Kato Koichi Official Site

It's a great honor to be given the chance to speak at this distinguished club.

Since in my position as secretary-general of the Liberal Democratic Party, I share responsibility with Prime Minister Ryutaro Hashimoto, I imagine that you've prepared a lot of questions for me, like "Is the 16-trillion-yen stimulus package adopted on April 26 really going to be enough to revive the Japanese economy?" or "Isn't Japan taking an unconcerned and irresponsible attitude toward the economic crisis in Asia?" I'll answer questions on points like these during the question-and-answer period.

First, however, I'd like to offer you some thoughts from our perspective in the LDP. I want to explain our understanding of the historical turning point that Japan has reached and how we're attempting to implement reforms appropriate to this juncture. I also want to explain the magnitude of the impact that these reforms will have, and the sacrifices that will have to be made as a result.

As you know, the LDP 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 Hashimoto has repeatedly declared that through these 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 to accomplish systemic change as radical as that of the two previous transformations. But that's not all. It's also a reference to the sacrifices that these reforms will entail, just as the previous two did. After the Meiji Restoration, for example, 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 landlords lost most of their property. The prime minister is saying that he's determined to implement this new round of reforms despite the fact that they will cause pain and encounter resistance similar to what was seen in the Meiji and postwar periods.

When the proposed outlines of the fiscal and financial reform plans were announced last year, 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 going into effect, with cuts in public-works spending 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's 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.

In order to elucidate what we're trying to accomplish with these reforms, let me refresh your memories about Japan's modernization process.

The starting point for Japan's modernization can be set at the Meiji Restoration of 1868, exactly 130 years ago. Under pressure from the United States and European powers, Japan had decided to abandon its policy of national seclusion and to find a place for itself in the international community.

Just four years later, in 1872, the new Meiji government sent a major mission to the United States and Europe headed by Tomomi Iwakura, a senior member of the administration.

In addition to meeting with senior government officials, Iwakura and his companions also energetically toured factories, went to the opera, and even had a look at urban slums. And among themselves they conducted an ongoing discussion of Japan's future direction. Based on their observations of the West, they concluded that Japan was about forty years behind. Catching up with the West became Japan's national goal, not just in the Meiji era but on into the Taisho and Showa eras of the twentieth century. For a period of over a hundred years, you might say that our country was running to close that forty-year gap.

In economic policy, the consistent approach taken by the Meiji government and its successors was to restrain consumption and devote the country's surplus resources to building up infrastructure and industry. The Second World War was an unhappy interruption, but at least in terms of the major economic indicators, Japan basically achieved its longstanding goal of catching up with the West around 1985-86.

Having reached that goal, naturally our country needed to set a new goal for itself. But for the past dozen years or so, we've continued to run on the same course as before. For a few years we became swept up in the so-called bubble economy, and some people even said, "There's 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 problems that had been hidden behind the façade of growth. The economic crisis we faced was serious, but what was even more serious was our lack of a clear new goal for ourselves. 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 Six Reforms.

The lead runner for the entire program was financial reform, which Prime Minister Hashimoto identified as "the fuse for reform of the Japanese system."

As you all well know, the Japanese financial sector operated for many years under a "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 each other. 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, 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. So when land prices plunged in the 1990s, the banks had no idea what to do.

Another pernicious effect of control as seen in command economies is the weakening of the sense of responsibility and deterioration of business ethics. If we trace the causes of the recent spate 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" reforms in the financial sector is to remove the heavy hand of control and restore the philosophy of economic rationalism so as to recapture the spirit of creativity and initiative.

With the implementation of the Big Bang this April 1, the foreign financial institutions already in Japan are moving to expand their 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 here. And faced with this competition, Japanese banks will have to raise the rates they pay their depositors. In order to offer higher rates, they'll need to find good corporate borrowers and develop new investment media. Corporations that have relied on low-interest-rate funding to stay in business will have to improve their own profitability in order to continue receiving loans. Distinctively Japanese practices like in-group transactions within

, or corporate groups, and labyrinthine distribution systems, which have often been the target of criticism from abroad—and 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.

