SPEECH AT THE APEC ECONOMIC COUNCIL SYMPOSIUM ON "THE FUTURE OF THE ASIA-PACIFIC ECONOMY" Dec.6, 1999"The Present and Future of the Japanese and Asian Economies"- From Economic Recovery to Knowledge Value Revolution -

Taichi Sakaiya
Minister of State for Economic Planning

Thank you very much for the opportunity to speak to you on this occasion. Today, I would like to give my personal opinions on the current situation and the future of the Asia-Pacific economies, in particular the Japanese and East Asian economies.

Asia is vast and diverse. Even looking just at East Asia east of the Malaysian Peninsula, it may be divided into three distinct regions. The first is Japan, the second China, and the third the other countries and regions of East Asia, including South Korea, Chinese Taipei, Singapore, Thailand, Malaysia, Indonesia, and the Philippines. Today, however, these three regions all feature a common clear commitment toward the market-based economy. Further, all of these regions have suffered from severe economic conditions in the past 30 months.

First, the Japanese economy went through a long and severe period of stagnation during the 1990s. As everyone knows, the Japanese economy experienced a rapid growth of 10 percent annually in real terms for about 20 years in the 1950s and 1960s. Even the oil crisis in the 1970s and the appreciation of the yen in the 1980s failed to bring this growth to a halt, and Japan continued to enjoy an average growth rate of 4 to 5 percent for the next 20 years. There was a positive cycle of growth in Japan where economic growth led to higher incomes, higher incomes resulted in much faster growth in savings, and these savings went into investment which promotes even higher economic growth.

As a result, in 1987, Japan achieved the highest per capita GDP among countries with more than 10 million people. In the late 1980s, Japan became the most advanced modern industrial society ever in human history.

At that time, however, human civilization changed its direction from a standardized mass production type modern industrial society to a diverse knowledge-value society. The development of information technology, the globalization of the economy, and the diversification of human needs changed the direction of the development of human culture.

As the 1980s came to a close, prospective investments for Japan dwindled and enormous excess liquidity surfaced. Part of these flowed to overseas investment, but the majority concentrated in real estate and stock investment in Japan and resulted in the so-called bubble economy. The collapse of this bubble incurred a terrible shock to the economy.

The Japanese government implemented a range of economic stimulus measures of over 60 trillion yen from 1993 to early 1998, but these had less-than-expected results. This is because the Japanese economy failed to divest itself of its standardized mass production type structures and psychology. The rapid shrinkage of the Japanese economy that began in the fall of 1997 clearly demonstrated this.

The Obuchi Cabinet, launched in July 1998, has faced this situation head on and been implementing structural reforms to achieve economic recovery. It first embarked on major reforms of the financial system. The Japanese financial system was originally established to assist the formation of a bureaucratically led standardized mass production society. It soaked up funds from the public at large to lend them out to standardized mass production type industries. For this purpose, uniform interest rates and government protection were adopted. However, the financial institutions had all deeply financed real estate and stock investments, and were seriously hurt by the collapse of the economic bubble and ended up saddled with huge bad loans. To deal with this, the Obuchi Cabinet abolished the bureaucratic led "convoy" approach of protecting the financial institutions en masse and moved to weed out the weaker ones. As a result, the Long-Term Credit Bank of Japan, the Nippon Credit Bank, and other failing institutions were taken over by the government while several local banks closed down. This was not all. The remaining banks started to merge and restructure their operations rapidly. The giant merger of three banks, Fuji Bank, Daiichi Kangyo Bank, and the Industrial Bank of Japan, and the merger of Sumitomo Bank and Sakura Bank are now underway. The message of the need for financial reform sent by the Obuchi Cabinet has set off a tremendous chain reaction.

The reorganization of financial institutions is shaking Japanese business affiliations and is prompting general manufacturers and large distributors to restructure their businesses as well. Japanese companies are now making desperate efforts to rebuild themselves.

The Obuchi Cabinet also changed the way of thinking about small and medium sized enterprises (SMEs) fundamentally. Until now, in Japanese society--which was oriented toward standardized mass production--SMEs were considered weak entities due to their small size, and policies were adopted for helping them to close the gap with large companies. In the diverse knowledge-based age, however, size does not directly determine the competitiveness or strength of a company. SMEs that boast a sophisticated level of technical and international expertise or that are deeply rooted in their communities can sometimes flourish. Future policy on SMEs will stress supporting the establishment of new firms as well as assisting the development of existing companies.

