(Mr. Sakaiya made the speech summarizing this text.)
The Present and Future of the Japanese Economy
Speech at Yale University
New Haven, Connecticut, USA May 2000
by Taichi Sakaiya, Minister of State
Economic Planning Agency, Government of Japan
Thank you very much for your kind introduction. I am truly delighted to be given this opportunity to speak about the present and future conditions of the Japanese economy here today, not only because Yale University is a great center of erudite scholarship, but because we now live in an days when it is essential to explain the present and future conditions of Japan's economy to Americans and to people across the globe.
I. The Present Status of the Japanese Economy
(1) The New Mori Administration will Continue the Active Economic Measures of the Obuchi Administration
As you all know, former Prime Minister Keizo Obuchi, who was beloved by the Japanese people for his good-natured, cheerful disposition, became seriously ill on April 2nd, bringing a close to the Obuchi administration. For some 615 days, a period of about one year and eight months, the Obuchi administration continuously battled against the recession, and while a complete victory has yet to be achieved, the Japanese economy has rallied from harsh conditions to a promising situation. Former Prime Minister Obuchi was suddenly struck down at a time when a full-fledged economic recovery was close in sight and just prior to the Okinawa Summit Meeting, where he was to serve as chairman, and I suppose that he must feel great regret.
Nevertheless, his successor Prime Minister Yoshiro Mori had Cabinet members remained and confirmed that he will continue with the domestic and international policies of the Obuchi administration. In particular, in terms of economic policy, in his maiden address to the Diet, Prime Minister Mori clearly stated that he will vigorously advance policies for economic recovery and structural reforms. I myself will also strive to continue and further develop the policies implemented to date as I remain at my post as the cabinet minister responsible for Japan's economic policy.
From the beginning of this year, the Japanese economy has performed in accordance with our expectations, and the trend toward a full-fledged recovery is spreading (Figure 1).
First, in terms of demand side, consumption fell sharply during the fourth quarter of 1999, but recovered in the first quarter of 2000 to surpass the level posted during the same period of the previous year, even after discounting for the leap-year effect. The growth in the number of new vehicle registrations and in sales of household appliances, especially personal computers, has been particularly outstanding. Housing construction remains favorable, and trade are rising rapidly, especially with Asia. Moreover, the most reassuring fact is that plant and equipment investment, which had been suffering a prolonged stagnation, turned to an increase in the fourth quarter of 1999. Machinery orders (private sector demand, excluding vessels and electricity), which is viewed as a leading indicator for capital investment, posted a year-to-year increase in the fourth quarter of 1999, for the first time in nine quarters, and this trend has continued on to the first quarter of 2000. The tendency toward expanded investment for the new era, especially IT-related fields, has finally emerged in Japan.
The expansion in production side is even more striking than that on the demand side. During FY1998 industrial production contracted by 7.1 percent from the previous year, but year-on-year growth has now been recorded ever since the third quarter of 1999, and from 2000 the annual growth rate has generally surpassed six percent. This is because inventory adjustments have been completed, the outlook for the Japanese economy is now favorable, and exports - especially to Asia - are increasing. Additionally, the Index of Tertiary Industry's Activities also turned to a year-on-year increase from the second quarter of 1999, and has been improving further from this year.
Corporate profits are also picking up. For the second half of FY 1999, current profits for all enterprises are estimated to rise by 16.8 percent from the first half. As well the ratio of profit to net sales at all enterprises, which was 1.97 percent in fiscal 1998, rose to 2.31 percent in fiscal 1999 and is projected to reach 2.61 percent in FY 2000.
However, the indices are not all positive. Employment conditions remain severe. The unemployment rate in March (seasonally adjusted) was 4.9 percent, remaining at the highest level recorded in the post-war era. Nevertheless, there are some positive signs. From December 1999 the number of job offers and the number of help-wanted advertisements have been on the rise, and overtime working hours have also been increasing. According to "Business Conditions Watcher," a systematic interview survey periodically conducted by the Economic Planning Agency, worker-dispatching companies already perceive a shortage of workers. While the unemployment rate generally lags behind business conditions, overtime working hours and the conditions at worker-dispatching companies often indicate future trends. From this perspective, one may infer that employment conditions are already turning towards a recovery.
My assessment is that the Japanese economy has already extricated itself from the prolonged recession and begun to take off. Nevertheless, it has only just risen from the runway, and substantial time will be required before this plane reaches a stable flight path. I think active fiscal and monetary support will remain imperative in the interim.
In this process, the important point is to ensure that we do not simply achieve an economic recovery. Rather, we must also advance structural reforms and improve the organizations and functions of Japan's society and economy. In other words, we must transform Japanese society, which has been built up for the mass production of standardized goods, into a society that is appropriate for the coming era of diverse knowledge. This is a great undertaking that may be compared to remodeling a huge, dull airship into a highly mobile jet airplane, and it will require time, hard work, money, and courage. The massive public debt accumulated by the Japanese government over the past two years may be considered as an unavoidable cost in this endeavor. The rewards to be gained will be more than sufficient to retire these obligations if these transformations are completed.
