The Future of the Japanese Economy and the IT RevolutionLead speech at the 39th Council Meeting at Ministerial Level

26 June 2000

Taichi Sakaiya, Minister of State

Economic Planning Agency

Government of Japan

1.Preface: The Japanese Economy and the Future Policy Tasks

The Japanese economy is presently overcoming a long recession phase and simultaneously accomplishing major structural reforms toward the realization of a "knowledge value" society.

As I first contended in a book written in 1985, the "knowledge value" society is now becoming the dominant paradigm in the post-industrial society. At that time, I defined the "knowledge value" society as "a society where the value of knowledge is the primary source of economic growth and corporate profits." This is now being achieved in North America and several European and Asian countries via the IT revolution. It can be said that the so-called "New Economy" has been brought about by a momentous change in social systems triggered by the IT revolution and that it represents the initial phase of a new stage of the historical development. The U.S. economy appears to be already in the midst of this process. However, Japan--which built up the consummate industrial society for the mass-production of standardized goods--has vacillated at the advent of this great change. This vacillation was a major cause of the stagnation of the Japanese economy during the 1990s.

2.The Japanese Economy over the Past Two Years

(1) Overcoming the Greatest Recession in the Postwar Era

From 1997 through 1998, the Japanese economy experienced its most serious recession in the half century since the end of the World War II. To counter this recession, the administration led by Prime Minister Keizo Obuchi, which took office in late July 1998, implemented policies in every field including fiscal, tax, and financial measures, and struggled to prevent Japan from falling into a deflationary spiral.

First, the Obuchi Administration introduced market principles into the financial industry, with thorough adherence to the process of selection and elimination. Second, the administration worked to prevent bankruptcies of small and medium-sized enterprises by creating a special credit-guarantee framework for these firms. Third, the administration expanded demand via large-scale public works expenditures and tax reductions. Meanwhile, the Bank of Japan has adopted the so-called "zero interest rate" policy since February 1999 to help underpin the economy via monetary policy. As a result of these efforts, since the summer of 1999, confidence in the outlook for the Japanese economy has been recovering, albeit slowly, leading to a rise in stock prices and a recovery in capital investment.

(2)Achievement of Positive GDP Growth in Fiscal Year 1999

In the fiscal year 1999, the Japanese government gradually shifted the relative emphasis of its policies toward projects for the next century and began to focus its efforts on implementing structural reforms and preparing the foundations for new development, as well as on stimulating the economy via aggregate demand expansion. Consequently, in fiscal year 1999, the Japanese economy achieved a positive real GDP growth of 0.5 percent, essentially attaining the government's target.

3. The Present Conditions of the Japanese Economy

Although the Japanese economy is still facing a severe situation, the movement toward economic recovery has become clear. The government has positioned fiscal year 2000 as "the year of self-sustaining economic recovery," and aims at putting the economy on a self-sustained recovery path led by private demand.

Roadmap of Japan's Economic Rebirth

The government's Economic Outlook released last December forecasts a real GDP growth of 1.0 percent for fiscal year 2000, but at present many private research institutes and international organizations are predicting higher growth rates in their recent projections.

Real GDP Growth Projebtions

The policy issue in Japan henceforth is to enhance qualitative changes, or structural reforms.

4. The Outlook for the Japanese Knowledge Value Revolution

Over the past two years, the Japanese economy has achieved rapid structural reforms, the purpose of which is to change various systems and customs established to achieve an industrial society for the mass-production of standardized goods toward ones more appropriate for the knowledge value society.

(1)Progress Toward the Knowledge Value Society

The first attempt has been to change the financial system. In 1998, the Japanese government abandoned its traditional policy of protecting financial institutions across the board and implemented a strict market-oriented policy by enhancing selection and elimination. This policy change has resulted in a major restructuring of the financial sector. Japan's 17 major banks will be reorganized into four large banking groups by next April.

The rearrangement of the financial institutions is shaking the "keiretsu" corporate groupings that have been organized around large financial institutions. Moreover, the business custom of placing and receiving orders based on "keiretsu" affiliations is also in the process of collapse in some fields, and transactions over the Internet are on the rise.

Employment customs are also changing and the practice of lifetime employment is weakening.

Furthermore, policy direction toward small and medium-sized enterprises has shifted from protection to an emphasis on the establishment of new businesses, by which the government is striving to attain a low-cost structure throughout Japanese economic society.

(2)New Developments

Private capital investment has been increasing since the fourth quarter of 1999. It is said that a central role has been played by IT-related investment. The spread of information equipment in the household sector has also been remarkable. The number of mobile phones has already reached 50 million units, surpassing the number of fixed telephone lines. Particularly, the number of "i-mode" units, which have larger screens and provide access to the Internet, is projected to exceed 10 million units within fiscal year 2000. This has the potential of completely changing the life and the information environment of the Japanese people.

The nursing care insurance system, which was launched in April 2000 to address the aging of the society, is expected to lead to expanded employment through the market entry of private firms into the elderly care business and the expansion of services.

In the environmental field, Japan has now begun earnest efforts towards reducing, reusing and recycling of goods following the enactment of the basic law for the promotion of recycling society.

(3)Issues to Realize the IT Revolution

Japan's IT activities can be comparable to those in the U.S. in terms of production capability of IT-related equipment. However, the acceleration of economic growth and improvement of productivity resulting from the IT revolution has not yet been realized. Japan is particularly behind the U.S. in development of software and in the creation of versatile content. Japan has the outstanding advantage of creating content in the fields of animated cartoons and software for games. However, the financial system and the social evaluation system are not sufficient to develop them.

IT Production in the World(1997)

IT Capital Stock in the U.S. and Japan (as percentages of GDP)

To realize the IT revolution, radical changes in the social structure--ranging from a transformation in the educational system and a reform in administrative organizations to corporate governance and the social evaluation system-- are essential.

5.Conclusion: The Rebirth of Japan and the IT Revolution

As noted in the OECD Secretariat's "Growth Project" report, promoting the IT revolution to improve productivity throughout the economy will be an imperative factor for the revitalization of the Japanese economy, or for the realization of a Japanese knowledge value revolution. I have great expectations for the OECD's final report, which includes policy recommendations by the Secretariat.

I believe that three fields--IT, the environment, and the response to the aging of society--will be the key areas for rapidly achieving a Japanese renaissance. Although Japan is facing extremely harsh fiscal conditions, it also has massive savings that surpass the fiscal deficit, and I am convinced that Japan has sufficient strengths to complete a knowledge value revolution within two to three years.