Market Outlook - BNP PARIBAS - Investment Services India

Japan: Vetting Budget Spending Requests
• Since spending programmes initially
deemed top priority lose urgency over time, it is
important to constantly review spending items.
• In November, the Government Revitalisation
Unit under took the epoch-making reform of
publicly vetting budget expenditure requests,
something previously decided in private by the
‘iron triangle’ of bureaucrats, special interests
and lawmakers.
• The vetting process may have only cut a
modest amount of wasteful spending, but the
process did create the framework for micro-level
fiscal discipline. Achieving results on a larger
level is the responsibility of the National Policy
Unit, which has the role of creating a scheme for
guaranteeing macro-level fiscal discipline.
• Combining the “bug’s eye” micro-level
discipline of the Government Revitalisation Unit
with the “bird’s eye” macro-level discipline of
the National Policy Unit could result in much
improved fiscal management.
• Although spending measures should
constantly be under review, it will be politically
hard to reassess the spending programmes
earmarked in the budgets for FY 2010 and 2011.
The coming year may thus be the last chance to
secure a far-reaching budget overhaul.
Epoch-making reform
In November, we had the privilege of briefly
participating in the nine-day process of vetting
budget expenditure requests that was undertaken by
the Government Revitalisation Unit. Whenever we at
BNPP take part in such government-related activities,
we usually report on them as soon as possible.
However, this time round, we refrained from doing
because the screening was so micro in nature that it
would necessarily require the naming of names.
However, with the entire budget-screening process
currently extremely prominent in the media, we have
decided to lay out our overall impressions.
The process as a whole was truly an epoch-making
achievement in that it was the first time such
screening was done in full view of the public. It goes
without saying that, even if spending programmes
were entirely appropriate when they were first
implemented, such needs and urgency inevitably
fade with the changing times, and some projects will
outlive their usefulness. However, the private sector
agents benefiting from these programmes become
vested interests that vehemently oppose cutting such
spending, while the bureaucrats pushing to fund the
programmes are adamant about their maintenance
owing to the power that holding the budget’s purse
strings allows them to wield over the private sector.
Thus, spending measures that should constantly be
up for review have become entrenched owing to
Japan’s iron triangle of bureaucrats, special interests
and interest-driven lawmakers that has been fostered
by more than half a century of single-party rule.
We participated in screening activities involving
remuneration for medical services and the pricing of
generic drugs. Thus, rather than studying whether or
not specific outlays should be terminated, as was the
main concern of other budget-vetting operations, our
working group (consisting of lawmakers, researchers,
fiscal experts etc) explored how best to repair defects
in the make-up of the systems concerned.
Background of Japan’s doctor shortage
For example, the pressing issue of a shortage of
doctors is not just a problem of headcount but also a
matter of uneven distribution of doctors by region and
by type of care due to defects in the remuneration
system (mispricing). On this score, the fact that
private practitioners can make far more money per
hour than hospital-employed physicians very likely
causes a shift from the latter to the former. This shift,
in turn, is a big reason why many regional hospitals
have been forced to close, as their members of staff
have defected to the greener pastures of private
practice. What is more, when hospital-based doctors
leave for the higher pay and predictable hours of
private clinics, they tend to give up their past
specialised skills, ending up treating general ailments
such colds and the flu – thereby further reducing the
nation’s pool of specialists. In other nations,
specialists earn greater wages than general
practitioners, but that is not the case in Japan owing
to the distorted remuneration system. The dwindling
number of specialists not only robs Japan’s medical
profession of the power to grow, but it also adversely
impacts the economic wellbeing of the Japanese
people, who otherwise would benefit from that growth.
Mispricing and uneven distribution of doctors
When opting for private practice, the fact that Japan
does not limit the doctor’s freedom to choose what
type of medicine to practice and where to practice it
means the selection is largely determined by income
and workday considerations (of course, the presence
Ryutaro Kono 29 January 2010
Market Mover
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