, the Diet, will work toward passage of comprehensive reforms in the coming months.
  • If passed, measures representing the "third arrow" of Prime Minister Shinzo Abe's economic revival program could substantially reshape Japan's political economy.
  • The structural reforms are expected to pass in both houses of the Diet, but then the real work will begin for Abe: overcoming the traditions and bureaucracy that make changes difficult to maintain in the long term.

When it comes to Japan, the term "structural reform" encompasses a variety of measures often only tangentially related to each other. For example, there are reforms aimed at expanding immigration or female workforce participation, deregulating long-protected markets and breaking up government monopolies, or enhancing labor productivity by making it easier for companies to hire and fire workers. These diverse measures share a common goal: to make Japan's economy more competitive by reducing regulatory, political and social or cultural barriers to productivity and profitability. In short, they seek to restructure the way Japan's economy works, as well as the relationship between Japan's economy and its society and government.

Three major structural reform bills are under consideration this legislative session. The first, concerning Japan's power sector, was approved by both houses of the legislature on June 16. The bill aims to eventually create separate independent transmission and distribution companies in a bid to enhance competition within the sector. The second reform, which was passed by the lower house of the legislature on June 19 and awaits approval from the upper house, is intended to further reduce restrictions on Japanese companies' ability to employ temporary and contract-based workers. This measure is part of an effort to cut employers' costs and improve labor productivity.

The final and in some ways most contentious reform will start the process of opening Japan's long-protected agriculture industry to outside competition by gradually reducing the political influence of Zenchu, the organization that sets policy for and lobbies on behalf of the country's farmers and agricultural cooperatives. The passage of this bill is widely considered a key step toward securing Japan's accession into the Trans-Pacific Partnership, a 12-country free trade agreement spanning the Asia-Pacific region. The lower house approved the measure June 1, and it is expected to go for debate in the upper house in July. 

Power Reforms

Power sector reform in Japan has its origins in the 2011 Tohoku earthquake and tsunami. The disaster left large portions of the country without access to electricity for weeks and triggered sharp spikes in residential electricity prices in some areas, thus exposing fundamental problems in Japan's regionally disaggregated and monopolized power markets.

The bill will separate electricity transmission and distribution from the nine regional companies and wholesaler Electric Power Development Corp. that have traditionally controlled both generation and transmission functions within their jurisdictions. The reform follows two measures aimed at creating a national grid operator and allowing households to choose their power supplier. Together, these measures are designed both to ensure consistent and stable electricity supply across the country and to lower and stabilize consumer electricity prices by opening the power generation market to new producers. This will force power providers to compete for consumers, and by separating generation and transmission and distribution functions, the measures will curb price cartels.

Despite the Diet's approval of these reforms, concerns linger about implementation. During the past year, intense lobbying by regional power companies has forced the government to scale back the national grid operator's regulatory powers, and it is not yet clear how or even whether the nine regional power companies that currently monopolize generation will be forced to shed existing operations. Thus, it is unclear how the government will prevent the maintenance of price cartels for residential electricity. Nonetheless, a number of non-power companies, including industrial giants such as Panasonic and Nissan, have already expressed interest in investing in power generation, and as the measures are clarified and implemented, Stratfor expects them to gain momentum.

Labor Reforms

On June 25, the lower house of Japan's Diet approved a revision to an existing law that would further reduce the role of "regular" workers (direct, full-time employees of a company, who are entitled to extensive benefits and who are comparatively difficult to fire because of law and custom) in the country's workforce. The bill allows companies to continue using "non-regular" (temporary, part-time and contract-based) labor indefinitely. The revision reverses an earlier measure that allowed companies contracting workers through recruitment (or "dispatch") agencies to use temporary workers for a given position for up to three years, after which the position would be made full time and the worker converted to full-time employment. Additionally, the June 25 revision states that a temporary worker can remain in the position as a temporary or "dispatched" worker for only up to three years, meaning that at the three-year mark the company must either convert the position to full time or bring on a new temporary worker to fill the position. One outstanding question regarding the measure is the impact it will have on business continuity within Japanese companies.