Competition may cause some additional failures among existing financial institutions. We may end up with a situation like Wimbledon tennis, where the courts are British 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.

It's said that Japanese funds even now account for more than 40 percent of the world's capital markets. In the years ahead we can expect to see these funds being used not just in interbank transactions and tie-ups with local organizations overseas but also as direct sources of finance for startup ventures in places like California and infrastructure-building projects in Southeast Asia. When this happens, the Japanese will become even more sensitive to movements in the New York stock exchange, and they'll have to study the business approaches of the Southeast Asians. We should see the acceptance of more diversity in values; together with deregulation, this should help make the Japanese more international in their outlook.

The Big Bang has of course come under various sorts of criticism within Japan. One assertion is that by adopting Western business practices we'll lose the value of our distinctive Japanese ways. 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 object of the 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 isn't a matter of imitation; it's a question of rational economic behavior. It's a natural characteristic of the age of the global economy that, based on the application of market principles to the fullest degree possible, similar rules should come to prevail in countries around the world.

There are several points that I'd like to emphasize here.

One of them is the fact that all these reform initiatives came from politicians 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, especially the Ministry of Finance, and that politicians just follow along. And I won't deny that this tendency did exist. 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 approaches other than the 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. And in fact it's the bureaucrats who are feeling the shock of the reforms most strongly.

Another point I should stress is the concern about the future that the people of Japan now feel.

I'm not well thought of these days because of my lack of enthusiasm for tax cuts. Since I'm a politician, naturally I feel the temptation at times to call for income tax cuts. After all, lower taxes are something that no voter is going to oppose. But given the nature of the Japanese people, more specifically, their high propensity to save, I can't really make statements that pander to the desire for tax cuts.

Over the years the Japanese have saved virtually all their extra money. And by comparison with people in other countries, they have put a very large share of their funds into bank deposits. And they have counted on the interest income from these deposits to supplement their pensions as a source of old-age financial security. But interest rates in Japan are at record low levels. The official discount rate is 0.5 percent, and interest even on long-term deposits is less than 1 percent. In other words, interest income doesn't offer much of a prospect for financial security. And when they're worried about the future, the Japanese try to save all the more, even if they find they have more leeway to spend. 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. Under these circumstances, the economic stimulus produced by tax cuts is limited. In order to revive the economy, what's needed above all is to restore the Japanese people's self-confidence and give them an optimistic vision of the future.

This is one of the main reasons the government has sharply increased its appropriations for science and technology, and especially for basic research, in recent years. Even if these efforts don't 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 people elsewhere in Asia and around the world in areas like energy and the environment, they should be able to recover its 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. And with this approach the country was able in fact 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 other group of which they were a member. And 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 on the individual level but were too busy worrying about others to enjoy it. But if we look back 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 flowered, and individuals enjoyed a variety of pursuits like composing haiku and cultivating bonsai. What we are now aiming to accomplish with the Six Reforms is a return to this sort of society, made up of independent individuals.

As I noted earlier, on April 26 Japan adopted a 16-trillion-yen package of economic stimulus measures. As you know, Taku Yamasaki, the chairman of our party's Policy Research Council, visited the United States to explain the details of this package, and it was given high marks. I won't go into the specifics here, but I think we can expect to see substantial results from now on.

We've been hearing a chorus of demands in the Diet that Prime Minister Hashimoto accept responsibility for changing policy direction. But there has been absolutely no change in the basic policy stance of the Liberal Democratic Party, which consists of its determination to carry out a drastic reform of the Japanese system. In the world of politics, we're naturally bound to encounter unexpected obstacles from time to time, and these may force us to slow our pace for a while. But that doesn't mean that we're changing our course.

The reforms are major, and they're bound to generate major resistance. We expect that. And since this is a democracy, it takes time to build popular agreement. But we intend to press on with these reforms because we believe that the direction we're headed is the right one for our country—and in fact that it's the direction that the whole human race must take.

Thank you.