Thank you for the introduction.
My subject today is "Current Political and Economic Conditions in Japan." As time is limited, I will focus my comments on four points: the Koizumi Cabinet's structural reform program; Japan's current economic conditions; the disposal of non-performing loans; and, responses to global warming.
Since taking office in April 2001, the Koizumi Cabinet constantly enjoyed very high public support ranging around the 80% mark. However, its approval ratings have plummeted since the firing of Foreign Minister Tanaka. This firing was the upshot of problems related to the exclusion of certain NGOs from the recent International Conference on Reconstruction Assistance to Afghanistan. Why this strong negative public reaction? First of all, the former Foreign Minister was very popular with the public. Secondly, most of the Japanese people believe that former Foreign Minister Tanaka was not at fault in the course of events leading to her firing.
While public support has plummeted for the Koizumi Cabinet, it still remains above 50%. Compared to its predecessors, this remains a very popular Cabinet and indicates that the public's expectations for reform have not subsided. Moreover, Prime Minister Koizumi has clearly shown that he is determined to press forward with reform regardless of the various forces of resistance. The Japanese business community stands firmly with Prime Minister Koizumi and we support him fully in his determination to go forward.
What kind of reform is the Koizumi Cabinet aiming to implement? The objective is to fundamentally alter Japan's political and economic system. The goal is to switch from a system in which the State plays a central role in economic management through regulations and special public corporations to a decentralized system led by local governments and the private sector.
Beginning in the Meiji Restoration, Japan achieved more than a century of economic development through a State-led economic model. In this model, the government played a distinctive and leading role in pulling the economy along. Throughout this period, Japanese companies as well as individuals got into a deeply ingrained habit of depending on the government whenever something came up. The government readily reciprocated by taking good care of those who turned to it.
But Japan has long since completed its process of catching up with the West. At the same time, the world has undergone major changes as it entered the age of globalization. This is an age in which not only goods and funds but also people and companies can move freely across national borders. In this new environment, the State-led model becomes an obstruction to development. As such, Japan faces the urgent need to create a new private-sector-led system which will allow individuals and companies to freely develop and express their capabilities.
Prime Minister Koizumi has advocated this basic concept: "Whatever can be done by the private sector should be left to the private sector, and the role of the government should be minimized." Based on this principle, Mr. Koizumi is endeavoring to press forward with deregulation and privatization, while reducing as much as possible public-sector investment and government enterprises. The other side of this reform program calls for individuals and companies to become less dependent on the government and to accept greater responsibility for themselves.
For Japan, these changes represent a major paradigm shift affecting systems spanning more than a 100 years. Consequently, very strong forces of resistance to these changes exist even within the ruling parties. However, as I mentioned at the start, both the general public and the business community have a palpable sense that the Koizumi reforms are very much in sync with the demands of the age that we live in. Therefore, though we are being asked to endure the pains of greater unemployment and other dislocations and to bear our fair share of the burden, we continue to strongly support the determination of the Koizumi Cabinet to implement "structural reforms with no sanctuaries left untouched."
Next, I would like to make some comments concerning Japan's current economic conditions.
After peaking in October 2000, the Japanese economy has been experiencing a contractionary phase. This is related to the global economic downturn which followed the slowdown in IT-related demand and other factors.
Unfortunately, thus far, both domestic and external demand has remained sluggish, and real economic activity is continuing to deteriorate. On the other hand, the financial and foreign exchange markets are in the throes of a "triple depreciation." Firstly, stock prices are down, led by a sharp drop in banking stocks. Secondly, the bond market is sagging. And thirdly, the value of the yen is declining. It is currently feared that unless a clear direction is spelled out for the disposal of non-performing loans and additional measures are taken to reverse the downward slide in stock prices, the situation may deteriorate critically towards the end of March. In January, the Keidanren conducted a survey of its principal members. The findings indicate that real economic growth during fiscal 2002 (April 2002 - March 2003) is expected to reach minus 0.6%, marking the second consecutive year of negative growth.
Under all previous governments ending with the Mori Cabinet, the government responded to a downturn in business conditions with expansionary fiscal policies. However, conventional responses centered on public investment projects only generated a temporary lift which did not result in self-sustaining recovery. All this while, the national and local government debts continued to balloon. Japan's outstanding public-sector debt is projected to reach ¥675 trillion by the end of March, equivalent to more than 130% of GDP. These figures are the worst among any of the seven leading industrialized countries.
