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The first challenge, needless to say, is the structural reform of our own economy.
Ladies and gentlemen, the scene outside our meeting place today is a winter wonderland of snow. If I may use this as a metaphor for the global economy, Japan may be compared to a four-wheel-drive car that was running freely on the snow until the end of the 1980s, winning the admiring and sometimes envious gaze of other countries for its speed and maneuverability. But then, with the start of the 1990s, this car suddenly lost speed.
The first reaction of any driver in such a situation is to rev up the engine. In fact, the Japanese government stepped on the accelerator, so to speak, starting in 1992, using fiscal stimulus in an effort to get the economy to pick up speed again. Initially the engine gave off a great roar and the vehicle seemed to gain a bit of momentum, but then it quickly decelerated.
After a while, in 1995 or '96, we began to realize that the problem wasn't the engine but rather the load of ice and snow that had become encrusted on the car during the "bubble" years of the 1980s. In order to make it run smoothly again, we realized that we would have to pry off this extra load. Under Prime Minister Ryutaro Hashimoto the Japanese government adopted a program of six reforms aimed precisely at scraping off this encrustation. We realized, of course, that this effort would cause us to lose even more speed over the short term. During the 1998 fiscal year, which ends this March, the economy will have contracted by about 2.2 percent. This bout of negative growth should be seen as an inevitable part of the reform process.
I am aware, of course, that some people blame the contraction on the hiking of the consumption tax in April 1977 and other aspects of the government's fiscal policy. But I would remind you that for several years we had repeatedly applied huge doses of fiscal stimulus, including public investment and income tax cuts, despite which it had not been possible to get the economy back on the track to recovery.
The passengers would certainly be happier with an approach that would let them stay in the comfort of the heated car while the driver continued to rev up the engine. But the car is simply not going to run smoothly until we get rid of that snow and ice.
I've been talking about the Japanese economy as if it were running in isolation, but of course I realize that our country is not alone. The global economy is like a caravan of vehicles moving through the snowfield together. It's not acceptable for the second-largest car in the group to come to a full stop just because it needs to be de-iced. The Japanese government has certainly had the global economy in mind, and that's the reason for the expansionary policy adopted both in fiscal 1998 and in the proposed budget for fiscal 1999.
Ironically, though, when the government announced the draft budget for the upcoming fiscal year, providing for government borrowing in excess of 31 trillion yen, long-term interest rates rose and the stock market fell. Politicians and business leaders, and even many ordinary Japanese citizens are now coming to realize that the only way to escape from the recession is to speed up the transformation of our society into one based fundamentally on a market economy. The change in people's mind-set has been especially dramatic, I would say, over the past month or two. we've reached a watershed in the process of moving to an economy governed primarily by the market mechanism.

The most crucial single element of the multifaceted reform process in Japan is the reform of our financial system, which provides the lifeblood for all economic activity. Last October the Japanese Diet passed a package of bills that provide the necessary legal framework for rebuilding our troubled financial sector. Even if additional banks or other institutions should fail, the means are in place to deal with the situation. The government has set aside a total of 60 trillion yen for this purpose. At the current exchange rate this comes to more than 500 billion dollars, and it's equivalent to 12 percent of our gross domestic product. This is an undertaking of a scale never seen before in Japan, or anywhere else, for that matter. I believe you can judge from this the extraordinary level of our government's determination in tackling this problem.
The basic aim of the reforms is to achieve a system that will operate transparently and in line with market principles. A new organ, the Financial Reconstruction Commission, has been set up independent of the Ministry of Finance; it will pass judgment on troubled institutions, decide when and where to inject public funds, and oversee the collection of credits taken over by the public sector. Public funds will be supplied on a transparent basis according to clearly defined rules. Financial institutions that are unable to achieve operational soundness will not be allowed to stay in existence. The new setup will mean a quick end for the old convoy that was kept together under the watchful eye of the Ministry of Finance. From now on each institution will have to ride out the waves of competition on its own. And as the effects of this reform take hold, the financial jitters that have been affecting the economy as a whole should rapidly subside.