But why is it that the Japanese economy was suffered by such a prolonged and deep recession? What measures were taken under the leadership of former Prime Minister Obuchi to rectify the situation, and what policies will be pursued by the new Mori administration? I should now like to address these points in some detail.
(2) The terrible 1998 Crisis
When the Obuchi administration was launched at the end of July 1998, one year and nine months ago, the Japanese economy stood at the brink of a deflationary spiral. Many financial institutions were holding enormous amounts of bad debts, and they were forced to sharply decrease their lending to improve their capital adequacy ratios. Thus the funds provision to non-financial firms declined, capital investment decreased dramatically, and there was also a pressing danger of employment. A particularly vexing problem was that many small and medium sized enterprises were beginning to be forced into bankruptcy even though their management was sound, because they could not procure sufficient working capital, as orders and payments from large enterprises fell off. The Japanese economy was shriveling up from an insufficient flow of capital, which may be considered as the lifeblood of the economy, because the financial institutions that serve as the heart of this circulatory system were not functioning properly.
What is more, individual sectors of the Japanese economy were also facing grave problems. Several leading distribution and construction firms were insolvent due to the decrease in land and stock prices. In the manufacturing industry as well, many principal enterprises were afflicted by excess capacity, excessive debt, and excess employment, and were operating at a loss amid the decline in demand and sales prices. In local shopping areas, hotels and restaurants were suffering from reduced sales. Additionally, the Asian currency crisis, which began in July of the previous year (1997), resulted in declining exports and dealt a ruinous blow to Japanese investment in Asia.
Reflecting these conditions, stock prices fell sharply. By October 9th, 1998 - the 72nd day of the Obuchi administration - the Nikkei average had fallen to 12,879 yen, a decline of around 4,500 yen, or 25 percent, from the previous year. The credibility of the yen itself was also lost as the foreign exchange rate reached 147.21 yen to the US dollar in August 1998, marking a depreciation of 83% from the peak of 80.34 yen to the dollar posted in April 1995, three years and four months earlier. In response, corporate managers rushed to restrict investment and contract the scale of their operations in order to survive. The Japanese people were plagued by anxiety regarding the future. They cut back on consumption and saved. At small and medium enterprises that had lost their orders from affiliated firms and been cut off from bank financing, the conditions were so bleak that some managers chose to take their own lives.
In the autumn of 1998, I warned that the Japanese economy was on the verge of a falling into a deflationary spiral. Unless the Obuchi administration implemented swift and bold countermeasures, there was a real danger of being swallowed up by a recessionary vortex and setting off a global recession, spreading out from Japan.
(3) "A Triple Recession" - Downward Slope of the Short-term Business Cycle
How did the mighty Japanese economy, which recorded rapid growth and great development throughout the 50 years following World War II, fall into such a miserable situation? The answer lies in what I would call "a triple recession."
The first aspect of the recession was that the economy had entered the downward slope of the short-term business cycle. After the bubble economy collapsed in 1990, the Japanese economy fell into a steep descent, but the economy turned to a gradual recovery from 1994 and maintained favorable performance in 1995 and 1996. The reconstruction demand following the Great Hanshin-Awaji Earthquake, the spread of mobile telephones and other new products, and, from April 1995, the depreciation of the yen versus the US dollar were all advantageous for the Japanese economy. Consequently, the annual GDP growth rate attained a high level of 3.0 percent in FY1995 and 4.4 percent in FY1996. Stock prices also picked up, and the Nikkei average surpassed 22,000 yen in April 1996. It was an increase of 56 percent from the low recorded in 1995.
Looking at these conditions, the Hashimoto administration which was then in office believed that the Japanese economy had indeed recovered, and decided that this presented a good opportunity to pursue fiscal reconstruction. The administration promptly initiated fiscal reconstruction measures, including raising the consumption tax and increasing the self-payment burden under the national health insurance system, and thus moved to increase the citizens' burden by a total of 9 trillion yen.
However, the improved business climate during 1995 and 1996 was essentially due to short-term factors, and structural reforms were not advanced. As a result, business conditions suddenly deteriorated following the peak which occurred around the first quarter of 1997. Then from July 1997, the heavy blow from the Asian currency crisis struck the Japanese economy. In November 1997, following the bankruptcies of Hokkaido Takushoku Bank, one of the nation's largest banks and Yamaichi Securities Company, one of Japan's "big four" securities, anxiety concerning the stability of the Japanese financial system suddenly became rampant.
In response, in December 1997 the government devised a 30 trillion yen financial revitalization scheme and implemented a special tax reduction and so on. The shallow viewpoint that these superficial measures would be sufficient for the revival of the Japanese economy was generally accepted.
(4) From Growth to Maturity - Aftereffects from the Great Wave of Transition
The second aspect of the recession was exacerbated by the fact that the aftereffects from the collapse of the bubble economy at the end of the 1980s had not yet been dealt with: that is, a "balance-sheet recession". The actual conditions indicate a structural recession due to the transition from a growth economy to a mature economy.
