Speech by Minister Taichi SakaiyaSorbonne University Paris, January 7, 1999

I am honored and grateful to have this opportunity to speak before the people of France on the subject of the Japanese economy and its future outlook.

I would like to begin by saying that Japan today is in the midst of carrying out major changes in how it approaches the question of the economy. I dare say that what we have in mind is a truly fundamental transformation. This is a transformation that will not stop with structural modifications of the economy, but must extend to the very roots of our social system as well.

The economic policies which the Obuchi administration espouses are totally at variance with those of the preceding Hashimoto administration. Nevertheless, as both administrations are rooted in the Liberal-Democratic Party, the Obuchi Cabinet obviously has carried forward many of the initiatives put in motion by the Hashimoto government. The most important of these is the commitment to government and administrative reform and the pursuit of a free market system in which sovereignty rests with the consumer and not with the bureaucratic structures of the past. Thus, under the leadership of Prime Minister Obuchi, not only is the program for administrative reform proceeding as scheduled, but we have added new momentum to various aspects of the program, such as trimming away many of the regulatory powers of the bureaucracy. Furthermore, we have broadened the scope and accelerated the pace of the reform of the financial system and deregulation.

In the area of economic and fiscal policies, the Obuchi administration has adopted an outlook which is very different from that of its predecessor. In assessing the prospects for the Japanese economy, I feel that the Hashimoto cabinet adopted a highly optimistic view of the near term while embracing an equally pessimistic view of the long term. Consequently, it assigned priority to achieving fiscal balance in the long term at the expense of the immediate performance of the economy. This of course was done by opting for tight fiscal policies.

On the other hand, the Obuchi cabinet has identified itself as the cabinet for "economic revitalization" and has pledged all its powers to stimulating demand and bringing about an economic recovery. Even prior to the birth of the new administration, Mr. Obuchi had already committed himself to a tax cut of 6 trillion yen and the passage of a supplementary budget bill funding projects of no less than 10 trillion yen. Thus, the new administration hit the ground running, and it is for this reason that so much has been achieved in terms of economic policy action in the mere five months that the new cabinet has been in existence.

In the area of near-term policies for economic management, what Prime Minister Obuchi and his cabinet ministers did before all else was to clearly delineate three specific goals for the coming fiscal year. As our first goal, we have pledged to achieve positive economic growth in fiscal 1999. To review the recent record, unfortunately the Japanese economy registered a negative growth rate of 0.4% during fiscal 1997. Our current projections indicate that the economy will again contract by about 2.2% in fiscal 1998. Therefore, we are actually committing ourselves to a very bold policy position when we say that we shall definitely achieve positive growth in fiscal 1999 which runs from April 1999 through March 2000.

Our second goal is to put a stop to the upward trend in unemployment. Japan has traditionally been able to maintain very low unemployment rates through its system of life-time employment, but unemployment has risen steadily in recent months reaching 4.4% in November 1998. No doubt, it is quite conceivable that unemployment may temporarily rise even further as a result of economic fluctuations. However, we are committing ourselves to the position that we shall not allow the unemployment rate for the entire fiscal 1999 year to rise above the 4.4% where it stands now.

Our third goal is to promote greater international harmonization. In this regard, we are committed to avoiding the intensification of trade and economic frictions. Similarly, we have pledged ourselves to doing all that is in our powers to revitalize the Asian economy.

We have repeatedly asked ourselves this question: "What must be done to achieve these three objectives?" With this question in mind, we have carefully observed and analyzed the problems which exist in the Japanese economy today and have tried to pinpoint the causes of the current recession. Our investigations have led us to the conclusion that the first and foremost problem of the Japanese economy is to be found in its ailing financial system. Therefore, the Obuchi administration has first of all concentrated its energies on bringing greater stability to the financial system.

