#97-DOF-29 "New Developments in Economic Policy: Complementarity 
            between Government and the Market Place" 
           (Yoshio Ichiryu, Yuji Hosoya, September 1998.) 

A WHOLE SENTENCE


ABSTRACT

    In this paper, the economic structural reforms currently being 
implemented by the Japanese government, along with the economic 
policies that are needed to make the Japanese economy dynamic and 
vigorous in the 21st century, are discussed from the basic viewpoint 
of comparative institutional analysis, with an emphasis on 
institutions and social and economic system. This paper also outlines 
the basic relationship between markets, private-sector institutions 
and governments, and asserts that the expansion of market functions is
now an extremely important role of the Japanese government.
    The market is inherently capable of achieving dynamic efficiency 
in resource allocation through innovation when it is complemented with
private-sector coordination and with the institutions that result from
the spread and firm establishment of this coordination. However, the 
market's performance is also greatly influenced by private-sector 
institutions, which are at various degrees of development in each 
nation. According to comparative institutional analysis, an 
institution possesses historical path dependence as a system, and so 
evolves within the context of a nation's economic and social 
environment and occasionally, when institutional complementarity 
exists, achieves stability as a firmly established economic and social
system that determines that country's comparative advantage. However, 
when the surrounding environment changes or a higher stage of 
development is achieved, institutions that had previously promoted 
proper performance can cease to function and in some cases actually 
hinder economic activity. The major environmental changes affecting 
Japan - namely, globalization, informatization, declining birth rates 
combined with the aging of society, and Japan's emergence as a 
front-runner in international society - are indeed changes that demand
institutional reform.
    Amid such circumstances, the Japanese government is being called 
on to play the role of facilitating the private-sector coordination 
intended to bring out the market's inherent dynamic resource 
allocation functions, which are achieved through the integrated action
of the market and private-sector institutions. In short, these are 
"market enhancing" policies. Market enhancing policies must enhance 
the abilities of private-sector coordination efforts and institutions 
to generate incentives for market agents, reduce moral hazards, and 
correct the asymmetry of information, and must also promote the 
establishment of intermediaries capable of assuming this role. With 
respect to Japan's current circumstances, it is essential to 
reinvigorate innovation, to overcome the inertia that arises from 
institutional complementarity, and to secure a diverse range of 
options that permit economically driven challenges.
    From this basic point of view, the second half of this paper 
discusses the direction that is preferable for the individual policies
Japan is currently promoting: introduction of the pure holding company
system, reevaluation of corporate governance, making proper conditions
to encourage the creation of new industries, tax system reforms, 
reevaluation of employment systems, university reforms, designing a 
proper intellectual property rights, environmental policies, 
introducing market functions into government activities, and improving
the social safety net, among others. The formulating of a package of 
such policies from a market enhancing view is seen as contributing to 
evolution that culminates in a new Japanese economic and social system.
    It is also imperative to expand those policies - which the authors
term type 2 market enhancing policy - in which the market complements 
government action through the introduction of market functions and 
private-sector coordination functions in fields where government 
involvement will continue, such as regulation and the providing of 
public goods. Establishing a trial period for government measures 
prior to full implementation and establishing an effective system of 
checks and balances in the government are also important issues in 
view of the need to address growing uncertainty about the future by 
reducing the possibility of government failure.