Thank you very much for your kind introduction.
And thank you so much for allowing me the privilege to be with you today. I feel truly honored to have the opportunity to speak before this distinguished audience of members of the FCCJ, a prestigious international correspondents' club that has a history of more than six decades.
Last year, the Japanese government set out important new national policies, which could open a new direction for this country. In June, the New National Growth Strategy and Fiscal Management Strategy were approved by the cabinet. And at the APEC CEO Summit 2010 that Keidanren hosted in November in conjunction with the APEC Economic Leaders' Meeting held in Yokohama, Prime Minister Naoto Kan declared that Japan would promote economic partnerships, including the TPP, Trans-Pacific Partnership, and "open the country" to the world.
But, unfortunately, with the divided Diet, where the upper-house is controlled by the opposition parties, the discussion of the major national issues has not shown enough progress. I sincerely hope that the ruling party and the opposition parties will work closely together this year to move the discussion forward and take action to solve the pressing issues facing Japan.
Today, I would like to start with an overview of the current economic conditions, and then, I would like to speak about what I consider Japan's three most pressing issues: namely, growth strategy; comprehensive reform of taxes, public finances and social security; and the TPP and agricultural reform. And finally, I will talk about Keidanren's "Sunrise Report" published last month, the private sector's action plan for revitalizing Japan's competitiveness.
Now, let me begin with an overview of the current economy. It has been more than two years since the outbreak of the global financial crisis. Japan emerged from the depths of the crisis and continued to recover at a modest pace until around last summer.
But the recovery is beginning to slow down. In the quarter of July to September 2010, Japan's real GDP grew at an annual rate of 4.5% from the previous quarter, but it is just considered a temporary rise. In the quarter of October to December 2010, the real GDP is expected to decrease.
A major factor behind this is that exports are showing signs of weakening, as the yen has risen more than the business sector anticipated and overseas economies are slowing down. In addition, consumer spending is declining. Demand boosted by the extremely hot weather last summer already cooled down. And demand for green vehicles is on the downturn after its sharp rise toward the end of September last year, when the government subsidies program ended. The performance of the corporate sector has been improving but still lacks real strength amid the strong yen and prolonged deflation. Under these circumstances, companies feel they have more production capacity and workforce than needed and remain reluctant to increase investment and hiring.
Sooner or later, the Japanese economy is expected to start recovering again, supported by strong growth of overseas economies, particularly the emerging economies. But there are some uncertainties ahead.
If the yen continues to be strong and Japan's business environment becomes worse, it might cause more Japanese companies to move their operations abroad and a number of investment and employment opportunities to go away.
The US economy is now in a positive mood because Christmas sales were stronger than expected and the "Bush tax cuts" were extended. But its outlook is not clear. Given unemployment staying high and many households saddled with heavy debt, the recovery of the US economy will likely remain slow.
In Europe, financial markets continue to be unstable. While the EU has decided to bail out Ireland, there is a growing concern that debt crisis may spread to Portugal, Spain and other debt-ridden nations in the region.
China and other emerging countries are now at great risk of economic overheating and asset bubbles as a huge amount of capital is flowing in from advanced economies where massive monetary easing has been implemented. In response, these emerging countries have begun to tighten monetary policy. We should keep a close watch on whether they can avoid a hard landing and achieve sustainable economic growth.
Now, I would like to move on to the next item, Japan's growth strategy.
In order to restore its economy under these circumstances and achieve strong and sustainable growth, Japan needs to take all necessary policy measures to get out of the grip of deflation immediately and promote investment and employment in the country. Aiming to show a new way forward for Japan, Keidanren developed its proposal "Growth Strategy 2010" in April last year.
In the proposal, we have presented four perspectives we consider essential for charting a new growth strategy.
First, we should strive to enhance international competitiveness of Japanese companies and create new jobs in Japan. Second, we should look at the economy in a holistic manner, taking account of both the demand side and the supply side, as well as both large corporations and small-to-medium companies. Third, we should undertake a comprehensive reform of taxes, public finances and social security. And finally, we should promote innovation in the public sector, eliminating unnecessary bureaucracy and streamlining administrative services by introducing novel approaches, such as "e-government".
