Focus: Bush Visit

JETRO, 1221 Avenue of the Americas, NYC, NY 10020February 17, 2002


President Bush Travels to Japan to Discuss Security and Economic Issues

U.S. President George W. Bush will be visiting Japan on February 17-19, 2002 to confer with Prime Minister Koizumi on a range of security and economy issues. The two leaders have met on four previous occasions and have established mutual ties of friendship and strong relations of trust and confidence. Since the tragic events of September 11, Prime Minister Koizumi has exercised strong leadership under the Japan-U.S. alliance to support President Bush's fight against global terrorism. On his part, President Bush has given his full support to Prime Minister Koizumi's structural reform programs for the Japanese economy. President Bush's forthcoming visit will provide an excellent opportunity to reaffirm the importance of robust Japan-U.S. relations and for engaging in frank discussions concerning the issues of terrorism, security and the Japanese and U.S. economies.

The Japan External Trade Organization (JETRO) provides the following information examining these issues in greater detail.


Prime Minister Koizumi's Leadership Concerning the Afghanistan Problem

While firmly supporting President Bush in the fight against terrorism, Prime Minister Koizumi has himself exercised strong leadership in implementing various measures to combat this global menace. Special Anti-Terrorism Measures were enacted with unusual speed, taking approximately three weeks for passage. Based on this law, the Government of Japan formulated plans to cooperate with, and support, U.S. military forces. This includes assistance in the transport of ammunition and materiel, search and rescue operations, and humanitarian relief for refugees. As a result, Japanese Self-Defense Force ships were dispatched to the Indian Ocean to provide logistical assistance to the U.S. military. On the economic front, Japan has contributed $3.3 million in support of Afghan refugees and $40 million in emergency economic aid to Pakistan. It has also taken action to freeze the assets of terrorist-related organizations. In January, Japan hosted the International Conference on the Reconstruction of Afghanistan. In a Policy Speech delivered to the current session of the Diet, Prime Minister Koizumi made the following statement. "The fight against terrorism, which is a grave challenge to civilized society, is an issue of our own as we must ensure the safety of our people, and we must be proactive in preventing and eradicating terrorism in solidarity with the international community."

Recognizing the insidious and global nature of this problem, Japanese authorities are therefore determined to maintain their steadfast dedication to working with the U.S. and other civilized nations to monitor and take necessary coordinated actions.

The Japanese Economy Reaches its Most Important Postwar Structural Turning Point

The Japanese economy, which achieved accelerated economic growth for almost five decades, is now suffering from the twin problems of non-performing loans and deflationary recession. The Koizumi Cabinet has responded to this situation based upon the realization that "real growth cannot be achieved without real reform." However, to achieve necessary change, Japan must bear tremendous costs to transform the economic structures that have provided the foundation for Japan's postwar economic achievements and which promise, over time, to propel it onto a new growth path. For this reason, the positive effects of reform will not be immediately visible. In fact, further progress will necessitate further pain and adjustment as Japan moves to implement the comprehensive reform and adjustment needed to resuscitate its troubled economy

Following the recent dismissal of Foreign Minister Tanaka, public support for the Japanese Cabinet fell sharply to the 50% level. This caused the markets to question whether the Koizumi Cabinet would in fact be able to implement the structural reforms it was planning. However, since taking office in the spring of 2001, the Koizumi Cabinet has advanced its reform agenda far beyond previous administrations. The resolution of structural problems and removal of vested interests, however, will require far more time than is normally needed to pull an economy out of recession. The Koizumi Cabinet has been in office for less than one year, and structural reform clearly requires time to reach fruition. Even with the high mobility of its resources, the U.S. economy in the mid-1980s took considerable time to achieve structural reform.

The Limits of Japan's Postwar Economic Model

Throughout the postwar period, Japan has made resource-allocation decisions based on government-led industrial policy. Given Japan's limited resources, this approach was suited to the goal of maximizing economies of scale by planning resource allocation, instead of leaving these decisions to be determined by market principles alone. Corporate financing centered on the "main bank" system and the long-term business relations allowed through "keiretsu" arrangements. This helped to leverage limited capital and to create necessary credit. In addition, a "life-time employment" system helped to maximize labor resources by promising stable and rising income throughout one's career. It was by locking-in such resources as labor and capital that the Japanese economy was able to make maximum use of its limited capital. However, in time, these same systems caused the economy to lose its dynamic momentum. In other words, the locking-in of resources robbed the economy of its ability to efficiently reallocate itself in response to changing economic conditions. The resulting accumulation of lost opportunity costs has come to weigh heavily on the Japanese economic system.