Japan's financial institutions sustained serious damage in the aftermath of the monumental speculative bubble of the late 1980s. Stock and real estate prices rose rapidly until 1990, and thereafter collapsed with equal speed. During the boom years, banks and other financial institutions provided very large amounts of credit collateralized against land and stocks whose values had become severely bloated during the late 1980s. The unraveling process began in 1990 when stock prices fell, soon to be followed by real estate prices. As a result, almost all financial institutions were left holding very large volumes of non-performing loans. Subsequently, beginning in the opening years of the decade, Japan began to experience a marked trend toward credit contraction. In 1980, the total outstanding loans of all Japanese financial institutions amounted to 56.8% of GDP. A decade later in 1990, this ratio had climbed to 103.1% of GDP. In other words, in just ten years, there had been a 45 percentage point increase in the relative size of lending. Thus, when stock and real estate prices fell precipitously, financial institutions quickly became saddled with huge non-performing loans. They reacted to this situation by cutting back on new lending. Needless to say, here was a sure formula for economic stagnation which in time would give way to a serious recession.

What did the Japanese government do in the interim? Between 1992 and the first half of 1998, that is, before the inception of the Obuchi administration, the government put together a total of seven economic packages featuring fiscal spending and tax cuts for projects totaling 80 trillion yen. Unfortunately, the impact of this fiscal stimulation was not as large as expected, the reason being that the credit provided by financial institutions was contracting at a tremendous pace during the same period. If we take into account the credit contraction which occurred in lending by non-financial corporations, the fiscal stimulus had been clearly dragged by the effects of credit contraction. In face of this fact, the Obuchi administration decided that it must completely sweep away the systemic risks which have plagued Japan's financial institutions over the past six years. During the summer of 1998, the government put together a 60 trillion yen scheme for the early stabilization of the financial system. Regarding this 60 trillion yen, this is the largest sum ever budgeted for normalizing a financial system in the entire history of mankind. Similarly, this sum is equivalent to 12% of Japan's GDP and represents a proportional commitment unmatched by any other country of the world.

Of this 60 trillion yen, a total of 17 trillion yen has been earmarked to fund the Deposit Insurance Corporation. With the backing of these funds, all the deposits and debentures of Japanese financial institutions will be fully guaranteed through March of 2001. Another 18 trillion yen has been set aside for the reorganization of failed financial institutions. This facility provides a sure line of defense in the event of bank failure as has happened with the Long-Term Credit Bank of Japan and the Nippon Credit Bank which have been temporarily nationalized following the determination of their negative net worth. The remaining 25 trillion yen is to be used for the recapitalization of sound financial institutions. Up until now, the government has received applications for capital infusion totaling approximately 6 trillion yen from the large, nationwide banks. We expect that medium-scale and smaller banks will be coming forward with their requests shortly. We believe that this initiative will go a long way toward improving the capital adequacy ratios of Japan's financial institutions.

While providing the financial institutions with public funds, the government is also pressing them to thoroughly restructure themselves. It is hoped that the financial institutions will emerge from the process of re-organization and consolidation as stronger and more efficient institutions, each concentrating in its own field of specialty and particular strength. In my personal opinion, the problems of the financial sector will be more or less settled within the relatively near future.

The government is taking further steps to cope with the problems of the financial sector in conjunction with the Emergency Economic Package which was finalized on November 16. This Emergency Economic Package contains various provisions for counteracting the credit crunch, taking the general contraction of credit into account. Specifically, various government financial institutions, such as the Small Business Finance Corporation and the Japan Development Bank, have been empowered to participate in corporate lending at a far larger scale than in the past. Similarly, the prefectural credit guarantee associations have been authorized with an additional 20 trillion yen facility for providing loan guarantees to small- and medium-sized enterprises. These steps have already made a major contribution to improving the funding environment for a large number of small enterprises.

The second economic action targeted by the Obuchi administration has been the stimulation of aggregate demand. Toward this end, the Emergency Economic Package of November 16, 1998 contains additional provisions for projects totaling 17 trillion yen. Of this amount, 8.1 trillion yen has been budgeted for social infrastructure projects. Projects to be chosen for funding will be measured against the triple criteria of "immediate impact, linkage effects, and future promise." In addition to this, four special projects have been identified for implementation. These future-oriented projects are to be placed under the direct supervision and leadership of Prime Minister Obuchi.

