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The Liberal Democratic Party made a pledge during the 1996 general election campaign to carry out reforms in six areas: public administration, public finance, economic structure, the financial sector, social welfare, and education. Prime Minister Ryutaro Hashimoto has repeatedly declared that through theses reforms he intends to achieve a 'third transformation' of Japan comparable in scale to the Meiji Restoration of the nineteenth century and the sweeping changes made after the Second World War.

The phrase 'third transformation' is of course a reference to the magnitude of the reform program, which aims at accomplishing systemic change as radical as that of the tow previous transformations. But that is not all. It is also a reference to the sacrifices that these reforms will entail, just as the previous two did. After the Meiji Restoration, the samurai class lost its privileged position, and many of its members fell on hard times. And after the Second World War, the old nobility was abolished and absentee landlord, lost most of their property. The prime minister is saying that he is determined to implement this new round of reforms despite the fact that they will cause similar pain and encounter similar resistance.

When the proposed outlines of the fiscal and financial reform plans were announced in the spring of 1997, the media was full of critical comments. The reforms were called 'half-hearted,' and the schedule for implementation was said to be too slow. But since some of the changes started to take effect, with cuts in budgets and the ending of protection for domestic financial institutions, we have heard a chorus of calls for the reforms to be more gradual. People have been crying out that the entire country is headed for ruin.

If you trace the current clamor to its source, you find that it all originates from the reform program. In other words, the cries that we now hear may be considered the creaking produced by the strains of reform. I know that when we first came out with our slogan of 'Six Reforms', many international observers were skeptical, to put it mildly. People said, "The Japanese may shout 'reform, reform,' but at the end of the day nothing is going to change." I would submit to you that today's cries are the most eloquent testimony to the fact that Japan truly is in the midst of drastic change.

At the time of the Meiji Restoration of 1868, when Japan re-entered the international community 130 years ago, our nation set the target of catching up with the countries of the West. At least in terms of the major economic indicators. Japan basically accomplished this in the mid-1980s. Having reached that goal, naturally our country needed to set a new goal for itself. But for the past dozen years or so, we have continued to run on the same course as before. For a few years we became swept up in the euphoria of the so-called bubble economy, and some people even said, 'There is nothing more for Japan to learn from the West; now it's the turn of the West to learn from Japan.'

But then, early in the 1990s, the bubble burst-as all bubbles must-and we were suddenly confronted by a rash of problems that had been hidden behind the facade of growth. The economic crisis we faced was serious, but what was even more serious was that Japan and its people didn't have a vision of their own 'tomorrow'. It was to provide this drifting nation an image of its future in the twenty-first century that the LDP came out with the program of basic reform on six fronts.

The lead runner for the entire program is financial reform. As you all well know, the Japanese financial sector operated for many years under a so-called 'convoy system' where the Ministry of Finance exercised strong control, making sure that banks and other institutions were moving in the same direction and at more or less the same speed. As long as they followed the ministry's instructions, financial institutions were confident that they would be protected. This was not necessarily a bad arrangement as far as they were concerned. After all the country was in effect guaranteeing their 'tomorrow'.

However, a system of management that relies on direction from above ends up stifling creativity and initiative. The consequences are amply clear from the failure of the socialist economies. In Japan's case, the bankers of the nineteenth and early twentieth centuries, what we call the Meiji and Taisho eras, had both the discernment and the ambitious vision to look at the projects for which funding was sought and exercise sound judgment both on their prospects for success and on the caliber of the businessmen who presented them. But as the government tightened its controls over financial institutions, the bankers' judgment abilities atrophied, and they ended up relying mechanically on a system of collateral, taking land in most cases as backing for their loans.

Another pernicious effect of control is the weakening of the sense of responsibility and deterioration of business ethics. If we trace the causes of the recent spare of scandals involving the Finance Ministry, Bank of Japan, and financial institutions, what we ultimately find at their root is this system of strong control from above. The objective of the 'Big Bang' is to remove the heavy hand of control and restore the philosophy of economic rationalism so as to recapture the spirit of responsibility and creativity.

With the removal of foreign-exchange controls this April 1, the foreign financial institutions already in Japan are moving to expand their business operations. And I understand that some additional institutions are now preparing to enter the Japanese market. Those institutions that are confident of earning high returns on their investments will naturally be willing to pay high rates of interest on the funds they raise. And faced with this competition, Japanese financial institutions will have to develop new productsinvestment media. Corporations that have relied on low-interest-rate funding to stay in business will have to sharply improve their own profitability in order to continue receiving loans.

