Kato Koichi Official Site

Good evening and thank you very much for the warm introduction.

Ambassador Foley, Representatives of Washington Diplomatic Corps, distinguished guests, ladies and gentlemen.

It is my great honor to have an opportunity to make a brief speech in front of such a distinguished audience. I particularly wish to thank Mr. Clyde Prestowitz of the Economic Strategy Institute for his kind invitation extended to me.

This evening I would like to share with you my thoughts, from a politician' s viewpoint and not representing the Japanese government about the ways in which we are now trying to reform our country. I will also touch on the Asian economic crisis and offer some thoughts on the future of the world economy in the twenty-first century. I hope not just to offer my own opinions but also to learn from yours.

As you all know, until the end of the 1980's the postwar Japanese economy expanded rapidly, so much so that it was referred to as the "Japanese miracle." Early in the 1990's, however, the economy took a sudden downturn. Equity and land prices fell, and growth in consumer spending began to slow down.

Unemployment also started to rise. The government tried desperately to stimulate the economy with tax cuts and public-works projects. In all, more than 460 billion dollars was poured into the economy for pump-priming. But far from picking up, the economy continued to stagnate.

It now appears that the Japanese economy underwent a drastic in the latter half of the 1980s, which eventually made our conventional economic policy tools ineffective.

One key issue in this context relates to our loss of a national goal. At the time of the Meiji Restoration exactly 130 years ago, in 1868, Japan embarked on a consistently sustained endeavor to catch up with the West. In order to achieve this goal, power was concentrated in the hands of the national government, and the bureaucracy orchestrated the nation's efforts. The process lasted for more than a century, and at least in terms of major economic indicators, Japan basically achieved this longstanding goal by the mid-1980s.

Having accomplished its objective, both our leaders and the general public fooled themselves into thinking that Japan could continue to develop and prosper by following its old path. We failed to notice that a new set of goals is needed before a systematic fatigue becomes apparent.

But the Japanese at the time could not have a clear vision of how to adapt themselves to these challenges and during the late 1980s we devoted our economic energies to the formation of huge speculative bubbles. Once equity and land prices peaked and began to fall, the self-fulfilling momentum formed during the bubble years reversed its direction. Today Japanese financial institutions are still struggling to deal with the bad loans left over from these bubble years. The weakness of the economy has led to a reduction of the official discount rate to a rock-bottom level and, naturally interest rates on bank deposits have become almost non-existent.

The Japanese, especially the elderly people, who have put a very large portion of their savings into bank deposits, have counted on the interest earnings from their savings to supplement their pension payments as a source of old-age financial security. But now, interest earnings do not offer much of a prospect for financial security. The Japanese try to save all the more, even if lower income tax gives them more leeway to spend.

In addition to the anxiety held for the financial security in time of fast ageing, many Japanese people have started to wonder if their matured economy will remain stagnant forever. One of the main reasons why the government has recently been increasing its spending for science and technology, especially for basic research, is that it wants to restore national self-confidence and an optimistic vision of the future. Even if these efforts do not produce any immediate fruits, we should see the benefits ten or twenty years from now. If at that point Japanese people are able to share their dreams with peoples elsewhere in Asia and around the world in the fields like energy and environment, our nation should be able to recover its self-confidence and vitality.

In order to truly revitalize the economy which people perceive as having reached an impasse, fundamental reforms, not stopgap measures, are seriously needed. This need became urgent around 1995, and the following year the Liberal Democratic Party rose to the challenge by promising major reforms in six areas; public administration, public finance, economic structure, the financial sector, social security and education.

The lead-off in this sweeping program is the reform of the financial sector, the Japanese "Big bang." On April 1 this year Japan implemented full liberalization of foreign exchange transactions and a whole set of deregulation in the financial sector is to take place this year.

In the past, the so-called convoy system, whereby the Ministry of Finance exercised strong control to ensure that financial institutions moved in the same direction and at more or less the same speed, protected Japanese financial institutions, but now they will face direct competition from foreign institutions at home as well as abroad.

Last autumn, Hokkaido Takushoku Bank and Yamaichi Securities failed. This was the first case of ships falling out of formation because they could not keep up with the rest of the fleet. In the longer run, as liberalization spreads and the fleet splits up, there should be ships getting well ahead or way behind of others, and more dropouts could well be expected. And the end of the convoy system means that any decision on survival will basically be in the hands of the market. Since the government will cease to intervene in each bank's management, this is a change from which there is no turning back. Even as I speak, Japan's banks are busily restructuring themselves.

A Friend of mine who is the president of a Japanese company listed on the Tokyo Stock Exchange recently was shocked when the bank that his company has been dealing with for many years suddenly told him that they wanted to cancel their lending relationship. As they explained it, his company was in good shape, so it should raise money directly from the market.

Until now blue-chip companies like his haven't had to worry about borrowing from banks. As long as they were able to provide collateral, bank loans were basically there for the asking, and the interest rate was low. The ties with the bank were cemented on the individual level with golf and entertainment.

But Japanese banks find that they can no longer keep up this sort of lending based on special relationships. In order to compete successfully, they have to look for higher profitability with better risk management.

Since late last year, the popular perception is that we've been witnessing a credit crunch, but this may be taken as evidence that Japanese financial institutions are now actually wearing themselves of their past habits.