In June last year, the government announced its New Growth Strategy. We Keidanren welcome the new policy because it is essentially well in line with Keidanren's Growth Strategy.
In order to develop an action plan for executing the growth strategy, Prime Minister Kan established a "Council of the Realization of the New Growth Strategy" in September, and I have been supporting the effort as a committee member. We Keidanren will continue to provide all possible support and cooperation for the government to successfully carry out the new growth strategy.
This past December, the government decided to reduce the effective corporate tax rate by 5%, as part of the tax reform for fiscal 2011. This is certainly a significant first step forward in implementing the New Growth Strategy and an important measure for revitalizing our economy. We in the business community welcome this decision, and we will increase our efforts to further enhance our competitiveness and to expand investment and create new jobs in Japan.
While carrying out the New National Growth Strategy, Japan also needs to undertake a comprehensive reform of taxes, public finances and social security as soon as possible.
For years, Keidanren has been calling for building a "small government" in the belief that the major objective of the government's economic policies should be to develop a free, fair and open business environment. But, in recent years, Japan's population has been aging fast with declining birth rates, and its labor market, which used to be supported by lifetime employment and the seniority system, has been changing dramatically. Along the way, Japan's social security system has developed some serious problems, shaking the public's confidence in the future. Given these developments, Keidanren set out a new policy in 2008 calling on the government to aim to build a "medium-level burden, medium-level welfare" state.
Without positive long-term prospects, the economy would not become vibrant and new demand would not be created. Japan's social security system is a system of insurance which is supported by premiums paid by working generations. Under the present structure, however, the system is not sustainable. The number of working citizens supporting one senior citizen is currently around 3.3 but it is projected to decline to only around 1.3 in 40 years from now.
In addition, as the population grows older, the total amount of social security benefits increases year after year. This will place a heavy burden on Japan's national finances, which could stifle investment in innovation that drives economic growth as well as investment in the development of human resources that support innovation. Such a scenario must be avoided at all costs.
To meet these challenges, Keidanren has called for drastic tax reforms, which include making the consumption tax a source of funds for the social security system and raising its rate initially to 10% and later toward 20% or even higher, step by step. A similar policy is presented in the cabinet decision announced on December 14 last year.
I sincerely hope the ruling party and the opposition parties will discuss this pressing issue constructively on a bipartisan basis and that they will develop a bold, comprehensive reform plan that will help to restore Japan's financial strength and rebuild the public's confidence in the future of this country.
In order to achieve sustainable economic growth, Japan also needs to establish a more open, free business environment and enhance its international competitiveness as a free trade and investment nation.
But Japan is now lagging behind the other major economies stepping up efforts to expand their network of Free Trade Agreements. The value of Japan's trade with its EPA partner countries only accounts for 16% of Japan's total trade, significantly lower than South Korea's corresponding rate, which has reached 36%. This gap represents the fact that while South Korea has already entered into FTAs with its major trade partners, such as the United States and the EU, Japan is falling behind in the effort to undertake free trade initiatives with its major trade partners, China, the US and the EU.
It is one of the most pressing issues for Japan to expand the EPA with ASEAN to include the entire Asia and the Pacific Rim. And the TPP will be a particularly important step in the process.
Participating in the TPP would help strengthen the relationship with the US, Japan's major trade partner, and also provide a foundation for a broad regional economic partnership under an FTAAP, Free Trade Area of the Asia-Pacific. In addition, it would have a positive effect on the efforts to realize an FTA among Japan, China and South Korea and an Economic Integration Agreement with the EU.
At the APEC Economic Leaders' Meeting last November, the leaders agreed to pursue the FTAAP as a comprehensive free trade agreement by building on on-going regional undertakings, such as ASEAN+3, ASEAN+6, and the TPP. And among these undertakings, the TPP is the only one where negotiations have already started.
It is absolutely imperative for Japan to participate in the TPP negotiations before the window of opportunity closes. It is significant and encouraging that in the cabinet decision "Basic Policy on Comprehensive Economic Partnerships" published last November, the government declared that Japan would start consultations with the TPP member countries.
Japan should join the negotiations immediately, get actively involved in the rule-making process and call for incorporating into the TPP appropriate border measures that take account of particular circumstances surrounding Japan.
