The 22nd World Gas Conference in Tokyo
Speech by Chairman OKUDA Hiroshi

"Challenges and Perspectives of the Japanese Economy and Industry"

Monday, June 2, 2003
Tokyo Big Sight

1. Introduction

Thank you very much for the introduction. I am Hiroshi Okuda, Chairman of Nippon Keidanren. I am deeply honored to have been invited to address the World Gas Conference, which is being convened in Asia for the first time in the 70-year history of this organization.
As my keynote address for this Conference that will remain in session for one week, I have chosen the subject of "Challenges and Perspectives of the Japanese Economy and Industry." Throughout my presentation, I will be drawing from a document entitled "Envisioning a Vibrant and Attractive Japan." This document, issued by Nippon Keidanren at the beginning of the year, presents the Japanese business community's medium- to long-term vision for the future of the Japanese economy and industry.

2. Current Conditions in the Japanese Economy

Allow me to start by briefly outlining the current conditions in the Japanese economy. Unfortunately, it cannot be denied that, among all the developed countries of the world, Japan is today facing particularly grave economic conditions.
For many years after the end of the war, Japan's industrial structure was geared toward the task of catching up with the advanced countries of the West. But in the final chapter of this process, Japan came face-to-face with the emergence and eventual collapse of the bubble economy. These events coincided with a series of highly significant global developments, such as the end of the Cold War structure, dramatic innovations in information and communication technologies, and the accelerated development of a borderless world. As a result, over a very brief period of time, Japan's industry and economy was thrown out into rough seas where the compass that had served so well in the past no longer worked.
In the years that followed, the Japanese economy has continuously faced highly unpredictable and opaque conditions. It has been buffeted by such international developments as the conditions in the Middle East and the series of international terrorist attacks.
During the current year alone, there have been various new developments on the international scene, including the war in Iraq and problems on the Korean Peninsula. More recently, the world has been grappling with the problems of SARS (Severe Acute Respiratory Syndrome), which has also affected the organization of this Conference. Finally, in mid-May, a major Japanese bank was saved through another massive injection of public funds. It seems that the whole of Japan has lost its way in a dark tunnel where no exit is in sight.
It is true that various reports and reform proposals have been submitted since the collapse of the bubble economy. Nippon Keidanren has similarly presented numerous policy proposals. It is also true that successive prime ministers have acted on these proposals to develop reform programs and to implement a number of systemic reforms.
But the question remains: How has Japan changed over the past ten or more years? And, has real progress been made in structural reforms? To be very frank, current conditions are such that the Japanese public cannot help but be very skeptical. One of the reasons for this skepticism is that we lack a shared vision of what exactly the proposed reforms aim to accomplish for the future. In the absence of an overall vision, there has been no systematic implementation of reforms. Instead, there has been a tendency to focus the treatment of immediate symptoms. Consequently, reforms have been repeatedly postponed or rendered ineffective by bureaucrats and certain politicians who have endeavored to protect vested interests, and by others who are opposed to change.
It was in response to this situation that Nippon Keidanren formulated its vision for the future of Japan. Taking into account what we can expect Japan to look like in the year 2025, we surveyed the future before us and outlined certain values. In addition, we considered a number of issues that had been mostly avoided in the past.

3. Basic Principles

Last year when I assumed the post of Chairman of Nippon Keidanren, I proposed two basic principles. The first principle is "attaining dynamism and creation through diversity." The second principle, which is needed to support the first, is "empathy and trust." In other words, corporations and individuals must identify their own specific goals and must endeavor to achieve these goals on their own responsibility. Even when these goals differ, corporations and individuals must be bound strongly together through mutual empathy and trust, so that the dynamism found in individual diversity can lead to overall economic and social development.
Japan's social and economic goals of the postwar period were established and pursued under government leadership. This postwar structure can be compared to an inward-looking circle, which was drawn with near perfect congruity. As opposed to this, the future Japan that we envision can be represented by a circle with marked incongruities. The participants in this incongruous circle are facing the outside of the circle and are working mightily to expand the limits where they stand.
During the long years of uninterrupted economic growth under government leadership, we the Japanese constituted the individual members of this perfectly congruous circle. Because of this experience, we have a tendency to look away from the harsh realities of low or negative growth that prevail today. In the past, whenever the economy ran into trouble, we would bide our time until it would eventually and inevitably return to its previous path of growth. But the situation has changed now. Since the collapse of the bubble economy, Japan has been caught in a prolonged period of economic stagnation that shows no indication of ending. The general public and most of the corporate community now realize that the wait-and-see attitude of the past can no longer be permitted under current conditions. The question that remains is whether we can individually establish our own goals and act toward their realization.
Fortunately, Japan already has a large number of small- and medium-sized enterprises that have captured very large global shares in their respective markets by capitalizing on highly innovative and creative ideas. As can be seen from the succession of Nobel Prizes awarded to Japanese scientists, the results of Japan's independent research efforts are receiving worldwide acclaim.
Japan also has many companies that have achieved a V-shaped recovery through bold reforms. These companies are now once again rowing out into the rough and open seas of international competition.
Instead of simply blaming our system and the government for the recession, each individual and each corporation must develop its own goals and work tirelessly toward their achievement. I believe that this will provide the energy and the driving force for making Japan vibrant and attractive once again.

