According to the 2001 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, 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 any of the principles of the code. The Constitution of Japan defines the roles and responsibilities of general government and clearly sets Japan's main government sectors apart from the private sector. The Public Finance Law and the Public Account Law, along with their subsequent amendments, define and formalize the budget and financial management system. The ROSC also states that 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 Japanese 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. Nevertheless, the 2001 IMF ROSC listed three important areas upon which Japan needed to improve: clarifying policy regarding the size of the Fiscal Investment and Loan Program (FILP) and assessing and reporting on the quality of FILP lending; setting fiscal policy in a longer-term context; and reducing the reliance on supplementary budgets and making the macroeconomic model and assumptions available for scrutiny by independent auditors. In its 2004 ROSC Fiscal Transparency Module - Update, the IMF observed that Japan had addressed all these issues. However, the 2004 ROSC Update also notes that Japan has only made limited progress in providing timely information on the consolidated central and general government fiscal balance. The ROSC Update recommends that Japan provide consolidated revenue and expenditure data for central and general government more frequently than is currently available, adding that such timely consolidation of fiscal data would require the standardization of accounting practices and reporting requirements.

General Overview

The 2001 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module concludes that Japan meets a high standard of fiscal policy transparency and performs well against the IMF's Code of Good Practices on Fiscal Transparency in various aspects of the budget process. In particular, the Constitution of Japan 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 vivid 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, define and formalize the budget and financial management system in Japan.

According to the 2001 ROSC, the Cabinet issued Economic Outlook and Basic Policy Stance on Economic Management and the Fiscal Policy Speech of the Finance Minister to the Diet provide information on the macroeconomic framework underlying the budget. Through several policy councils (i.e. 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 are reported on a gross basis, and that the data are 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.

Plus, the ROSC states that 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 Japanese 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 of Japan mandates that final accounts are audited annually by the Board of Audit, which is independent of the Cabinet by law. 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 has the legal authority to require that improprieties it identifies be rectified" (p. 12).

Nevertheless, the IMF 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). Furthermore, the 2001 IMF ROSC listed three important areas upon which Japan needed to improve: clarifying policy regarding the size of the Fiscal Investment and Loan Program (FILP) and assessing and reporting on the quality of FILP lending; setting fiscal policy in a longer-term context; and reducing the reliance on supplementary budgets and making the macroeconomic model and assumptions available for scrutiny by independent experts.

In its 2004 ROSC Fiscal Transparency Module - Update, the IMF observed that Japan had addressed all these issues. For instance, the update reports that, under the FLIP reform commenced in 2001, Japan had significantly reduced the size of FILP and clarified its policy regarding this. Also, regarding Recommendation #2, the IMF Update notes that, since January 2002, Japan's Cabinet Office has published medium-term macroeconomic and fiscal projections, and it has plans to also publish a qualitative reference for Japan's economic and fiscal policy regimes. Finally, in regards to Recommendation #3, the IMF observes that, since FY2003, the Japanese government has made a concerted effort to minimize the use of supplementary budgets and has made its macroeconomic model and assumptions available for scrutiny by independent experts.

However, according to the 2004 ROSC Update, Japan has only made limited progress in providing timely information on the consolidated central and general government fiscal balance. The ROSC Update recommends that Japan provide consolidated revenue and expenditure data for central and general government more frequently than is currently available, adding that such timely consolidation of fiscal data would require the standardization of accounting practices and reporting requirements.

The 2007 IMF Article IV Consultations report that Japan's fiscal policy is 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 lays out the strategy to modernize fiscal structures in Japan. For example, Japan has "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" (IMF 2007, p. 36).

The 2008 IMF Article IV Consultations 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" as part of comprehensive tax reform to secure fiscal sustainability (p. 3). The 2008 Consultations also highlight challenges created by rapid ageing in Japan, such as increasing inequality in pension benefits between generations and the mounting costs of Japan's ageing society. The 2007 and 2008 Consultations conclude that public debt in Japan is uncomfortably high, and recommend that Japan reduce the debt ratio and accelerate consolidation to "buy 'policy insurance' against adverse shocks and create fiscal space to accommodate rapid population aging" (p. 11).

The Principles

Clarity of roles and responsibilities.

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According to the 2001 IMF ROSC - Fiscal Transparency Module, 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, in terms of the structure and functions of government, the Constitution of Japan 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 vivid 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 IMF 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 are 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, such as the Public Finance Law, which prevents the Bank of Japan (BoJ) from lending to the government, even though under special circumstances, this may be done with Diet approval. In Japan, public financial institutions are used extensively for fiscal policy purposes. For example, the Fiscal Investment and Loan Program (FILP) channels funds to finance public investment projects and other priority spending.

