Privatization and Deregulation in Japan
This chapter describes a series of public reforms in Japan since the 1980s. This reform includes the introduction of the market mechanism, the performance evaluation, and the division of decision-making and implementation. This chapter focuses on the introduction of the market mechanism: privatization and deregulation.
Firstly, privatization was held in the 1980s and the 2000s. The process of privatization includes not only just selling public corporations but also subdividing a company. Methods of division include horizontal separation and vertical separation. Horizontal separation refers to separate a public corporation by region, such as west, central, and east, or by function of business, such as a passenger company and a freight company. Vertical separation refers to separate a public corporation into a company which obtains infrastructure and a company which uses it. The process of privatization has raised political conflict between the pros and cons of privatization because privatization of public corporations would affect the allocation of pork-barrel among beneficiaries. In recent years, furthermore, the government has introduced another type of privatization, the concession system, to operate public facilities. A good example of this is the airport PFI introduced by the Democratic Party government.
Secondly, about deregulation there are also various cases because in terms of devising economic policy, the Japanese Government had preferred regulatory frameworks to nationalization of industry after World War II. Civil aviation and finance policy, for instance, had regulated business licenses, prices, and so on. Because of changing economic circumstances, the government, however, changed its policy from the late 1980s. In the civil aviation industry, the government gradually eased the regulations mentioned above. The Hashimoto government conducted the Financial Big Bang, which ended the “convoy system” in the postwar Japanese finance industry.
In the 1980s, as in other developed countries, the Japanese government privatized state-owned companies (hereafter SOCs). As Obinger et al. (2016) argue, privatization of SOCs can be of two types. One involves the selling of the properties of an LOC. The other refers to a change in the legal status of the LOC. The Japanese government preferred to choose the latter type. This is because most cases were for reforming business, which was struggling and had huge amounts of debt. Furthermore, the executives of the government were wary of the resistance they would have to face from backbenchers who were against privatization in order to reserve their pork barrel for their beneficiaries. Section “Privatization Overview” describes five cases of privatization in Japan since the 1980s. These are the national railways, telecommunication, highway agencies, postal services, and airports.
The Nakasone Government
The Yasuhiro Nakasone government (1982–1987) privatized three public corporations. This section explains two typical cases of privatization of public corporations: Japan National Railways (hereafter JNR) and Nippon Telegraph and Telephone Public Corporation (hereafter NTTPC). The privatization of JNR was meant to reform a public corporation whose management had collapsed as the railway industry was in shambles. The other, the privatization of NTTPC, was, on the contrary, privatization in which the management was good and the industry had a bright future.
Japan National Railway
From the administrative, political, and economic points of view, the reform of JNR was considered the most difficult task for the Nakasone government. First, in the administrative sphere, the management of JNR had completely collapsed. The amount of annual operational losses and accumulated debt was incredible. In 1986, JNR’s annual income from the railways was 3.2 trillion yen, but the annual cost was 4.6 trillion yen. When JNR became privatized in 1987, its accumulated long-term debt was 37.1 trillion yen.
Second, from the political point of view, politicians of both the right, the Liberal Democratic Party (hereafter LDP), which was the governing party, and the left, the Social Democratic Party of Japan (hereafter SDPJ), had intervened in JNR. The LDP politicians demanded that JNR construct railway lines for their constituencies although it would lead to losses, and the LDP along with the local authorities did not permit the closure of loss-making lines in the rural areas. The SDPJ insisted that the government and JNR freeze the rising fares from the welfare point of view, although JNR could not afford the inflation. They, furthermore, supported trade unions in their strike against the executives of JNR. Trade unions of JNR were hostile to the executives and went on strikes to disrupt JNR executives. This disruption resulted in confusion among railway users.
In the transportation market, JNR lost its competitiveness against both other railway companies and road transport services for both passengers and freight. In the first case, the loss was because of the disruption caused by the strikes. In the second case, the government proceeded to undertake road construction and the development of the automobile industry.
Privatization of JNR was meant to resolve these complicated problems. However, people who were part of the discussion process of privatization did not necessarily have confidence that privatization would salvage JNR (Kasai 2003). The Nakasone government chose a horizontal separation and split JNR into six passenger railway companies (JRs) and a freight company. The government did not introduce vertical separation, like in the UK and the EU countries. However, privatization of JNR resolved these issues beyond their expectations. Especially in metropolitan areas, such as Tokyo and Osaka, JNR recovered competitiveness to other private railway companies. Except for dealing with the increasing consumption tax, three JR companies, East, Central, and West, have not raised their fares since privatization. In the inter-city services, the shinkansen, the high-speed train network, has been beating civil aviation. Politicians found it difficult to intervene in the investment plans of JR companies without the fiscal resources for construction (Takamatsu 2006). In 2017, 30 years after privatization, four out of the six JR companies listed their stock in the market.
