Compliance in Progress Summary

According to the fiscal transparency module of the 2001 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC), Japan performs well against the IMF's Code of Good Practices on Fiscal Transparency. However, the ROSC does not specifically address Japan's compliance with the individual principles of the code. Japan’s Constitution defines the roles and responsibilities of general government and clearly distinguishes Japan's main government sectors from the private sector. The Public Finance Law and Public Account Law define and formalize the budget and financial management system. The Japanese government is required by law to publish and disseminate fiscal policy information, and the Constitution requires the Cabinet to regularly report the country's fiscal condition to the Diet. The Public Finance Law stipulates that the national budget and its supporting documentation be made available to the public as soon as it passes the Diet. In its 2004 ROSC Update, the IMF observed that Japan had addressed all concerns raised by the IMF in its 2001 ROSC. However, the Update also noted that Japan had only made limited progress in providing timely information on the consolidated central and general government fiscal balance. The Update recommended that Japan provide consolidated revenue and expenditure data for central and general government more frequently than was available at the time, adding that such action would require the standardization of accounting practices and reporting requirements. Subsequent reports by the IMF through 2009 have not explicitly addressed this issue. The IMF's 2009 Article IV Consultation underscores the need for fiscal transparency, especially in light of the significant fiscal stimulus undertaken as a result of the global economic downturn.

General Overview

In 2001, the International Monetary Fund (IMF) published a fiscal transparency module on Japan as part of its series of Reports on the Observance of Standards and Codes (ROSC). According to this report, Japan meets a high standard of fiscal policy transparency and performs well against both the IMF's Code of Good Practices on Fiscal Transparency and the Organization for Economic Cooperation and Development's (OECD) Best Practices for Budget Transparency in various aspects of the budget process. The ROSC noted that although the main focus of fiscal policy in the Japanese Diet (bi-cameral legislature) deals with the national government's general account budget, the Diet also approves 38 special government-controlled funds as part of the national budget. In addition, the Diet approves the Fiscal Investment and Loan Program (FILP) and the budgets of nine government financial institutions, and the extensive local public finance program. According to the ROSC, "the links between these various agencies and programs, and their relationship with the national budget . . . complicate the fiscal system and have a significant impact on fiscal transparency" (p. 4). The ROSC noted that the then-recent passage of a Freedom of Information Law marked an improvement in fiscal transparency and reflected the public's belief that it has a right to be informed about the government's fiscal activities. Other improvements include the publication of ministerial mission statements and the dissemination of policy council deliberations to the public. While the ROSC applauded the publication of a government balance sheet, it suggested that the asset valuations appearing thereon could do with greater scrutiny. The ROSC further suggested that fiscal developments be reported on more regularly, and that a longer-term context be provided for the formulation of fiscal policy through the adoption of a medium-term budget framework and long-term fiscal projections. The ROSC also called for greater clarification of "the roles and consequences of public financial intermediation through the FILP" (p. 13).

The legislative underpinning for Japan's fiscal policy comprises the Constitution, the Public Finance Act, and the Public Account Act. The Constitution defines the roles and responsibilities of general government and clearly sets Japan's main government sectors apart from the private sector. The relative roles of the executive, legislative, and judicial branches are clearly defined in the Constitution, which also lays out a clear separation of powers across the executive, legislative and judicial branches. The Public Finance Law of 1947 and the Public Account Law, along with their subsequent amendments, further define and formalize the budget and financial management system in Japan. According to the 2001 ROSC, the Japanese Cabinet reports to the Diet on the economic outlook and basic policy stance on economic management, and the Finance Minister delivers a fiscal policy speech to the Diet as well, in which information on the macroeconomic framework underlying the budget is provided. Through several policy councils (e.g. the Tax Commission and the Fiscal System Council), external actors are allowed to participate in the formulation of the budget prior to its finalization, which promotes an open budget process. The Public Finance Law requires that budget data be reported on a gross basis, and that the data be provided ministry by ministry for both the general account and the special accounts. Also, Japanese law requires quarterly reporting to the Diet on the execution of the budget, with a one quarter lag and monthly reporting of the receipts and outlays of national treasury accounts, with a two-month lag.