If it fails to participate in the negotiations, Japan will be placed at a significant disadvantage in the competition with the US and other economies in the Asia-Pacific. And if Japan should join the TPP after the negotiations are completed, there would be no chance of obtaining favorable terms in the areas vital to its national interests, such as agriculture, and Japan would have no choice but to accept the rules that do not consider Japan's circumstances.
Participating in the TPP does not necessarily mean we would be required to remove all tariffs immediately. It is certainly possible to negotiate exceptions to the requirement as well as the phased reduction of tariffs over a certain period of time. Therefore, it is all the more important for Japan to join the negotiations as soon as possible and take the initiative in the rule-making process.
As the government has stated in the "Basic Policy on Comprehensive Economic Partnerships", in order to promote high-level economic partnerships by participating in the TPP and other regional undertakings and to achieve the vision of "opening the country" and "creating a new future", Japan needs to implement fundamental domestic reforms to increase its industrial competitiveness in global markets.
In particular, the agricultural industry needs substantial structural reforms to enhance competitiveness. In the "Basic Policy on Comprehensive Economic Partnerships", the government says, "agriculture is the field most likely to be affected by trade liberalization" and "considering Japan's aging farming population, the difficulty farmers have in finding people to take over their farms when they are ready to retire, and the low rate of profit, there is a risk that sustainable agriculture will not be possible in the future". And the government says, "it is imperative to institute bold policies that will realize the full potential of Japan's agriculture, for example, by improving their competitiveness and exploring new demand overseas."
We Keidanren have the same concerns over the future of the agricultural industry. Currently, around 60% of the agricultural workers in Japan are over 65 years old, and it has increasingly become difficult for the agricultural workers to find successors. In addition, the area of abandoned farmland has reached approximately around 400,000 hectares—or approximately 1 million acres. This is roughly equal to 10% of the arable land in the country. Japan's food production is in a serious condition and at the risk of collapse.
It is now imperative to attract more new entrants to the agricultural industry and develop a more diverse farming population while also taking action to protect high-quality farmland.
It is also essential to enhance competitiveness by seeking the economies of scale. Rice is a staple food for the Japanese people and rice farming is the mainstay of Japan's agricultural industry. But the effort to increase the scale of operation has not progressed in rice farming as much as in vegetable farming and livestock breeding.
Japan's average rice farmer only manages a rice field of less than 1 hectare—or less than around two and a half acres. Consolidating small farmlands, increasing the scale of operation and improving productivity are absolutely necessary to strengthen Japan's agricultural industry.
Japan's total agricultural output currently stands at only 8.5 trillion yen, and that should be expanded. In order to increase the value-added of Japan's agricultural industry, the farming community and the business community should strengthen their cooperation in a wide range of fields, including production, processing, distribution, as well as marketing and sales. And it is also important to expand the export of Japan's high-quality farm produce and processed food products, which enjoy high reputation abroad.
Among these areas, there are many where companies can make significant contributions. We Keidanren will provide extensive support to strengthen Japan's agricultural industry and make it a growth industry. And we strongly hope the government will show strong leadership in this issue and that the "Headquarters to Promote the Revival of the Food, Agriculture, Forestry, and Fishery Industries", a newly formed Cabinet taskforce headed by Prime Minister Kan, will formulate effective reform measures.
Next, I would like to speak about Keidanren's Sunrise Report.
What Japan needs now is strong economic growth driven by a dynamic private sector. When I became Chairman of Keidanren in May last year, I made this the number one priority on Keidanren's agenda. It is only when companies are energized and the economy is growing that effective action can be taken to create new jobs, improve living standards, build a sustainable social security system and restore the health of public finances. So I keep telling business leaders in Japan to be confident, spur innovation and create new businesses, and take a leadership role in revitalizing the Japanese economy.
Last December, we Keidanren announced our "Sunrise Report", an action plan that sets out what the private sector can do to enhance Japan's industrial competitiveness and revive the Japanese economy.
In recent years, while various countries have been achieving strong growth by implementing policy measures for increasing competitiveness, Japan has been undergoing a prolonged stagnation, often called "two lost decades". But we Keidanren strongly believe that by giving full play to its outstanding technological prowess and human capital and continuously developing innovative products and technologies, Japan can revitalize its economy and achieve dynamic and sustainable growth.