Nippon Telegraph and Telephone Public Corporation
In contrast to the case of JNR, the telecommunication industry had a prosperous future ahead because of the foreseen development in communication technology. Unlike JNR, the NTTPC operated in the black. Rather, restrictions introduced by the government were considered to impede free and efficient business activity. The NTTPC’s business had been controlled by the Diet or the Ministry of Posts and Telecommunications because it was a government corporation. These restrictions on the NTTPC included permissions for the annual budget, investment, and fund usage.
The telecommunication industry was a natural monopoly and therefore, monopoly by the public body was justified. Under the system of a public monopoly, the government implemented construction of telecommunication network infrastructure. The development of the network and technology, however, reduced the need for state monopoly. In other words, unlike JNR, which was a reform meant to remove the deadlock, this one was in preparation “for the twenty-first century” and corresponding to the rapid growth of telecommunication technology and its market (Otake 1994).
In 1985, the Nakasone government privatized the NTTPC to Nippon Telegraph and Telephone Corporation (hereafter NTT) and in 1987 listed its stock on the market. Because of the bubble economy, the share of the company became extremely valuable to individual investors. Selling NTTPC to NTT, the government earned about 10 trillion yen. However, the government also set two restrictions on NTT capital. The government would keep the lions’ share, which is more than a third, because the telecommunication infrastructure was important for national security. The government also set restrictions on foreign capital investment in NTT.
Simultaneously, the government eased regulations to enable entry of other enterprises into the telecommunications market. Many New Common Carriers (hereafter NCCs) were established, and they entered the market, especially the long-distance call market. To accelerate the entry process for the newly joined, the government created a new business category, by which a company did not need to hold infrastructure by itself but instead could lease it from a company that held it. Furthermore, for starting the business, the company needed to only register with the Ministry.
Although NCCs built up the long-distance call network by themselves, for the last one mile they had no choice but to depend on the network owned by NTT, their competitor. Conflict arose when they had to connect their network with that of the NTT. The Ministry of Posts and Telecommunications realized that competition between the two would be unfair, because the last one mile infrastructure monopolized by the NTT. Moreover, with the emergence of new technologies, such as the Internet, mobile communications, and optical fibers, the Ministry reexamined the state of NTT. In 1997, because of lack of competition in the telecommunication industry, the government revised the privatization scheme and divided NTT into four companies, a holding company, two regional companies, and a long-distance call company.
The Junichiro Koizumi government (2001–2006) also tackled privatization of government-affiliated corporations. This section describes two highly politicized cases, privatization of the highway agencies and the postal services. A characteristic feature of these cases is that in privatizing the two, there was conflict not only between PM Koizumi and the opposition party but also between the PM and the backbenchers of the LDP, whose interests apparently suffered by privatization.
Japan Highway Public Corporation
Highway construction has long been the source of patronage politics by the LDP. The LDP politicians initiated a long-term development plan to construct a highway network of 9,342 km across Japan. Japan Highway Public Corporation (hereafter JH), constructed the highway and operated it.
Although the highway network contributed to the economic development in Japan, a few routes were not economically viable. Some routes, especially in the rural areas, could not afford the construction cost due to the limited usage. The construction of such routes became a burden on the JH management, which had about 40 trillion-yen interest-bearing debt. The LDP members whose constituencies were situated in such rural areas, however, strongly demanded that the government continue constructing the remaining planned routes.
Therefore, when PM Koizumi mentioned privatization of JH, it was expected that the construction of new routes would no longer be possible. This was because a private company would naturally avoid loss-making businesses and, in fact, JR companies, the predecessors of privatization, had stopped railway construction in rural areas and had been shutting down loss-making lines. Hence, political conflict arose between Koizumi and the backbenchers who supported highway construction. The Committee for the Privatization of Highway agencies, whose members were appointed by PM Koizumi, discussed the scheme of privatization and sought to prevent the construction of loss-making lines.
