The Present and Future of the Japanese Economy-From the Economic Recovery to the Knowledge Value Revolution-

Taichi Sakaiya
Minster of State Director-General, Economic Planning Agency
Government of Japan

Speech for the East Asia Economic Summit Singapore, October 1999

It is a great honor for me to be given this opportunity here today to speak about the present conditions and the future outlook for the Asian economy.

Speaking only about the area from the Malay Peninsula to the east, Asia can be broadly divided into three sectors: Japan, China, and the rest of East Asia including South Korea, Taiwan, Thailand, Malaysia, Indonesia, the Philippines, and Singapore. I will begin my remarks by addressing the situation in Japan.

Over the past 30 months, the Japanese economy has been under extremely severe conditions, and this hardship demanded the process of transcending the paradigm of the modern industrialized society.

Japan aimed at achieving a modern society from the end of the 19th century, and worked to foster industries for the mass production of standardized goods. Specifically, the nation posted 40 years of high economic growth following World War II, and achieved the highest per capita GDP in 1987 among all nations with a population of at least 10 million people. It may be said that at the end of the 1980s, Japan had formed the most perfect modern industrialized society in the history of mankind.

At that time, however, the tide of human civilization had already entered a new stage of historical development- the knowledge value society. This was brought about on the supply side by the advances in information management technologies, which enable more diverse manufacturing and distribution, and on the demand side by the expanded pursuit of the value of knowledge to meet individual preferences. As a consequence, Japan, which had built up a modern industrialized society for the mass production of standardized goods, faced reduced opportunities for investment and an enormous surplus of funds. While some of this surplus was invested in foreign corporations and overseas real estate, the majority was invested in Japanese stocks and real estate, resulting in abnormally high prices for these assets.

What is more, this problem was exacerbated by the arrangements for harmonious relations in each industry, which had been established under bureaucratic guidance to foster standardized mass production. Virtually all Japanese banks provided massive loan, accepting shares and land as collateral.

High prices that are dissociated from actual corporate profit levels cannot be sustained. Securities and land prices plummeted from the 1990s, and the financial institutions were left with a tremendous amount of non-performing loans. Naturally, the financial institutions' equity capital deteriorated, and lending was restricted. These difficulties were the root cause of the prolonged recession in the Japanese economy.

The administration of Prime Minister Obuchi, which was launched in July 1998, resolved to sever the cycle of sluggish performance from three directions: finance, demand, and employment. In terms of finance, last autumn the administration established a 20 trillion yen special credit guarantee system for loans to small and medium enterprises, and created a revitalization and recapitalization scheme including some 60 trillion yen allocation for governmental guarantee to restore soundness of the financial institutions and prompt the weeding-out of weak institutions. As a result, the Long-Term Credit Bank of Japan and the Nippon Credit Bank were temporarily nationalized, and several regional banks were closed. The other surviving financial institutions are moving forward with restructuring efforts and mergers. The Obuchi administration's bold financial policy not only contributed to the realignment and increased the soundness of financial institutions, but also sent a strong message that the principle of free market competition has been introduced into the Japanese financial sector.

Turning to policies for the increase of demand, the fiscal 1998 supplementary budget and the fiscal 1999 budget include large increases in government allocations for public works, as well as tax reductions totaling over 9 trillion yen in the form of permanent reduction in income and corporate taxes and special taxation measures to promote the purchase of houses.

In part due to the effects of these policy measures, the Japanese economy has shown distinctive improvement from 1999, recording annualized growth rates of 8.1% in the January-March quarter, and 0.9% in April-June. I have repeatedly stated that Japan would achieve a positive growth rate of 0.5% in fiscal 1999, and many domestic and foreign institutions are now forecasting even higher growth rates.

Nevertheless, this does not imply that the problems facing the Japanese economy have been resolved. The unemployment rate remains at a high level of 4.7%, and private-sector non-residential investment continues to decline. While corporate profits are improving, they remain at a low level.

There will be two important items to boost corporate profit rates and expand investment. The first is the bold restructuring of existing corporations, and the second is the creation of new firms.

At the extraordinary Diet session scheduled for this November, the Obuchi administration is expected to present a second supplementary budget for fiscal 1999 to further promote the economy as well as measures to support small and medium enterprises and venture businesses. Particular emphasis will likely be placed on upgrading the information infrastructure required for Japan's transition to a knowledge value society, improving the international competitiveness of major cities, redeveloping central urban areas towards boosting efficiency in a society with a small number of children per family, restructuring industries, and promoting science and technology.

In sum, Japan is presently moving to transcend the modern industrialized society to become a knowledge value society, and this represents a new stage of historical development. In a recent cabinet decision, "the greatest freedom and the smallest dissatisfaction" was adopted as a social goal for the nation ten years. Today, Japan is steadily promoting major reforms toward the realization of a new society-"knowledge value revolution". Japan in the future will be in the era of diverse knowledge.

Asian Economy - Economic Recovery and the Structural Reform

Next, I should like to present my opinions about the economies of the other Asian nations. I interpret the Asian economic crisis over the past 30 months as part of the process of industrialization. We should note that from the 1980s, the actual economic development in Asian countries moved away from classic development theory. Traditional development theory states that the industrialization of developing nations begins with upgrading the physical infrastructure, such as roads and telecommunications networks, which integrates the domestic market, and with the promotion of import-substitute industries (which target the domestic market).

During the 1980s in Asia, however, foreign capital and technologies were introduced, and export industries (which target foreign markets) developed. The reason of this difference is as follows: from the 1980s, with the liberalization of capital transactions, the introduction of capital became facile, and with the advances in the computer field, middle management gained access to advanced technologies. Also, with the liberalization of trade, production for overseas markets became possible.

The entire world was amazed by the "miraculous" growth that was achieved. Up until around 1995, it was widely believed that the 21st century would be the "Asian century." However, there were three prerequisites for the continuation of this process: (1) the expansion of exports from stronger international competitiveness; (2) stable labor and social infrastructure costs from an appropriate allocation of resources; and (3) improved financial and distribution systems in accordance with the industrial development.

While, however, the Japanese yen and the Chinese yuan depreciated against the U.S. dollar from the mid-1990s, the international competitiveness of many Asian nations weakened due to rising labor costs and more restricted access to social infrastructure, and their balances of trade fell into the red. This led to the monetary crisis from 1997, and to a great deal of confusion.

Right from the outbreak of the crisis, I believed that it would be overcome within a relatively short time period. This is because I believed that the situation was analogous to the dramatic recession that Japan experienced in 1965 as part of the process of rapid industrialization.

The Japanese economy overcame the 1965 recession in about one and half years, and Japan's GDP doubled over the next seven years. This recovery was supported by three fortunate factors. The first was the stability of the domestic political situation. The second was the favorable growth of the global economy and the advantageous terms of trade for Japan. The third was the success achieved in the structural reform of the Japanese economy and Japanese business management.

I believed that the Asian nations will also overcome the recent crisis and return to a rapid growth path. While this admonition holds true for Japan as well, we should not relax our vigilance based solely on the recent recovery. Economic developments are always followed by counter-reactions. Whenever economic conditions improve, there are economic phenomena and political demands that move to decelerate the growth. To go beyond this and firmly establish a true growth path, the fundamental character and disposition of entire societies must be reformed. Of course, the goals selected and the means adopted to achieve these goals will vary from country to country, but we do share a common direction. That is to devise frameworks for the more rational, more efficient allocation of capital, human resources, knowledge, and motivation.

Thank you very much.