According to the 2001 ROSC, the Japanese government is required by law to publish and disseminate fiscal policy information. The Constitution of Japan requires the Cabinet to regularly report to the Diet on the country's fiscal condition. The Public Finance Law stipulates that the national budget and its supporting documentation be made available to the public as soon as it passes the Diet. Japan has a plethora of publications (issued by various institutions) that report fiscal developments and aggregates. The two main budget documents in Japan, the General Account Budget and the Special Account Budgets, are accompanied by the budgets of government financial institutions and explanatory documents, all of which are submitted to the Diet for approval. After Cabinet approval, these budget documents are immediately released to the public (sometimes in English) and briefing material is provided to the press. The Constitution mandates that final accounts are audited annually by the Board of Audit, which is independent of the Cabinet by law. Every November, the Board submits its audit report to the Cabinet, which then submits the report to the Diet. Upon submission to the Cabinet, the Board also disseminates a summary of its audit report to the press. Perhaps most importantly, the "Board of Audit has the legal authority to require that improprieties it identifies be rectified," (p. 12) according to the ROSC. Nevertheless, the ROSC observes that Japan's "institutional arrangements are not easy to understand, primarily because they are difficult to interpret in terms of central government or general government operations as conventionally defined" (p. 4).

The original 2001 ROSC was updated by the IMF in 2004, wherein it was observed that Japan had addressed all the major issues raised in the earlier report. For instance, the ROSC Update reported that FILP reform commenced in 2001, which led to a significant reduction in the size of the FILP and a clarification of FILP policy. The ROSC Update further noted that, since 2002, Japan's Cabinet Office had published medium-term macroeconomic and fiscal projections in order to provide a quantitative reference for Japan's economic and fiscal policy regimes. Finally, the Update observed that, since fiscal year 2003, the Japanese government had made a concerted effort to minimize the use of supplementary budgets and had made its macroeconomic model and assumptions available for scrutiny by independent experts. On the other hand, the Update reported that Japan had made only limited progress in providing timely information on the consolidated central and general government fiscal balance. The Update recommended that Japan provide consolidated revenue and expenditure data for central and general government more frequently than was currently available, adding that such timely consolidation of fiscal data would require the standardization of accounting practices and reporting requirements. None of the subsequent Article IV Consultation reports through 2009, however, addressed Japan’s progress on this issue.

In its 2007 Article IV Consultation report, the IMF stated that Japan's fiscal policy was firmly focused on consolidation, which, while proceeding faster than expected, ought to be accelerated even more. The Japanese authorities outlined action plans for further consolidation reforms in the 2007 Basic Policies document, which laid out the strategy to modernize fiscal structures in Japan. For example, Japan had "set fiscal targets to reduce the debt-to-GDP ratio in a stable manner by the mid 2010s and, as a first step, to achieve a surplus in the primary balance of the central and local government combined by 2011" ( p. 36). The 2008 IMF Article IV Consultation report recommend that, "with expenditure cuts nearing their limit, the focus of fiscal consolidation should shift towards tax measures, including raising the consumption tax and broadening the income tax base" (p. 3) as part of comprehensive tax reform to secure fiscal sustainability. The 2008 report also highlighted the challenges created by a rapidly ageing population, such as mounting costs and increased inequality in pension benefits between generations. Both the 2007 and 2008 Article IV Consultation reports concluded that the public debt in Japan was uncomfortably high.

The 2009 IMF Article IV Consultation report focuses its attention on Japan's circumstances following the global economic crisis, which had serious implications for fiscal policy making since the peak of the crisis in late 2008. Japan responded to the downturn with a sizeable fiscal stimulus. According to the IMF, this policy "should remain flexible to address further downside risks" (p. 3). However, it also occasioned a significant increase in what was already a high level of public debt. The IMF observes that this necessitates "that attention be paid to the medium-term strategy to secure fiscal sustainability" (p. 4). According to the 2009 report, economic conditions in combination with political considerations have made it more challenging to implement fiscal and structural reforms. The 2009 report notes that, due to the need to respond to the economic downturn, Japan's fiscal deficit was expected to widen, due primarily to a sharp drop in tax revenues, stimulus spending, and a rise in social security payouts. Many of the tax-based stimulus measures will expire over the coming three years. Pre-crisis fiscal planning aimed at achieving primary balance by fiscal year 2011 has been derailed for the time being. However, the 2009 report found that the "current stimulus appears to provide adequate support to growth under the baseline" (p. 13), adding that further stimulus could be in order in 2010, should the recession persist. Nonetheless, the report argued that Japan should prioritize the clarification of its medium-term consolidation strategy. Japanese authorities responded with a commitment to pursue medium-term fiscal consolidation, stressing that it was "critical for maintaining market confidence" (p. 14). In addition, "they agreed that greater emphasis on the debt ratio could help raise public support for fiscal consolidation" (p. 14). They announced their intention to publish the details of their fiscal targets in the June 2009 edition of Basic Policies. The IMF cautioned that "as the crisis eases, exceptional interventions in the financial and corporate sectors will need to be smoothly unwound" (p. 25), and argued for the need for transparency in the exit strategy.

