Ambassador Thomas S. Foley's Speech to the Foreign Correspondents' Club of Japan

Tokyo, Japan
January 20, 1998

(As delivered)

I am very pleased to be before you this afternoon. I learned that when my predecessor Fritz Mondale spoke to you just as he was departing Japan a little over a year ago, he made a public confession that he actually liked reporters. He said that as man in public life, he had made it his practice to read and listen to those whose job it is to report and comment on the news. "American democracy could not survive," he said, "and America could not grow and progress without a free and skeptical press." That is true of Japan and it is true of any democracy in the world.

I have been on the job here for less than two months and I can report to you that I find it as stimulating a job as I have ever had. I also consider it an honor to wear the mantle of such dedicated stewards of the U.S.-Japan relationship as Mike Mansfield, Michael Armacost and Fritz Mondale. I can report to you that Mike Mansfield at 94 years old is as bright and as active as he ever was. He is a great example of what one can achieve in later life - along with President Bush jumping out of airplanes and Senator Glenn about to go into space again. Mike Mansfield is a tremendous example of good living and a clean heart.

As I begin my own term that there is no shortage of challenges in the U.S.-Japan relationship. It was almost a hundred and forty years ago that Commodore Perry landed in Japan, so our relationship is a long one. Our relationship has been based primarily in recent years on a very strong security relationship. Another area of U.S. Japan relations that I think needs emphasizing is the important Common Agenda that Prime Minister Miyazawa and President Clinton undertook in 1993 when the President visited Japan. The concept of the U.S. and Japan working together, as the world's two most advanced science and technology centers and certainly the two largest economies in the world, to make a massive contribution to the improvement of economic development, the environment and to medical science is something I think is enormously exciting. The economic relationship, fundamental as it is and interconnected in myriad ways, is now marked by issues that are macroeconomic as well as financial. This has become particularly evident in the last six months, as financial market crises have affected several East Asian countries. We recognize and appreciate the contributions that Japan has made to financial stabilization programs in this region, and the close cooperation that we have enjoyed with the Japanese authorities in our responses to the Asian financial crisis. But as we have said, and as the Prime Minister himself emphasized in Kuala Lumpur, the most effective contribution that Japan can make to Asian recovery is the achievement of vigorous economic recovery in Japan based on domestic demand-led growth.

We welcomed and applauded the Prime Minister's decision to implement a ?2 trillion cut in personal income taxes, along with the other tax and budgetary measures that were announced in December. These are important steps towards boosting Japanese domestic demand. But we must recognize that the economic policies required to bolster confidence and restore growth are a moving target, and we hope that the Japanese government will take steps sufficient to bring about a vigorous economic recovery led by domestic demand. Measures to strengthen the Japanese financial system are also critical to restoring growth in Japan and confidence in the region. The proposals by the LDP, including the strengthening of the Deposit Insurance Corporation, are constructive steps. Our own experience, and I think the experience of other countries, indicates that it is important to move quickly to close truly insolvent institutions, while at the same time protecting depositors and restoring confidence in the financial system. In addition to achieving economic recovery, Japan has the challenge of bringing about more vigorous and sustained growth. Creating a stronger and more dynamic financial system is a key part of reaching this goal. Thorough and fundamental deregulation is also key to unleashing the innovative potential of a modern economy, and it is this longer-term issue on which I want to focus today.

Deregulation does not just benefit companies trying to enter the Japanese market. Japanese companies and consumers will benefit even more. The cellular phone agreement is an excellent example of the positive results of opening a protected market to competition. In just three years, cellular phone subscribers increased by 85 percent. American and Japanese equipment suppliers saw major increases in their sales. The greatest beneficiaries, however, were Japanese consumers who enjoyed dramatic reductions in the prices of cellular phones and service.

In a speech on the progress of Japanese deregulation to the Reform Club in New York last year, Masaya Miyoshi, President of the Keizai Koho Center, cited statistics from Japan's Economic Planning Agency which demonstrated that deregulatory measures in the fields of distribution and telecommunications between 1990 and1995 generated a net annual increase of 7.3 trillion yen in aggregate demand. This is the equivalent of 1.6 percent of nominal GDP of one year. Now that's a significant demonstration of the positive economic impact of deregulation. This considerable increase occurred during a period when the Japanese economy was still coping with the after effects of the burst bubble. What accounts for the reluctance to enact the changes which will provide Japanese consumers and manufacturers so many benefits? Japanese decision-making which rests so heavily on the need to find consensus, is one of the culprits. The search for consensus can frustrate deregulation because of the need to gain support from the same bureaucratic and business sectors of the economy which tend to resist change. In his New York speech, President Miyoshi characterized the Japanese system of capitalism as suffering from" systemic fatigue," but he also acknowledged that the influence of what he termed a deeply rooted "traditional conservatism" was slowing regulatory reform.

