Kato Koichi Official Site

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. Sometimes, it is said that Americans are no longer interested in Japan. It is my observation in this country that interest in and concern about Japan remains high in this country. I was pleased to see the polls conducted last year by the Chicago Council of Foreign Relations showed that an overwhelming proportion of Americans at both the elite level and in the public regard Japan as vitally important to the United States. In fact Japan ranked first among the public and second for 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 American sense that Americas own destiny and interests in Asia are intimately bound up with those of Japan -- its major Asian alliance partner and economic partner. And, despite the economic crisis, Asia as a whole is tremendously significant to the United States because it contains more than half the worlds population and accounts for more than a third of its annual production of goods and services.

Today, Asia is the course of another revolution, one born out of economic necessity and social and political change. Japan is a part of this revolution in which economic restructuring and reform is making sweeping changes in Japanese corporate life and in the lives of individual citizens. Every day Japanese newspapers are reporting the restructuring of major Japanese corporations. Large firms like Hitachi and Toshiba are being split into smaller independent corporations. Less profitable units are being absorbed into or merged with other corporations in the same lines or services, rationalizing production and marketing along more economical lines.

Thus an item like electric razors will probably no longer be manufactured by a dozen corporations like NEC, Toshiba, or Hitachi regardless of profit, but will be produced more by some new entity that consists of divisions split off from the old giant corporations and then merged together in Japans restructuring and rationalization process.

You may have forgotten Japan's "big bang" in 1996 or regard it as just a distant echo, but I believe that the current wave of corporate restructuring is a direct consequence of the six economic reforms adopted at that time. Before the big bang, this kind of restructuring 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 bubble burst, it was clearer than ever before that the old corporate system had outlived its usefulness and that reform was desperately needed to retain 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 pattern of preaching, deregulation by a thousand cuts, and relying on foreign pressures would not bring about this needed economic restructuring. Something 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 seeking 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. When tax cuts were adopted later as a corrective measure, this proved unable to stimulate demand. Japans successive stimulus plans have pumped enormous funds into the economy but these also have also proved ineffective. We have to improve the supply side. I, therefore, favor the new government initiative to continue to encourage the industrial competitive restructuring process. [This initiative and Council not clear from your e-mail] In this way, Japan's economy will 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 yet. Faced, like many Western governments with the aging of the population, in fact a much more rapid aging than in the West, the Japanese government pension system was in serious financial trouble. Thus the government 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, developing new vehicles like the 40lK plans in the United States. Aside from pension uncertainty, private individuals were required to increase their co-payments for health care insurance.

These steps in an aging society increased the level of anxiety among the common citizens. Life time employment was ended, and unemployment reached levels unprecedented in post-World War II Japan. Companies that had long been thought of as permanent pillars of the Japanese business establishment were failing. Some pension systems had collapsed, and benefits under the government system were being curtailed. Medical care costs had increased. Because of changing demographics, older citizens felt they could no longer rely on their children to shelter them. Finally, the end of the economic miracle in the rest of Asia affected Japanese public attitudes. It was the natural action of Japans always thrifty consumers to save even more rather than to spend. People stopped buying new products unless it was absolutely indispensable. Price were going down anyway, so why not wait a little longer? Thus consumer spending collapsed, intensifying the economic crisis in Japan.

In summary, I would say that Japan has taken some solid steps, but that another is needed. The big bang initiated the restructuring process. The financial institutions that were not viable have been taken over. Healthy financial institutions have been recapitalized. But we still have work to do to restore public faith in our pension and health care systems. This is the key to reestablishing a prospering Japanese economy.

I am confident that well do it. For all its recent and 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, often including women workers, who can in the future be making a much stronger contribution to the Japanese economy. There is much scope for productivity improvement, particularly in the white collar and modern service industries. The change in corporate structure and behavior will ensure a strong and healthy Japanese economy in the new century.