4. Fiscal Structure Corresponding to Dwindling Birthrates and Aging of Society

Next, I would like to identify some of the major challenges facing Japan today and to outline the directions that I believe Japan should pursue.
The most serious challenge facing Japan today is the dwindling birthrate and the aging of society. It is estimated that Japan's total labor force will decline to approximately 61 million people by the year 2025. Currently, each elderly person is supported by 3.5 working-age persons. By 2025, this ratio will decline to 2, and by 2050, Japan will have only 1.5 working-age persons to support each senior citizen.
Pension and health insurance benefit payments currently amount to roughly 70 trillion yen per year. However, at the rate that we are going, this amount will double by 2025 to reach 140 trillion yen.
How should Japan foot this bill? What will happen if we attempt to maintain the present system of defraying these costs through income taxes, corporate taxes, and social insurance premiums? Such an approach would certainly place an inordinate burden on the working-age population and corporations who are creators of wealth. This would undermine economic vitality and close the door to Japan's economic revitalization.
In the case of Japan, what is particularly noteworthy is the speed at which the birthrate is falling and the society is aging. We must bear in mind that if we procrastinate, the public burden will grow exponentially. This in turn will directly result in the loss of the international competitiveness of Japan's companies.
In order to overcome this problem, Japan must undertake a bold program of integrated reform covering three key systems: fiscal structure, the social security system, and the tax system. The most urgent requirement is to achieve real reductions in national and local government expenditures by means of thorough administrative and fiscal reforms.
The combined long-term debt of the national and local governments is now approaching the 700-trillion-yen mark, equivalent to 140% of GNP. Even an early restoration of primary balance has now become an extremely difficult objective.
Expenditures in public works projects grew rapidly during the expansionary phase of the bubble economy. Now it is necessary to reduce these expenditures without allowing for any exceptions. The social security system itself must be revised. It is essential to reform the pension system, including a reduction of benefit levels. Reforms must also be made in the health-care system for the elderly and in the long-term care insurance system. It is my belief that the sum of taxes and social insurance premiums must be kept below 50% even in this rapidly aging society. If the national burden ratio is allowed to rise above the 50% mark, I am afraid that the Japanese people and companies will be obstructed from developing their full potential.
However, even if such fundamental reforms are implemented, Japan's current fiscal structure does not provide an adequate foundation for supporting the revitalization of the nation. As birthrates dwindle and the aging of society proceeds, we will have to introduce sound and sustainable reforms on the revenue side as well.
It is inappropriate to turn to income taxes and social insurance premiums to carry additional burdens. Instead, we must increasingly rely on taxes, the burden of which is allocated widely among all members of society. In other words, I believe Japan cannot avoid the European model, in which consumption taxes are a core element in the tax system.
When I presented this position at the beginning of the year, I received a wide range of views and comments. Unfortunately, however, this proposal has yet to be examined on the government level.
From the perspective of the consumer, consumption taxes are the most immediate and familiar form of taxation. Therefore, there is no doubt that the raising of consumption taxes will entail some very difficult problems from the perspective of its impact on the economy as well as its political ramifications.
However, the undeniable truth is that birthrates are declining and society is aging at an accelerating pace, and that Japan's fiscal structure is deteriorating from day to day. How are we to respond to these challenges? Politicians and individual members of society alike are being pressed to make difficult choices.

