Japan and the U.S. - The Path to Prosperity

By Ambassador Howard H. Baker, Jr.
This article appeared in the Asahi Shimbun on May 17.

In just a few days, the leaders of our two great nations will meet to toss baseballs, eat Texas steak and discuss our common goals - peace and prosperity. Our alliance has proved strong in the face of challenges from Iraq and global terrorists. I believe we can also take satisfaction from our efforts on the economic front - we have come a long way. No one should doubt that a robust Japanese economy is a critical priority for the United States. When Japan prospers, the United States prospers. Furthermore, a healthy, vibrant Japan is a Japan that is able to take its proper place on the world stage - a critical factor in the security of the region, and of the world as a whole.

As Japan moves on the path toward stronger sustained economic growth, there will be opportunities for success and opportunities for failure. Recently, Japan has taken important steps in addressing non-performing loan (NPL) - and non-performing company - problems, and in deregulating its economy. These are two tremendous opportunities for success. Together with continued supportive monetary policy, such measures can help end deflation and spur economic growth.

First, Japan has established a market-driven entity to facilitate corporate restructuring. The Industrial Revitalization Corporation of Japan (IRCJ) will help rid the banking system of non-performing loans by purchasing bank loans of indebted borrowers and facilitating the restructuring and revitalization of the borrower. Private sector specialists will choose companies for IRC support based on whether the market will ultimately judge the restructured companies saleable. Investors will efficiently allocate the assets associated with NPLs, helping to address the "bad borrower" side of the bad loan problem.

Second, the government of Japan has announced that it will establish almost 60 Special Zones for Structural Reform ("special zones"), designed to revitalize the Japanese economy through locally led reform initiatives, aimed to improve business activity in specific sectors. The special zones will help the economy grow by attracting Japanese and foreign businesses, and increasing employment opportunities.

But even as such advances are made, there are opportunities for failure. No success in either corporate restructuring or structural reform is assured without continued support from the government and, importantly, the people of Japan. Just as the experience in the U.S. has shown, if special interests take control of financial and regulatory reform, the market will not function. The success of the IRCJ and important structural reforms will necessitate confronting Japanfs vested interests. Prime Minister Koizumi has pledged to pursue "reform without sanctuary." He has also pledged to keep the IRCJ free from political influence. Japanfs partners, the markets and the people of Japan will be watching and willing the Prime Minister to stand firm.

Of course, progress on corporate restructuring and the establishment of special zones alone are only the first steps toward greater economic growth in Japan. There are many other opportunities for success. First among these is fixing the financial system. Rigorous implementation of the FSA's Financial Revitalization Program to strengthen the banks and improve bank management will be critical to the success of Prime Minister Koizumi's reform efforts. Implementation of promised free market-oriented structural reforms such as the reduction of telecommunications rates, liberalization of aviation markets and rationalization of the energy market will be important to create new jobs and revitalize the economy. Moving against the market would increase Japan's chances of failure. I am confident that Japan has chosen the market and will continue to make progress on the central issues of banking, deflation and structural reform.

As the two leaders of the world's largest economies meet again, as partners and as friends, they will discuss our common goals of peace and prosperity, including both countries' global responsibilities and roles as economic engines of growth. The leaders' meeting is a reminder that our countries, like our leaders, are good friends and strong partners.