There are also other areas in which conceptual change is taking place in Japan.

One is a result of the fundamental change in the information environment in the 1980s. Japan became number one in the world in information apparatuses, in both quantity and quality. During the appreciation of the yen in the mid-1990s, many manufacturing plants were moved out of the nation in line with the rapid growth of South Korea and Chinese Taipei. On the other hand, in the field of software, Japan has not only been far outstripped by the U.S., but also has been slow in the spread of the Internet and CATV networks.

The Japanese government has decided to close this gap by connecting all public schools to the Internet by the end of the year 2001, then completing the software for the "electronic government" by the year 2002, and finally linking the entire country by an optical fiber network by the year 2005.

In particular, the government designated the year 2001 as the "Internet Fair" and is scheduled to sponsor a "virtual expo" of large scale events on the Internet, by networking prefectural governments, private businesses, and NPOs. This should lead to rapid growth in Japanese creativity in software.

Until now, Japan's information environment has consisted of two levels--high and low--with nothing in between. The "high" level was made up of the mass media of ground-based television that broadcast standardized nation-wide information and entertainment from the sky to the public, and was monolithic, massive, and one-way. The other "low" level was made up of word of mouth exchanged by telephone among small groups of people.

However, these "high" and "low" levels are augmented by intermediate BS broadcasting, CS broadcasting, CATV and the Internet. That is, the gap between the "high" and "low" level will be filled by various new types of media to create a more three-dimensional information environment. The Japanese government would like to complete this as quickly as possible during the Internet Fair 2001.

The Japanese are inherently very creative and artistic. Much of Japan's creative talent, however, is now going into the fields of animation and game software. This has to be spread more widely to the field of information software.

Another conceptual change now being experimented in Japan is in the area of urban and regional planning. Until now, urban planning in Japan has, perhaps unconsciously, incorporated socialist ideas. They thought that labor and the means of production such as factories and large stores were gradually separated from each other in modern society. Therefore, urban structure should be consisted of housing zones for reproduction of labor, industrial zones where the means of production concentrate, and commercial zones that are separate from one another, and these zones should be linked by trains, highways, and other routes. This was the so-called "zoning idea."

However, in the Policy Measures for Economic Rebirth (November 11, 1999), the government is proposing "towns where one can get around on foot safe and sound," where senior citizens and working couples can easily live and work. The idea is to create mixed zones equipped with a full range of residences, retail stores, housework outsourcing services, one-stop government services, health and care facilities, and cultural and leisure facilities within a one-kilometer radius.

This fiscal year, we are only canvassing for about 10 candidates for model zones, but this represents a basic shift in urban planning in Japan. If this is generally accepted, there will be fundamental change in Japanese cities and in the lifestyles of the Japanese people.

Japan is not just pushing forward with these changes. Underlying all of this is a change in the thought of ideal policy concepts and policy measures. It will take a long time for this to penetrate more deeply and spread to all parties concerned. Even in the financial sector, which is furthest along in this, many bank workers are reacting passively compared to the bank presidents who made brave decisions. The older employees, unable to let go of the past, are stubbornly opposed to the changes. In the field of policies on employment and SMEs, there is also strong resistance among related journalists and some politicians. In addition, there is a powerful undercurrent in favor of protecting the powers and expertise of the bureaucracy. These have combined to form a resistance front against innovative ideas, deregulation, and changes in policy.

Those who understand the situation in detail think that reforms will be completed far in the future. One must not overlook the fact, that the changes in the different areas will interact and shake society as a whole. In the end, they will set off an "Aquarian conspiracy," prompting reforms in society as a whole.

The Japanese succeeded in the deepest reforms in world history at the time of the Meiji Restoration and right after World War II. Japan will soon undergo another metamorphosis and enter a "new plus" era. That is, it will move in a positive direction as a society of a nature and mood commensurate with the new diverse knowledge-based age rather than just moving into another phase of recovery in the business cycle.

What about the East Asian economies? Although they were under difficult situation during the past 30 months, these economies recovered faster than Japan in 1999. But they still have not finished overcoming all of their structural problems such as the bad loans of the financial institutions and the debt structure of numerous companies.