In the 1980s, Japan took pride in its massive production capacity and its mighty international competitiveness in the field of modern industrialized society based on the mass production of standardized goods. In fact, Japan's adoption of standardized mass production was not limited to its industrial economy, but even encompassed the nation's schools; the educational system has been built up to foster highly patient and cooperative personnel perfectly suited for working on site in standardized mass-production industries. Domestic demand did not grow as quickly as production (supply), savings increased, and the trade surplus piled up, resulting in the fierce appreciation of the yen.
A portion of the excess capital flowed overseas, but most of the funds were invested in domestic stocks and real estates. As a result, stock and land prices skyrocketed in 1988 and 1989, and new stock market and land millionaires suddenly appeared throughout the nation. At its peak near the end of 1989, the total market value of all shares listed on the Tokyo Stock Exchange First Section reached 611 trillion yen. Similarly, at the end of 1990 the total value of Japanese land assets was 2,365 trillion yen, 3.3 times the US figure even though the area of the US is 25 times larger.
Nevertheless, this surge in land and stock prices was simply a bubble phenomenon, with no long-term profitability backing up these high valuations.
Bubbles may easily occur when a given nation makes the transition from a growth to a mature economy. This is because under the growth cycle, growth results in high savings, savings become investment and promote further growth, and this leads to higher incomes and another increase of saving. But the time eventually comes when there is a shortage of investment opportunities, resulting in nothing but a continued high level of savings and surplus capital.
This phenomenon is an apt description of the Japanese economy at the end of the 1980s. This type of bubble continues to expand until it bursts open. When the bubble finally ends the outcome is by no means pleasant, and the collapse in Japan was no exception. After the Nikkei average peaked in December 1989 at 38,915 yen, Japanese stock prices dramatically collapsed, and fell to one-third of their former value by October 1992. Land prices fell about a year later, and the declines in the Tokyo and Osaka metropolitan areas were on the same order as those in stock prices.
As a result, construction companies and leading distribution firms that had purchased large quantities of land and stocks were left holding massive losses; and the financial institutions, which had provided financing using land as collateral, also suffered from massive bad debts.
If Japanese managers, politicians, and bureaucrats had only possessed superb foresight and sufficient courage, it would have been possible to inject public funds into the nation's financial institutions by 1993 and dispose of the bad debts. However, at that time the priority was being placed on the revision of the Public Offices Election Law. The managers and bureaucrats lacked the courage to decisively dispose of the bad debts, and simply prayed that land and stock prices would soon recover. In the end, in the early 1990s the bad debts were only resolved at a few small-scale financial institutions and at the so-called "jusen" exclusive housing loan companies, which often bank subsidiaries.
When the Obuchi administration was launched in 1998 a great number of Japanese financial institutions and enterprises were saddled with massive bad debts. As these bad debts were to be dealt with, they could not make new investment and create new business.
Under my earlier analogy, if the bad debts at the financial institutions were a type of heart disease obstructing the circulation of capital, then the valuation losses at the nation's corporations were like excess fat and cholesterol that appeared during the transition from a growth to a mature economy, and were clogging the blood vessels. To rebirth the Japanese economy, the patient had to be placed on a harsh training regimen to extirpate the fat and flush out the cholesterol.
(5) The Shackles of the Standardized Mass-production Society
At that time, the most important issue facing the Japanese economy was actually the more fundamental problem of the organization and way of thinking restraints imposed by the standardized mass-production society.
For over 100 years after the Meiji Restoration, Japan had striven to develop as a modern industrial state through standardized mass production. These efforts bore fruit in the post-war period, and in the 1980s Japan achieved the most complete modern industrialized society based on the mass production of standardized goods in the entire history of mankind. In 1987, Japan's per capita GDP surpassed that of the US to become the highest among all nations with a population of at least 10 million. The unemployment rate remained below three percent, there was an equitable distribution of wealth, the international balance of payments had been showing a surplus since the late 1970s, and exports continued to rise despite the appreciation of the yen.
What is more, even though the population had concentrated in urban areas along with economic growth and the progress of industrialization, the nation enjoyed excellent public order and crime had declined. The social welfare system was extensive and income disparities had declined, but the people had not lost their eagerness to study or their diligent working habits. From the 1980s, rapid advances were made in pollution prevention and urban renewal. I think it may be said that in the 1980s Japan was the nation that came closest to approximating the "ideal modern industrialized society."
This achievement may be attributed to the social systems that the nation had adopted. The first of these was the fostering of industry under bureaucratic guidance. Japan began to modernize and industrialize after the US and the nations of Europe, introduced superior technologies and systems from overseas, and disseminated these to private-sector enterprises under bureaucratic leadership. The financial system played a particularly important role. From the 1930s, all Japanese financial institutions were placed under government regulation, and in exchange all the institutions were protected from bankruptcy under what came to be called "the convoy system." Additionally, Japan has a massive postal savings system that accounts for approximately 30 percent of all household deposits, and the postal savings funds are allocated by bureaucrats.