The harmful effects of this weakness did not become immediately apparent. In fact, it was only after the "collapse of the bubble" which followed the post-Plaza Accord appreciation of the yen in 1985, that harmful effects began to surface. The dramatic collapse of asset prices lowered and destabilized the public's expectations of future income levels. This shrinkage of unrealized capital gains put an enormous burden on the credit economy by rapidly raising Japan's capital leverage ratio. This in turn resulted in a massive shrinkage of aggregate demand.

The Essence of Japan's Stagnation

Throughout its postwar history, Japan maintained equilibrium based on low resource mobility. Considerable time and cost must now be expended to transform the system into a more mobile and liquid one. Throughout the 1990s, effective demand was propped up by fiscal and monetary policies. While such emergency measures were being implemented Japan should have taken bold and swift action to promote the reallocation of resources from low-productivity to high-productivity sectors. Unfortunately, however, fiscal measures provided a disincentive against the movement of labor out of low-productivity sectors, such as public works. Moreover, past U.S. administrations exerted pressure on Japan along these same lines in the hope of generating short-term macroeconomic growth. In the final analysis, the series of remedies attempted, which included fiscal stimulation through public works investments, capital infusion based on application, and the postponement of limits in the deposit insurance system, only served to put off risks and to preserve corporate organizations which should have been liquidated. Consequently, Japan currently faces a very difficult situation in fiscal and monetary policy management.

Lessons from U.S. Economic Revitalization

The structural reformation of the U.S. economy required a time-frame of about a decade. During the first half of the 1980s, the U.S. economy experienced stagflation and an export offensive from Japanese companies. This contributed to the collapse of conglomerates and brought about an end to life-time employment in the U.S. What followed was a period of massive restructuring. To restore the competitiveness of its industries, the U.S. government implemented a series of measures that included deregulation, investment tax breaks, fiscal reconstruction, depreciation of the dollar, promotion of R&D activities and a conversion from a military to a civilian economy. This was by no means an easy path and, along the way, the U.S. economy came face-to-face with such critical problems as the twin deficits and non-performing loans. By making use of the advantages of being a key-currency country, the United States was able to overcome these difficulties.


Koizumi Cabinet's Structural Reform Program

Last year, new administrations were born in Japan and the United States almost simultaneously. The Bush Administration has sometimes been described as the first U.S. presidency since the collapse of the bubble to fully support structural reform in Japan, while the Koizumi Cabinet was the first Japanese administration fully committed to carrying out this agenda. Therefore, for the first time, the stage is set for implementing reforms designed to eliminate vested interests and prod Japan to break free from an equilibrium based on resource immobility. Tectonic shifts are definitely occurring within Japan's 50-year old postwar structures, however, as of yet, these changes cannot be fully appreciated on the surface. However, nonetheless, they are definitely in progress

Progress in Systemic Reforms

Over the past five years, the Japanese government has acted as a facilitator to bring about important systemic changes. These include a revision of laws concerning business re-organization, regulatory reform, increased liquidity of land and labor resources, and the development of transparent accounting practices. The process of systemic reform has been accelerated under the Koizumi Cabinet and the government is scheduled to submit bills within the current Diet session to fundamentally reform company laws.

More specifically, on March 15th, the government will submit a bill to the Diet incorporating the most comprehensive revisions to Japan's Commercial Code in 100 years. Key elements include the introduction of outside directors and corporate organizations as found under U.S. law. In last year's extraordinary Diet session, stock option systems were liberalized with the elimination of all eligibility restrictions and ceiling amounts. In addition, under Prime Minister Koizumi's leadership, a consolidated taxation system will be introduced this April. In the area of pension systems, a 401(k)-type pension system was launched in October 2001 and as of last December, 15 companies had already received approval to introduce this system. The number of companies signing on is expected to continue -- with some analysts predicting that funds under 401(k) pension management will eventually reach ¥20-30 trillion. Following a revision of laws concerning real estate investment trusts, two REIT issues were listed in the fall of 2001. Real estate transaction taxes have also been reduced and this trend is expected to accelerate in the years to come.

With regard to the reform of public corporations and the disposal of non-performing loans, the basic stance should be to allow the markets to handle the disposal of liquid assets. The private sector is also actively pursuing restructuring. To accelerate the pace, it is necessary to apply a "strong shock" to the public sector. This represents the most inefficient area of resource allocation in Japan. The destruction of the equilibrium based on resource immobility within this sector has great symbolic and material importance. This is what the reform of public corporations and the privatization of the postal savings system is all about. And that is the focal point of the concept of "reform without any sanctuaries." Currently there are 163 public corporations. At the end of last year, the Koizumi Cabinet finalized a decision to dissolve 17 corporations and to privatize 45.

