How the Big Bang Is Changing Japan

Remarks by Mr. Koichi Kato
Member, House of Representatives, Japan
At the Japan Society and Foreign Policy Association
New York, NY., May 19, 1999

Thank you very much for your kind invitation to speak. It is always a pleasure to be in New York and among personal friends and so many American friends of Japan.

It is sometimes said that Americans are no longer interested in Japan. It is my observation, however, that interest in and concern about Japan is actually very high in this country. Key polls would appear to bear this out. I was particularly pleased, for example, to see the poll conducted last year by the Chicago Council of Foreign Relations showing that an overwhelming proportion of Americans at both the elite level and in the general public regard Japan as vitally important to the United States. In fact Japan was ranked first in importance by the public and second by the elite, with figures far ahead of any country in Western Europe, Latin America, or the Middle East. I believe this is based on an deeply felt belief that America's own destiny and interests in Asia are intimately bound up with those of Japan ﾐ without question its principal ally and economic partner in Asia. Indeed, Asia as a whole is tremendously significant to the United States not least because it contains more than half the world's population and accounts for more than a third of its annual production of goods and services. The recent economic crisis has not changed this.

Today, Asia is undergoing a revolution of sorts, one born out of economic necessity but also encompassing fundamental social and political change. Japan is a part of this revolution in which economic restructuring and reform is having a profound effect on Japanese corporate life and on the lives of individual citizens. Every day Japanese newspapers carry reports of the latest restructuring taking place in major Japanese corporations. Large firms like Hitachi and Toshiba, for example, are being split into smaller independent corporations. Less profitable units are being absorbed into or merged with other corporations in the same business so as to rationalize production and marketing along more efficient lines.

Thus an item like electric razors will probably no longer be manufactured by a dozen corporations like NEC, Toshiba, or Hitachi in a way essentially regardless of profit, but will be produced increasingly by some new entity made up of divisions split off from the old giant corporations and then merged together as part of Japan's restructuring and rationalization process.

A key catalyst to this process was Japan's now dimly remembered "Big Bang" of 1996, which was a central plank of six key economic reforms instituted by the Hashimoto government at that time. Before the Big Bang, the kind of restructuring now taking place would have been unthinkable in corporate Japan. Japan's major corporations focused more on market share than profit. Financing was relatively cheap because the banks--then part of the major corporate groups--lent to other firms in the group at very low margins. When the economic "bubble" burst, there was no longer any question that the old corporate system had outlived its usefulness and that reform was desperately needed to maintain economic competitiveness.

This was the challenge we faced when the LDP again regained governmental leadership in 1995. Then Prime Minister Hashimoto and myself as Secretary General of the LDP felt 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 big bang was the policy consequence of this thinking, and it was an remarkable step in the Japanese economic policy because it was driven by our own concern about Japanese competitiveness, not by outside gaiatsu or foreign pressure in search of greater gain

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 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.

Why has the recovery been so slow? One reason is that private companies must do a great deal of restructuring in order to be competitive at the global level. Restructuring, of course, takes time. I also believe that there is another side to the Japanese economic story that has not yet been sufficiently recognized. Faced, like many Western governments with an rapidly aging population that actually is in a more advanced stage compared to the West, the Japanese government pension system is in serious financial trouble. In response, the government has began to cut future benefits for the public pension schemes while increasing contributions and self-help aspects. In a sense our Ministry of Welfare did its job too effectively. Private companies also sought reductions in the public pension system, arguing that their own contributions were far too burdensome. They supported the banks, trust companies and life insurance companies that hoped to benefit from shifting the plans over to private institutions and developing new vehicles like the 40lK plans used in the United States. In addition to the greater uncertainty surrounding their pensions, private individuals have also been required to increase their co-payments for health care insurance.

These steps taken in response to an aging society have greatly increased the level of anxiety among the general public. Life time employment has effectively ended, and unemployment in Japan is now at levels not seen since the of World War II. Companies that had long been thought of as permanent pillars of the Japanese business establishment have fallen. Some pension systems have also collapsed, and personal benefits under the government system are being curtailed. Medical care costs have also increased. Moreover, because of changing demographics, older citizens no longer feel that they can rely on their children to care for them. Finally, the sharp setback to the economic fortunes of other Asian countries has had a dispiriting effect on the Japanese public.

Compounding these factors has been the traditional inclination of Japan's already thrifty consumers to save even more rather than to spend. People have stopped buying new products unless they were absolutely essential to their daily lives. Also, with prices going down, their understandable attitude is to wait a little longer. Consumer spending has thus collapsed, intensifying the economic crisis in Japan.

Overall then, I would say that Japan has taken some solid steps in the right direction: the Big Bang precipitated the long overdue restructuring process, the financial institutions that were not viable have been taken over and healthy financial institutions have been recapitalized. But we still have work to do to restore public faith in our pension and health care systems. We still have more to do, as I argued earlier, in pushing supply side reforms. This is the key to reestablishing a prospering Japanese economy.

I am confident that we can do it. For all its current economic problems, it would be a mistake to write Japan off as an economic power. Japan has tremendous financial assets. It has one of the best educated and disciplined work forces in the world. It has advanced technology. It has under-utilized human resources, particularly women, who can in the future make a much stronger contribution to the Japanese economy. There is also much scope for productivity improvement, particularly in the white collar and modern service industries. The change in corporate structure and behavior will eventually ensure a strong and healthy Japanese economy in the new century. The situation may still look gloomy but the sun will once again rise and break through the dark clouds.

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