Revitalizing the Japanese Economy

Short Term: Greater Effort by Private Sector, Strengthening of Safety Net
Let’s begin with the short term. Today the newspaper reported the Japanese government's announcement that the Japanese economy had negative growth in the fourth quarter of calendar year 1998, making the rate for calendar year 1998 -2.8 percent. Although I share with many of my Japanese colleagues the view that the first quarter of calendar 1999 will be better than the previous quarter, I have no doubt that fiscal 1998 will have negative growth for the second year in a row.

Let’s review what Prime Minister Obuchi’s government has done since he came into power. Last year, on July 30, he was elected prime minister with the lowest popularity rating of any prime minister in recent history. A week later, on August 7, he promised to rebuild the economy in one or two years. Very few believed him, including most newspapers and television. On August 11, the yen depreciated to ¥147.64 per U.S. dollar, the weakest in eight years. Later that month, the government announced plans to inject public money, which had been discussed for some time, into the Long-Term Credit Bank of Japan. On September 18, LDP and opposition parties agreed to revise financial bills. Three days later Mr. Obuchi met with Mr. Clinton, and Mr. Clinton urged him to stabilize Japan’s financial system. On October 2, the Nikkei stock index fell below 13,000—the lowest in 12 years—and then six days later the yen appreciated sharply to ¥111.45 to the dollar in London. The Diet passed financial recapitalization bills to deal with failing or failed banks. On November 16, the government announced a ¥24 trillion economic stimulus package. On December 12, the government announced the nationalization of Nippon Credit Bank. Immediately after the turn of the year, on January 14, Prime Minister Obuchi surprised everybody by forming a coalition cabinet with Ichiro Ozawa’s Liberal Party. And on February 19, the Lower House passed the fiscal 1999 budget plan. Today the stock market is about 15,000.

My personal view is more optimistic than before, but cautiously optimistic. The new minister for economic planning, Taichi Sakaiya, contends that he sees the beginning of a move of the economy. Some people say that contention is not backed by the numbers. But my personal experience is that there are more positive signs than before in various parts of the economy. The number of bankruptcies is down (some experts offer concrete negative reasons why, but still, the number is down). Inventory adjustments are not finished, but have been going on quite nicely. Sales of electronic consumer goods at large consumer electronic stores are up. However, corporate profits are down, wages are down, and equipment investment (which traditionally moves with the economy) is still down. So, the current picture is encouraging, but still far from totally reassuring. We have to keep watching.

Where does the Japanese economy go from here? What has to be done to continue this improving tone into the balance of this year and hopefully to 2000 and 2001? Certainly, the most important thing that has to happen, particularly this year, is a much greater effort by the private sector to do a couple of things. One is the continued effort to do a much better job coming out with better services, better products, and better technologies. We have been watching unique, creative, best-selling products that manufacturers just do not have enough capacity to make. Instead of adopting the very defeatist sort of attitude that this is a bad time, people have everything and they do not have anything to buy, the facts prove that, if you really try hard enough, you can come up with the products that are attractive even under difficult times.

The second is restructuring. We all know today that a lot of Japanese companies have excess facilities and manpower. Discussions are already taking place to deal with excess facilities. Action like extending the period over which writing off losses can be taken is one aspect of the discussion. The employment question is the hardest. We are seeing fairly large-scale restructuring going on. For instance, a company just announced its manpower will be reduced by 15,000 people over three years, or maybe a little longer. It is a large number by Japanese standards, and there are a lot of those cases being announced. These actions can dampen the mood of the people. But interestingly, the stock market has taken these actions more positively. In cases like NEC, Toshiba, and some of the banks, the market is responding positively to the actions taken by management to rebuild the companies on a much stronger structural basis. Now, how this will continue and how this will impact the mood of the market has to be watched very carefully.

At the same time, it is very important that we hurry up not only the completion, but the bettering of the so-called safety net, particularly in the area of unemployment assistance. In Japan, for almost half a century people have, rightly or wrongly, never seen such insecurity in employment, particularly in respect to large-scale corporations. Unemployment is particularly unpleaseant in the social framework in Japan. This has to be handled rather carefully, and having a well-prepared safety net will help accelerate the necessary restructuring and deregulation of the economy.

