Japanese Politics and Structural Reform

Before going into what is happening about structural reform, let me talk about politics itself. Our general election is coming soon, probably this June. As you know we have formed a three-party coalition (although the third party, the Liberal Party, recently split and the half still in the coalition now calls itself the Conservative Party). If we win the majority with the combined seats of these three parties, I think we will continue along the lines of the policies basically that we have been following. But polls show that the coalition itself is in rather crummy shape: sixty percent of the general public is against the coalition that is now formed. So we will have to see what is going to happen in the next general election. I am changing from the upper house to lower house, so I am hoping that at least I will win!

Policy Actions Have Contributed to Major Structural Changes
Practically every political party calls for reform as the next general election approaches. Indeed the new Mori Cabinet slogan is “towards the renaissance of Japan’s economy and bold structural reform.” I know the press, in particular Western journalism, has viewed this rather cynically, and I also know there is reason for such cynicism. For example, the reason Mr. Ozawa left the coalition—taking about half of the Liberal Party with him—was the fact that the coalition government didn’t fully apply the reform policy agreement among the three parties. I can understand there might be some reasonable doubt from the media’s point of view how the coalition will proceed with reform.

In hindsight, however, Japan has undergone a number of major structural changes—more than you can recall—during the past several years. For example, in ‘98 the financial regulatory power was separated from the Ministry of Finance and the Financial Supervisory Agency created. In that year, the FSA nationalized a few large commercial banks and allowed one of them to be sold to an American investing group. A comprehensive administrative reform reorganizing the entire executive branch of the government was decided upon, which will be put into effect at the beginning of next year. Comprehensive judicial system reform is underway. The financial accounting standards setter is going to be privatized. Capital market enforcement functions are now under review, on the verge of the establishment of two new capital markets for venture businesses, as Mr. Son was explaining to us. There are countless others. On the national security front, the new Japan—U.S. defense guidelines have been put into place. Unlike most of the policy changes before the Hosokawa administration, these reforms are led by politicians.

In the private sector, more rapid changes have been taking place, as has been discussed earlier. At the risk of redundancy, let me offer a few examples. Perhaps no one, say, five years ago would have expected Nissan to import its Brazilian-born President-CEO from France. The list of such unexpected developments is long, including the sales of Yamaichi Securities to Merrill Lynch, Nikko to Salomon, and Mitsubishi Motors to Daimler-Chrysler. These private initiatives have obviously been stimulated by competitive pressures, not just at home, but in the international marketplace.

But policy actions have also contributed to these developments. Banking consolidation began under the regulatory pressures which put more emphasis on prompt resolution, departing from the previous forbearance policy. Corporate restructuring has become easier to implement under the legislation for holding companies. As such, competitive pressure itself is a product of policy efforts.

Serious Caveats Against Optimism
Having said this however, a serious caveat should be placed against optimism: recidivism into the old system can be detected; old habits die hard. Behind this very visible business restructuring, average Japanese people might feel some reform fatigue against the background of both current higher unemployment and a possible export-led cyclical economic recovery. As the economy recovers, people tend to forget the necessary reform agenda. Coincidentally, at the political level, I think a sense of urgency, or momentum toward structural reform, might be slowing down as the economy picks up. (I agree with Mr. Sakakibara that big companies should lead the structural change.)

The first example would be lack of political commitment. Structural reform always requires strong political commitment to implement. However, recent political decisions taken after the fall of 1998 tend to go against reform commitments, such as the one-year postponement of reform of bank deposit insurance, and the suspension of the planned collection of contributions for public elderly care insurance. Also public pension reform and medical reform are still only half-way through. Another example is the supposed ban on bureaucrats’ participation in discussions at the Diet. This Diet reform has not worked well, I guess since politicians frequently cannot answer technical questions because of insufficient policy staffs. As a result bureaucrats still participate in discussions at the Diet as observers.

Second, there tends to be revival of the old regime in the course of restructuring the old economy. For example, the new financial and industrial revitalization laws both require government permissions, from FSA or MITI, if a bank or a corporation makes use of these restructuring measures, such as public capital injections or tax breaks. So I am afraid an illusion of old government in the political sense is now reinforced among the majority of Japanese in the old economy. Measures for reform tend to revitalize the iron triad among politicians, businessmen and bureaucrats.

And third, recently transparency in policy-making has been somewhat decreased. Under Kato Koichi, then Secretary-General of LDP, we had open discussion on, for example, Ministry of Finance reform, revision of the Bank of Japan law, the total financial plan, and the proposed bridge bank. But recent decisions, for example, to suspend bank deposit reform and the collection of contributions for public insurance for elderly care, mentioned above, were abruptly made at the coalition leaders level, without deep discussion among the general public or even within the LDP.

I suppose these factors may indicate a political backlash in Japan, which may jeopardize necessary structural reform. In this regard I have a different view from other high-ranking leaders, who tend to indicate that a slower restructuring speed will suffice given the cultural difference between Japan and the West. I believe that politicians should not use this slower speed as a pretext for deferring reform.

Politicians with a Long-Term Perspective; More Flexible Forms of Public Service
To tell the truth, however, I admit that we politicians today have not been able to present a new form for Japan’s governance or productive policy debates among parties which successfully conform to both Japanese traditional values and global market mechanisms. One of the main obstacles for reforms is the behavior of politicians, who tend to care only about votes. Another is the behavior of the bureaucrats. The bureaucrats tend to adhere to their ministry’s interest, for his or her promotion. For this drawback, a solution might be to enhance mobility in policy-making, moving professionals in and out of the ministries in order to increase mobility in human resources in public service. So, politicians need to have a long-term perspective and there should be more flexible forms of public service. I do believe the mobility of labor forces in both public and private labor markets is the crucial issue that should be addressed in order to have quick structural reform in Japan. I would appreciate if you can give us advice and help us avoid being bogged down in the mess.