The backbenchers of the LDP, who finally understood that privatization was inevitable, strongly insisted that the government introduce vertical separation and an infrastructure holding company of public-related bodies to continue highway construction in public interest, not private interest. PM Koizumi finally compromised with the backbenchers and accepted their demands.
In 2005, the government decided to break up JH and other highway agencies and privatize them into six highway companies. As per the LDP members’ preference, an independent administrative agency, named the Japan Expressway Holding and Debt Repayment Agency, was established to hold highway infrastructure and repay interest-bearing debts inherited from Japan Highway. Thus, the highway assets were given on an agency lease to five other highway companies, which managed and operated the highway business and the lease fees were paid to the agency. These companies were also involved in the construction of new highway routes, which would then be transferred to the agency along with its long-term debt from the construction. By this system, highway companies would avoid the burden of the debt, and hence, they had an incentive to expand their network. In other words, a new highway line would continue to be built in accordance with the 9,342 km Scheme.
Reforming the Japanese postal services was Junichiro Koizumi’s political lifework. He had already begun to appeal for postal privatization in the 1980s, when he was the Parliamentary Vice-Minister for Finance. This opinion, however, had seen hostile reaction from the other members of the LDP, because quite a few LDP members depended on the support from the Association for Small Post Office Masters (hereafter Zentoku). In 1871, the Meiji government introduced a postal service between Tokyo and Osaka, which was the start of the modern postal service in Japan. Since then, the postal services in Japan had been undertaken as a government business. To expand the postal network, the Meiji government appointed local magnates, who donated their land and building for the post office to the government, as owners of Small Post Offices and gave them the status of a national public servant. Later, they formulated the Zentoku to keep their benefits and became strong supporters of the LDP. If the postal service became privatized, they would lose their position as a national public servant as they feared that the loss-making small post office would become abolished.
When he became the prime minister, Koizumi moved into action to achieve his ambition and submitted the Postal Privatization Bill to the Diet. However, the process that he and the executives of the LDP had taken was a deviation from the intraparty legislative procedure that the LDP usually took. Therefore, the LDP members who opposed privatization insisted that the executives could not declare that and the LDP members must vote in favor of the party decision. In the House of Representatives, although there was rebellion from the LDP, 37 oppositions and 14 absentees, the bill was approved by a slim margin with the support of 233 votes and opposed by 228 votes. In the House of Councilors, however, the bill was rejected with only 108 votes in support and 125 votes opposing it. The rebellion from the LDP was 22 oppositions and 8 absentees.
PM Koizumi dissolved the House of Representatives on the same day and asked the electorates whether the postal service should be privatized. In the general election campaign, Koizumi made maximum use of his right to choose the LDP candidates and did not give party tickets to those who had opposed the postal privatization bill. Furthermore, he nominated rival candidates to them. The result was a landslide victory for the LDP, which secured more than two-thirds majority in the House of Representatives. This majority could help in passing the bill in the House of Representatives even if the House of Councilors rejected it. At the special Diet session after the election, the Postal Service Privatization Law was approved by both Houses.
The postal services were privatized with both vertical and horizontal separation. As a holding company of the Japan Post Group, the government established Japan Post Holdings. Japan Post Network obtained the postal network infrastructure, post offices. Using this infrastructure, three operative companies, Japan Post Service, Japan Post Bank, and Japan Post Insurance, ran their respective businesses. The law required Japan Post Holdings to sell all the stock of Japan Post Bank and Japan Post Insurance by 2017.
In 2009, however, the Democratic Party of Japan (here after DPJ) led by Yukio Hatoyama won the general elections and his government decided to review the postal privatization scheme. Until the government decided upon it, the listing plan was frozen. In 2012, the parliament passed the Japan Post Privatization Amendment Law, which removed the deadline for selling all stocks to the market.
In 2015, a holding company, the Japan Post Holdings, and its subsidiary, Japan Post Bank, were listed to the Tokyo Stock Exchange, and they sold a small part of the stocks to the market.
Privatization of International Airports
As in many other countries, in Japan most of the airports were constructed and operated by the central and local governments. The Ministry of Transport held the power to decide and approve the location and plans for airport construction every 5 years. It permitted local governments to construct new airports or expand the existing ones. This institutional framework changed alongside the deregulation of civil aviation mentioned later.
The exception to this was the three international airports, Narita, Kansai, and Chubu, which were operated by special public corporations. In the early 2000s, the Ministry of Land, Infrastructure, Transport and Tourism (hereafter MLIT) had to tackle the privatization of the New Tokyo International Airport Authority (hereafter NAA), which operated the Narita Airport, and the financial trouble of the Kansai Airport Company.
