The 40th Japan-U.S. Business Conference
Speech by Chairman Hiroshi Okuda, Nippon Keidanren

"The Political and Economic Situation in Japan"

Sunday, November 2nd, 2003
The Ritz-Carlton, Washington, D.C.

Thank you for your kind introduction.

Japan is currently in the midst of a period of great change, both domestically and overseas, characterized by a declining birthrate, an aging population, the globalization of corporate activity, and the advance and spreading use of information technologies.

I would like to talk today about the issues that Japan is addressing in order to break out of its protracted economic sluggishness and to create a society and economy that are appropriate for the 21st century.

1. The state of the Japanese economy and the required acceleration of structural reform

(1) Present state of the economy and its outlook

I would like to begin by giving my impression of the current economic situation - namely, that the economy is finally beginning to show signs of life.

Buoyed by a recovery in corporate earnings, capital investment in the private sector is on a sustained uptrend. In addition, the recovery in share prices has dispelled much of the uncertainty about the financial situation, and that should have a positive effect on capital investment and consumer spending.

The Cabinet Office has released its estimate of real GDP growth for this fiscal year, putting it at more than 2%, but I believe that if the U.S. economy begins to experience the steady recovery that has been forecast, we should expect Japan to achieve growth at a rate that exceeds the official estimate. On the other hand, we have recently been seeing a sustained, sharp appreciation of the yen. As abrupt fluctuations in the exchange rate have a substantial impact on corporate business operations, I hope to see stability being restored to exchange rates.

(2) Acceleration of structural reform to achieve sustained economic recovery

Although the economy is currently looking up, I would not be so bold as to describe the pace of that recovery as sound and steady. That is because the social and economic systems that underpinned Japan's postwar period of rapid economic growth have ceased to function effectively amid changes such as the declining birthrate, the aging of society, globalization, and the pervasive spread of information technologies.

In view of this, if Japan hopes to achieve sustained economic growth, it is essential for the government and private sector to act in cooperation to push through the structural reform of the nation's socioeconomic systems and create a private-sector-led, autonomous new economy and society that befit the new era in which we live.

I would like to focus today on three priority issues among the structural reforms that Japan must carry out to achieve that.

The first of these is the strengthening of the competitive base that is necessary for Japanese companies to triumph in the face of global competition.

With respect to the tax system, revisions this fiscal year have shaped a system that fosters research and development and IT investment, but steps must now be taken to lighten the burden of corporate taxes still further, including reducing the effective rates of corporate taxes to the same levels as in the major European countries.

Stimulating technical innovation is also important. To do that it is vital to step up efforts to strengthen collaboration between industry, the government, and academia in a way that leads to the industrialization of new technologies.

The second priority issue is the development of an environment in which companies can exercise their originality and ingenuity and engage freely in their activities.

It is important to break free from a bureaucracy-led society, and in its place mold a society in which individuals and companies can give birth to new businesses and employment by taking on a diversity of challenges. To achieve that we must resolutely promote the use of special zones for regulatory reform and structural reform, and create an environment in which companies are free to provide competitive goods and services.

In particular, there is an urgent need to accelerate reform in fields in which government regulation has traditionally been strong, such as medical care, welfare, education, and agriculture, in a way that will lead to new demand and an increase in employment opportunities.

The third priority issue is to sweep away the anxiety about the future that is largely felt by the Japanese people. For that it will be necessary to rebuild the social-security system and public finances into long-term sustainable systems that do not dampen economic activity.

In contrast to the United States, where the population is projected to double by 2100, the declining birthrate and the aging of society in Japan are advancing at a rapid pace. Japan's working population is forecast to fall by some 6.1 million by the year 2025, which means that whereas today an elderly person is supported by 3.5 working people, in 2025 there will be only 2 working people supporting each senior. In order to maintain the vigor of the economy in such a situation, I believe that the top priority, even in an aging society, should be to keep the potential statutory charge - namely, the total tax burden and social-security burden, plus the national and local budget deficits - below 50%.

To accomplish that there must be a drastic reduction in government expenditures through administrative and fiscal reform at both the national and local level, and there must also be a fundamental reform of the trinity of social-security benefits and payments and the government's revenue sources.

2. The required cooperative relationship between the political and business worlds

To bring about the "private-sector-led, autonomous" economy and society that I referred to earlier, strong political leadership is indispensable. In particular, it is incumbent upon the political parties at the core of a parliamentary democracy to put forward a national vision for the future, and to set out clearly, in a way that the people find easy to understand, the policies that will bring that society into being.

In my view, a major reason why Japan has been in a state of prolonged sluggishness since the bursting of its economic bubble is that the politicians have put off implementing radical reform. However, we in the business community must also ask ourselves whether it has been right to regard the political world simply as the target of criticism and lobbying, or to distance ourselves from it.

We at Nippon Keidanren believe that in order to accelerate reform in Japan, we should, in addition to making a number of requests of politicians, extend all due cooperation, including in the sphere of funding, to political parties that are genuinely striving for reform.

