Remarks by Ambassador Thomas S. Foley To the Research Institute of Japan

"Thoughts on the Future of the
U.S.-Japan Economic Relationship"

June 25, 1999

Tokyo, Japan

(As delivered)

Thank you for the generous introduction. I am pleased to be able to address the Research Institute of Japan, continuing a tradition passed to me by my predecessor, Ambassador Mondale. For 45 years, this has been an important venue for discussion of public policy. Bringing together corporate managers, government leaders, and journalists, the Institute provides a valuable service in the development of public policy in Japan. Being invited to speak to you today is a great honor and, I think, a clear indication of the centrality of the U.S.-Japan relationship to a broad range of policies taken in both of our nations.

It is my good fortune to participate in what I believe is the most vibrant, complex bilateral relationship the United States has anywhere in the world. Our future is connected to Japan's in so many ways, not only because of the strength of our intergovernmental relations but also because of the enduring bonds of friendship, commerce, and shared values between our two nations. The basic elements - a security relationship that is the cornerstone of peace and stability in Asia and an economic relationship that represents 40% of the world's gross domestic product - enrich both countries and the world.

Our overwhelmingly positive relationship will endure despite temporary difficulties over sensitive issues, sometimes in trade, such as steel. Recently, we have been pleased to see the level of imports from Japan fall significantly and rapidly over the last several months, and we remain committed to resolving such issues together with Japan. The Administration will continue to press for fair and free markets throughout the global economy, and we welcome also Japan's efforts in that direction.

I might note that the day before yesterday, the United States Senate rejected a motion to proceed on steel quotas, reflecting the firm determination of the Administration to oppose this legislation, as a hindrance to world trade, and against the tradition of United States leadership in maintaining open channels of trade.

As I have frequently said, the United States wants and needs a strong Japanese economy. At the G-8 Summit, as he did during his trip to Tokyo last November, President Clinton emphasized once again that Japan's economic growth is good for the world, as well as for the Japanese people. A revitalized Japanese economy, for example, will provide an additional engine for Asian economic recovery as it draws in imports from its Asian neighbors.

I must say parenthetically that one of the things which has concerned me in recent months is the report I have had that polling indicates a significant part of the Japanese public believes the United States somehow wants a weak Japanese economy, not a strong Japanese economy. Of course, the truth lies in the desire of the United States for a strong Japanese economy, not only because it is the economy of our friend and partner, but because it is in the U.S. interest to have a strong Japanese economy.

First of all, our trade deficit increases in recent months have occurred, not so much because of surges of Japanese exports to the U.S. - though there have been cases like that such as steel - but primarily because our imports into Japan have been reduced as a result of the weakening of the Japanese economy. As President Clinton said time and time again during his visit to Japan last November, the United States wants and needs, and hopes for and wishes to cooperate in, building a strong Japanese recovery.

It is essential in our judgment that Japan continues to use all available macroeconomic tools to support recovery. While encouraged by the first quarter GDP results, we agree with EPA Minister Sakaiya and Bank of Japan Governor Hayami that now is not the time to become complacent.

But it would also be wrong not to recognize the very substantial efforts that have been made by Japan, particularly in the last year: the strong infusions of macroeconomic stimulation, with tax reductions included, and also with the very important refunding of banking institutions by government funds. We recognize that, and we believe these are very positive steps which need to be maintained.

At the same time, macroeconomic policy alone will probably not be sufficient to sustain growth in the long term. Financial stabilization, improving the environment for business investment and regulatory reform are also key areas for change in order to strengthen Japan's economy. I want to briefly mention the first two areas, and then focus on regulatory reform, particularly in the area of telecommunications.

Financial Stabilization

Regarding financial stabilization, the United States and Japan share a keen interest in the long-term stabilization of Japan's financial sector. Again, improvement in this area is key to Asian recovery, because of the need to help stabilize Asian financial markets together with Japan. We very much welcome the giant steps which Japan has taken over the past year to address financial sector problems, closing some of the country's most problematic financial institutions, and committing significant public resources to improving the balance sheets of Japan's banks, while simultaneously tightening Japan's supervision and disclosure regimes. Additional action will be needed, however - in particular, measures to accelerate the final and complete disposal of assets associated with non-performing loans. To help with the effort, Japan is right now tackling some thorny but difficult and important problems associated with revising financial, real estate, and tax laws to help improve the overall liquidity of Japan's real estate markets.