First, the Koizumi government decided to examine the possibility of privatizing all government-owned companies, including the three public companies operating Narita, Kansai, and Chubu airports, respectively. The MLIT sought to privatize the Narita Airport Company to salvage the Kansai Airport Company, which was in financial trouble. Because this airport was constructed on reclaimed land along Osaka Bay, the Kansai Airport Company had incurred a huge amount of interest-bearing debt, about 1.3 trillion yen in 2006, which had a negative impact on the management of the airport. Furthermore, the weak economy in the Kansai area led to the number of passengers to the airport fall far below the government’s expectations.
The MLIT intended to merge the three existing international airport companies, Narita, Chubu, and Kansai. This plan, however, was criticized because it involved a cross-subsidy from the surplus of Narita to the deficit of Kansai, and hence it would reduce the competitiveness of the Narita airport. The MLIT then withdrew the scheme and privatized the NAA as the Narita International Airport Corporation in 2004.
Even after the privatization of Narita, the financial problems of Kansai Airport persisted. A proposal for resolving this problem stemmed from a local government (Takamatsu 2016). The Osaka-prefecture Governor Tohru Hashimoto proposed closing down of the Osaka International Airport (hereafter Itami Airport). This airport is located in the Kansai area, same as the Kansai Airport, and close to the city center and hence convenient for a multitude of passengers. However, Itami Airport had been the cause for high levels of noise pollution, and therefore, the governor felt that residents around the airport might approve his proposal. To the contrary, Kansai Airport is located in far from the city center to avoid noise pollution. In fact, after opening up Kansai Airport, there had been plans to abolish Itami Airport. However, the governor of Hyogo prefecture opposed this proposal because the abolition of Itami Airport would reduce convenience for passengers for Kansai region. Conflict between Osaka and Hyogo prefectures led to frustration and failed to reach an agreement at the local government level.
The MLIT proposed a merger of both airports and privatization by using a concession system. Under the concession system, the government does not transfer the proprietorial right of an airport to a private sector and maintains a contract to grant the right to operate infrastructure over a long period to the private airport operating company. Both governors accepted this proposal. The DPJ government amended the PFI Act, in which the object facility was expanded to the airports and seaports.
To recover from the devastation of World War II and conduct postwar economic policy reforms, the Japanese government preferred to the implementation of regulatory frameworks rather than the nationalization of industry. This policy is said to achieve certain results (Johnson 1982). However, the government implemented deregulation in a variety of industries since the 1980s. This section explains two important deregulation policies: the civil aviation and the financial big bang. Both of them are related to the Japanese economic policy post the 1980s.
The Ministry of Transport introduced a regulatory framework in the civil aviation industry called the “45–47 system” in the 1970s. This framework was for the “protection and fostering” of the civil aviation industry, which was an infant industry at the time (Akiyoshi 2007).
The Ministry of Transport controlled the civil aviation market by four regulatory institutions. First, with regard to entry regulation, the Transport Minister held the sole authority to issue permission for an airline that wanted to start a new line. In fact, the Ministry did not give permission easily, because a new competitor might confuse the market. Second, the Transport Minister also held the power to permit changes in the fares and charges such that a consistent profit was obtained for the carriers. Third, the Ministry of Transport controlled even the number of flights in each line. It set high standards for airlines when they wanted to increase the number of flights. This was done to avoid over-competition. Last, the Ministry introduced a system in which lines were allocated to three airline companies. Japan Airline (hereafter JAL), the national flag carrier, to fly domestic trunk lines and the international lines; the All Nippon Airline (hereafter ANA), the second largest airline, to fly domestic trunk lines, local lines, and short-distance international lines; and Toa Domestic Airlines (hereafter TDA), a follower airline, to fly domestic local lines.
This system, however, was forced to change in the middle of the 1980s when the United States started to deregulate its civil aviation market. The idea may have spread to other countries (Akiyoshi 2007). In 1986, the Civil Aviation Council in the Ministry of Transport issued the “86 Report,” which proposed to turn the aviation policy from protection to competition. In response to the Report, the Ministry of Transport made the following changes in policies.
First, the Ministry permitted ANA to operate in the international market. Second, the government introduced double and triple tracking of a domestic market if a particular line met the criteria for the number of passengers: 700,000 for double tracking and one million for triple tracking. Third, the government sold the shares of JAL to privatize it completely.