When I saw the economic crisis that hit East Asia in the summer of 1997, I considered it to be a recession in the process of rapid economic growth which Japan also experienced in 1965, and predicted that recovery would come in a short while. In 1965, Japan experienced a shortage of foreign capital, which led to a recession, plummeting stock prices, and, in turn, to the collapse of financial institutions and trading companies. However, we overcame the crisis in about a year and a half. Japan subsequently experienced rapid growth, doubling its GDP in the seven years from the late 1960s. This was because Japan enjoyed stable domestic politics, an excellent international environment, and improved corporate standings during that period.

The East Asian economies industrialized rapidly in the 1980s. The so-called "Four Mini Dragons"--South Korea, Chinese Taipei, Hong Kong China, and Singapore-- industrialized first, followed by the "Three New Dragons", --Thailand, Malaysia, and Indonesia-- and in the 1990s, the "Big Dragon"-- China.

These economies industrialized by a process completely different from previous traditional development theory for developing economies. Conventional development theory explained that developing economies should first build the domestic infrastructure and basic education to consolidate the domestic market and launch import substitution type industries to serve it. By doing this, capital would accumulate there, middle managers and engineers would be trained, industries would be converted to export industries, and more sophisticated industries would be created.

The rapid industrialization of the East Asian economies since the 1980s, however, started with export industries for serving foreign markets through the introduction of foreign capital and the use of foreign technology. This was made possible by the increase in international capital transactions, the liberalization of trade, and the development of computer technology. This new approach, what can be called as "East Asian System", garnered tremendous success.

This system requires an environment in which foreigners can invest without worry. Therefore, many East Asian economies linked their currencies with the international key currency, the U.S. dollar. Fortunately, from the late 1980s to the mid-1990s, the U.S. dollar fell with respect to the Japanese yen and German mark, so the East Asian currencies, linked with the dollar, dropped relatively and helped maintain the international competitiveness of those economies.

During the same period, however, wages risen in the East Asian economies. Due in part to the insufficient infrastructure and overcrowding of the large cities, costs rose and international competitiveness was gradually sapped. In addition, Japanese yen started to drop against the US dollar after April 1995, and China devalued the renminbi in steps. Along with this, the international competitiveness of the East Asian economies rapidly weakened and trade balances went into the red. The East Asian economies required a greater influx of foreign capital to maintain equilibrium in their international balances so strengthened their dollar linkages to entice more capital. This, through the imperfect financial systems, led to speculation in stocks and real estate, and to increasingly poorer international competitiveness. The Asian currency and economic crisis in 1997 can be said to have been a result of a surfacing of these contradictions.

Having enjoyed rapid growth through industrialization for more than 10 years, however, the East Asian economies had developed a sound spirit of hard work and well-organized labor customs. Therefore, the significance of the stable currency and the meaning of economic crisis were well understood by the majority of the public, and people were able to deal with the crisis calmly and wisely. I believe that the East Asian economies succeeded in maintaining public order, overcoming inflation, and restoring production despite the dramatic economic crisis, because of these reasons

Most important factors for economic development are modern economic ideas and a sense of order that promotes a return to a normal economic cycle. With these, the hard working nature of the public is preserved, savings accumulate, investment is promoted, and, with population growth and technical progress, the economy grows. The approach taken by the East Asian economies to deal with the currency and economic crisis in the past 30 months proved that these are deeply rooted in the Asian people.

Therefore, I believe that the East Asian economies will continue to grow, led by manufacturing sector. However, there are conditions attached to this. One is that steady progress should be made in the reforms of the economic structure and corporate organizations of the Asian economies, and that an atmosphere of social fairness be created. This is also important both for the stability of the domestic political scene and for the continued influx of foreign capital.

Another is that the international environment be kept good. The continued prosperity of the U.S., the economic recovery of Japan, and the stable supply of primary products such as oil are all essential conditions.

Peering ahead at Asia 10 years from now, I see Japan with a diverse knowledge-value society and the East Asian economies with higher level of industrialization. Japan will have a splendid knowledge-value society filled with confidence and optimistic ideas, swelling with domestic demand. Therefore, due to fewer children and the aging of the population, people with various backgrounds will probably be sought. As a result, Japan's surplus in international balance of payments would gradually diminish.

On the other hand, the East Asian economies can be expected to become more industrialized and to grow into bases for the supply of industrial products. A smooth flow of goods, money, information, and manpower should develop between Japan and the Asian economies. This will, however, require mutual understanding, restraint, and humility.

The future of Japan and Asia is bright. It is now important to believe that a bright future awaits all of mankind.