It is not just hard for Japan to change. It is hard for any society to shift from the old, comfortable way of doing business to anew and unknown way of doing business. As someone who was in the Congress when our deregulation issues were being debated, I can at test to the fierce battles which occurred between those in favor and those opposed.

Deregulation in the United States initially focused on the heavily regulated transportation industry. In the 1970s, a coalition of conservatives, liberals, consumer advocates and market-oriented economists emerged to challenge the regulatory cartels which had grown up around land and air transport. Air travel was considered an essential public service so for 40 years the Civil Aeronautics Board barred the creation of any major new airline. Carriers could fly only those routes awarded them by the Board. The regulatory agency approved all fares. And strings were attached to this system for the airlines. Airlines had to provide service on routes which were unprofitable. Over time, the airlines became insulated from competition. The regulated airline industry had little incentive to lower costs. Then, when costs did rise, the airlines sought price increases and the regulators resisted. This depressed industry profits which in turn impeded new investment and perpetuated the high costs and poor service.

The airline industry's experience with deregulation has been extensively analyzed and the results are remarkable. A Brookings Institution study says that the airlines have achieved a 24 percent decline in costs per unit of output since deregulation in 1978. Another study estimates that airline fares are now actually 25 percent lower than they would have been without deregulation. This despite a 45percent increase in fuel costs! Airlines, freed from the Civil Aeronautics Board's route restrictions, organized "hub and spoke" systems, feeding passengers to major transfer points that provided more connections and more frequent service than before. In 1978,about 14 percent of all passengers had to change airlines to reach their destinations. By 1995, this figure was reduced to about 1 percent. The trucking and railroad industries were deregulated at about the same time as the airlines. Prior to 1980, the Interstate Commerce Committee reviewed and approved virtually all pricing of interstate carriage of goods by railroads. That year, the industry was freed to set its own rates and to determine whether to invest in rolling stock or dispose of it. Since then, rail freight traffic has increased by 42percent. A decline in costs plus increases in productivity has produced a 53 percent decline in inflation-adjusted freight rates. This in an industry which 20 years ago was considered moribund. Trucking has seen a similar increase in productivity and decrease in costs. Trucking rates have dropped by 30 percent adjusted for inflation. The U.S. Department of Transportation estimates that since the Motor Carrier Act of 1980 was passed, the savings from lower freight rates and improved service total approximately 10 billion dollars a year. The impetus for deregulating the telecommunications industry was different from the transportation industry. For railroads, airlines and trucking, a consensus emerged that regulation was acting as a barrier to consumer benefit. The AT&T case stems from anti-trust litigation. When the Justice Department first brought its case against AT&T in 1974, the company had been treated for years as a natural monopoly and it controlled almost all U.S. telephone service, local and long distance, as well as the production and supply of all telephone equipment used in the United States. The settlement reached in 1982 resulted in AT&T's divesting itself of all local operating companies which could provide only local service. However, other firms could enter the long distance market and compete with AT&T. AT&T in return was free to enter other electronic businesses such as computer-related services. The telecommunications industry is are markable example of how deregulation prompted competition and market access which in turn has spawned the development of whole new technologies. The deregulation of the telephone-equipment market resulted in the fax machine becoming ubiquitous. Between1987 and 1995, sales of fax machines jumped from half a million to4.2 million.

At the time of the 1982 court order, there were fears that the poor would lose their phones because local phone rates would rise in response to the loss of the subsidy provided by the profitable long-distance service. What happened was that the phone companies reduced their costs, so phone rates remained stable. By 1995, the share of U.S. households with phones actually rose from 92 to 94percent.

Competition was a major spur to laying fiber optic cable. In1985, there were only 215,000 kilometers in AT&T's system. AT&T's competitors, Sprint and MCI, had more. AT&T responded. By 1994, it had laid 2.09 million kilometers of fiber cable. Analysts say that it was competition which spurred the major long-distance providers to lay fiber optic cable on an accelerated timetable. This acceleration, of course, coincided with the rapid expansion of computer technology and has allowed the United States to become the most wired nation on the globe. Electronic commerce is growing rapidly. Today, over 5 percent of all airline tickets are sold on-line.

