Japan's Recovery:
Lessons from the Last Decade

Remarks by Mr. Koichi Kato
Member, House of Representatives, Japan
At Harvard University, May 17, 1999

Thank you for giving me this opportunity to speak to you today. Having once studied at Harvard I feel that I have in a sense come back to my alma mater. It is certainly reassuring to be in familiar surroundings and be amongst so many friends.

Let me first apologize to you for a miscommunication between my office and the University over the title of my remarks. What had started out as "Lessons from a lost decade" somehow became "Lessons from the last decade". I'm not sure whether this was the handiwork of a sympathetic Harvard friend wishing to spare me some discomfort or proof that even email has "ghosts in the machine!"

In looking back over the last decade, I think it useful to take the long view. Students of historyﾑas I was once at Harvardﾑbecome appreciative of how a nation's fortunes can rise and fall; lasting success is not guaranteed but neither is decline necessarily an irreversible process. For this reason, I must admit to having an inherently positive outlook on Japan's future prospects. Thus while one can dwell on the shortcomings and disappointments of the last ten years to emphasize how much Japan has fallen from the heady days of the 1980s, I personally believe that the decade should not be written off as a total loss. Indeed, I firmly believe that the 1990s will be seen by historians as a critically important time when the seeds of Japan's recovery in the 21st century were planted.

Let me illustrate what I mean by this before you write me off as hopelessly optimistic. [rush me off to the Harvard Medical Clinic to have my sanity checked!] In essence, over the last decade important initiatives were launched that are already bearing fruit in three areas: economic restructuring, political regeneration, and in foreign and security policy. Let me touch on each of these briefly turning first to economic restructuring:

Economic Restructuring

In many respects the economic restructuring and financial reform that begun under Prime Minister Hashimoto represents the continuation of a process started fifteen years ago under Prime Minister Nakasone. He too became convinced of the need to restructure and deregulate Japan's economy that had become the world's most successful democratic socialist system but was now showing signs of flagging. While succeeding in privatizing Japan Railways, the Japan Tobacco Company, and the National Telephone and Telegraph (NTT) company, he halted his efforts mid-way, largely because there was insufficient support within the Japanese political system for him to reform the bureaucracy that had served Japan so well during its reconstruction after the war but which now stood the way of more fundamental change.

Partly out of frustration, Mr. Nakasone shifted his attention to foreign affairs, leaving his campaign for administrative and socio-economic change unfinished. In the course of the following 15 years, the problems kept accumulating eventually culminating in the disastrous "bubble economy" propelled by overvalued land and stock prices. The Hashimoto Cabinet inherited the resultant mess and set about the task of restructuring and re-energizing Japan's economy that Mr. Nakasone had originally begun.

This took the form of six reforms including the so called "Big Bang" initiated in 1996. Though now rapidly fading in people's memories, the Big Bang in my opinion provided the necessary basis for the current, long overdue wave of corporate restructuring to take place. The key, I believe, was our evaluation at the time that the usual mixture of preaching reform, advocating deregulation by a thousand cuts, and relying on foreign pressures would not bring about the necessary economic restructuring. Something radically new was needed, and it was our belief that the most effective means of encouraging restructuring was through banking reform, taking into account that the predominant share of corporate financing in Japan depends on bank borrowing.

The resulting big bang was a remarkable step in Japanese economic policy because it was driven by our own concern about Japanese competitiveness, rather than the result of gaiatsu or foreign pressure.

However, we were aware that by removing the protection and subsidies that some Japanese industries had enjoyed for many years, the short-term effect on the economy would probably be negative, even though the reforms were essential for more solid growth over the long-term. Many have argued that the effort to correct the financial imbalance through a 9 trillion yen worth tax increase and increase of health insurance rates was a policy misjudgment that pitched the economy into recession just when recovery was possible. But I believe the economic downturn was the inevitable and unavoidable result of the restructuring process rather than a consequence of policy mistakes.