5. Boosting the Industrial Strength of Japanese Companies

As I have explained, the restructuring of government revenues and expenditures stands as an absolute prerequisite in creating a system that can sustain the future Japanese economy. But this can only be the foundation and the starting point. The task of building of an affluent economic and social system upon this foundation depends primarily on the successful development of the industrial strength of the private sector. There is a tendency for us to focus on such macroeconomic indicators as poor economic growth performance, declining stock prices, and the drop in real estate values. However, we must not lose sight of the realities that lie behind these macroeconomic developments. That is, we must earnestly reflect upon the fact that, over the past few years, the profitability of Japanese industries has remained significantly below that of other countries, and that profitability continues to decline. Compared with the bubble period, the market value of Japanese real estate has declined by 1,000 trillion yen. Similarly, shares listed on the Tokyo Stock Exchange have lost a total of 400 trillion yen in value. In this environment of severe deflation of asset values, Japanese companies have been faced with the challenge of the "three excesses:" excess debt, excess facilities, and excess labor. These three excesses stand as a daunting challenge to management.
To cope with these immediate challenges, it is certainly important to develop and to implement bold and flexible policy responses to buoy stock prices, to promote the disposal of non-performing loans, and to support the revitalization of industries. However, Japan must not stop with these measures. Japan's industrial strength cannot be boosted without forward-looking initiatives in the areas of capital investment and research and development.
China and the other Asian countries are registering very strong economic growth rates, while Japan's industrial structure is undergoing major changes. Japan's imports from China exceeded its imports from the United States for the first time at the end of last year, making China the leading source of imports for Japan. The product makeup of Japan's imports from China is also changing. Japan is not only buying Chinese textiles and food products, but is now turning to China as a supplier of IT products, machinery, and other advanced industrial goods as well.
While promoting the process of international specialization and division of labor with the Asian countries, Japan must take effective measures to commercialize its accumulated wealth of advanced scientific technologies and to apply these to industrial uses. At the same time, as a technology-based economy, Japan must continuously develop new technologies and products and present them to the world as a front-running nation. Notwithstanding its severe fiscal conditions, the Japanese government has made exceptional provisions for budgetary allocations for research and development activities, and continues to increase its outlays in this area. I believe that this policy should be continued and that the government's R&D related outlays should be focused on priority areas directly linked to the revitalization of the economy.
As Japan attempts to boost its industrial strength, there is one area of particular importance that must not be overlooked. That is the strengthening of the partnership ties among industry, academia, and the government. In this context, we should recall that Japan is already at the forefront of the world in terms of total R&D investment amounts and the number of patent registrations. The problem is that these achievements are not being efficiently commercialized. Thus, they have not given birth to new industries and new employment opportunities. In certain cases, we observe that Japanese companies are more eager to undertake joint research with foreign universities than with Japanese universities. Conversely, we observe that various research results of Japanese universities are being commercialized by foreign companies. These concerns are underscored by the World Competitiveness Report issued by IMD of Switzerland. According to this report, Japan ranks lowest among all developed countries in commercializing its R&D results and in terms of entrepreneurial spirit. To improve on this sorry record, Japan must develop necessary frameworks and train human resources to promote the active commercialization by domestic companies of the knowledge created by Japanese universities.
As a step in this direction, Japan's national universities are currently being reorganized into autonomous corporations. Beginning in fiscal 2004, the staff and employees of the national universities will no longer be civil servants. It is hoped that these measures will promote the reversion of the fruits of university research to society by introducing competitive principles and instilling greater freedom of thought. We also look forward to new approaches in strengthening the ties among industry, academia, and the government, such as the hiring of foreign professors and researchers, the promotion of personnel exchange between academia and companies, and the joint training and development of engineers by industry and academia.
Parallel to these efforts, the government must also promote further systemic reforms for developing industrial strength.
Japan's effective rate of corporate taxes remains higher than those of the Asian countries as well as those of the other developed countries. Measures must be taken to promptly lower Japan's corporate tax rates. Beyond that, there are large numbers of other reforms that must be undertaken. Among them, I would like to mention the need for further deregulation and compliance with international legal standards for corporate organization, such as LLC.
There are many other changes that have to be made. Some of the most essential and indispensable requirements include the expansion of "angel" tax breaks to promote the establishment of new businesses, and the further development of Japan's securities markets as an efficiently functioning source of corporate fund procurement to replace indirect financing.

