Keynote Speech of Ambassador Thomas S. Foley U.S.-Japan Business Council

Tokyo, July 10, 2000

Thank you for the kind introduction. It is always a privilege to join the annual meeting of the U.S.-Japan Business Council. This gathering - a Who's Who of business on both sides of the Pacific - provides a welcome opportunity for me to review the events of the past year and to consider with you the items that remain on our bilateral agenda. Your thirty-seventh annual meeting this week provides an important forum to further economic cooperation between the two largest economies in the world. Your companies have created here an important mechanism to learn from each other, to discuss common concerns, and to create new opportunities.

Summit Season

Your meeting is a welcome complement to "Summit Season" in Japan. Last weekend, the G-7 Finance Ministers met in Fukuoka, where they reviewed global economic conditions. While prospects are good in the aggregate, they noted, the persistence of large global imbalances points to the need for more balanced global expansion, especially through more rapid and solid growth in Japan and sustained expansion in Europe.

Later this week, the Foreign Ministers will meet in Miyazaki, on the Pacific coast of Kyushu. They are expected to discuss over their two days of meetings a range of global issues affecting the international community and pave the way for the G-8 Leaders' meeting in Okinawa next week.

The Finance Ministers last weekend laid out four themes that will play an important part in the Leaders' discussions. First, they stressed the importance of growth as the key determinant for reducing poverty and the need to move forward with the Enhanced Heavily Indebted Poor Countries - HIPC - Initiative. This will require a balance between debt relief and high-quality reform programs. Second, they reviewed the progress made over the last year at strengthening the international financial architecture. They put forth some proposals to change the incentives underlying IMF lending facilities. Third, they discussed recent progress in combating international financial crime. Finally, they discussed how to make the best use of information technology in confronting national and global economic challenges.

All four of these themes - and others that will emerge from this week's Foreign Ministers' meeting - should make this an unusually productive G-8 summit.

A Year of Transition

Since I spoke to you in San Francisco last July, it has been a year of great transitions for Japan and for our bilateral relationship. Japan's economy has begun to turn the corner from its long and difficult recession, as the U.S. economy has continued to anchor the world's return to prosperity. The financial gbig bangh has taken hold and is bringing real reform and innovation to the banking and securities industries. Foreign direct investment into Japan continues to set new records, and we have seen important initiatives begun this year toward further improving the investment climate - for Japanese firms as well as foreign firms.

Our political relationship has seen great transitions this year also. Together we have mourned the loss of a great Japanese Prime Minister. President Clinton valued his friendship with Prime Minister Obuchi and made a very personal decision to come to Japan last month to pay his respects to the Obuchi family and the people of Japan. This year, both of our countries are celebrating the greatest of democratic institutions, free and fair elections. This year, we also have seen the passage of legislation that further strengthens our strategic partnership.

Investment

One of the great transitions we have been pleased to see in the past year has been the change in discussion about investment. No longer is there serious debate about whether Japan should actively court Foreign Direct Investment. The government and business realize the benefits of attracting efficient, innovative capital to spur competition and create jobs. There is also growing acceptance that for investment to grow in Japan, it needs to take place in a competitive, deregulated market. We no longer talk about gbarriers to foreign investment.h Those are almost entirely gone. Rather, we and our Japanese colleagues discuss ways to improve the gInvestment climateh to encourage both domestic and foreign firms to invest in Japan.

Even with the move to welcome more foreign investment, last year FDI flows into Japan were only one quarter of one percent of Japanese GDP. Last year FDI flows into the U.S. equaled 8.6 percent of U.S. GDP. Similarly, while foreign-affiliated firms produced about six percent of American GDP, in Japan foreign capital firms contributed only six-tenths of one percent of GDP. Reducing this disparity is now seen as a common challenge, not as an issue for negotiation.

In March this year, we made a very powerful statement about how much this is a common challenge. The State Department, MITI and JETRO co-sponsored the gInvest in Japan Symposium 2000.h The symposium brought together over 30 leading experts on investment and business acquisitions from the government, academic, and corporate sectors of our two countries. The audience of over 600 was particularly struck by the identical views of the American and Japanese business communities on what was needed to continue to improve the environment for investment in Japan. Let me repeat that: The business experts from both countries agreed on gWhat is needed to improve investment in Japan,h not "foreign investment in Japan.h The message of the symposium was that in a globalized economy, there is no distinction between barriers to foreign investment and barriers to domestic investment.

Panelists at the investment symposium praised the many regulatory reforms the Government of Japan has carried out over the past few years to break down barriers to investment. Let me mention a few of the most important:

• The new bankruptcy law represents a real step forward. For the first time, the law will provide for Chapter 11-style workouts to help firms revive before they collapse completely.

• Consolidated accounting - and next year, mark-to-market accounting - for listed firms will help reveal real strengths and weaknesses in the financial situation of companies looking to form strategic alliances or attract capital.

• The first major revisions to labor laws in 45 years have brought important new vitality to the labor market. Longer fixed-term contracts and more flexible work hours are now possible for workers. Temporary workers can now engage in a broader range of occupations. U.S. firms are simply not facing the same difficulties in attracting quality Japanese employees they did even a few years ago.