The nonfinancial sector is also changing fast. In the past, Japanese business leaders tended to place all their trust in "the authorities," expecting the government to be able to deal with economic problems large and small. But now, with the economy mired in an unprecedented recession, the new conventional wisdom in the business world is that companies can only hope to survive on the strength of their own efforts. Manufacturing companies have been assiduously restructuring their operations, and their executives have focused their gaze on maximizing the efficiency of their allocation of resources, human, material, and financial. The leaders of the business world have come to realize that Japan won't get better unless they themselves adopt a reform-minded approach. To sum up, I can say the following three words with confidence: Japan is changing.

But in addition to reforming its own economy, Japan faces a second big challenge: helping to cope with the problems elsewhere in the global economy, especially in Asia.

In the wake of the financial and economic crises that have struck the region since the summer of 1997, Asia has now turned into a target of worry rather than admiration, a drag on the global economy rather than a locomotive of growth. I believe that we must with alacrity correct this situation for the sake of the rest of the world. But the issue actually goes beyond one of keeping other countries' economies ticking.
For one thing, the situation in Asia has a bearing on the viability of the globalized economy that we need to establish as our paradigm for the twenty-first century. Last year Malaysia returned to a system of state controls on foreign exchange and capital movements. Countries like South Korea, Thailand, and Indonesia are currently working to rebuild their economies in concert with the International Monetary Fund, but meanwhile many people in the region are expressing doubts about the IMF regime with talk of "Asian values" and "a capitalism of our own."
If Asian countries fail to rebuild their economies, the feelings of skepticism about prospects for an open global economic system are bound to grow. In order to prevent this from happening and to achieve the sort of open economic order to which we aspire, it is therefore essential that the Asian economies regain their footing.
Another point that we must note is that Asia's economic fate has a major bearing on the peace and security both of the region and of the world as a whole. During the course of the 1980s, intraregional trade expanded rapidly in Asia, and this contributed to the building of ties of interdependence. Economic interdependence does lead to increased friction over trade and other issues, but at the same time it promotes the cause of mutual understanding and helps firm the foundations of peace. If the countries of this region were once again to put up high fences separating themselves from each other, regional stability would be threatened, and the edifice of global peace would be destabilized.
Fortunately, the countries of Asia meet the necessary conditions for renewed economic growth. They have highly educated populations and high rates of saving. They also have considerable infrastructure and technology built up during their earlier periods of strong growth. For the most part they enjoy relatively stable political systems. And what I would stress in particular is that their leaders are motivated by a powerful sense of mission and are working hard at promoting reform.
One additional point I would like you to note is that this part of the world has the longest experience of any region in international trade. At the end of the fifteenth century, Portugal's Vasco da Gama sailed around the Cape of Good Hope and opened up a sea route to India. This was part of Europe's great Age of Discovery, during which Columbus crossed the Atlantic and then Magellan circumnavigated the globe. But well before this, in the fourteenth century, a great trading zone had been formed stretching from East Asia to the Indian Ocean. In fact, da Gama was able to reach India by taking an Indian pilot on board at the Cape of Good Hope. For the Europeans, the Indian Ocean was a new sea to be explored, but for the Asians it was as familiar as the Mediterranean was to the travelers from Europe. Of course, many of the countries of Asia later went through periods of being colonized by Western countries or by Japan. But if we include the colonial age, Asia's store of international economic experience is second to none, and this is bound to help the region make a successful comeback.
I don't mean to suggest, however, that we can just sit back and let the affected countries find their own way out of their current difficulties. We can't do that, because the fate of the region has a direct and major bearing on the prospects for other regions and the world as a whole in the century to come. This is a matter that needs to be at the top of the world's economic agenda. If the rest of us do our best to help out the troubled Asian countries, the region will regain its confidence and redouble its reform efforts. I hardly need to say that this will contribute in a major way to stabilizing the global economy.

As I noted earlier, Japan itself is in the midst of a major reform program; also, as the country struggles with its domestic recession, the government is severely strapped for money. But we are not using this as an excuse to turn our backs on our Asian neighbors. We recognize our responsibility to do as much as we possibly can to help them out. Putting these all together, Japan's aid to Asia comes to about 80 billion dollars. This is three quarters of the global total of bilateral aid, and it is 1.5 times the total of multilateral aid provided through the IMF, World Bank, and Asian Development Bank. I think it should be clear that Japan, despite its domestic difficulties, is doing its part to help its neighbors and thereby to support the global economy.
At the same time, we realize that the biggest way of helping the region to recover is for us to revive our own economy. So we are also not shrinking from the challenge of our domestic economic issues.