In the area of regulatory reform, the Council for Regulatory Reform filed its recommendations at the end of last year. It identified six priority areas, including medical services, welfare and childcare, human resources and labor, education, environment, and urban revitalization. Their recommendations are now being studied and are scheduled to receive Cabinet approval in March. Substantial progress has also been achieved in deregulation, with the electric power business representing one major case in point. The market for large-scale power consumers has already been liberalized and the government is now examining options to liberalize the market for households and other small-scale consumers. It is scheduled to announce its conclusions before the end of fiscal 2002. In another area, the lowering of telecommunications connection charges has facilitated an explosive growth of the ADSL market, which registered a 900% increase in subscribers in one year.

Financial Sector Reform and Current Status of the Disposal of Non-Performing Loans

The introduction of limits on the deposit guarantee system was postponed in the past and it is expected that a new system will be implemented this April as part of the general program for financial sector reform. The disposal of non-performing loans remains the most important issue on hand in financial sector reform. While much remains to be done, all the necessary tools are in place: the functions of the Resolution and Collection Corporation (RCC) have been strengthened and an Industrial Revitalization Fund created.

Current Status of the Disposal of Non-Performing Loans

According to experts, bulk sales in the Tokyo market have already topped ¥40 trillion, making this the largest market for non-performing loans in the world. Reports from some market participants indicate that, in certain instances, assets sold to foreign investors in competitive bidding and backed by due diligence have yielded proceeds in excess of the amounts appropriated to reserves.

The Japanese Government enacted a Revised Financial Rehabilitation Law on December 7 of last year. This revision has substantially strengthened and improved Resolution and Collection Corporation (RCC) functions. Prior to the adoption of these measures, the RCC was licensed only to undertake trust operations. Prime Minister Koizumi has urged the RCC to begin purchasing NPLs more aggressively by making the most of these strengthened measures and to encourage financial instiutions to make the most of the Bank Equity Purchasing Corporation which will begin its operations shortly. Specific developments include:

  • The RCC can now purchase bonds from banks with greater ease. Their purchase price is defined as the market price, and the details of the market price have been clarified.

  • The RCC has also been given corporate rehabilitation functions. A Corporate Rehabilitation Headquarters has been established in the RCC, and studies are currently being conducted for the rehabilitation of representative cases.

  • To facilitate the sale of assets purchased by the RCC, as a rule, a disposal period of three years was established.

The RCC, however, does not represent the only means for the disposal of non-performing loans. In-court and out-of-court workouts provide alternative approaches. In-court workouts are proceeding at an accelerated pace. For example, during 2001, a total of 14 listed corporations failed, including Mycal, Taisho Fire and Marine Insurance (¥413.1 billion in liabilities) and Aoki Construction (¥390 billion). Overall, the number of corporate bankruptcies with liabilities exceeding ¥10 million reached nearly 20,000 cases during 2001. Furthermore, the total liability of these bankruptcies amounted to ¥16.5 trillion, equivalent to 3.3% of GDP. In April 2000, the new Civil Rehabilitation Law came into force and by the end of September 2001, about 1,300 applications had been filed under this law. In September 2001, the Guideline for Multi-Creditor Out-of-Court Workouts was formulated based on the 8 principles of the International Federation of Insolvency Professionals (INSOL). This new Guideline was applied for the first time to Ichida Co., Ltd.

In one notable case, Daiei, in January, the company announced plans to reduce its interest-bearing liabilities to below ¥1 trillion within three years. Liabilities will be securitized, and banks will take special charges to cover a substantial cancellation of claims against Daiei. The company will liquidate its non-core businesses, which have been acquired by U.S. investors, and will also close down a considerable number of money-losing stores.

The Development Bank of Japan is scheduled to contribute ¥100 billion to several funds for corporate reconstruction. These funds will be managed by the private sector, and it is hoped that foreign investors will also participate. Investments made by existing corporate-reconstruction funds are also steadily growing in scale. This has resulted in the acquisition of Nagasakiya and Dia Construction by Cerberus; Miyazaki Phoenix Resort by Ripplewood; and Nikko Electric by WL Ross.

In addition, on February 14, Prime Minister Koizumi ordered Hakuo Yanagisawa, Minister of Financial Services to carry out aggressive audits of banks irrespective of their capital structure, which should be made known to the public. Furthermore, the Prime Minister instructed Yanigisawa's FSA to supervise financial institutions carefully so that depositors will feel assured even after the introduction of limits on Japan's deposit insurance system. The results of these rigorous inspections will be reflected in a series of March settlements. It is hoped these inspections will promote an appropriate categorization of assets and accelerate the elimination of bad debts from balance sheets.

