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No. 40 — October 22, 1999

 

Feature Article

FISCAL CRISES IN JAPAN'S PREFECTURES
AND THE DEBATE ON CORPORATE TAX REFORM

Hiroyuki Takahashi

Summary

Japan's local governments face a worsening fiscal crisis; recession has eaten away at their revenue bases. In particular, prefectures containing large cities have suffered a deterioration of their financial conditions in the 1990s. The main reason for their troubles is that the revenue from corporate taxes, which accounts for more than one-third of total tax revenue, has dropped due to the economic slump.

Meanwhile, prefectures across the board are saddled with higher expenditures as a result of the central government's anti-recessionary public works spending. Urban prefectures — where declining corporate tax revenues have caused increases in the ratio of recurring expenditures to total revenue — have been hit the hardest. Prefectural governments are calling for corporate tax reform in order to ensure a steady stream of revenue and to decrease their dependence on corporate earnings. Furthermore, according to critics of the current system, reform also is needed to correct certain perceived inequities such as the fact that unprofitable firms have no tax liability.

In July 1999, a tax advisory council to the prime minister published four alternative corporate tax schemes, each of which if implemented would de-emphasize the current reliance on corporate earnings and stabilize prefectural revenue. However, opposition to nonincome-based tax has been vigorous and widespread, and the debate continues.

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Weekly Review

BOJ, EPA ON SAME POLICY WAVELENGTH
--- by Douglas Ostrom

The Bank of Japan and the government are legally separate and, in recent months, they have had some high-profile differences of opinion on economic policy. As of mid-October, however, the central bank and the Economic Planning Agency seemed to be of a very similar mind in their assessments of economic conditions and the appropriate policy responses.

 

BULLS AND BEARS BATTLE OVER TOKYO STOCK MARKET
--- by Jon Choy

While a few negatives remain strong, a growing number of positive developments have gradually lifted Japanese stock prices over the past six months. The process has not been smooth, however. In some cases, investors have reacted strongly to swings in the yen/dollar exchange rate and to the ups and downs in overseas equity markets. Nevertheless, gains have outnumbered losses in 1999. The upward trend in stock prices along with changes in the regulatory and business atmosphere hint that the market may be entering a "virtuous cycle," something not seen since the "bubble economy" of the late 1980s.

 

OKINAWAN LAWMAKERS BACK HELIPORT RELOCATION
--- by Barbara Wanner

As so often has been the case in U.S.-Japan relations, a little heat from Washington may have helped to move a protracted matter &emdash; in this instance, the 1996 bilateral base consolidation accord &emdash; off square one. In late June, President Clinton urged that all pending issues concerning American military bases on Okinawa &emdash; including a controversial plan to relocate the U.S. Marine Corps' Futenma Air Station heliport elsewhere on the island &emdash; be resolved in time for the July 2000 summit of the seven industrial nations plus Russia, which will be hosted by Japan's southernmost prefecture (see JEI Report No. 24B, June 25, 1999). Secretary of Defense William Cohen subsequently turned the temperature up a little higher, reiterating that message during a late July meeting in Tokyo with his counterpart, then-Japan Defense Agency Director General Hosei Norota (see JEI Report No. 30B, August 6, 1999).

 

JAPAN, INTERNATIONAL DONORS PLEDGE SUPPORT FOR PALESTINIANS
--- by Marc Castellano

A two-day meeting of the Ad Hoc Liaison Committee on Assistance for the Palestinians, cochaired by Foreign Minister Yohei Kono and Norwegian Foreign Minister Knut Vollebaek, concluded in Tokyo October 15 with the signing of a plan to more effectively implement assistance for the Palestinians. The group, established under the 1993 Oslo Accord to coordinate aid policies and to help advance the peace process in the Middle East, includes donor nations and international bodies, plus Israel and the Palestinian National Authority. The new plan commits the PNA to improve accountability in using aid by cutting expenditures and promoting sound fiscal management. For its part, Tel Aviv promised to take a broad range of steps to facilitate the implementation of Palestinian aid projects by, for example, ensuring the secure movement of goods and people between the West Bank and the Gaza Strip.

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