These four projects are as follows: the fundamental restructuring of information network for the creation of a high-tech nation based on information technology; the improvement of the urban transportation and living environment of Japan痴 major metropolitan areas by enhancing those international competitiveness; promoting new city planning for a safer and more comfortable environment; and, the creation of a more flexible employment system. From the perspective of Japan's traditional bureaucratic structures, this approach of assigning projects which overlap the conventional boundaries of government ministries to a "virtual agency" functioning under the direct jurisdiction of the prime minister can prove to be dramatically effective. As such, these projects hold out the promise of improving Japan's bureaucratic structures and rectifying their most serious faults, foremost of which is the obsession with "turf" which has lead critics to say that our ministries are all locked into their own fiefdoms and oblivious of the nation.

The third theme of the Emergency Economic Package is the expansion of employment. Japanese labor system have traditionally been quite closed and inflexible. In this context, labor practices were characterized by the conventions of life-time employment, seniority pay, and group decision-making. Hence, for many years it was generally believed that a high-school or college graduate finding employment with a certain company or government ministry would stay with the same organization until retirement at age sixty, or at most would be transferred to an affiliated company belonging to the same corporate group. Because of this widespread practice, the government's employment-related policies were clearly geared toward upholding the system of life-time employment. For instance, the government provided subsidies to specific industries and regions hit by recession to encourage companies to keep their redundant workers on their payrolls.

This policy may have made good sense when the Japanese economy was enjoying strong and sustained growth. That is, a business downturn in a specific industry could be assumed to be a temporary phenomenon and the affected sectors could be expected to shortly return to their previous growth path. But these assumptions have been rendered inoperative by the dramatic changes which have occurred in the Japanese economy during the present decade. What we now have is a clear polarization between sectors which can be expected to expand and those where growth has come to a dead stop. Faced with this new reality, Japan must now actively address the two separate challenges of promoting growth in new industrial fields while speeding the contraction of senescent industries. In order to succeed in this vital undertaking, it is necessary to heighten the mobility of labor, capital and new technologies.

This is why we are paying very close attention to measures which will introduce greater flexibility and mobility to our labor system. As such, the Emergency Economic Package emphasizes various programs for occupational training, the promotion of labor placement systems, and support for establishing new enterprises. While these are measures which were almost totally overlooked or undervalued by the government in the past, approximately 1 trillion yen will be budgeted for these programs in the current supplementary budget and the budget for fiscal 1999. For Japan, this represents a highly innovative departure from traditional policy lines.

This now brings me to the subject of the fiscal 1999 budget, the government draft of which was completed on December 25 of last year. I believe that the draft budget bears very eloquent testimony to the conceptual underpinnings of the economic structural reform program and the fundamental transformation of Japanese society which the Obuchi administration is seeking to implement.

The first point that must be made is that the draft budget makes provisions for tax reductions amounting to 9.4 trillion yen. As I have already mentioned, even before taking office, Prime Minister Obuchi had committed himself to personal income tax and corporate tax reductions of no less than 6 trillion yen. These commitments will be fully and properly implemented. The maximum personal income tax rate, including both national and local taxes, will be brought down to 50%, while lower income categories will benefit from an across-the-board flat-rate tax cut. As for corporate taxes, the effective rate will be lowered to roughly 40%, placing Japan roughly on par with the United States and France.

Some of the most notable features of this tax reduction include its policy-specific tax cuts targeting the acquisition of new homes and corporate spending on computers, and temporary tax cuts aimed at jump starting the economy. The most important of these measures relates to tax exemptions for the acquisition of new homes. Under the proposed rules, a new homeowner will be able to claim a maximum tax exemption of 5.875 million yen over a fifteen year period. Combined with the very low interest rates on home loans, this provision will be expected to contribute to a significant surge in housing starts in the next fiscal year.

