First Proposal for Enhancing
the Competitiveness of Japanese Industries

Introduction

Since the bursting of "the bubble economy," Japanese industries have been constrained by Japan's high-cost economic structure and huge domestic demand-supply gap, which now amounts to over ten-trillion yen. The Japanese government has already boosted demand through economic stimulus measures and major tax reductions. In order to put Japan back on track towards stable economic development, it is now essential to strengthen industrial competitiveness, especially through supply-side restructuring.
The government should provide an adequate environment to encourage the supply-side restructuring; this restructuring should be based on individual corporate initiative to meet structural changes on the demand-side. Restructuring will lead to sound corporate operation and financial stability, contribute to Japan's industrial competitiveness, and ensure and expand employment.
Under the strong leadership of Prime Minister Keizo Obuchi, the Japanese government must take prompt actions to create an environment suitable for supply-side restructuring. Keidanren takes this opportunity to offer concrete proposals that will help create such an environment, particularly regarding legislative and tax measures that call for urgent attention.

1. Measures for reforming the supply-side structure to enhance industrial competitiveness
   1. Revision of corporate laws and taxation to help diversify the organizational forms of corporations
   2. Placement of the tax system on an equal footing with international standards
   3. Introduction of special tax measures to facilitate the resolution excess capacities and the conversion of business activities
   4. Legislative measures to bring about corporate revitalization
2. Measures to resolve labor market imbalances and create new employment
   1. Resolution of labor market imbalances
   2. Creation of new employment
3. Measures to ensure the effective utilization of unused real estate, and a fluid market for such real estate

Measures for reforming the supply-side structure to enhance industrial competitiveness

Supply side restructuring, especially in the manufacturing sector, is essential for Japan to maintain and enhance its industrial competitiveness. In order to enable Japanese firms to quickly respond to an ever changing business environment, the government must make integrated efforts for the revision of legal and tax frameworks concerning the restructuring of business organizations and groups.

Revision of corporate laws and taxation to help diversify the organizational forms of corporations

Global competition requires Japanese firms to respond quickly to economic and social changes through the restructuring of their own business operations. Firms need to reorganize their forms of enterprises through such means as spin-offs, exchanges of stock, and mergers. To facilitate such actions, prompt steps must be taken to establish the necessary laws and tax regulations.

[1] Establishment of Laws for Corporate Splits; Readjustment of Laws for Branching out companies; and Related Legislative Measures
(1) Establishment of laws for corporate splits
1. Direct share distribution system as in continental countries
2. Distribution of subsidiary stock to stockholders as in American system (Indirect distribution system)
(2) Tax measures regarding corporate splits
1. Disregard of profits from transfer of property and stock
2. Reduction of registration tax, real estate acquisition tax, etc.
(3) Readjustment of laws for branching out of companies
1. Annulment of an inspector's examination of investment in kind, property taking, and ex-post establishment
2. Clarification of definition of important business transfers which requires special resolution at general shareholders' meeting stockholders.
3. Collective transfer of debts
4. Legal permissions and approvals of each business category to be succeeded collectively by subsidiaries
(4) Tax measures regarding branching out of companies
1. Postponement of taxation on profits from transfer in investments in kind for the establishment of a joint-investment company
2. Postponement of taxation on profits from transfer in additional investments in kind to existing enterprises in the group
3. Reduction of registration tax, real estate acquisition tax etc. on property transfers
[2] Readjustment of Laws for Consolidation of Enterprises
(1) Early introduction of systems for exchange of stock and readjustment of tax laws
1. Postponement of taxation on profits from transfers from a subsidiary to a parent company of less than 100% of the stock of a subsidiary of the subsidiary
2. Reduction of registration tax in the establishment of a new parent company as a result of stock transfer
(2) Review of anti-monopoly law
1. Abolition of regulations on stock-holding by large-scale companies (provided in Clause 2 of Article 9)
2. Further flexible application of regulations on mergers, business transfers and stock acquisitions
(3) Readjustment of laws regarding M & A
1. Introduction of the cash out merger
(4) Other legislative issues
1. Collective succession of permission and licenses of business at the time of mergers and business transfers
2. Facilitation of integration of company pension plans at the time of mergers
[3] Revision of the Stock Option System
(1) To be made available to managers/directors and employees of subsidiaries
(2) Increase in the striking price (currently 10 million yen a year) eligible for favorable tax treatment
[4] Introduction of a new law for Limited Liability Corporation
(1) Establishment of a business reorganization which all the investors assume limited liability and which will treated as a pass through entity for taxation purposes