Introducing Measures to Combat Deflation

While attention is being devoted to the liquidation of assets and the disposal of non-performing loans, the problem of deflation is becoming more serious. The required trade-off presents the government with hard policy choices. Currently, economic policymakers are moving forward with extreme caution. Unemployment is rising and stock prices have been pushed down by the dissolution of share cross-holdings. However, these phenomena are unavoidable in the process of promoting the necessary liquidation of resources. Therefore, this needed treatment should not be allowed to undermine the continuing movement toward comprehensive structural reform. However, as this process is played out, effective measures must also be taken to eliminate fears that the Japanese economy may trigger a crisis in Asia or in the world economy. Various steps have been taken for this purpose. For example, fiscal stimulus is being given through a supplementary budget focused on effective areas of disbursement, and monetary policy continues to feature quantitative easing.

On February 13, Prime Minister Koizumi ordered economy-related ministries to immediately put together packages of anti-deflationary measures. The Prime Minister made the following statement: "Measures for further promoting the disposal of non-performing loans, stabilizing the financial system, targeting the capital markets, and coping with the credit squeeze on small and medium-sized businesses must be formulated before the end of February and implemented as soon as possible." Prime Minister Koizumi also asked that "bold monetary policies be implemented by the Bank of Japan to overcome deflation." Furthermore, the Prime Minister has clearly stated that all necessary measures will be taken to prevent a financial crisis. These developments indicate the Japanese government is fully aware of the situation on hand, and that necessary preparations are being made to avoid an economic crisis, even while continuing to go forward with the reform program. Additionally, on Feb 14, Prime Minister Koizumi asked Japan's Securities and Exchange Surveillance Commission to monitor closely any abuse arising from improper short selling and margin trading.



The Fundamental Strength of the Japanese Economy

Despite Japan's current economic problems; the fundamental strength of the Japanese economy must be properly recognized. Japan's essential strength lies in the economic resources at its disposal. This includes high-quality human capital and a competitive labor force; an ability to develop new technologies; industries in which Japan enjoys strong international competitiveness; high-quality, though high-cost economic infrastructure and capital stock; assets valued at ¥1,400 trillion; and a sophisticated market comprising more than 100 million consumers. It also possesses stability in its balance of payments and foreign reserves as the world's top creditor nation and well-developed welfare and medical services. While unemployment is climbing, approximately 1.24 million people are said to be hoping to start businesses. Of this figure, some 570,000 people are already making preparations. On average, households headed by persons in there sixties hold assets averaging about ¥60 million, of which roughly ¥20 million is accounted for by financial assets.

Measures to Promote Economic Revitalization

In addition to measures to counter deflation and promote the disposal of non-performing loans, the government is currently studying various measures to promote the economic revitalization needed to achieve medium- to long-term growth. In the January meeting of the Council on Economic and Fiscal Policy, Minister Hiranuma of the Ministry of Economy, Trade and Industry identified the following priority areas:

  • Enhancing competitiveness through technology development, including industrialization in areas such as biotechnology and nano-technology;

  • Strengthening intellectual property rights protection;

  • Reforming education, training and employment systems;

  • Promoting the growth of start-up businesses and new industries;

  • Encouraging restructuring at the corporate and industry level;

  • Promoting inward foreign direct investment to rectify the current imbalance with outward foreign direct investment, to the levels seen in other developed economies;

  • Creating new markets to meet potential demands, including more efficient management of assets owned by the elderly; fostering the growth of medical and nursing care; and transition of environment and energy to growth sectors; and

  • Developing foreign economic policies to support structural reform, including the development of cooperative agreements with Asian countries.

Linking Technology Development to Commercialization

Japanese firms are leading the way to develop many new promising technologies. It is hoped these innovations will lead to a range of new industrial and consumer applications with worldwide potential. Specific achievements include:

  • Development, testing and standardization to promote the early commercialization of fuel-cell cars, the leading hope for the next generation of low-emission vehicles;

  • Development of Internet technologies to transform automobiles into a key element in the information and communications infrastructure of the mobile society;

  • Development of materials usable as nano-tech elements;

  • Development of technologies to integrate digital home appliances; and

  • Development of mobile fuel cells to run cell phones and portable computers for long hours.

Growing Importance of Foreign Direct Investment

Inward foreign direct investment can play an extremely important role in bringing the Japanese economy to a recovery path. As was seen during the Meiji Restoration and again after the Second World War, Japan has the necessary "tolerance" for importing beneficial resources from abroad and learning from them. As mentioned above, considerable progress has been made in implementing systemic change to promote inward FDI. Likewise, there has been a substantial growth in inward FDI from the United States and Europe, and success stories now abound. Over the past five years, U.S. investment into Japan has increased six-fold. These investments are providing economic resources that are highly beneficial to expand and strengthen Japan's movement toward comprehensive structural change. Therefore, Japan eagerly welcomes and invites these investments.

For additional information, please contact Satoshi Miyamoto, Executive Director of JETRO NY at Tel: 212-997-0416, Fax: 212-997-0464, E-mail:

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