In the USA and Europe, after deregulation, new airline companies were established and newcomers such as Ryanair dominated the market. In Japan, however, newcomer and competition did not occur easily. In 1996, the first new airline, Skymark Airlines, was established, but it failed in 2015. In 2012, ANA established a low-cost carrier (hereafter LCC), Peach Aviation. After that various LCCs were established, such as Jetstar Japan and AirAsia Japan, and the Japanese domestic aviation market at last entered the LCC competition era.
“The convoy system” introduced by the Ministry of Finance in the Japanese financial market illustrates the characteristics of the postwar Japanese economy. The Ministry utilized the power of approval and permission for various aspects of business, such as entry and price, and controlled the financial industry. The Ministry of Finance also introduced controls over classification of business categories and regulated interests and commissions. The Ministry controlled the business area of each bank via administrative guidance. Moreover, the foreign exchange market was also restricted by the Ministry.
This system resulted in the stabilization of the financial markets in Japan from the 1950s to the 1980s. This stability of the financial market enabled banks and securities to provide finance to industries in the period of postwar reconstruction in the 1950s and saw high economic growth in the 1960s and the early 1970s.
However, the collapse of the bubble economy in the early 1990s brought about a crash in the condition of banks, especially stemming from bad loans, which drove banks and securities into bankruptcy. This breakdown of the monetary institutions made it impossible for the Ministry of Finance to maintain this system.
To resolve this crisis and the confusion in the financial market, and revitalize it, the Ryutaro Hashimoto government formed a financial market delegation called the “financial Big Bang” in Japan from 1996. The keywords of reform were “free,” “fair,” and “global” (Mabuchi 2009). “Free” referred to the government’s abolition of the various regulations such as interest rates, commissions, and entries for financial business. “Fair” referred to the government-introduced deposit insurance system and disclosure of information about banking organizations. “Global” referred to the government’s liberalized foreign exchange.
The financial big bang resulted in, first, newcomers from other industries, such as IT companies or supermarkets, bringing a fresh new perspective into the market; second; through a process of competition and survival, banks that had lost their competitiveness were eliminated from the market; and third, the number of banking companies decreased from 1,117 in 1976 to 589 in 2008.
This chapter described privatization and deregulation in Japan. In the first, the privatization in Japan tended to change a legal status of public corporation rather than to sell off a company. The case of NTTPC privatization that the government sold the share to the public coming only 2 years later of the privatization was exceptional. This is because privatization in Japan was mostly for the reconstruction of management or for PM’s political ambition. Recently, however, by introducing the concession system into an airport management, the government, which was suffering from the prolonged financial difficulties, found the new fiscal resource to invest an infrastructure.
In the second, about deregulation policy, this was a major turning point for Japanese economic policy in postwar era. Until the 1980s, the government had implemented regulatory frameworks, by which the government had protected and fostered industries for the reconstruction and development of the postwar Japanese economy. The Japanese government, however, has changed its regulatory policy from protection to competition, because of the changes of circumstances surrounding Japan, such as globalization and collapse of bubble economy. Deregulation resulted in newcomers for competition and in elimination of losers.
- Akiyoshi T (2007) Kokyoseisaku no Hen’yo to Seisakukagaku (the changes of public policy and policy Sceience). Yuhikaku, TokyoGoogle Scholar
- Johnson J (1982) MITI and the Japanese miracle: the growth of industrial policy, 1925–1975. Stanford University Press, StanfordGoogle Scholar
- Kasai Y (2003) Japanese National Railways: its break-up and privatization. Global Oriental, KentGoogle Scholar
- Mabuchi M (2009) Gyoseigaku (Public administration). Yuhikaku, TokyoGoogle Scholar
- Otake H (1994) Shinjiyushugiteki Kaikaku no Jiidai (The era of Neo-liberal Reform). Chuokoronsha , TokyoGoogle Scholar
- Takamatsu J (2006) Paradox of privatisation: the case of railway policy, vol 9. CCLP Publications, Tokyo, pp 221–245Google Scholar
- Takamatsu J (2016) Kuko Min’eika to PFI Donyu no Seijikatei: NAR Min’eikato Kansai⋅Itami Ryokuko no Togo Mondai wo Jirei toshie (Political process of airport privatisation and PFI introduction: the case of NAR privatisation and Mereger of Kansai and Itami airports). Meijo Hogaku 66(3):345–380Google Scholar