The 39th Japan-U.S. Business Conference
Speech by Chairman Hiroshi Okuda, Japan Business Federation

The Political and Economic Situation in Japan


Monday, October 21, 2002
Imperial Hotel

Thank you for your kind introduction.

I would like to speak today about the issues that Japan must address if the nation is to overcome its protracted economic sluggishness and emerge from the impasse in which it is currently mired - the issues we must address if we are to create a vigorous, attractive, and affluent 21st century here in Japan.

1. Perception of the current environment in Japan, and the formulation of a new vision

During the 20th century, Japan strove to catch up with Europe and America, and the nation devoted itself primarily to the pursuit of material affluence. Indeed, those efforts became the common goals and values of the Japanese people, and they served as the driving force for achieving high economic growth and establishing a high standard of living.

However, now that those goals have been reached, Japan finds itself today at an historic turning point - as important as the period of modernization that was ushered in by the Meiji Restoration in 1868 as well as the era that followed World War II. The principal characteristics of the current challenge are clear - at home Japan is experiencing a rapid fall in its birthrate and the aging of its society, while internationally the nation is confronted by issues such as the advance of globalization, the information and communications revolution, the emergence of China as a big and strong competitor with a huge new markets, and environmental problems.

To cope with these radical changes, it is essential that we boldly yet flexibly reform the values and social and economic systems that the nation has clung to for so many years. However, the delays and postponements in doing just that have led to the prolonged economic sluggishness that has afflicted Japan in the 10 years since the economic bubble burst.

In my view, the biggest reason for this is that after Japan had caught up with Europe and America, neither the people nor the corporate sector, let alone Japanese government, were able to establish goals regarding the type of economy and society they wanted to create, or any strategic vision in pursuit of such goals.

Because of that, by March of next year Japan Business Federation intends to issue a vision for the renaissance of Japan, and it will include a concrete outlook for the future shape of the country and recommendations pertaining to the institutional reforms necessary to translate that vision into reality.

The philosophy that underlies that vision can be succinctly defined this way: "Attaining dynamism through diversity". "Attaining dynamism through diversity."

The effort will entail altering our uniform lifestyle and the consensus approach exemplified by the collective orientation that has underpinned the pursuit of material affluence in the postwar era; instead, we must create a society that attaches paramount importance to the diverse values and individuality of each and every person, a society in which individual differences are mutually respected.

If individuals and companies set diversified goals and then create the energy needed to engage freely in the activities required to achieve those goals, I feel certain we will be able to structure a new economy and society in Japan.

A long-standing aim of Japan Business Federation has been the achievement of "small government" through regulatory reform, and this too is an attempt to build a vibrant society that will enable full play to be given to the creativity and ingenuity of both private individuals and companies. It is incumbent upon us to pursue that agenda ever more vigorously.

To that end, we need to make greater use of the very best in human resources, technologies, and know-how from overseas.

2. Current state of the economy and structural reform

I have now voiced my thoughts from a medium- to long-term perspective regarding the direction in which Japan should move; next, I would like to give my opinion on the economy as it exists at present, and to talk in more concrete terms about the issues that must be addressed if we are to break out of the current difficult situation and create a Japanese society that is at once vigorous and a pleasure to be part of.

In the April-June quarter of this year, Japan's real GDP recorded 0.6% growth over the preceding quarter - the first positive growth in five quarters.

However, two-thirds of that growth was the result of external demand, while components of domestic demand such as capital spending and housing investment remained sluggish. Also, the harsh environment for employment and personal incomes, coupled with the delay in social security reform, has meant that consumption continues to lack strength. As these and other factors indicate, there is still little cause for optimism.

What is more, prospects for the external environment are declining as a result of mounting uncertainty surrounding the U.S. economy, the international political situation, and crude-oil prices, and because of those factors there is no predicting how long a recovery led by external demand can continue. Another cause for anxiety is the impact that the current slide in stock prices - now sinking to new lows in the post-bubble period - will have on the Japanese financial system and the real economy.