Nevertheless, the IMF also 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). Furthermore, the 2001 IMF ROSC listed three important areas upon which Japan needed to improve, including clarifying policy with regard to the size of the Fiscal Investment and Loan Program (FILP) and clarifying the government's role in financial intermediation. In its 2004 ROSC Fiscal Transparency Module - Update, the IMF notes that, under the FLIP reform commenced in 2001, the Japanese government had sufficiently clarified its role in financial intermediation and now regularly publishes information on FILP activities.

Open budget processes

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In the 2001 ROSC - Fiscal Transparency Module, the IMF concludes that in Japan "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, in addition to disseminating information on the state of the economy, the Cabinet issued Economic Outlook and Basic Policy Stance on Economic Management and the Fiscal Policy Speech of the Finance Minister to the Diet provide information on the macroeconomic framework underlying the budget. Through several policy councils (i.e. 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 are reported on a gross basis, and that the data are 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. Final accounts are available within a year.

The 2001 IMF ROSC listed three important areas upon which Japan needed to improve, including reducing the reliance on supplementary budgets and making the macroeconomic model and assumptions available for scrutiny by independent experts. In its 2004 ROSC Fiscal Transparency Module - Update, the IMF notes that, since FY2003, the Japanese government has made a concerted effort to minimize the use of supplementary budgets. Since January 2002, Japan's Cabinet Office has published medium-term macroeconomic and fiscal projections, and it has plans to also publish a qualitative reference for Japan's economic and fiscal policy regimes. These fiscal projections span the main fiscal aggregates, such as the central and local government balances, public debt and total general government expenditure. Furthermore, the ROSC observes that, since 2002, the Japanese Ministry of Finance "publishes 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). Also, in 2002, Japanese 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 2004 IMF ROSC Update also notes that the "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).

Public availability of information.

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According to the 2001 IMF ROSC - Fiscal Transparency Module, 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. Nevertheless, the ROSC states that 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 Japanese Diet on the country's fiscal condition. The Public Finance Law of 1947 stipulates that the national budget and its supporting documentation be made available to the public as soon as it passes the Diet. Also, quarterly reporting on budget implementation is required by law.

Japan has a plethora of publications (issued by various institutions) that report 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. The ROSC notes that Japan provides detailed information (i.e. disaggregated revenue and expenditure data) on the general account and the special accounts. Also, the Medium-Term Fiscal Projections document includes projections of general account revenue and expenditure for the three years following the budget. It is then submitted to the Diet. Information on gross debt and government holdings of securities are also included in budget documentation. Japan also publishes the Annual Report on the National Statistics, even though it is done with a one-year lag. According to the 2001 IMF ROSC, Japan subscribes to the IMF's Special Data Dissemination Standard (SDDS), and it provides advance release date calendars for data covered by the SDDS. However, Japan does not meet the SDDS requirement related to the timeliness and periodicity of central and general government data since Japan exercises flexibility options on these requirements.

The 2001 IMF ROSC listed three important areas upon which Japan needed to improve, including setting and examining fiscal policy in a long-term context and making Japan's macroeconomic models and assumptions available for scrutiny by independent experts. In its 2004 ROSC Fiscal Transparency Module - Update, the IMF notes that, since January 2002, Japan's Cabinet Office has published medium-term macroeconomic and fiscal projections, and it has plans to also publish a qualitative reference for Japan's economic and fiscal policy regimes. These fiscal projections span the main fiscal aggregates, such as the central and local government balances, public debt and total general government expenditure. Furthermore, the ROSC observes that, since 2002, the Japanese Ministry of Finance "publishes 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). The ROSC Update also notes that Japan now makes its macroeconomic model and assumptions available for open scrutiny by independent experts. However, the ROSC Update notes that Japan has made limited progress in providing timely information on the consolidated central and general government fiscal balance.

Independent assurances of integrity.

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The 2001 IMF ROSC - Fiscal Transparency Module 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 of Japan mandates that final accounts are audited annually by the Board of Audit, which is independent of the Cabinet by law. 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 has the legal authority to require that improprieties it identifies be rectified" (p. 12).

To maximize the integrity of budget data, final accounts are fully reconciled with the budget and with the Bank of Japan (BoJ) accounting report on the national treasury accounts. Furthermore, Japan has a history of decentralizing the compilation of government finance statistics, which augments 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. While stating there are problems with expenditure estimates, the ROSC also notes that budget data in Japan are based on fairly reliable forecasts and expenditure estimates in initial budgets. However, the ROSC notes that Japan's heavy use of supplementary budgets diminishes the significance of the estimates, and of the initial budget as a measure of fiscal stance. In its 2004 ROSC Fiscal Transparency Module - Update, the IMF notes that, since FY2003, the Japanese government has made a concerted effort to minimize the use of supplementary budgets. For example, the supplementary budget in FY2003 was restricted to "urgent and necessary expenditures for policies such as measures for dealing with natural disasters and economic assistance for Iraqi recovery" (p. 2).