Another notable change in tax rules relates to the depreciation schedule for corporate purchases of computers. Under the proposed rules, corporations will be able to write off the cost of computers purchased at less than 1 million yen in a single year. This move will certainly expand computer sales in Japan. Moreover, its impact will be felt not only by the Japanese electronics industry, but also by the global electronics industries which will benefit from the revitalization of a major market.

Taken in total, these tax reductions add up to 9.4 trillion yen. While these measures are primarily aimed at pulling the economy out of its current recession, we can see how the Obuchi administration has taken this opportunity to accelerate the advance toward the goal of a small government and the transformation of Japan from a land of bureaucratic leadership to one of consumer sovereignty.

Turning next to the question of Japan's contribution to the Asian economies, I dare say that we have done many things in this area. In addition to the $44 billion which Japan had earlier allocated to the economic assistance of Asia, we have more recently allocated an additional $30 billion under the "new Miyazawa initiative." We are also providing further support by expanding our ODA loans to the region. We believe that Japan will be able to make an important contribution to the Asian economies through these assistance funds and through the expansion of our imports resulting from the recovery of our own economy.

For 120 years since the start of the Meiji Era and the inception of modern Japan, our nation was focused on creating a standardized mass-production economy under the guidance and leadership of the bureaucracy. The 120 years of hard work during the three consecutive Meiji, Taisho and Showa Eras was richly rewarded with the full realization of this goal. It seems to me that Japan in the 1980s attained the highest peak of industrialized society ever realized in the history of the world. In a sense, it was the "optimal industrialized society." Thus, Japan continues to lead the world in such industries as cars and electronics as these are industries which are most amenable to standardized mass-production. And it is in these areas where Japanese manufacturers excel in terms of productivity, competitiveness and quality. Thanks to this manufacturing prowess, the products of our island nation have covered the entire globe and are prized and applauded by the consumers of all countries.

However, while Japan was basking in its industrial accomplishments, such countries as the United States and Europe had already passed through the age of the modern industrialized society and were trying to come to grips with the newly emerging age of knowledge- and information-based society. In 1985, I wrote a book which I entitled the "Knowledge-Value Revolution." In it I tried to examine in detail the direction of these changes and their ramifications. Looking back after the passage of 13 years, I feel that my analysis and predictions were to a great extent accurate. Unfortunately, however, Japan did not move in the direction that I had predicted or hoped for.

In competing with Japanese exports during the 1980s, many American manufacturers were left with no choice but to thoroughly and boldly restructure their businesses. Plants and factories were closed and the pace of industrial transformation was accelerated. There is no doubt that during this period many Americans experienced the pain of losing their jobs or seeing their paychecks reduced on account of the growing volume of imports from Japan. To a somewhat lesser degree, similar events were occurring in Britain and Germany at the same time. But this pain was not lost on the European and American people and they came back in full force by creating many new software and information-processing industries. I believe these countries are now leading the way in the creation of a new "knowledge-value society" which allows its citizens to choose from a very wide range of available designs and services. I believe that the birth and development of this new kind of society which provides its members with the choice of a highly diverse scope of values and goals is in fact responsible for the expansion and low unemployment of the American economy and the continued steady growth of the European economies. The launching of the single European currency will no doubt lend fresh impetus to the advance of the knowledge-value by giving rise to an integrated market of enormous scale in rich cultural heritage.

As compared to the American and European experience, perhaps Japan was simply too successful in industrialization. We had erected a meticulously ordered industrial society, and there was little reason to doubt the wisdom of continued dependence on manufacturing industries based on standardized mass-production approaches. So, can you imagine our disappointment when we saw the world moving away from the industrialized society and toward the new paradigm of knowledge-value society? It seems to me that the Japanese remain locked in the clutches of a deep depression which comes from contemplating this unforeseen turn of events. The Asian countries which had followed the lead of Japan and had rapidly industrialized themselves during the 1980s find themselves today in a similar predicament brought on by this historic tidal shift. Be that as it may, Japan is determined to ride out the present storm and to make its best efforts toward gaining entry into the new age by creating its own knowledge-value society.