On the monetary front, the Bank of Japan has been pursuing policies of quantitative easing. However, because this has not led to an increase in bank lending to the corporate sector, monetary policies have also failed to spawn a recovery.
Thus, Japan finds itself blocked from all sides. How then should Japan break through this impasse? What is essential and indispensable is for both the government and private sector to implement fundamental reforms in each of their own spheres.
The most urgent issue that the private sector must take on is the disposal of the non-performing loans of the banking sector. Failing to resolve this problem, the Japanese economy will not be able to embark on a new path of growth.
Thus far, Japanese banks have disposed of a total of ¥75 trillion in non-performing loans. Notwithstanding these efforts, the volume of non-performing loans has not been diminished. In fact, it continues to grow. More stringent inspections of major banks by the Financial Services Agency must be used as a lever to accelerate the disposal of non-performing loans.
In this process, the recently strengthened Resolution and Collection Corporation (RCC) must be effectively utilized in purchasing non-performing loans. Should, at any time, the erosion of the strength of the banks pose an obstacle to disposal of non-performing loans, I believe that a fresh infusion of public funds should be made without hesitation. Furthermore, the disposal of non-performing loans must be undertaken in tandem with the elimination of deflation. This will require the introduction of a further round of bold monetary easing. It should be noted that the pay-off system will go into effect partially in April. Should this give rise to any undue developments, the government and Bank of Japan stand ready with effective countermeasures. Therefore, I do not believe that systemic risk is an issue here.
Parallel to the disposal of non-performing loans, action must be taken to treat the reverse side of the problem. By this I mean the excess of capacity and the excess of liabilities on the supply side. While this is sure to be a painful process, I believe it is necessary to urge companies laden with huge debts with little prospect of setting their businesses in order to make an early exit from the market. Furthermore, money-losing businesses must be discarded at a faster pace than before, while management resources are concentrated in profitable fields. It is of vital importance for Japan to stick to this process in order to ensure the birth of new industries and new businesses.
The final point I wish to address today concerns our responses to global warming.
Agreements were reached in COP-7 concerning the rules of implementation of the Kyoto Protocol. In preparation for ratification during this year, the Japanese government is now fully engaged in laying the groundwork for the necessary modifications and development of domestic systems.
Japanese industries have shown a keen interest in energy conservation ever since the first oil crisis of 1973. As of 1998, Japan's ratio of CO2 emissions to GDP was one-third that of the United States, and one-half that of Europe. In 1997, the Keidanren announced its Voluntary Action Plan on the Environment which has already generated various positive results. By implementing the measures contained in this plan, the original goal of reducing CO2 emissions to 1990 levels has almost been achieved.
We shall continue to improve the transparency and the reliability of the Voluntary Action Plan, and we are committed to making steady efforts towards achieving the goals that we have set for ourselves.
We also warmly welcome the new anti-warming initiatives announced by President Bush on February 14.
As the source of one-fourth of all global CO2 emissions, the United States must definitely take action. Otherwise, we cannot hope for China, India and the other developing countries to join an international framework to counter global warming. Consequently, efforts to reduce global CO2 emissions would prove ineffective.
The new U.S. proposal features the voluntary initiatives of industries and incorporates a strategy for the gradual reduction of emissions in order to achieve emission cuts while maintaining economic growth. The proposal also calls for concerted efforts to promote the development of new technologies. We highly appreciate these important features. Unfortunately, however, an extremely wide gap separates the U.S. initiatives and the Kyoto Protocol. Continued efforts must therefore be made to reduce this gap.
I feel that there is a pressing need to step up the level of discussions on both government and private levels. As such, I am hoping that in the course of this conference, we will have an opportunity to hear the candid views of the U.S. business community on how to effectively counter global warming.
We have two days of meetings ahead of us. I very eagerly look forward to a frank exchange of views with our American counterparts on the four points that I have raised, as well as on various problems that our two countries face, and ways and means by which we can contribute to global economic growth.
In closing, I sincerely hope that our meetings will bear many valuable results for the future.
Thank you.