Some of you probably have read the final report and recommendations from the prime minister-appointed Economic Strategy Committee headed by Mr. Higuchi. Interestingly, this report really pushed for deregulation, but also advocated very strongly the very early and thorough preparation of the safety net. The government has listened to this report, but the contents of the report are, in the eyes of the bureaucrats, too dramatic and dynamic to commit to them. However, the position of the government, particularly of Mr. Sakaiya, the head of the Economic Planning Agency, is that, instead of softening the contents of the report to the level where the bureaucracy says, “Yes, we can commit,” it is much better to publicize the contents of the report, even at the risk of the Cabinet not being committed to it. I personally feel the report has already had very wide circulation and discussion, and I hope that it will have the impact intended by Mr. Sakaiya and Mr. Obuchi.

On government fiscal and monetary measures, there are not very many things left to be done. Already, of course, there is a growing concern about the long-term fiscal health of the Japanese economy, simply because of what has been done already and how that has impacted long-term interest rates. At the moment, the actions by the central bank seem to be acting positively on the market. An almost zero interest rate, the increase in the money supply, and increased public spending are having a meaningful impact. Again the numbers still say you have to be cautious, but the information networks in the local areas do tell you that they are benefitting in a very visible way from the huge amount of public spending.

Of course, there is the question of how long it will last. Will it last for the balance of this year or is it going to be necessary to come in with additional money? To come in with additional classical public spending is out of the question. If something like this is going to be necessary, it is going to be in the most selective of areas; there are lots of infrastructure areas that need to be improved. We suffer from the universal and, perhaps, political problem of not being able to allocate those resources to the needy areas. Often, these decisions are political, with some areas receiving redundant resources that are wasted. But we will continue to pursue this further.

So, the current picture seems to be a mixed bag, but I think the general feeling is that, although you can not just stand optimistically with your hands down, it is still a much better situation than when we met in Berlin last year.

Longer Term: Corporate Governance, Guiding Principles, Education
A word or two on three aspects of the longer-term revitalization. One is already beginning—fundamental change and improvement in the area of corporate governance. For instance, Mr. Kojima’s very fine paper points to the huge non-performing loans that have blocked the quick recovery of the economy.* But a basic, more fundamental question is: Why did it happen? Why was the banking situation left unmanaged for so long? It is not just poor management. The question of corporate governance is being looked at very hard by many Japanese companies, resulting in reducing the size of the board, but more importantly, inviting outside board members to inject into the management a new structure and outside views. This is a fundamental change in the way Japanese companies are run. It is going to take a long time before the changes will have a visible effect on the way companies are run, and size itself might grow again, but this is a very, very important beginning.

The second aspect is a question of the guiding principles for the management and the captains of the economy. Next month I will be assuming the presidency of an organization called the Japan Association of Corporate Executives (Keizai Doyukai). Immediately after World War II, when all the former captains of industry had been purged, younger men of aspirations and idealism worked together with the very high hope of establishing a benevolent business society. Their guiding principle was called “modified capitalism.” What did they mean by modified capitalism? This idea is interesting because in Japan today, we are talking about shifting toward the so-called Anglo-American model of capitalism; but in 1945, what had been proposed was modification away from the Anglo-American capitalism that had previously dominated the Japanese economy. Since then, we have overdone the modification or, perhaps, we forgot to remodify the whole thing. Japan does not have capitalism, it has socialism. So, it is no wonder people are now calling for shifting back toward the Anglo-American model. Nobody is saying that we have to go all the way, but, if not, what is going to be the mix—70:30, 80:20, 50:50? In Japan, we are getting our minds together to think about and learn from the experiences of America and Europe, but this will take a few more years. Organizations like the Japan Association of Corporate Executives will think very deeply about what the new guiding principles will be for us beyond shifting toward Anglo-American capitalism.

There is one last thing that has to be done. We need to revitalize not only the Japanese economy, but also the Japanese society as a whole. If you look back on what has happened in the last half a century, while we were growing very rapidly economically, areas of education like the liberal arts had been more or less left behind. In the last several years people have come to realize that there is something more fundamental that has to be established in Japan—the sense of common values that we all share. We should not sit still until this long process of rebuilding our education system is done; this process has to run parallel to short-term and mid-term actions reestablishing the guiding principles for business and the economy. When that is done, whether ten or twenty years ahead, that will be when we can really say that the Japanese economy has been revitalized.

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Now, for the short term, we have a mixed bag, but to me it is looking more promising. In 1999, the most important part of maintaining this momentum has to come from the private sector; and I can tell you that in the Keizai Doyukai and the Keidanren there is a very, very firm commitment on the part of the private sector. The government has done as much as it can do. Now it is our turn.

* Kojima Akira, “Getting to the Bottom of Japan’s Economic Blues,” Trilateral Memorandum, 4 (March 13, 1999).