In the Sunrise Report, we have proposed new private-sector initiatives that aim to accelerate innovation, reinvigorate the economy and build a new Japan where the people can live safe and secure and enjoy high quality of life even if the population continues to age and decrease.
Japan should capitalize on its advanced technologies and work to develop new solutions to pressing challenges facing itself as well as many other countries around the world. These challenges include, for example, climate change, energy and resource security, aging populations and low birth rates, as well as the revitalization of local economies and the rebuilding of competitiveness as a business location.
If Japan can lead the world in solving these issues and provide the solutions around the world, Japan will be able to stimulate its economic growth while also contributing to the prosperity of the international community. With the aim of developing this new growth model, Keidanren has proposed 22 projects in three areas of "Future City", "Resource Security" and "Human Resource Development and Utilization".
Now I would like to give you an overview of our "Future City Model Project", the flagship initiative we proposed in the Sunrise Report.
In this project, certain cities will be selected as "Future Cities", and companies will bring to these Future Cities their most advanced technologies in such areas as energy and the environment, ICT, health care and transportation. And they will conduct field-tests and develop innovative new products, technologies and systems that help achieve sustainability, greater safety and security, and higher quality of life.
More specifically, we will target several priority areas, such as:
as well as:
As the development of new products and services is accelerating worldwide, it has increasingly become difficult to secure international competitiveness only by providing a single product or technology. In this Future City Model Project, we will work to remove the barriers separating different industries, experiment with the combination of new ideas, products and technologies brought from different fields of business, and develop high value-added, innovative packaged solutions. By rolling them out throughout Japan as well as abroad, we believe we can create new domestic demand while also taking advantage of dynamic overseas demand, and in the long run, we can help create new growth industries in Japan.
We will select several cities for Future Cities. Candidates include cities with populations of around 200 thousand to 300 thousand, selected by taking account of their respective distinctive characteristics, infrastructure and business environment. We will also consider the nature of technologies to be developed and the level of commitment of the local government.
Since this is a private-sector-led initiative, participating companies bring their own ideas, products, and technologies, invest at their own risk, and work to get return on the investment through their own operations. But they might ask the national or local government for support, for example, if deregulation or seed money is necessary to implement the project or achieve sufficient return.
Currently, the government is working on their "Comprehensive Special Zone System" and "Future City" initiatives, studying the possibility of setting up special zones and implementing there bold regulatory reforms and support measures relating to the tax, public finances and monetary systems. We will also consider collaborating in these initiatives.
Now, let me give you a brief description of some of our projects under study. In the area of energy and the environment, where Japan has a distinct competitive advantage, we will work on a project to build a low-carbon community by introducing advanced equipment for generating, conserving and storing energy in households and commercial and public facilities and throughout the community. In addition, environmentally-friendly transportation systems, including intelligent transport systems and electric buses, will be field-tested.
We will also undertake projects in the fields of agriculture and medical care, where there are calls for drastic reforms. For example, we will test high-efficient seed sowing and agricultural chemical spraying by a radio-controlled helicopter and will also experiment with advanced tracking technologies to achieve new levels of traceability in the distribution of agricultural products. In the area of medical care, we will build an information network that enables local hospitals, clinics, pharmacies and patients to share medical information, with the aim of improving the efficiency and quality of medical care.
By the end of March this year, we will develop our final report, describing more details of these projects, such as schedules, locations and specific action items.
I have a strong conviction that Keidanren should become an economic organization not just making proposals but also taking action to build a more vibrant, prosperous society.
I do hope we Keidanren can breathe fresh air into this country by implementing these projects and that the Japanese economy will see a new sunrise very soon.
To realize dynamic and sustainable economic growth in tandem with the rest of the world, Japan should build cooperative, win-win relationships with other countries. And it cannot be achieved without ensuring that the situations that Japan is in and where the country is headed are clearly understood by the international community.
In view of this, it was very worthwhile to have the opportunity today to speak about Japan's major issues and our ideas and opinions before you representing news organizations from around the world.
In closing, I would like to express my sincere appreciation to the FCCJ and all of you here for giving me this special privilege.
Thank you very much for your kind attention.