As I have explained, the Obuchi administration has taken various steps to lead the nation to economic recovery. By the same token, it has clearly outlined the new directions in budget allocation for leading the nation into a new era. What still lies ahead is the even greater challenge of re-organizing and restructuring the government bureaucracies, a challenge which has thoroughly eluded all challengers of the postwar period. This coming April, the Obuchi administration will submit a bill to the Diet for a series of laws for the re-organization of the bureaucracy slated to be implemented in the year 2001. I am hopeful that the bold, future-oriented economic policies of the Obuchi administration and its unyielding determination to carry through the program of administrative reform will trigger a Big Bang in Japan's bureaucratic structures and that this will serve to usher in a fundamental reform of Japan's bureaucracy-oriented society and lead to the establishment of the sovereignty of the consumer.

Before ending this talk, I would like to take this opportunity to impress upon you that Japan is a highly open market. In fact, in the area of manufactured products, Japan ranks together with Hong Kong and Singapore as the world's most open market. There is not a single manufactured product for which Japan retains import-volume restrictions. The importation of textile products is totally free, and Japan is a very major importer of high-quality French and Italian fabrics and apparel. I am happy to note that not a single anti-dumping case is pending in Japan, nor is Japan pursuing any voluntary export restriction agreements from its trading partners. Moreover, Japan's average tariff rate for manufactured products stands at roughly 1.5%, as compared to approximately 5% for Europe and the United States. The only import restrictions which apply to manufactured goods are those pertaining to environmental protection and consumer safety and protection.

In the area of agricultural products, Japan retains some import restrictions, such as for the importation of rice. However, in compliance with the Uruguay Round agreement, these restrictions are being lowered from year to year.

Turning next to the market for services, I would like to emphasize that Japan is going forward with an accelerated program for deregulation and liberalization. The long-standing protection of the financial sector by the Ministry of Finance has been terminated and Japan is moving forward with a Big Bang program that will place it on par with Europe and the United States. We are earnestly examining and preparing for the liberalization of such strategic industries as telecommunications and airlines. And, I hasten to remind you that Japan continues to register huge trade deficits in its service balances with both Europe and the United States.

In its pursuit of economic revitalization and growing employment opportunities, Japan is very eager to receive foreign investments from Europe and the United States. Thus, we are very happy to note the recent surge in the activities of European and American financial institutions in Japan. May I also remind you that the main streets of Tokyo and Osaka are crowded with French and Italian boutiques, and Toys 迭? Us, the American retailer of toys, has grown to become Japan's top seller of toys within ten years of opening its first store in our country.

As Director-General of the Economic Planning Agency, I am responsible for improving the investment environment for foreign companies seeking to do business in Japan. I would be very happy to receive any requests or comments on this matter from you and all the people of Europe.

Japan stands committed to the free market system and to the sovereignty of the consumer. Today, it has put aside its fears and hesitations and has taken the first steps toward a new era. During the first half of this year, the Economic Planning Agency is scheduled to draw up a new medium-term outlook for the Japanese economy. This medium-term outlook will delve into the question of how the Japanese will be living in the 21st century, and I expect that this document will go beyond the issues of economic structure to address the more fundamental subject of Japanese society and culture. Today, Japan faces the very difficult challenge of a declining birth rate. Seen from a different angle however, this phenomenon underscores the fact that our people have been freed from the fear of a young and untimely death. Today, Japan is groaning under the burden of a huge volume of non-performing loans brought on by the sharp drop in real estate values. Again, seen from a different angle, this drop in land prices has made it possible for the Japanese people to use the nation's scarce land resources more freely.

Japan is the world's largest creditor nation. Japan has the largest stock of personal savings in the world. And among all the nations of the world, Japan has one of the top levels of higher education. Blessed with this rich heritage, Japan should certainly be able to make many very important contributions to the world of the 21st century. I will close by saying that the Japanese people today are earnestly aspiring to this noble dream and are very much aware of the responsibilities that come with these potentialities.

Thank you very much.