Distinctively Japanese practices like in-group transactions within keiretsu, or corporate groups, and labyrinthine distribution systems, which are not economically rational, will have to be changed in response to the newly demanding stance of banks as lenders and the competitive forces unleashed by deregulation.

As a result of competition, we may end up with a situation like Wimbledon tennis tournament, where the courts are in Britain but the main players are foreign. That is to say, our domestic players in the financial sector may find themselves very much on the defensive at times. But we should accept this if it means that interest and dividend income will increase and nonfinancial industries will become healthier.

If foreign financial institutions take over the management of much of Japan's capital, the Japanese will become even more sensitive to movements in the New York Stock Exchange, and they will have to study the business approaches of the Southeast Asians. This should help make the Japanese more international in their outlook.

Japan's Big Bang has come under various sorts of criticism. One assertion is that by adopting Western business practices we will lose the value of our distinctive Japanese says. I don't agree with that view. As I said earlier, Japan's bankers in the Meiji and Taisho eras were able to judge the merits of business projects and the mettle of businessmen. Even in the Edo period, the age of national seclusion that preceded the Meiji Restoration, financial transactions were widely conducted. Actually the excessive controls of the wartime and postwar periods should be seen as an aberration. The objective of Big Bang is to remove this aberration so as to recover the Japanese spirit of creativity and initiative and restore the vigor of individuals and businesses. The result will probably be the spread of business practices like those of the West. But this is not a matter of imitation; it is a question of rational economic behavior. It is a natural characteristic of the age of the global economy that based on the adoption application of market principles, similar rules should come to prevail in countries around the world.

There are two points that I would like to emphasize here. One is the fact that all these reform initiatives came from p9oliticians like Prime Minister Hashimoto and-if I may say so-myself.

The conventional wisdom among foreign observers is that policy in Japan is made by the bureaucrats of the central government and that politicians just follow along. I will not deny that this tendency did exist from the Meiji era on. But when it came to breaking out of the impasse that the country reached in the early 1990s, the bureaucrats were incapable of coming up with approached other than linear extension of existing policy vectors. They were far too caught up in the system to come up with radical prescriptions for change. The bureaucracy itself was part of what needed to be reformed to change Japanese society in order to achieve a sweeping transformation of Japanese society. And in fact it is the bureaucrats who are feeling the shock of the reforms most strongly.

Over the years the Japanese have saved virtually all their extra money by placing them in bank deposits. And they have counted on the interest earnings from these deposits to supplement their pensions as a source of old-age financial security. But, given the very low interest rates available for their bank deposits nowadays, interest earning does not offer much of a prospect for financial security. A further source of concern is the aging of the population, along with the feeling that our economy has matured and will not develop any further. When the Japanese are worried about the future, moreover, they channel money into savings rather than consumption even if they are in a sound financial position. The multiplier effect of tax cuts these days is said to be only 0.46.

If the economic stimulus produced by tax cuts is to be effective, what is needed above all is to bolster the Japanese people's hopes and give them an optimistic vision of the future. This is one of the main reasons the government has in recent years sharply increased its spending for science and technology, especially for basic research. Even if these efforts do not produce any immediate fruits, we should see the benefits ten or twenty years from now. If along the way Japanese people are able to share their dreams with peoples elsewhere in Asia and around the world in areas like energy and the environment, they should be able to recover their self-confidence and vitality.

From the Meiji era on, Japan concentrated a high level of authority in the central government, which drew up various plans to serve as the basis for economic development. With this approach the country was able to grow into the world's second largest economic power. But at the same time, collectivism and uniformity came to permeate the entire nation, and people were expected to pledge their loyalty to the company or some other group of which they were a member. Each of these corporate and other organizations, as well as individuals, came to focus to an unhealthy extent on the moves of their immediate rivals rather than on self-directed development. We ended up with a peculiar sort of society where people had gained a fair degree of affluence but had little sense of their fortunate circumstances.

But if we look at the Edo period, we see that Japan back then succeeded in running its affairs with a small government and a high degree of decentralization. Regional cultures blossomed, and individuals enjoyed a variety of pursuits like composing haiku and cultivation bonsai. What we are ultimately aiming at accomplishing with the six reform initiatives is a return to this sort of society, made up of independent individuals.

An economy is, of course, living creature, and we must not let reform kill it. With this in mind, the government on April 24 approved a stimulus package with a total value of 16.6 trillion yen which should lift GDP by about 2 percentage points. Taku Yamasaki, the chairmen of our party's Policy Research Council, visited the United States to explain the details of this package, and it was given high marks.