Under this financial system, Japanese citizens' savings have been allocated for the establishment of standardized mass-production industry under the guidance of the nation's bureaucrats. As the financial institutions were protected from bankruptcy, they were free to boldly provide long-term financing. From the 1960s, the large industrial conglomerates known as "keiretsu" were formed in Japan, mostly centered around leading banks, and these conglomerates each fostered the development of their own general trading companies, general contractors, automobile and household electrical appliance manufacturers, and other industrial firms. In turn, each of these companies had their own subcontractors, and sub- subcontractors, comprising a large nexus of affiliated firms. Under this system, mutual trust was built up through long-term trading relationships, and the principal firms at the tops of the pyramids provided capital and conducted personnel exchanges (posting retired personnel to key positions) with the small and medium enterprises that served as their subcontractors. Thus, Japan's industrial organization became characterized by the cooperative horizontal linkages in coordination of industries formed under bureaucratic guidance, and the vertical "keiretsu" linkages with financial institutions or large enterprises at the core.
The Japanese employment practices of lifetime employment and seniority-based wages were also connected with this system. Lifetime employment became possible because the nation's large firms almost never went bankrupt and because senior personnel could be reassigned to affiliated firms. Moreover, the Japanese management approach of limiting stock dividends to a low payout ratio and maintaining substantial internal reserves for future investment was also facilitated by the extensive cross-shareholdings among "keiretsu" firms whereby the leading shareholders were willing to mutually accept minimal dividend payments.
The unipolar centralization of the information dissemination function in Tokyo and the suppression of individuality under the educational system were also highly significant in the process of fostering a superior, standardized mass-production society. As a result of centralizing the media and other information sources in Tokyo, the same information was disseminated throughout the nation, facilitating the mass-volume sales of products manufactured using the same standards. The compulsory education system at the primary and secondary levels whereby students are required to attend certain schools based on their residence location emphasized cooperation over personality, and patience and rote imitation over creativity.
In short, numerous systems and organizations were developed so that Japan could become a consummate standardized mass-production society. At the end of the 1980s, however, just as Japan had successfully attained this goal, the tide of human civilization was beginning to shift from standardized mass production to a new era of diverse knowledge. The nation's goal rang hollow, as it was out of alignment with the course of civilization. In 1998, the root cause of the grave recession that Japan had fallen into was that the nation had lost its direction for development. As a result, Japan became a constrained nation with a dearth of new businesses, and unattractive as an investment location.
Not only was the Japanese economy suffering from the constitutional defects of heart disease, excess fat and cholesterol build-up, the organizational structures that had been painstakingly established turned into shackles, and the skills that the nation had acquired were no longer of any use.
Looking toward the revitalization of the Japanese economy, the Obuchi administration was assigned the great task of dismantling the paradigm of the standardized mass-production society and reorganizing this into appropriate one for the new era of diverse knowledge.
II. Tactics and Strategies for Rebirth of the Economy
The Obuchi administration's adopted three staged strategies for rebirthing the Japanese economy, which was suffering from the triple recession. The first stage is the "Emergency Economic Package" to prevent the imminent fall into a deflationary spiral; the second stage is the "Policy Measures for Economic Rebirth" to promote a full-fledged recovery and to begin structural reforms based on the accomplishments of the first stage; and the third stage is the new development policies to radically shift the paradigm and establish socioeconomic conditions that are appropriate for the new era of diverse knowledge.
(1) Bold Financial Reform - Profound Problems in Japanese Society
The first action taken within 1998 was the emergency economic measures to prevent the imminent fall into a deflationary spiral and the object is to ensure definite positive growth in FY1999.
The main contents were comprised of the following three areas: 1) the financial revitalization, 2) preventing bankruptcies at small and medium enterprises, and 3) expanding domestic demand.
The approach to financial revitalization was to abandon the former "convoy system" and to apply the principles of development and natural selection via market competition. Namely, the idea was to allow institutions holding excessive bad debts to go bankrupt, and to inject public capital to regenerate and strengthen the other institutions. To these ends, the government announced a 60 trillion yen financial revitalization scheme in October 1998 (70 trillion yen including the additional 10 trillion yen made in the fiscal 2000 budget) (Figure 2). Of this, 17 trillion yen was allocated to protect the depositors at failed financial institutions (a total of 27 trillion yen including the additional 10 trillion yen in FY2000), 18 trillion yen for the disposal of bankrupt financial institutions, and 25 trillion yen for a liquidity injection to reinforce the equity capital at sound financial institutions.
In accordance with this policy, the Long-term Credit Bank of Japan and Nippon Credit Bank went bankrupt and to date over a dozen small and medium-sized banks have been dissolved. Meanwhile, approximately 7.9 trillion yen of public funds have been injected into 21 other financial institutions, including the nation's largest banks.