An essential prerequisite for preventing the stock-market slump from causing turmoil in the financial system and the real economy and thereby sending the economy into a free fall - and for bringing about growth over the medium- to long term - is to have the government implement forward-looking policies such as the early implementation of regulatory reform and large-scale tax reductions.

In the Cabinet shuffle at the end of last month, the appointment of Heizo Takenaka as the Minister of State for Financial Services - a position he will hold concurrently with his role as Minister for Economic and Fiscal Policy - demonstrated Prime Minister Koizumi's strong determination to expedite the disposal of non-performing loans in the banking system. I agree that non-performing-loan disposal should be accelerated, but at the same time I believe it is essential that we improve and consolidate safety nets designed to cope with side effects such as the expected increase in corporate failures and unemployment. Given current economic conditions, we must face up to the need for a two-track "offensive-defensive" strategy that involves steps to boost demand on one hand, and progress with structural reform on the other.

Regarding structural reform, we in the business community wholeheartedly support Mr. Koizumi's strategy in which "nothing is sacred." The reform menu has already been set, so what we need is the political leadership to put it into effect. Even if difficult problems emerge from clashes of interests in the course of reform, it must not be postponed; rather, it should be pushed forward to its conclusion.

On this point I have high hopes for the strong leadership of Mr. Koizumi, and he can count on the robust support of the business community. For my part, I believe that the full vigor of the private sector must be brought into play if we are to lead the Japanese economy out of its current malaise.

There are of course a number of important issues involved in the structural reform that Japan needs to undertake, but today I would like to say a few words about two that are of particular importance - namely, tax-system reform and the reform of the social-security system.

There is an urgent need to reform the tax system in order to rid the economy of deflation and to foster and strengthen corporate vitality, which is the key to economic revival. The debate on the revision of the tax system next fiscal year is expected to get into full swing between now and the end of 2002, revolving around the government and the ruling parties; and as part of that debate the business community plans to demand forcefully that the government implement early large-scale tax reductions, primarily to reduce the tax burden on companies.

More specifically, it is important to have highly effective measures that strategically incorporate tax cuts to stimulate corporate R&D and capital investment and tax cuts to stimulate housing investment; also required is a reduction in the effective rate of corporate tax.

Another prerequisite for maintaining the vigor of the economy is to make sure that there is no increase in the burden that taxation and social security place upon ordinary people. Given the rapid decline in the birthrate and the graying of society, it is particularly important to implement radical reforms to ensure that the entire social security system - encompassing medical care, pensions, and nursing care - is sustainable, and to eliminate the anxiety among people and in the corporate sector about future increases in the burden imposed on them.

At the same time, we in the business community must also be aware that structural reform is an issue that we must ourselves address.

To enhance our international competitiveness and be successful in the face of global competition, it is vital for us to tackle management reform, including strengthening management through selection and concentration, and pursuing corporate tie-ups and cooperation. Japan Business Federation intends to make persistent appeals to the government to press for the creation of an environment - in regard to the system of laws regulating economic activity and the tax system - that will enable companies to give full play to their corporate vitality.

Regarding corporate ethics, it is indeed regrettable that at the very time that the government, the corporate sector, and the people need to join together to tackle structural reform, there has been a series of corporate scandals in Japan that have betrayed the trust of consumers and the nation as a whole.

Just as it is in the United States, a Japanese company cannot survive once it has lost the confidence of society, and companies that do not understand this will inevitably fall by the wayside. For structural reform, too, the people's understanding and trust are essential; and no matter how strongly the business community supports the Koizumi reforms, so long as the people harbor doubts about corporate behavior, it will be difficult to act in unison in the area of reform.

In this area, Japan Business Federation has revised its Charter for Good Corporate Behavior, and the senior managers of member companies have been asked to ensure rigorous adherence to ethical corporate conduct.