Placement of the tax system on an equal footing with international standards

The Japanese tax system is less favorable to business activities than the tax systems of other countries. A drastic review of the tax system is needed in order for Japanese firms to maintain and strengthen their international competitiveness.
Corporate tax reforms should enhance economic vitality. Currently, the introduction of a tax assessment system based on a business's size is being debated. Such an assessment, which merely aims to fill regional public coffers, will increase the fixed cost of business and obstruct economic revitalization. The ill effect that this type of an assessment system has had on economic activities in Germany and France has led to those two countries to reconsider their decision to use this means of tax assessment. Such a form of taxation also would hinder current efforts to simplify the tax system, and lighten the burden on tax payment and tax collection work.

[1] Early Introduction of Consolidated Tax Payment System
(1) Detailed discussions on earliest possible introduction of the system
[2] Review of Refunding of Loss Carry-back and Carry-over
(1) Earliest possible realization of refunding losses from the past two years and carrying-over for ten years
[3] Review of the Depreciation of Fixed Assets
(1) Reduction of the depreciation period reflecting economic conditions and overall simplification of the system
(2) Review of ceiling for the final depreciable limit (Approval of depreciation down to the nominal value
[4] Review of Taxation on Research and Development
(1) Treatment as a tax deductible expenses collectively

Introduction of special tax measures to facilitate the resolution of excess capacities and the conversion of businesses activities

To encourage Japanese firms to resolve excess capacities and switch to new business activities, the government should introduce a bold and fixed-term tax policy.

[1] Tax Measures concerning Disposal of Excess Capacities and Changes of Business
(1) Introduction of an early depreciation system based on an plan for disposal of equipment
(2) Flexible application in the approval of tax-free debt, forgiveness to group companies
[2] Tax Measures to Facilitate Switch of Business
(1) Tax-free transfer at the time of purchasing new land, buildings, machinery and equipment to replace land under long-term ownership

Legislative measures to bring about corporate revitalization

In a free market economy, companies withdraw from the market if they have lost out to competition. Legal institutions, however, should assist companies in getting back on their feet if they have a reasonable potential for revitalization, and if restructuring efforts are successfully proceeding in the company's industrial sector.

[1] Early Introduction of a New Bankruptcy Procedure with Provisions for Reorganization
(1) Early establishment of a new bankruptcy procedure with provisions for reorganization
(2) Facilitation of capital increases and reductions during the new bankruptcy procedure
[2] Readjustment of doe Debt Equity Swap
(1) Special measures to limit stock-holding by financial institutions
[3] Supply of New Money to Enterprises Undergoing Reorganization
(1) Expansion of low-interest financing by the Japan Development Bank
(2) Regarding small-to-medium-size enterprises, public guarantee is important to ensure necessary funds for the continuation of business activities

Measures to resolve labor market imbalances and create new employment

In addition to the more efficient use of financial capital, the improvement of labor productivity is another key factor necessary to strengthen the competitiveness of Japanese firms.
Firms have a social responsibility to make the utmost effort to create and secure employment. In the medium to long term, lower birthrates and the aging of the population will reduce the size of the labor force in Japan. Japanese firms, however, will not be able to succeed against global competition if they stick to the conventional approach of maintaining redundant workers while switching to a new business.
In the field of employment, appropriate measures should be taken to overcome today's difficult situation. It is vital to prepare safety nets to protect against changes in the business environment. Particularly necessary are laws that will help resolve labor supply-and-demand imbalances, and a new employment insurance system which will emphasize improvement of vocational competence.
At the same time, positive measures should be taken to expand job opportunities; to assist the emergence of new businesses in the fields of medical care, public welfare, information and telecommunications; to invite foreign companies into Japan and promote investment in Japan.

