Japan at the Gates of Reform

U.S. Ambassador Howard H. Baker, Jr. speech to the Executive Morning Forum

Imperial Hotel, Sakura Room
Tokyo, Japan
Thursday, October 31, 2002

(Text as prepared)

It is a pleasure to be here today with so many prominent business leaders. There has been some talk recently about Japan becoming the Switzerland of Asia: a small, rich country with low growth, and little international power. Reality is Japan already has huge economic power, high living standards, and a remarkably similar natural beauty. But, Japan's future international role, including its ability to contribute to the peace and prosperity of the region and the world, will be affected by today's economic choices. As Japan's friend and ally we want to see a vibrant economy; one that assumes its rightful place as a leader in the community of democracies.

Prime Minister Koizumi wants Japan to play a larger role in world affairs. His recent cabinet shuffle and actions signal that Japan is facing up to its economic challenges.

But, how does Japan rebuild confidence so that people can look forward to a brighter future? Japan presently stands before the gates of reform; and the choice before it is stark: act decisively to address systemic problems or continue to muddle through. I believe that Prime Minister Koizumi has acted and the people of Japan will support his reforms.

I believe the Prime Minister has the energy and momentum to implement his reform program. His daring trip to Pyongyang captured the nation's imagination. The Prime Minister has kept the U.S. advised, and Japan consults with us on many important regional issues, and we are grateful.

While there are many unresolved problems in Japan's relations with North Korea, the Prime Minister's high approval ratings give him a mandate for change.

The Koizumi Administration clearly recognizes the challenge that it faces in order to restore Japan to its full growth potential. Overcoming the bad loan and distressed borrower problem is one. Eliminating Japanfs persistent deflation, which weakens balance sheets and discourages investment and household spending is the second. Fundamental structural reform and deregulation to open up new investment and growth opportunities will also promote growth. And, as the Prime Minister has emphasized, Japan needs a credible program for restoring balance to public finances in order to assure confidence among investors and savers.

No one of these areas is sufficient. Progress on each supports efforts on the other. But a comprehensive, integrated approach can move Japan to far greater economic performance than what it has known in the recent past. I want to speak a bit about the third of these challenges - structural reform and deregulation to open up new investment and growth opportunities, and the contribution that Foreign Direct Investment can make.

Foreign Investment in Japan has been growing rapidly over the past years. This FDI is a new lifeblood for Japan in the same way that it has been for the American economy.

Today's foreign investors see business opportunities that will lead to exchanges of technology and know how between the world's two largest economies. My friends, make no mistake, there are great market opportunities for investors, foreign and Japanese, in Japan, and the purchase and restructuring of Nissan will not be the last foreign investment success story in this nation.

The larger picture, however, is not the mega investment deals. It is mergers and acquisitions in small and medium-sized enterprises that provide the key to a vibrant and growing economy in Japan. Cisco Systems and Microsoft are international powers today because they used M&A to obtain the best technologies, to hire the most creative people, and to expand into new sectors.

In Japan, there are many small and medium-sized enterprises with good technology, good people, and good ideas. These firms, however, lack the capital to succeed. Sony did it 50 years ago, the question is who will be next in Japan?

Foreign Direct Investment, although growing, is still low in this country. In 2000, for example, Japan's stock of FDI was only 1.1% of GDP compared to 12.5% in the US or 29.0% in the UK.

Foreign Direct Investment has increased and continues to increase US competitiveness. Imagine how capital, technology, and management know-how that accompanies foreign investment could help restructure Japan's economy.

Over the last decade regulatory and legal reforms improved Japan's investment environment. Japan can adopt additional measures to attract foreign investment and can aggressively advertise that it welcomes FDI, just as my home State of Tennessee does so successfully in the years past, including investment from Japan.

Japan can create opportunities for investment, both domestic and foreign, and help itself move to higher rates of sustainable economic growth through regulatory and structural reform.

Japan continues to deregulate and restructure its economy, but the pace on average has been slow. The US experience has shown that deregulation can increase growth rates and Japan has the potential to move beyond its recent 1% economic growth rate.

Where Japan has deregulated and increased market flexibility, you have success stories. Reform of the retail sector encouraged new stores that offer Japanese customers a wider product selection at lower prices. Japanese companies and consumers have benefited from reform in the telecommunications sector. Cellular phone penetration rates are some of the highest in the world, and costs are extremely competitive for cell phones, the Internet and DSL.

Japan, however, has only seen the tip of this iceberg. Some other benefits of deregulation could include:
-- Lower energy prices, as well as greater consumer choice and increased energy efficiency and many others.
-- Better transportation and distribution service networks that can reduce costs and make Japan open for business 24 hours a day.

International comparisons show that economies that are more open and transparent have lower business transaction costs. There is a link between America's competitiveness and our transparent and relatively regulatory-free system. The welcoming environment for FDI in the United States also makes America the number one destination for international business. The U.S. experience has shown that deregulation and structural reform spur economic growth, promote job creation, improve consumer choice, and reduce consumer prices.

Japan can reap these benefits as well by implementing the Prime Minister's regulatory reform agenda.

Conclusion Friends, as I mentioned earlier, Japan is at the Gates of Reform. The Koizumi Administration appears to have a choice. I believe its actions will make Japan the preferred investment locale in Asia.

I have great faith that the Prime Minister's reform program will address Japan's economic difficulties. These steps will help our two nations form an even stronger basis for our relationship; the most important bilateral relationship in the world. President Bush and Prime Minister Koizumi have a long personal relationship that, in my opinion, adds value to U.S.-Japan policy discussions.

Their relationship also adds weight to the Prime Minister's reform efforts, because the United States believes Japan knows how to best proceed with its reforms, and once Japan decides what to do, the President and America will stand behind our ally and good friend.

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