The Organization for Economic Cooperation and Development on Wednesday urged Japan to expedite regulatory reform efforts to avoid a depression and lay the groundwork for sustainable long-term growth.

The Paris-based club of developed nations made the recommendation as part of its ongoing review of regulatory reform in member countries, which it began in 1997.

The OECD Review of Regulatory Reform in Japan criticizes the slow pace of Japan’s regulatory reform, warning that Japan is falling further behind standard OECD regulatory practices and that its failures in that regard have contributed to its poor economic performance in the 1990s.

“While both adverse external shocks and cyclical factors have played a role in the current crisis, the most important factor has been structural rigidities resulting from an increasingly outmoded regulatory and institutional framework,” the 129-page report says.

“Without further reform, any economic recovery in Japan will likely be fragile and short-lived,” it adds, warning that unemployment may rise even further and become long-term in nature as a result of structural imbalances in the economy.

The OECD report encompasses three generic areas concerning Japan’s regulatory policy, competition policy and enforcement measures for enhancing market openness and two sectors of telecommunications and electricity. “Japan is not obligated to do anything (in accordance with the OECD recommendation). However … our very best assessment is that regulatory reform is one of the keys to restoring growth and job creation in Japan,” Joanna Shelton, OECD deputy secretary general, told a press conference televised in Paris and aired in Tokyo. “Japan’s economy is one of the most highly regulated economies in the OECD,” she said, calling for “a sharp break with past regulatory practices” in Japan.

Japan must rapidly implement comprehensive reform plans built on its current 1998-2000 deregulation program with specific timetables in order to open the way for competition in air travel and other transport modes, electricity, telecommunications and land use, the OECD report says.

For the Japanese government to make its three-year deregulation program more rapid, comprehensive and result-oriented, the OECD is calling for the Fair Trade Commission to play a more active role.

The FTC should evaluate, at least annually, the extent to which barriers to competition still exist in each sector under reform, and how competition is developing in response to reform efforts, the report says.

To accelerate and deepen reform, the Japanese government should clarify independence of its Deregulation Committee from ministries, while boosting its capacities and resources, Shelton adds.

The impact on employment of such an ambitious program should prove positive in the medium-term, the report says, though it notes that it is difficult to speculate since the effects depend on the larger environment for investment, labor mobility and other “framework conditions.”

To improve framework conditions — administrative transparency, accountability, adaptability, competition policy and enforcement — governmentwide reforms are needed, it says.

“New incentives, participants, and controls in regulatory reform processes are needed to reorient old relationships with producer groups, break up information monopolies in the ministries, and reduce wide administrative discretion,” it says.

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