Although these policies were adopted as emergency measures, they also represent important reform at the underlying levels of Japan's economy and society.
The reaction by private-sector financial institutions was greater than the government expected, and mergers and alliances among Japan's leading banks are moving forward at a rapid pace. While Japan had 20 large-scale financial institutions just three years ago, these have now be reorganized into just four main banking groups, with the sole exception of Daiwa Bank, which is said to be a big region-oriented bank, and each of these banking groups holds approximately 100 trillion yen in capital.
As a matter of course, the consolidation has led to the demise of the vertical "keiretsu" structure centered around the nation's top banks. A total of more than 10 trillion yen in cross-shareholdings is said to be sold off during FY 1999, and the "keiretsu" subcontractor enterprise relationships are easing. Recently, new firms have emerged that specialize in parts orders as an Internet business, and they are receiving a growing number of orders from outside their former "keiretsu" affiliates.
These developments are also engendering major changes in the way of life of Japan's salaried workers. The legions of employees who wined and dined at company expense to entertain clients and government officials are rapidly dwindling, and high-priced Japanese restaurants and clubs are feeling the pinch. This may lead to even changes in Japanese culture.
(2) The Shift in Government Policy for Small and Medium Enterprises
The second area of the Obuchi administration's emergency economic measures is to prevent bankruptcies at small and medium enterprises and to foster new businesses.
Japan had long maintained a credit guarantee system for small and medium enterprises. In October 1998 the government established on it a new 20 trillion yen public guarantee framework (30 trillion yen including additional 10 trillion yen in FY2000) for the guarantee of uncollateralized loans to small and medium enterprises of up to 50 million yen. This approach was adopted because of the many cases in which even sound enterprises were deprived of the necessary working capital due to the recession and the precipitous fall in the prices of the real estate used as collateral for their outstanding loans. With the launch of this system the number of bankruptcies at small and medium enterprises over the approximately one-year period from December 1998 declined dramatically, and this made a significant contribution to preventing the Japanese economy from falling into a deflationary spiral.
Fundamental reforms were instituted to Japan's small and medium enterprise policy in FY1999 by the government. The small and medium size enterprise fundamental law, revised in FY1999, focuses on the diversity of smaller enterprises, with the main purport of providing support to new firms and venture business in terms of finances, information, and personnel supply.
(3) Policies to Expand Demand - Public Works and Large Tax Reductions
The third emergency measure taken by the Obuchi administration in battling the recession is the expansion of domestic demand, specifically via expanding public works and large-scale tax reductions.
The ratio of public works in the Japanese economy has been rather high. In FY 1998, public works (IG) accounted for approximately eight percent of Japan's GDP, which was 2.5 times the US figure. So the expansion of demand via government expenditures primarily has depended on public works. The reason is that the per unit demand creation multiplier effect from public expenditures is high.
The Obuchi administration also adopted this method, compiled a large-scale supplementary budget in December 1998 including additional 3.8 trillion yen public works. Large part of it was distributed to local government bodies as subsidies for local public works; and the local governments' shares of the project costs are added to these national expenditures. So the whole size of the public works added at by the FY1998 supplementary budget was estimated at 8.1 trillion. It was expected to push up real GDP by about 1.9%.
Together with this increase in public investment, the Obuchi administration also approved large-scale tax reductions in FY1999. For individual income taxes, the administration implemented some 4 trillion yen in permanent tax reductions, which effectively decreased the maximum tax rate on personal income (the combination of national income and local residence taxes) from 65 percent to 50 percent. Meanwhile the effective corporate tax rate (total of national and local taxes) was reduced to the prevailing international level of around 40 percent, for a tax reduction of approximately 2 trillion yen.
The decision to set the maximum income tax rate at 50 percent implied a movement toward accepting greater disparities in disposable income as a result of competition.
As an economic stimulus measure, the 2 trillion yen in policy tax reductions are particularly noteworthy. These included a measure to stimulate the purchase of housing by making a fixed percentage of outstanding mortgage balances tax deductible, as well as permitting the immediate depreciation of the full cost when purchasing certain electronic equipment.
In sum, the tax reductions implemented from FY 1999 reached approximately 9 trillion yen.
(4) Definite Positive GDP Growth of 0.5 Percent for FY1999
Concurrent with the government's bold and swift economic measures, the Bank of Japan adopted a monetary easing policy. Specifically, the bank adopted the "zero interest-rate policy" from February 1999 to guide the overnight call rate to effectively zero (0.02 percent); the yield on ten-year government bonds generally remained below 2.0 percent.
We, the Economic Planning Agency, had firm conviction that these policies would result in definite positive GDP growth for the Japanese economy in FY1999. In our economic outlook released at the end of 1998, we projected positive growth of 0.5 percent for FY 1999.
At that time, only a few people believed that our projection was accurate. Virtually all of the more than 40 Japanese research institutes that estimated the subsequent fiscal year's growth rate projected negative growth (the average of the projections was for a decline of 0.6 percent), with only one institute projecting positive growth, and that was for a trifling 0.2 percent. Additionally the IMF, OECD and other international organizations all projected that the Japanese economy would continue to record negative growth.