Foreign Investment

Foreign investment can be another important piece in the puzzle of Japanese economic recovery. Foreign investment brings in far more than just new capital to an economy. It brings competition, vision and innovation.

Japan's rate of inward foreign direct investment, while improving, remains by far the lowest among industrial nations. This low rate of investment deprives Japanese companies of the opportunity to form partnerships with top international firms in order to benefit from their expertise in research, in manufacturing, and in marketing, and it contrasts with Japan's very large external investment in the economies of other countries. If Japan becomes a more attractive place to invest, jobs will be created, production will become more efficient, markets will open, and opportunities that did not exist before will come into being. The arrival of multinational financial firms has already brought innovative financial services products that are serving investors and businesses alike.

Our two governments recently issued a joint report on steps Japan is taking to improve its climate for foreign direct investment. Three key aspects of these changes form the core of this report:

* Steps to develop a more active and efficient market for mergers and acquisitions, in order to enhance the productivity of capital in Japan;* Measures improving foreign investors' access to land, and increasing the overall liquidity of Japanese real estate markets; and * Policies aimed at enhancing the flexibility of Japan's labor markets, making it easier for employees to switch jobs.

We look forward to working closely with the Japanese Government as it implements these changes.

Regulatory Reform

Regulatory reform is an indispensable element in sustaining economic growth. Regulatory reform encompasses not only deregulation, but where there are companies which dominate a specific sector, robust implementation of competition law and policy, to ensure new entrants will not be disadvantaged. Regulatory reform can help strip away inefficiencies and encourage innovation and competition. Our experience in the United States has been that regulatory reform generates significant new investment and creates millions of new jobs as well. Let me emphasize this last point because those opposed to change often resort to scare tactics about unemployment. Deregulation creates new, better, and more productive jobs. That has been our strong experience over the last several decades.

Telecommunications: A Critical Sector

Telecommunications provides perhaps the best example of how regulatory reform and a positive investment climate can: * stimulate growth and employment, * give consumers much more for their money, and* position a nation in the fast lane on the information superhighway.

Because telecommunications is an essential tool - and an important cost - for all businesses, both large and small, the gains made in telecommunications are quickly transmitted throughout the economy, magnifying their impact. In short, telecommunications liberalization is a stimulus package for the entire economy.

Because of the importance of telecommunications and the prospects for real progress, I hope you will bear with me as I outline our position on bilateral telecommunications issues in some detail. I think this discussion will highlight the tangible benefits to Japan that could result from enhanced progress in this area.

In the United States, pro-competitive telecommunications policies in recent years have resulted in tens of billions of dollars of new investment, spurred innovation and the introduction of advanced services, lowered prices, created hundreds of thousands of new jobs, and quite simply, changed the way our country communicates and does business.

Japan has also seen gains from liberalization: a telecom sector where growth in output far outpaces the rest of the economy, falling prices, employment creation and more innovative services. There can be no clearer example of the benefits of liberalization than the explosive development of the Japanese cellular telephone industry after deregulation in 1994, and the 50 percent drop in international call prices in Japan following liberalization last year.

While Japan should be proud of these gains, there is also evidence that competition is still not flourishing in certain sectors of the Japanese telecommunications market. While telecom investment has been booming worldwide, investment in telecommunications has actually fallen in the past two years in Japan. Introduction of important new telecom technologies in Japan is lagging. And, Japan's telecom prices remain high compared to competitive markets in the U.S. and Europe. This deprives the Japanese people, and the Japanese economy, of the full benefits of a competitive telecommunications market being enjoyed in the U.S. and other parts of the world.

A more troubling problem for the long-term development of the Japanese economy - which the Ministry of Posts and Telecommunications highlighted in its recent White Paper - is that high local telephone charges are discouraging the use of the Internet, perhaps the most important and transformational technology in the world today. While the number is increasing, Japan has only 17 million Internet users, compared to around 80 million in the U.S. Only 10% of Japan's schools are connected to the Internet, compared to 78% in the U.S. This has profound implications for Japan's future, as the Internet is revolutionizing commerce, education, medicine and many aspects of our daily lives.