The business community - both Japanese and international - is solidly behind these initiatives. Two more important transitions are now taking shape in the rewriting of the Commercial Code and making the legal system more responsive to the needs of a great commercial and financial center. I am especially pleased to note that both MITI and Keidanren have actively sought recommendations from the international business community as they developed their own policy papers on commercial code and legal reform. Other beneficial regulatory reforms - most notably the introduction of portable, defined contribution pension plans - seem to be on the horizon.

Unfinished Business - Deregulation

However, the panelists at the investment symposium were equally unanimous that more things remain to be done in areas such as:

• Corporate governance. How does management become more accountable to shareholders?

• Regulatory reform and regulatory transparency. How do firms get clear guidance - in advance - from government agencies before undertaking significant investments or other new activities?

• Corporate restructuring. How can the tax system and business laws be streamlined to facilitate more efficient corporate operations, including the disposition of non-performing assets?

• Merger and acquisition policies. How can the government facilitate these important investment vehicles while safeguarding legitimate interests of minority shareholders, consumers and workers?

First on the list of remaining common concerns about improving the investment climate is the ongoing effort at regulatory reform. Reducing the regulatory burden on business increases productivity, open markets and creates the basis for a sustainable economic recovery in Japan. We were encouraged that Prime Minister Mori has endorsed renewing the Japanese Government's three-year regulatory reform program. On a bilateral basis, under the U.S.-Japan Enhanced Initiative on Deregulation, our two governments are discussing a wide range of issues. These include important sectors such as financial services and energy, and structural issues such as transparency in decision-making, opportunity for citizens to comment on proposed regulations, and strengthening competition policy in Japan.

The discussion is no longer - it cannot be - whether to deregulate the Japanese economy, but how to do it most effectively. The loudest voices calling for deregulation are no longer those of foreign governments and foreign businesses. Keidanren's list of deregulation proposals was almost twice as long as that of the U.S. Government. That single statistic speaks volumes about how important Japanese business believes deregulation is to its future success.

Unfinished Business - Telecom

We hope to present to the President and the Prime Minister a third Joint Status Report on the Deregulation Initiative in connection with the upcoming G-8 summit. We also hope the two leaders will be able to announce that we will extend our bilateral dialogue for a fourth year. I would be less than candid, though, if I did not say we still have serious issues to resolve before we can issue that report and make that commitment. Chief among our unresolved issues is a commitment from the Japanese Government to rapid and significant reform in telecommunications, specifically

• reducing interconnection rates,

• providing timely and reasonable access to facilities needed to build new networks, and

• ensuring fair pricing.

A welcome and important transition this year has been the addition of influential Japanese voices to those pressing for reform in this sector. In recent months, Japanese business people - including the President of the Federation of Japanese Employers (Nikkeiren) - and influential commentators have joined the call for steep cuts in interconnection rates, the rates one company charges another to use its existing network. Bringing those rates down is key to bringing innovation to the telecommunications industry in Japan. To see the effects of deregulation, one need look no further than cellular and long-distance service here. We see new services expanding in those areas so rapidly that companies are calling gtime outh on signing up new customers until their equipment can catch up with the demand.

The current structure of interconnection rates is a disservice to Japanese business and to Japanese consumers. A 1997 study by McKinsey and Company found that an additional dollar of investment in telecommunications in Japan produced less than half as much effect as did the same amount of investment in the U.S. Even more striking, the study concluded that the regulatory burden on telecommunications was a principal cause of that inefficiency. Freeing up the telecommunications sector would probably do more than any other single step to spur Japanese economic recovery. Every business and every home uses telecommunications. By reducing those costs and bringing new services to businesses and consumers, this one step could create new jobs and businesses, generate formation of new capital, and stimulate broader economic growth. As the Government is finding that each succeeding supplementary budget has a smaller multiplier effect, the need for this innovation is clear.

The Internet - New Common Ground

An important new area of innovation and cooperation between the U.S. and Japan this year has been the Internet. The Internet creates a borderless world in which the policies of one government quickly affect people in other countries. We only need to remind ourselves of the gLove Bugh virus this spring to appreciate that Internet security threats - and the means to address them - do not stop at borders either. Governments need to continue to consult on regulations to facilitate the use of the Internet as well as on how to increase the security of the Internet. I know that our governments are in touch on how best to handle all of these issues. I hope our private sectors are talking, too.

Common Commitment

One feature of our bilateral relationship that I am pleased to say has remained constant this year is our commitment to working together to address our many issues of common concern. Both the U.S. and Japan recognize that our relationship needs to accept growth and change, in order to be sustained over time.

Similarly, I think we both recognize that we can best accomplish this not necessarily by large new initiatives, but by getting small things right. We need to strengthen our cooperation and listen more carefully to each other. There is no question that Japan is our main economic partner in Asia. This will not change - Japan is the second largest economy in the world, home to some of the most innovative companies, most advanced technologies and hardest working employees in the world.

There is real and irreversible change in Japan - the result of global market pressure, demographics and the vision of forward-looking business and government leaders. Change is occurring across all sectors: there are only two wholly Japanese-owned car manufacturers left; two of the top three securities firms are foreign; and new retailers open their doors every month.

Next year at your meeting, I expect you will see a much more vibrant Japanese economy, one that is solidly recovering its former strength, one that is even more deregulated, and one that looks to the future with confidence.