On the other hand, in response to a series of corporate accounting scandals, a corporate-reform act - the Sarbanes-Oxley Act - was enacted on July 30 this year for the purpose of bringing about the recovery of confidence in the securities markets, the cornerstone of the U.S. capitalist system. We appraise the swift and comprehensive action taken by the US government. The Japanese companies whose stocks are listed in the U.S. are in agreement with the act's objectives, and are now taking steps to respond to it. Nevertheless, there are differences between the U.S. and Japanese legal systems concerning corporate governance, and in this regard they are requesting the SEC and the New York Stock Exchange that they be exempted from the act, while by no means being contrary to its spirit. We would appreciate the understanding and support of our colleagues in the U.S. business community in this matter.

3. Addressing global issues

Finally, among the global issues that need to be addressed cooperatively by the United States and Japan, I would like to comment on two: fostering progress in the new WTO round, and dealing with global warming.

At the Fourth Ministerial Conference held in Doha in November of last year it was agreed that a new round of comprehensive negotiations would be initiated. Through steps such as the further liberalization of trade and investment and the revision of the WTO rules, this new round will seek to bring about the orderly expansion of trade and the development of the world economy.

The time limit for the round is January 1, 2005, and in the meantime negotiations are moving into full gear toward the Fifth Ministerial Conference, due to be held in Cancun in Mexico in September next year.

The U.S. and Japanese business communities have common interests in a large number of areas - for example, the liberalization of services and the improvement of market access - and in view of this, it is very important that we cooperate in bringing about the success of the round. Also, during negotiations it will be necessary to give full consideration to the needs of developing countries, which currently comprise around 80% of the 144 WTO member countries and regions. The Japanese business community is making overtures to the Japanese government with a view to ensuring that the new round proceeds in a balanced way that enables all WTO member countries - developing countries as well as industrialized nations - to enjoy its fruits. At the same time, we wish to strengthen our collaboration with the business communities in the United States, Europe, and other countries and regions.

And finally, as regards the problem of global warming, Japan ratified the Kyoto Protocol in June of this year; and depending upon what action Russia takes, the protocol could come into effect next year.

Japanese industrial circles are already implementing voluntary measures based on the Keidanren Voluntary Action Plan on the Environment, which was introduced in 1997. Steady efforts are being made toward a fiscal 2010 target of reducing emissions of greenhouse gases by all industries, including the electric power, oil, and gas sectors, to levels at or below what they were in fiscal 1990. Almost all of these targets have already been met. In addition, this year we set up a third-party evaluation committee as part of our efforts to enhance the transparency and credibility of the Action Plan.

On the other hand, the United States, which produces one-quarter of the world's carbon dioxide emissions, and developing countries, such as India and China, whose emissions are projected to increase sharply as their populations grow and they undergo economic development - these nations are not signatories to the Kyoto Protocol and thus have no obligation to reduce emissions. If measures to combat global warming are to be truly effective, it is essential for the United States and developing countries to participate in the framework for reducing emissions. I implore the representatives of the U.S. business community here today to understand this vital point. Of particular note, as regards the second commitment period from 2013 and beyond, a suitable method of setting reduction targets acceptable to all countries - both industrialized and developing - must be studied at an early stage.

In any event, as far as global warming is concerned, the dialogue at both the government and private-sector level must be strengthened, and to that end I very much hope that our American colleagues will voice their views candidly at this conference.

Before I conclude my speech, allow me to deviate from the main theme of my speech today, and briefly touch upon the issue of the US West Coast ports labor dispute.

Japanese business community highly appreciates appropriate action taken by President Bush to resolve the dispute by using his statutory authority under the Taft-Hartley Act. However, given the adverse financial effects of the US West Coast labor dispute on the business entities and the economies of the US and Japan, I would like to propose that the US-Japan Business Council urge the US government to continue to make efforts to resolve the dispute as quickly as possible.

4. Conclusion

This year marks a crucial phase in Japan's efforts to bring about its own economic revival, yet if we look outward toward the U.S. economy and the world economy as a whole, we can see a host of problems looming.

At a time like this, I believe it is very meaningful for members of the American and Japanese business communities to gather together for a candid exchange of views on the problems that we face, and to pool ideas for solutions to those problems.

I feel certain that the two days of this conference will prove to be a very fruitful period for us all.

Thank you.


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