But how can these problems best be addressed? In our view, the answer is to take bold steps to promote competition in the local telecommunications market, a sector where one company has overwhelming dominance in Japan. Enhanced competition will attract innovative, lower-cost carriers and force the existing carrier to be more efficient, both of which will reduce prices. Any policy short of promoting full competition in the local market will not provide a long-term solution to the problem.

To promote fuller competition, we are urging the Japanese government to adopt a regulatory framework that puts competition first in its telecommunications policymaking - a policy some have called a telecommunications "big bang." This means freeing new entrants to introduce innovative services while restraining a dominant carrier's ability to stifle competition - a framework the United States calls dominant carrier regulation.

In specific terms, we call on Japan to lower interconnection rates for both NTT and NTT DoCoMo, ensure fair and reasonable access for competitors to NTT's ducts and conduits, and permit flexible construction and management of new telecom networks. These are the types of changes which will result in significantly lower local telephone rates and will stimulate activity throughout the Japanese economy.

Regarding interconnection charges, Japan has two major opportunities in the next six months to choose policies that will promote competition. First, NTT can reduce its interconnection rates for the current fiscal year through a tariff it will present this fall. Second, the Government of Japan is planning to select a new methodology for computing interconnection rates - known as Long Run Incremental Costing - this fall. If Japan selects a pro-competitive model, it should dramatically reduce rates and encourage NTT to operate more efficiently. We will obviously be watching with great interest how these policies develop.

Another critical step Japan can take is to renew our bilateral NTT Procurement Arrangement. This agreement not only benefits foreign companies but also encourages NTT to procure the most efficient equipment and services available worldwide. This translates into lower costs for NTT, lower interconnection charges for its competitors and lower prices for NTT customers. As the Arrangement expires when NTT restructures on July 1, we see the need for immediate progress on this issue.

Economic Recovery: Our Shared Interest

While I have focused on certain areas where we believe further steps by the Japanese government would yield great benefits for the Japanese economy, I want also to recognize again the significant steps Japan has taken in the telecommunications area and to underscore the value we place on the intergovernmental discussions we have on regulatory reform.

Our two governments have been engaged in intensive discussions on telecommunications and five other sectors through our "Enhanced Initiative on Deregulation and Competition Policy," launched by President Clinton and then-Prime Minister Hashimoto in June 1997. The package of deregulation measures that Prime Minister Obuchi and the President approved in Washington in May contains important steps in telecommunications and other areas. We look forward to full implementation of the agreed measures and to working together to identify additional steps in the coming year.

We have been pleased by the progress we have made with the Japanese government in other trade-related areas as well. We have forged three dozen agreements in areas ranging from agriculture to civil aviation to computers, since the beginning of this Administration. To ensure these arrangements achieve their intended purposes, we have watched progress in reaching the goals set out by these agreements. The signing of these agreements has been just the beginning of the common ground we have found. It is in the effective implementation of these agreements that we will realize the benefits.

We will continue to find more areas of common economic interest in the multilateral area as well. The world's trade ministers will meet in Seattle, Washington, later this year to launch another round of World Trade Organization negotiations. The United States and Japan have a great stake in a constructive outcome of those talks. A likely focus will be trade in services, an area where both the United States and Japan have competitive strength.

It is our belief that the reforms we have pursued together, whether through our bilateral discussions or multilateral negotiations, will play an important part in Japan's return to prosperity - a recovery, which I say again, is in our great common interest.

I hope you will take from my remarks today several key ideas. First, we look to Japan to use all available fiscal and monetary tools to support a recovery. Second, the United States believes financial stabilization, foreign investment and regulatory reform are key to sustained prosperity. Third, within the area of regulatory reform, there is no sector where the potential gains from further liberalization can be greater for the entire economy than in telecommunications.

Having said this, I also want to say that I am personally encouraged and confident that Japan's economy is on the road to recovery, after many years of lagging performance and general concern not only in this country but abroad. The things which gave Japan its' opportunity to create the modern economic miracle that it has become in the second half of the 20th century are still present in this country.

Its high technology, splendid education resources, its hard-working population; all the things which made Japan the economic miracle of the past decades are still present. They will assert themselves, I know, and make Japan in the next century another engine of growth and prosperity, not only for its own citizens, but for the entire world economy. So it is in that sense that I am especially proud to have the opportunity and honor to be the United States Ambassador to Japan at this critical time. I thank you very much for your attention; it has been a great honor to appear today.

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