Nevertheless, the government's swift and bold measures proved effective. In the first half of 1999, as consumption demand rose up more than expected, optimism spread through the summer and autumn of 1999, and many domestic private research institutes and international organizations revised their forecasts to above 1.0 percent. In comparison, the Economic Planning Agency remained cautious, and in our economic outlook released in November 1999 we only made a slight upwards revision in our projection to 0.6 percent. This was because we expected that during the fourth quarter, the winter bonuses to be disbursed in December would be at a low level, that this would push down consumption, and that overall demand would become stagnant.
The development of the fourth quarter was as expected, but in the first quarter of 2000 there are emerging signs of a clear recovery.
Additionally, business capital investment, which had long remained stagnant, increased by 4.6 percent over the previous quarter in the fourth quarter of 1999 (a year-to-year increase of 3.1 percent), indicating that Japanese enterprises had already begun to take a positive stance toward new investment, especially in information technologies equipment.
III.Economic Rebirth Measures and Outlook for FY2000
What, then, are the goals of the Japanese economy for FY2000? These are indicated by the "Policy measures for Economic Rebirth," that comprises the second stage of the economic revitalization policy. The government has positioned FY2000 as the year for securing full-fledged recovery, and is projecting steady real GDP growth of 1.0 percent. Though this might be actually a somewhat conservative projection, it should be a relatively large increase because the latter half of FY1999 stagnated while the first half showed high growth. (Figure 3). While further advancing the financial sector reforms, the new small and medium enterprises policy, and the demand expansion measures started under the emergency economic measures, in particular the goal for FY 2000 is to realize structural reforms in the Japanese economy.
Concerning financial sector reforms as the government has resolutely implemented financial liberalization and introduced the market principle to the financial industry, integration and merger activities among financial institutions are moving forward at a fast pace. At the same time, reforms are also advancing in the securities field, including two new markets: the Mother's section of the Tokyo Stock Exchange, which was launched last November, and Nasdaq Japan, which is scheduled to open at the end of June in Osaka. These new markets should make it significantly easier for small and medium enterprises and venture businesses to procure funds.
The new policy for small and medium enterprises is also steadily proceeding. The shakeout of weaker firms has been also moving forward since the end of 1999. Meanwhile, an increasing number of new businesses are being founded in the information, software, and elderly-care industries.
In making the transition to the second stage of tactics and strategies, the area where major changes are implemented is public works. With the "Policy Measures for Economic Rebirth", the focus is shifting to preparing social infrastructure that is suitable for the new era of diverse knowledge. In the fiscal 2000 budget, public works related expenditures total 9.4 trillion yen, which is the same amount as in the previous year (on an IG basis, combining national and local government expenditures, the total is approximately 40 trillion yen), but 2.06 trillion yen of these funds are targeted at the four key areas such as information, aging of society, environment, and new urban infrastructure.
The budget includes funds for connecting all Japanese public schools to the Internet by 2001, for information reforms whereby the "electronic government" will be completed by 2003, for making public transportation barrier-free, for composite urban redevelopment that is pedestrian-friendly, and for gene analysis projects.
Additionally, as 2001 will be the gateway to the new millennium, a large-scale on-line "Internet Fair 2001 Japan" is also being planned, and I myself am the cabinet minister in charge. All of Japan's prefectures and major cities will be participating, and numerous corporations and organizations will be setting up virtual pavilions on the Internet.
Having perfected the industrialized society with the mass production of standardized goods, in terms of information and telecommunications technologies, Japan has superior development and production capabilities for equipment. However, Japan is behind the US in the fields of software development and content creation. The Internet Fair will help to foster organizations and personnel for content creation in regions throughout the nation, bring new vitality to the Japanese economy, and thus bring new joys into the lives of the Japanese people.
Large-scale international research activities are also beginning under the "Policy Measures for Economic Rebirth." Specifically, the government has launched an international research initiative to clarify the basic visions for a vibrant aged society and for a sustainable recycling society. The two research projects to be pursued by the Economic Research Institute of the Economic Planning Agency.
For the research on an aged society that is filled with vitality, we think it is necessary to elucidate the industrial structures, employment systems, working environments, work apparatuses, and taxation and pension systems required to create a society where individuals may choose to continue working until they become 70 years old.
Regarding the research on a sustainable recycling society, it is necessary to drastically raise the labor productivity in the waste processing and resource recovery industry. To these ends, we must develop the necessary technologies, build the required facilities, foster the training of skilled laborers, and establish systems for voluntary participation.
IV. The Future of the Japanese Economy
The Japanese economy is rapidly recovering at present. The final performance for FY 1999 will probably be very close to the government's economic outlook (positive GDP growth of 0.6%), and it is highly likely that the economy will expand by 1.0% in FY 2000. The economy is then expected to move onto a new development path from FY 2001, and may achieve annual growth of over 2 percent, which is considered to be the natural growth rate.