I am not arguing that deregulation is painless. It is not. Jobs are indeed lost in industries where regulation has stifled competition and protected inefficiency. Since 1980, employment in the railroad industry has dropped by over half. Some of those jobs were the clerical jobs required to provide all the forms and tables and statistical paperwork the regulatory body required! More importantly, however, deregulation also creates jobs. More people work in the airline industry today than did when the industry was deregulated in the late1970s. And I don't need to tell you how much the telecommunications industry has expanded since deregulation of the telephone industry coincided with the computer revolution. If it were not for the dramatic decrease in long distance charges, would the Clinton Administration's goal of having every classroom in America on-line by the year 2000 be a realistic one? I doubt it.

Critics of deregulation also claim that deregulation compromises safety. Contrary to these claims, and despite dramatic increases in commercial air traffic, air safety has improved and there has been a significant reduction in accidents since deregulation. Similarly, there are fewer accidents per track mile of railroad to day then there were before deregulation. And while trucking has expanded, it is a safer industry today than it was 17 years ago!

Deregulation is not synonymous with abandoning rules which protect the public. For example, when the U.S. Food and Drug Administration announced that it would no longer require that tests for new prescription drugs be done wholly in the United States, it did not at the same time abandon scientific testing standards. Similarly, while the banking industry was liberalized, bank surveillance standards were strengthened.

The current deregulation debate in the United States involves the electric power industry. Americans can soon expect to be swamped with attractive offers to switch from their current energy company to another power supplier just as they are being bombarded today with offers from long distance telephone companies.

In just 20 years, what was once seen as a radical policy --deregulation - is now viewed as an accepted principle. It is generally recognized that individual decisions made in a competitive market are likely to prove more economically efficient than government's control and regulation of those industries. Market decisions are likely to encourage efficiency in production, distribution and pricing as well as spur innovation and employment. We have found that creating greater access to our domestic market helps ensure vibrant productivity growth. However, deregulation works if, and only if, meaningful competition replaces the regulatory environment. Japan's Large-Scale Retail Store Law is an example of a regulatory system which impedes productivity increases. The United States would welcome its repeal, but is wary that local officials may attempt to impose local regulations which would effectively maintain restrictions on retail floor space and store location. Deregulation at the national level should not be an invitation for regulation at the local level.

My government urges Japan to deregulate because we see Japanese regulations as forestalling access to its market by foreign firms. When a potential trader is barred by unnecessary regulations or defeated by uncompetitive practices it is not only the trader who suffers. Consumers and that market and ultimately the entire international trading system also bear the consequences.

The Economic Planning Agency estimates that Japan's failure to deregulate costs Japan over 1 percent in GDP growth annually. A1 percent increase in GDP in the world's second largest economy translates into a lot of missed investment opportunities and a lot of jobs which were not created. Recall the results of the cellular phone agreement. If there were any losers, they were greatly out numbered by the winners.

Twenty years ago, the average Japanese household spent over 30 percent of its income on food. That figure is now 19 percent. Foreign pressure to lower the barriers and eliminate the rules which kept foreign agricultural products from Japan is the reason why Japanese families now have more money for vacations, housing, clothing, education and hobbies than they had before. And that percentage of income spent on food continues to drop. Over the past four years, the annual survey of sixty supermarket items shows that more items show a decrease in price than an increase. But Japanese food prices could drop even further. For example, if Japan simplified its plant quarantine system, Japanese supermarkets could stock more imported fresh produce like lettuce, apples and nectarines at lower prices. In his inaugural speech, President Clinton said that the way to create jobs is to embrace change. I know Japan is a more conservative country than mine, and that it is wary of radical change. Jobs are needed, new jobs for the next generation of workers. For several years, Japanese companies have scaled back their hiring and fewer graduates have found jobs with Japanese companies, jobs which promise advancement and good salaries. It must be disheartening for Japanese parents after considerable sacrifice for their children's education to see the new graduates faced with bleak job prospects. Japan's young people deserve an economy which offers them challenging employment which will contribute to the economic well being of their country in the next century. And the well-being of Japan is the well-being of the world.

I look forward to hearing from you during my tenure. I am confident I can benefit from what you say and write. Thank you very much for listening to what I have had to say.

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