In the near term, the primary impact of the revision will likely be to reduce operating costs for businesses by giving them more latitude to decide whether to convert temporary positions to full time (and thus assume the costs associated with bringing on new full-time employees) or to maintain the positions as temporary. In the long run, it intends to help improve worker productivity by creating a more competitive labor market — namely one in which the traditional binary of regular and non-regular workers is gradually replaced by a market in which few, if any, workers enjoy the legal and social-cultural premium of regular employment and thus in which workers are more equal. Clearly, this is a long-term process, and it will be many years — even decades — before distinctions between regular and non-regular employment are fully erased.

In the meantime, subsequent reforms are likely to center on improving conditions for temporary workers, such as ensuring equal pay with regular workers (a provision that was left out of the most recent bill). However, the June 25 revision marks an important step not only toward eliminating the structural conditions that have left Japan with a non-regular workforce equivalent to nearly 40 percent of total workers but also toward improving productivity among workers.

Agricultural Reforms

The third major structural reform is the first step in a much broader effort to open Japan's long-protected agriculture markets to greater outside, including foreign, competition, and in doing so encourage consolidation and enhanced productivity on the part of Japanese farmers. The legislation under consideration is designed to remove the ability of the Japan Agriculture Group and its central administrative body, known as Zenchu, to audit and extract taxes from the country's 694 agricultural cooperatives by 2018. In doing so, it seeks to reduce Zenchu's power to lobby the central government and pave the way for the eventual reduction of protective tariffs on key agricultural goods — a process that Tokyo hopes will compel Japanese farmers to consolidate and improve their efficiency and productivity by subjecting them to outside competition.

Although the agriculture sector accounts for only 1 percent of Japan's gross domestic product, it exerts outsized influence over Japanese politics largely because of Zenchu's ability to mobilize farmers during election time. Japan's farmers are a crucial and increasingly important electoral demographic, especially given population aging and decline (most farmers are over the age of 60). This political power has enabled Zenchu to undermine Japanese leaders' repeated efforts to secure free trade agreements and make other reforms designed to improve economy-wide efficiency and international competitiveness, namely by barring reductions of import tariffs on agricultural goods. The current reform will neither eliminate Zenchu as an important player in Japanese politics nor open Japanese agricultural goods to foreign competition, but it nonetheless marks a first step toward doing so. However, it remains to be seen whether the reforms will be implemented effectively. As prior prime ministers' struggles to secure reforms have shown, there is ample room for de jure shifts in highly politicized sectors such as agriculture to be partially or substantially reversed in practice.

The Challenges Ahead

The labor and agricultural reforms are widely expected to pass both houses of the Diet and be enacted into law before the current legislative session ends in late September. Then the real work will begin for the Abe administration.

In Japan, where the administrative bureaucracy has historically functioned with a high degree of autonomy from — and a great deal of de facto control over — the legislative system, implementation of reforms that cut against the ingrained interests of government-backed monopolies in sectors such as power and agriculture have been and will continue to be difficult to enforce over the long term. As the partial reversal of many of the monopoly-breaking reforms enacted by former Prime Minister Junichiro Koizumi between 2003 and 2006 made clear, even a highly charismatic (and politically connected and savvy) leader is little match for a civil bureaucracy that has ruled Japan, with unusual consistency, since the Meiji Restoration of the 1870s.

Japan faces strong, in some ways unprecedented, pressures to reform its domestic political and economic institutions. Demographic decline and declining economic competitiveness, China's military expansion, the United States' increased reliance on regional partners to maintain security in East Asia and the approaching conclusion to Trans-Pacific Partnership talks are all factors. The question is whether these compulsions will be great enough to make the changes under consideration now — and deeper reforms to come — stick.

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