But rather than quantitative growth, the most important areas for the Japanese economy today are structural reform and rapid transformation of organization function. The new Mori administration is determined to continue with an active economic policy towards these ends.
(1) The Explosive Information Revolution
So what will the Japanese economy's new development vector be? And what will Japan's economy be like in the future?
The first point that should be mentioned here is the ongoing information revolution. In Japan today, mobile information equipment is increasing at an explosive rate. Within this year, the number of mobile telephones in Japan will exceed 50 million units, surpassing the number of fixed telephone lines. Moreover, the so-called "i-mode" large-screen mobile units that provide access to the Internet are also spreading at a phenomenal rate.
The digitization of home appliances is progressing at a fast clip as well. Sony's new game machine, the Playstation II, incorporates communications functions and a DVD player, all at cost of less than 40,000 yen. Japan's electrical machinery manufacturers are rushing to place similar convenient, low-priced information equipment on sale, so there is no doubt that the Japanese information environment will improve markedly over the coming year.
(2) Structural Reform - Transcending the Work-centered Society
Second, Japan must urgently advance structural economic reforms, especially the rearrangement of the nation's economic framework. As I mentioned earlier, the major reforms in the financial system have shaken the very foundations of the vertical "keiretsu" corporate groupings centered around large financial institutions, and this trend will only intensify from next year as the integration and mergers of the nation's principal financial institutions that have already been announced are implemented.
At the same time, the corporate "keiretsu" affiliations linking major manufacturers and general contractors with their subcontractors are rapidly dissipating. Having been separated from their financial "keiretsu" affiliates, manufacturers and general contractors are now facing harsh price competition, forcing them to procure parts more quickly and at lower prices.
Moreover, the lifetime employment system, which was the most salient characteristic of post-war Japanese society, is starting to collapse. During 1999, leading corporations that were believed not to dismiss their regular employees before retirement age in the past announced restructuring plans one after another, and this has been accepted by Japanese society.
As a result of these developments, the way of thinking of the Japanese people is also changing. For decades, Japanese white-collar salaried workers have identified themselves not with their families, not with their local societies, not even with their religions or hobbies, but based on a powerful sense of affiliation with their work place. I call this phenomenon the "work place society," that is, a society that is dominated by work relationships. Nevertheless, this framework is now beginning to unravel, and this will likely lead to changes in Japanese ethics and aesthetics, that is to say, to a paradigm shift.
(3) Conceptualization that is Appropriate for the Era of Diverse Knowledge
When I wrote the 'Revolution in the Value of Knowledge' back in 1985, I predicted that the era of standardized mass production would end in the not too distant future, and that "the value of knowledge" would become the main source of corporate profits and economic growth. This expectation came true not in Japan, but in the US. When I wrote this book, the US had fallen into an economic crisis, with financial institutions going bankrupt, a stagnant manufacturing industry, heightened unemployment, social instability, and escalating twin fiscal and balance-of-payments deficits. However, the US subsequently deregulated its financial and transportation sectors, which led to the creation of new financial transaction, software and other knowledge value-creation industries through free competition, and this has resulted in the present long period of prosperity.
In the 1990s Japan was experiencing all of the unfortunate conditions that were present in the US during the 1980s, with the sole exception of a balance-of-payments deficit. In the case of Japan, however, the social structure that supported the nation's consummate standardized mass-production society had been fabricated by carefully contrived systems and organizations. There was support based on the national experience of success in achieving high economic growth during the post-war era. But, we absolutely must escape from these outdated arrangements. To achieve this, at the very least, the following three transformations will be essential: 1) a major reform of the government administrative structure, 2) a revolution in our view of lifestyle, and 3)a shift in the way that we assess human value.
The new Mori administration is determined to face these three challenges.
The basic policy for administrative reform was set by the Hashimoto administration at the end of 1997, and this was codified into law by the Obuchi administration in 1999. From January 2001, the central government organizations will undergo a major reorganization and the number of ministries and agencies will be reduced from 21 to 13. The primary goals of this reform are to strengthen the power of the prime minister and to enhance the prime minister's influence over budgeting and government administration, which had been finely partitioned by bureaucrats at the individual ministries and agencies.
I believe that the Mori administration will firmly maintain this policy direction and ensure that it is effective, along with the reform of the government structure.
This should ensure that the systems for cooperation among firms in each industry and the initiative of bureaucrats that are firmly entrenched in Japanese society are completely eradicated.
Turning to the second transformation, a revolution in the Japanese people's view of lifestyle, the important thing is that we must realize a way of life to enjoy the present rather than worrying about the future. Under Japan's traditional culture we are taught to first be concerned about our worries and only enjoy ourselves thereafter, which is to say that a pessimistic and wary approach to life is deemed admirable. In fact, this teaching was only broadly applied during the post-war high growth era because of the facts that large corporations were always advantageous and asset prices inevitably rose. Those who zealously studied for the difficult university entrance exams in their youth gained entry to top-ranked universities, were hired by the leading firms, and were promised the comforts of an upper middle-class life for the rest of their days. Those who scrimped and saved to buy land and housing early in their careers reaped the fruits of real estate appreciation. These are the conditions that gave credence to the view of lifestyle, worrying about the future rather than enjoying the present. And this is also the reason why Japanese savings rates remain exceptionally high to this very day even though the economy has entered a mature stage and the population structure is aging.