Subsequent efforts to revive the economy, however, have proved either ineffective or short lived. Thus, the tax cuts introduced were unable to stimulate demand. Likewise, the series of stimulus packages that have pumped trillions of yen into the economy have had little more than a temporary effect. Quite clearly orthodox demand-side approaches to stimulating the economy are not working to the extent hoped.

I personally have long doubted the wisdom of this approach especially at a time when the Japanese consumer is gripped by uncertainty over the security of his job and his savings. Thus what we really need to do is boldly execute supply-side reforms that will speed up the restructuring of our excess plant capacity, excess debt and excess employment. Some progress has already be made in this direction but clearly much more needs to be done. Only in this way will Japan's economy revive.

Let me now turn to Japan's political regeneration:

Political Regeneration

Although Japanese politics viewed from afar may appear very much as "business as usual" especially now that the LDP has regained its preeminent position, the truth is that much has changed and changed, moreover, for the better. I think it fair to say that politics in Japan is undergoing a very healthy period of regeneration in several important respects:

First, politicians are increasingly being forced to grapple with public policy issues rather than simply rely on the bureaucracy to solve most of the problems. We have many excellent bureaucrats, but bureaucracies are not well equipped to lead revolutionary change. This is the responsibility of politicians working together with forward thinkers in other sectors of society, not just our more thoughtful and knowledgeable bureaucrats.

One illustration of the shift of influence in Japanese politics is the increasing tendency of the media to request interviews with political leaders or young politicians with policy expertise such as on the North Korean missile threat or reform of the social security system. Until relatively recently, the media would typically seek comment only from senior government bureaucrats.

A second positive development in the new era has been coalition politics. You might think it strange for a senior and dedicated politician of the LDP to say this. I believe, however, that coalition politics is a healthy development for our party and for the Japanese political system as a whole. In the old days, the opposite side of the coin from LDP dominance was a group of relatively small minority parties with virtually no expectation of participation in governance. This made it relatively easy for them to pursue opposition politics for its own sake without having to consider the dilemmas and responsibilities that those actually holding power must consider. LDP dominance also contributed to an attitude within our party of dismissing the opposition as well as to political ossification.

In the past six years, however, coalition politics has become not just a necessity but also the norm. For example, passage of the defense guidelines legislation in the Lower House required cooperation among Diet members of different parties. Politicians from diverse parties also worked closely with NGO leaders in drafting and passing a bill to strengthen civil society in Japan.

The LDP is prepared to work with opposition parties that want to contribute constructively to governance and the process of change, while most opposition parties now understand that they can no longer count on a certain level of support simply by opposing for the sake of opposing. I think broad based coalitions, both to address specific issues like the Defense Guidelines, and to maintain a credible and effective government induce a greater sense of responsibility in both the smaller parties as well as the LDP.

Foreign and Security Policy

Finally, Japan's foreign and security policy has also undergone some very positive changes over the last decade that have laid the foundation for Japan to play an increasingly active role on the world stage that is in keeping with its clear potential to do so.

Thus after the Gulf War brought home the inadequacies of what others derided as Japan's "checkbook diplomacy," we took measures to allow for greater Japanese participation in UN peacekeeping operations. What may have appeared at the time as very modest initiatives, were nevertheless a vital first step in what is for us an unavoidably slow and incremental process given our constitutional constraints. Indeed, the recent amendments to the PKO legislation that allows for greater Japanese participation would not have been possible without it.

The most significant achievement of the decade, however, was undoubtedly the revitalization of the US-Japan security alliance, due in no small way to the efforts of my friend Joe Nye sitting beside me today. Through a series of agreements culminating in the recent enactment of the Defense Guidelines, the US-Japan security relationship has not only been strengthened to face the challenges that could confront us at any time, but also broadened in scope to make it much more than just a military alliance.

Let me say in closing Japan has changed much more over the last decade than is typically acknowledged. To be sureﾑand I want to allay any misunderstanding on thisﾑmuch still needs to done. But as the old Chinese proverb says, ﾔEvery journey begins with a single step." Japan, I believe has already taken several important steps on the road to recovery.

Thank you for your attention and I welcome your comments and questions.