The Principles

IIClarity of roles and responsibilities.

According to the fiscal transparency module of the IMF's 2001 ROSC, fiscal policy in Japan has a "solid legal basis and establishes clear administrative accountability" (p. 1). However, the assessment does not specifically address Japan's compliance with this principle. The ROSC states that the Japanese Constitution defines the roles and responsibilities of general government and clearly sets Japan's main government sectors apart from the private sector. The relative roles of the executive, legislative, and judicial branches are also well defined in the Constitution, which lays out a clear separation of powers across the executive, legislative, and judicial branches. Furthermore, the ROSC notes that "the Constitution, the Public Finance and Public Accounts laws, and laws specific to individual government agencies provide a clear legal framework for fiscal activity" (p. 4). Specifically, the Public Finance Law and the Public Account Law, along with their subsequent amendments, define and formalize the budget and financial management system in Japan.

According to the ROSC, mechanisms for the coordination and management of budgeted and extra-budgetary activities are "fairly effective" (p. 5), and the legislative basis for taxation, regulation, and administrative procedures is clear. The commitment and expenditure of public funds is governed by the Constitution, the Public Finance Law and the Public Accounts Law, which also provide a comprehensive legal framework for public expenditure management. Japan also has laws governing general government that prevent the Bank of Japan (BoJ) from lending to the government except under special circumstances and only with the approval of the Diet. In Japan, public financial institutions are used extensively for fiscal policy purposes. The FILP may be used to channel funds to finance public investment projects and other priority spending. The ROSC observes that Japan's "institutional arrangements are not easy to understand, primarily because they are difficult to interpret in terms of central government or general government operations as conventionally defined" (p. 5). It asserted that Japan needed to clarify its policy with regard to the size of the Fiscal Investment and Loan Program (FILP) and to specify the government's role in financial intermediation. The 2004 ROSC Update reported that FILP reforms resulted in sufficient clarification of the government's role in financial intermediation, and observed that information on FILP activities is now regularly published.

IIOpen budget processes

The 2001 ROSC asserts that Japan's "budget documentation is comprehensive; and there is regular reporting on budget execution" (p. 1). However, the assessment does not specifically address Japan's compliance with this principle. According to the ROSC, the Cabinet disseminates information on the state of the economy and provides information on the economic outlook and the administration's basic policy stance. In addition, the Finance Minister delivers a fiscal policy speech to the Diet that includes information on the macroeconomic framework underlying the budget. Several policy councils (e.g. the Tax Commission and the Fiscal System Council), permit external actors to participate in the formulation of the budget prior to its finalization, which promotes an open budget process. The Public Finance Law requires gross budget data to be reported on a ministry-by-ministry basis, covering both the general account and the special accounts. This law also requires quarterly reporting to the Diet on the execution of the budget with a one-quarter lag, as well as monthly reporting of the receipts and outlays of national treasury accounts with a two-month lag. Final accounts are available within a year.

The 2001 ROSC noted some areas in which improvements could be achieved. It called for a reduction in the use of supplementary budgets. It also advocated making the macroeconomic model and assumptions available for scrutiny by independent experts. The 2004 ROSC –Update observed that the Japanese government had made a concerted effort to minimize the use of supplementary budgets, beginning in fiscal year 2003. In addition, it noted that, in January 2002, Japan's Cabinet Office began publishing medium-term macroeconomic and fiscal projections, and further planned to publish a qualitative reference for economic and fiscal policy. These fiscal projections would span the main fiscal aggregates, such as the central and local government balances, public debt and total general government expenditure. Finally, the ROSC Update observed that, since 2002, the Japanese Ministry of Finance has published "three-year forward estimates of the national government general account revenues and expenditures . . . based on draft budget and an assumption of the continuation of current policies" (p. 2). In 2002, the Diet passed the Policy Evaluation Law, which requires that the results of policy evaluation at each central government ministry be included in Japan's budget formulation. However, the ROSC Update noted that "budget documentation could further extend its coverage of contingent liabilities, estimates of tax expenditures, or information on the nature and estimated costs of quasi-fiscal activities related to public policy obligations of government financial institutions and public corporations" (p. 3).