6. Making the Environment and Energy Pillars of Industrial Strength

In pursuit of the goal of becoming a technology-based nation, the Japanese government has identified four priority areas for research and development. These are: life sciences, information and communication technologies, nanotechnologies, and the environment. To gain a global leadership role, the government has assigned budgetary and policy preference to these fields. Four other keys fields have also been identified: energy, production technologies, social infrastructure, and frontier technologies. This total of eight fields has been approved by the Cabinet for priority initiatives in Japan's Science and Technology Basic Plan.
Of these eight, I would like to speak in some greater detail concerning the environment and energy, which are closely linked to the theme of this Conference.
As you well know, among all the developed countries, Japan is the poorest in domestic energy resources. Currently, domestic resources can provide for only 4% of Japan's energy needs. This self-sufficiency ratio rises to about 20% with the addition of nuclear power, which can be considered to be a semi-domestic source of energy. In comparison, the United States provides for more than 70% of its own energy needs, while Britain boasts a self-sufficiency ratio in excess of 100%. These figures present a rough idea of the serious nature of Japan's energy challenge.
Although operating under this constraint, Japan has been able to develop its economy and its industries while achieving the world's highest level of energy efficiency. Energy consumption in Japan's household, commercial, and transport sectors increased significantly throughout the 1990s. On the other hand, energy consumption of the industrial sector has remained basically unchanged from the levels of the early 1970s.
In terms of GDP, Japan has improved its energy consumption efficiency by more than 20% since the first half of the 1970s, and Japan's current level of efficiency is twice as high as the OECD average.
On the other hand, environmental concerns continue to become more important. The reduction of carbon dioxide emissions and other responses to global warming will certainly exert a growing impact on the economy and industry.
As I mentioned earlier, Japan has already achieved a high level of efficiency in energy consumption. Consequently, Japan's ratio of carbon dioxide emissions to GDP is roughly one-half the OECD average. Nevertheless, the total tonnage of emissions has been affected by the sharp rise in the emissions of the household, commercial, and transport sectors, particularly since the 1990s. Therefore, the Kyoto Protocol, which calls for a reduction of emissions to below 1990 levels, presents Japan with a hurdle that will be very difficult to clear.
With regard to the industrial sector, Nippon Keidanren has formulated its Voluntary Action Plan on the Environment from which very positive results have already been achieved. Under this Action Plan, an annual follow-up review is conducted for individual industries. Last year's follow-up survey revealed that total carbon dioxide emissions for all industries during fiscal 2001 was 3.2% lower than the emissions during fiscal 1990.
As members of the Japanese business and industrial communities, we look forward to further strengthening our voluntary efforts. At the same time, we believe that the development of an effective response to the problem of global warming, which affects all of humanity, requires the development of an international framework involving all countries and companies in a united effort for the reduction of greenhouse gases.
There are various areas where we hope that the Japanese government will redouble its efforts. Some of the major initiatives we would like to see include government support for energy-saving programs in the household, commercial, and transport sectors, the shift to the use of environmentally friendly natural gas, the promotion of the use of nuclear power, and continued support for the development of innovative technologies including fuel cells. As for the governments and companies of foreign countries, it is our hope that they will cooperate in responding to the problem of global warming by pursuing the common objectives of the Kyoto Protocol.
It is because Japan is a resource-poor country that it has led the world in energy and resource conservation, and in the development of fuel cells, solar cells, and other new technologies.
Advances made in fuel cell technologies have extended the viable scope of the application of this technology well beyond the automobile. New possibilities for the use of fuel cells will soon present themselves in such areas as household power generation. We live in an age with many emerging opportunities for contributing to the preservation of the global environment by developing new businesses in the fields of energy and the environment and presenting these to the entire world.
With regard to energy and the environment, there is another matter than we must not overlook. In the years ahead, continued industrial development in the Asian region will sharply increase energy consumption in the region and will have a major impact on the environment. Estimates indicate that by 2010 Asia will account for 26% of the world's total energy demand. This ratio is expected to reach 30% by 2020. On the other hand, the Asian region cannot be expected to significantly increase its output of petroleum and other energy resources. Consequently, Asia will become increasingly dependent on the energy resources of other regions of the world.
Thus, from the perspective of energy security in the Asian region, it will become increasingly important to create an international cooperative framework.

7. Conclusion

I have briefly presented my thoughts on the current conditions in the Japanese economy and industry, and have addressed some issues pertaining to energy and the environment.
This year again, the world has been experiencing some very dramatic changes. On the domestic scene, the Japanese economy is approaching a moment of truth that will determine the future course of its revitalization. With regard to energy, the immediate challenge will be how Japan rides out the peak demand for electric power in the summer months ahead.
I am a firm believer in the potentialities of Japan. It is my earnest hope that the Japanese people and Japanese companies will be able to contribute to the development of humanity through mutual trust and free competition. Finally, it is my heartfelt hope that the Japanese people and Japanese companies will be able to contribute to the achievement of the main theme of this Conference, an eco-responsible future.
In closing, I extend to you my best wishes for the great and historical success of this World Gas Conference in Tokyo, and pray for the continued progress of your work.

Thank you.


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