Specifically, on behalf of the business community we have set out a list of 10 "priority policies" that we want to see put into effect immediately, and we will be evaluating the policies and efforts of each political party in the light of these, with the intention that our assessments be used by our member companies to form judgments when they are looking to make voluntary political contributions.

In Japan, we are currently in the middle of a general election campaign for the House of Representatives; polling day is November 9. What is remarkable about this election is that we are seeing policy-based election campaigns of a kind we have not experienced before; for example, both the ruling and opposition parties have issued manifestoes in which they publicly set out the policies they will implement if they form the next administration. I believe that donations to political parties based on policy assessments will further accelerate these moves by the parties and will help to realize a species of politics that is truly policy-based.

3. Addressing global issues

Finally, I would like to share some of my thoughts on the issues that Japan must address as a result of the globalization of economic activity, particularly as regards trade and investment liberalization and international accounting standards.

(1) Fostering further liberalization through the WTO negotiations

The first issue is the furtherance of multilateral trade and investment liberalization through the WTO Doha Development Agenda negotiations.

As you are all aware, the WTO Ministerial Meeting in Cancun ended in a very regrettable manner, and it was not even possible to issue a final statement. This resulted from fierce conflicts of interest among the 146 member countries (now 148), such as disagreements over agricultural issues and the opposition of developing countries to the four so-called Singapore issues, including investment.

In spite of this, the status of the WTO as the cornerstone of the international trading system will remain unchanged, given its stewardship of the basic rules and dispute-resolution mechanism in relation to trade.

What is essential now is that all countries use the lessons learnt at Cancun to rebuild the WTO. In order to reach an agreement by the first deadline, January 1, 2005, the industrialized countries must strive to achieve constructive compromises, as well as make a sustained effort to gain the understanding and participation of the developing countries.

(2) Achieving liberalization through Free Trade Agreements and Economic Partnership Agreements

The second issue is that of expediting liberalization by means of free trade agreements (FTAs) and economic partnership agreements.

The outcome of the Cancun Ministerial Meeting has given rise to predictions that moves to liberalize trade and investment on a bilateral or regional basis will gain strength worldwide. This has been reflected in the statements by the United States and European Union that they will shift their focus to bilateral and regional FTAs.

To date, the only FTA that Japan has concluded is the Economic Partnership Agreement with Singapore that came into effect at the end of November last year, but we are studying bilateral FTAs with Mexico, South Korea, Thailand, Malaysia, the Philippines, Taiwan, and Indonesia. As regards FTA with South Korea, during the APEC summit last month, the goal was agreed through a discussion between our heads of government that negotiations would begin this year and would essentially be completed before the end of 2005.

In my view, it will be important for Japan, lagging as it does behind the United States and the European Union in its approach to FTAs, to both maintain its efforts to achieve multilateral liberalization through the WTO and at the same time strengthen its efforts in the sphere of FTAs. And I believe that a study should also be made of the domestic structural reforms needed to foster trade and investment liberalization.

As for an FTA between Japan and Mexico, the aim was to reach substantive agreement at the occasion of the visit of President Fox to Japan on October 15. Although negotiations were conducted between our two governments up until the last moment, unfortunately a basic agreement could not be reached, though negotiations are still ongoing. A Japan-Mexico FTA will be the touchstone for Japan's FTA negotiations, so it is my fervent hope that our two governments will step up their efforts and ensure that a basic agreement is reached as soon as possible.

(3) International accounting standards

The third and the final issue I will mention is that of international accounting standards.

In view of the globalization of corporate activities and capital flows, the International Accounting Standards Board (IASB) is seeking to formulate international accounting standards that can be applied to markets worldwide.

However, recent standard-setting by the IASB has been biased towards the fair-value principle and has not reflected the opinions of individual countries, and this is arousing considerable concern not only in the business community but also among heads of government and standard-setting bodies. We in Japan have no particular problems that the companies raising funds in the United States are required to use the SEC standards, but we have strong objections to the IASB's behavior.

The move towards the convergence of accounting standards espoused by the IASB is desirable as an ideal, but given that capital-market systems and legal and tax systems governing companies differ from country to country, different accounting standards will exist in parallel in the three major markets - Japan, the United States, and Europe - from 2005, when Europe adopts the International Accounting Standards.

The important thing now is for Japan, the United States, and Europe to build a structure in which the accounting standards of each are mutually recognized, and for the governance of the IASB to be reviewed with a view to having the IASB engage in proper standard-setting. I wish to propose today that the U.S. and Japanese business communities work in collaboration on this matter.

4. Conclusion

Those are the thoughts that I wanted to share with you today on the issues facing Japan.

The structural reform being undertaken for Japan's economic regeneration is reaching a critical phase. What is more, looking around the world we can see that a diverse array of difficult issues is building up amid the bewildering pace of change in the international situation.

This two-day conference provides an ideal opportunity for representatives of the American and Japanese business communities to engage in a frank exchange of views on these difficult issues, and I will close my remarks now by expressing my sincere hope that this will once again prove to be a very fruitful conference.

Thank you.

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