Resolution of labor market imbalances

[1] Positive Utilization of Private-sector Resources in Labor Market Readjustments
(1) Measures to liberalize placement services
1. Expansion of employment categories
2. Review of the licensing system
3. Review of handling-charge regulations
4. Offering to private sector of public employment agency's information on job offers and job seekers, and active use of the Internet and other media
(2) Measures to liberalize manpower provision services
1. Negative listing
2. Abolition of regulations on operating a placement service concomitantly with another business
[2] Review of Employment Insurance System
(1) Improvement of vocational competence and ability to switch jobs
1. Establishment of a system vocational training for the unemployed (on the assumption that they earn qualification and find employment)
2. Increased commissioning to the private sector with the main emphasis on training
3. Diversification of incentive measures to help find new jobs
(2) Review of unemployment-benefit system (Payment must be proportional to urgency of need)
1. Payment should be made mainly to middle-aged or older people with a family to support who have been dismissed
2. The state liability ratio should be raised should the employment situation further deteriorate
(3) Discussion on how to subsidize employment readjustments
[3] Review of Wage System and Introduction of an Annuity
(1) Review of wage system (including retirement pay and pension)
(2) Introduction of an annuity in fiscal 2000 and readjustment of relevant laws including tax laws

Creation of new employment

[1] Healthcare Services for the Elderly and Disabled
(1) Ensuring of enough human resources for healthcareservices
1. Partial streamlining of the home-helper training business
2. Review of the training period for caregivers, physical therapists and work therapists
3. Addition of a meal delivery service for coverage under care insurance
(2) Diversification of business entities providing healthcare services
1. Authorization of healthcare services at fee-paying old people's homes as being "facility services"
2. Authorization of flexible "standardized services"
[2] Environmental readjustment in the field of information and telecommunications
(1) Further provision administrative information
(2) Promoting a more information-technology-based public sector, and outsourcing to the private sector
(3) Introduction of a flat rate system for household Internet-related communication fees
(4) Drastic review of laws related to the media and telecommunications, including enforcement of a new telecommunications law
1. Replacement of the Electricity and Telecommunications Enterprises Law with a new telecommunications law with the aim of promoting free and fair competition
2. Deregulation of NTT, release of stock held by the Japanese government, etc.
[3] Promotion of service businesses for households and companies and enterprises closely catering to regional needs
(1) Enforcement of support measures to promote service businesses for households and companies and enterprises that closely cater to regional needs
[4] Environment Readjustments for the Creation of New Industries and Enterprises
(1) Proposal of tax measures
1. To allow carry-over of deficiency without a fixed settlement rate for the first five years of a business start-up
2. Expansion and improvement of the Angel Tax System (by, for example, aggregating the loss of investment with the income from sources other than profits from stock transfers)
3. Introduction of a venture capital tax
[5] Strengthening of NPOs' Social Basis
(1) Enforcement of various policies to strengthen the financial, human-resources, organizational basis for activities
1. Exchanges in and ensuring of human resources
2. Fostering of support centers
3. Display of further flexibility and promptness in authorizing corporations specifically designed to increase public welfare, and increases in the upper limit for including donations in losses and in the limit of income tax exemptions
[6] Environment readjustment to accelerate invitation of foreign enterprises
(1) Accelerated abolition of regulations, deregulation and correction of an overall high-cost structure
(2) Discussions of favorable measures for invitation of foreign enterprises

Measures to ensure the effective utilization of unused real estate, and a fluid market for such real estate

Effective use of real estate such as former factory sites and increase of their market fluidity have vital importance to Japanese firms. Firms should promote closer collaboration with regional governments as well as with private developers at the stages of planing and execution of redevelopment projects. The government should flexibly apply regulations related to land utilization and provide public infrastructure that facilitates the projects.

[1] Promotion of model projects
(1) Positive promotion of model projects for housing and urban development
(2) Discussions on active utilization of various fund raising means (including PFI, project financing and securitization of real estate)
(3) Tax measures related to SPC
1. Deregulation of dividend requirements (over 90%)
2. Exemption of registration and license tax and real-estate acquisition tax
[2] Functional Expansion of the Housing and Urban Development Corporation and Private Urban Development Organizations and Prior Acquisition of Land
(1) Centralization of information gathering through localautonomies, the Housing and Urban Development Corporation and private urban development organizations and presentation of development plans; positive approach to prior acquisition of land by the above-mentioned two organizations; and preparation of basis by local autonomies
(2) Establishment of information center for information on unused former factory sites
[3] Changes in Land-use Designations
(1) Flexible and prompt response of local autonomies to changes in zone designations
(2) Flexible use of the areas in redevelopment plans and promotion of prompt procedures
[4] Deregulation on Reutilization of Land as Factory Site
(1) Relaxation of the Construction Standards Law and its flexible enforcement
(2) Relaxation of the Factory Location Law (Greenery Standards), the Disaster Prevention Law targeted at petroleum industrial complexes, etc., and their flexible enforcement

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