While the elderly of Japan are wealthy, with many assets and large bank balances, a number of Japanese 80-year-olds save a portion of their pensions each month. In order to realize a true rebirth of the Japanese economy, the Japanese people will first have to adopt the custom of enjoying life. In this regard, the losses suffered on leading investments from the sharp decline in land prices in the 1990s and the blows now being dealt to the lifetime employment system may actually prove to be highly educational.
Changing the view of lifestyle is also closely related to the third necessary transformation: a shift in the way that we assess human value. In Japan, individuals who slowly climb up the bureaucratic personnel ladder at massive corporations and central government organizations often receive greater respect than creative entrepreneurs like Bill Gates and Warren Buffet. At Japanese schools, the students who are praised are the ones that do a good job at memorizing their textbooks and who score well on exams, and in the arts world the greatest respect is given to those schools that faithfully imitate the techniques of their founders. In Japan, originality is scorned as being egotistical, and strong individuality is disdained as peculiar. This perspective on the human value, which also resulted from copying the leading technologies from the West to build up the standerdized mass-production society and became firmly established in the Japanese educational system after World War II, must be revised for Japan to embark on a new developmental stage with the creation of many new businesses.
To rectify this weakness, the Japanese government has launched the National Conference on Educational Reform aimed at a radical reform of the nation's educational system. As Prime Minister Mori is a politician who is exceptionally conversant with educational issues, the implementation of substantial reforms is expected.
(4) Fiscal Reconstruction Must Take Place within the Context of Overall Social Reformation
In closing, I should like to make a few brief comments regarding the status of Japanese government finances.
The situation in Japan's central and local governments finances is almost critical. Including the two supplementary budgets, the net deficit for FY 1999 was on the order of 42 trillion yen, and 43.4 percent of the expenditures were financed by government bonds. While this situation will ease slightly during fiscal 2000, the government fiscal deficit is about 7.8 percent of GDP. Combining the central and local government borrowings, the outstanding balance of long-term government debt is expected to reach 645 trillion yen in FY 2000, which is approximately 130 percent of GDP.
As Japanese interest rates are presently extremely low, with the yield on ten-year government bonds holding around 1.8 percent, the interest payments on the cumulative debt are relatively small. But they will certainly amount to a great burden if domestic interest rates rise to international levels. Many analysts insist, based on these figures, that reconstructing the national finances will eventually require major tax increases and expenditure reductions so great that they will inevitably lead the Japanese economy into a decisive recession.
This type of deterministic logic, however, is mistaken. The Japanese economy is presently suffering from a triple recession, so tax receipts are exceptionally low. In particular, taxes on corporate income (corporation and enterprise taxes) have declined sharply, reflecting the stagnant business performance. Additionally, while the low interest rates lessen the interest payment burden on the public debt, they also reduce the tax payments received on interest income. Although the outstanding balance of long-term government debt stands at 645 trillion yen, Japan holds some 1,330 trillion yen in personal financial assets. My point is that Japan's long-term fiscal problem should not be debated assuming the present conditions of the 1998-1999 recession and the structural incongruities. Rather, this issue should be discussed based on the future conditions following economic recovery, structural reform, and a paradigm shift.
In the 1980s, the US was also suffering from a fiscal deficit, but the US government is now enjoying a budget surplus so large that there is an active debate on how the excess funds should be used. During the 1980s, or even as recently as 1992, I do not think that anyone has predicted that the US government finances would shift to a surplus within such a short period of time. The fiscal balance has moved into the black precisely because the structural reforms of the US economy were successful.
Former Prime Minister Obuchi repeatedly quoted the ancient Japanese proverb "He who hunts two hares loses both." The Prime Minister was often criticized for only chasing the hare of economic recovery with expansion of expenditure, so letting the fiscal deficit hare run wild. But I say this criticism was unwarranted. The two hares of economic recovery or economic rebirth and fiscal reconstruction are not running in different directions, but rather moving along the same course, and the Prime Minister was correct. We must first bag the hare of economic recovery and economic rebirth that lies just before us, and only then hunts down the hare of fiscal reconstruction that waits further down the path. If we abandon our economic rebirth measures halfway and rush to increase taxes and restrict government expenditures, we surely loose both hares and come home empty-handed.
The Mori administration takes over this policy and adopts positive fiscal policy stance putting a top priority on the economic rebirth. Every necessary policy measures should be considered in response to economic situations.
We are resolutely determined to push forward with the revitalization of the Japanese economy and the rebirth of Japanese society.
Thank you very much.