IIPublic availability of information.

According to the IMF's 2001 ROSC, Japan provides "comprehensive budget documentation and supporting information to the Diet and the public" (p. 8). However, the assessment does not specifically address Japan's compliance with this principle. The ROSC states that the government is required by law to publish and disseminate fiscal policy information. The Cabinet is constitutionally required to report regularly to the Diet on the country's fiscal condition. The Public Finance Law of 1947 stipulates that the national budget and its supporting documentation must be made available to the public as soon as it passes the Diet. Also, quarterly reporting on budget implementation is required by law.

Various institutions in Japan publish a wide range of documents that report on fiscal developments and aggregates. Detailed information is provided in comprehensive budget documentation, which extends beyond the national budget and covers agencies and programs financed from the budget. The two main budget documents in Japan, the General Account Budget and the Special Account Budgets, are accompanied by the budgets of government financial institutions and explanatory documents, all of which are submitted to the Diet for approval. After Cabinet approval, these budget documents are immediately released to the public (sometimes in English) and briefing material is provided to the press. Also included in the budget documentation is information on the gross debt and government holdings of securities. The ROSC notes that Japan provides detailed information (i.e. disaggregated revenue and expenditure data) on the general account and the special accounts. The document dealing with medium-term fiscal projections includes projections of general account revenue and expenditure for the three years following the budget. This information is submitted to the Diet. Japan also publishes an Annual Report on the National Statistics, albeit with a one-year lag.

Areas in which the 2001 ROSC felt improvements could be achieved included the adoption of a long-term context within which fiscal policy could be decided and examined. In addition, the ROSC recommended making Japan's macroeconomic models and assumptions available for scrutiny by independent experts. The 2004 ROSC Update observed that the Cabinet Office began publishing medium-term macroeconomic and fiscal projections in January 2002, and planned to begin publishing a qualitative reference for Japan's economic and fiscal policy regimes. These fiscal projections would span the main fiscal aggregates, such as the central and local government balances, public debt and total general government expenditure. The Update added that, since 2002, the Japanese Ministry of Finance has published "three-year forward estimates of the national government general account revenues and expenditures . . . based on draft budget and an assumption of the continuation of current policies" (p. 2). According to the Update, Japan now makes its macroeconomic model and assumptions available for open scrutiny by independent experts.

Japan subscribes to the IMF's Special Data Dissemination Standard (SDDS) and meets or exceeds most requirements of coverage, periodicity, and timeliness of its data. However, the SDDS website discloses that Japan avails itself of flexibility options for its central and general government operations data. The website shows that Japan produces advance release calendars for its fiscal sector data, and makes such data available to all interested users simultaneously. There is no government access to the fiscal data, and no commentary accompanies the release of general government or public sector operations data.

IIIndependent assurances of integrity.

The IMF's 2001 ROSC states that "fiscal information is subject to effective independent audit" (p. 12). However, the assessment does not specifically address Japan's compliance with this principle. The Constitution mandates that the Board of Audit conduct an annual audit of the final accounts. The Board of Audit is legally independent of the Cabinet. Every November, the Board's submits its audit report to the Cabinet, which then submits the report to the Diet. Upon submission to the Cabinet, the Board also disseminates a summary of its audit report to the press. Perhaps most importantly, the Board of Audit is legally authorized to require the rectification of any improprieties it identifies.

To maximize the integrity of budget data, final accounts are fully reconciled with the budget and with the Bank of Japan's accounting report on the national treasury accounts. The ROSC finds that Japan's decentralized approach to the compilation of government finance statistics further enhances independent assurances of integrity. For instance, the national accounts and the national government finance statistics are prepared by two separate independent bodies, the Economic and Social Research Institute of the Cabinet Office and the Budget Bureau of the Ministry of Finance, respectively. The ROSC found Japan's budget data to be based on fairly reliable forecasts and expenditure estimates in initial budgets. However, the ROSC cautioned that that Japan's heavy reliance on supplementary budgets diminished the significance of the estimates, and of the initial budget as a measure of fiscal stance. In its 2004 ROSC Update, the IMF applauded Japan's efforts to reduce its reliance on supplementary budgets since 2003.