Big Bang does not just liberalize the financial sector, but it also has a drastic impact on Japanese society as a whole. Both banks and business corporations will find that they can no longer survive in a competitive environment by continuing to conduct transactions favoring members of their Keiretsu, or corporate groups, regardless of price or quality. And products that have to pass through a long and complex distribution network will no longer be able to compete at the retail level.

Winning the competitive race will require superior human resources. There is already an intense headhunting drive underway among financial institutions in Japan, and eventually this can be expected to spread to every field of industry, This is going to mean a major change in the traditional practice of lifetime employment, which has kept the labor market rigid and acted as a hurdle to new entrants.

Starting a year ago, the government announced the outline of its reform program successively in the six areas that have been targeted. But immediately after the plans were unveiled, we encountered a barrage of media criticism. According to the pundits, our program was too slow and not ambitions enough.

Then last fall there was a chorus of calls for us to postpone the deficit-cutting and financial-liberalization drives and concentration on reviving the economy. But the government is continuing with the reforms.

The cries of pain that can now be heard are an inevitable result of the effort to change our country. The very fact that they are so loud and widespread should be seen as sign that Japan is actually changing. The Big Bang plan and other forms of deregulation will turn Japan into a place where the cold logic of the marketplace takes precedence over the ties of sentiment and tradition.

One additional point I'd like to emphasize here is that bureaucracy took virtually no initiative in developing the current set of reforms. The bureaucrats were consistently incapable of finding an approach other than the linear extension of existing policy vectors. I know that the conventional wisdom among foreign observes is that policy in Japan is made by the bureaucrats, and that politicians just follow along. And I don't deny that this kind of tendency did exist. But the current reform initiatives came from Prime Minister Ryutaro Hashimoto and other politicians. This too is a sign of change in our country.

It's true, of course, that an economy is a living creature, and we should not let reform kill it. It is for that reason that the government on April 24 decided on a stimulus package with a total value of over 120 billion dollars. The package should boost gross domestic product by about 2 percentage points. It is meant to transfuse fresh blood to a patient undergoing an operation, and we appreciate the support expressed by Secretary Rubin, Chairman Greenspan and other senior policy makers here.

Naturally, providing support to the troubled Asian economies, was also an important consideration in this package. According to one calculation, the recent crisis has caused the loss of some 95 billion dollars in economic output of the region last year and this year. Since last July, Japan has provided 42 billion dollars of funds to help the countries affected by the crisis. But more importantly, through our efforts in stimulating domestic demand, Japan should be able to offer a big market for the exports of its Asian neighbors.

I imagine that America, as the leader of the world, formulates economic policies based on consideration of their international impact as well as their domestic effect. In Japan as well, the need to formulate economic policies that take account of the world as a whole is now widely recognized. It is now the consensus of the Japanese people that we must share responsibility with America in supporting the world economy.

Japan is now struggling desparately to reform itself so as to become a market that is open to the world. But this is not a perfect solution. Capitalism is now presenting us with a new challenge. I believe meeting that challenge, along with the United States, will be one of Japan's major tasks in the twenty-first century.

I still remember vividly how I was struck by trenchant criticism of the fundamental flaws of capitalism that was published in the New York Times in 1989. The author stressed that capitalism, being based on the principle of competitions, doesn't encourage cooperation among people, and observed that because it pursues profits and efficiency, by nature it isn't conductive to preservation of the environment, human rights, and the historical heritage.

Fortunately, the principles of democracy can compensate for the flaws of capitalism. Under democracy we are able to point out to each other specific faults to which capitalism can lead, and deliberate and decide on steps to correct or prevent them, it is thanks to the presence of democracy alongside the market principles that advanced capitalist countries today enjoy effective protection of social welfare, environment, human rights, historical heritage and so on. At the same time, democracy functions well only in affluent societies. In short, democracy and capitalism are complementary, and each is indispensable to the other. The United States and Japan, which are resolved to take responsibility for the world economy based on market principle, must also act as defenders of democracy.

The biggest challenge before us is probably how to deal with the movements of international capital. As a result of the Asian crisis, it is said that almost 100 billion dollars of wealth was removed from Asian countries over an extremely short period of time. We cannot simply ignore developments like this as the inevitable results of capitalism, but must share in the responsibility for dealing with them.

There is a problem present when people who yesterday were earning an honest living and could have dreams for the future find themselves without a job today and have no idea how to make ends meet tomorrow. George Soros wrote in the Atlantic Monthly in February 1997: "I now fear that the untrammeled intensification of laissez-faire capitalism and the spread of market values into all areas of life is endangering our open and democratic society." The fact that this alarm was sounded by an international investor of his caliber impressed upon me the flexibility and goodwill to be found in the United States.

The other countries responsible for the world economy cannot shrug off this warning. While continuing to place our trust in capitalism, we must work together to keep it from running away with us. Our situation is akin to that of the eighteenth-century American pioneers who, in the course of pushing the frontier westward, managed to keep their horses under firm control while fully trusting in them--or rather, because they fully trusted them.

International financial capital is now threatening to get the bit between its teeth and run away with us. We haven't yet figured out how to bring this unruly mount under control. I don't have a concrete solution to propose. But I fear that if economic storms like the hurricane that struck Asia last year keep recurring, we will see a backlash in the developing world against moves toward free trade and open economic systems. So if we hope to create a truly open world market, we must confront this matter head on.

Solving this problem together with the United States, the home of bronco-busting rodeos, will be an extremely exciting task for Japan. I look forward to joining all of you in meeting the heady new challenges posed by the capitalist system we cherish.

Thank you