[NISHIOKA] Good morning, ladies and gentlemen. My name is Nishioka of Nikkei. Let us begin the session for the day immediately.

We will be inviting Mr. Higuchi of Asahi Breweries. He is chairman of the Economic Strategy Council. He is currently probably the one individual with the most clout in the business community in Japan.

With that I'd like to call upon Mr. Higuchi.

[HIGUCHI ] Good morning, ladies and gentlemen. Thank you for the introduction. I am Hirotaro Higuchi.

I am very much pleased to speak before this audience for two reasons. First of all, I happen to be the director for this hotel, so I'm thankful that you're using our facilities, and if your mood calls for it, you may even want to drink a glass of Asahi beer.

Our council has produced a report, and all the ministries and agencies are now making a follow-up effort. And I think Nikkei has distributed to you our report and recommendation to the prime minister entitled, Strategies for Reviving the Japanese Economy. It is not my style to follow the pages of this report in chronological order. Together with Mr. Tsuruta of Nikkei, I had an opportunity to attend the bilateral meetings between Japan and France, Japan and Germany, and Japan and Spain. I just came back from those three meetings yesterday, so my mind is still a little blurry, but I hope you will have some sharp tough questions for me after my presentation.

Now about this strategy committee, let me give you a history of how this committee came about. I think Mr. Sakaiya, nobody knew that he was going to be the head of the Economic Planning Agency. I think he was himself to be responsible for this work, but then, when he was called on to become a minister, he preferred that position. So I, in turn, ended up heading the committee when the invitation came to me. This committee, by the way, issues reports in English and many people have already read this. For instance, Monsieur Chirac has told me that he has read this report. We used to talk only about sumo , which is his favorite sport, but he, as I understand, has taken a look at this report. very interestingly. And because this is an issue for both managers and corporate management, I think I can talk about this.

Please look at page 1, which gives you the current status of the economy and assessment of the current economy. It talks about the signs of change as effects of recent large-scale economic packages. There are some signs that the severe economic downturn has stopped. It says that the first and second quarters of this year have posted a positive GDP, so economic growth for the first two quarters was positive, but domestic demand is still stagnant; as a whole, progress in terms of private demand remains stagnant, so the economic prospects for self-supported recovery are still not very clear.

Mr. Hashimoto and his cabinet introduced six reforms. One was an administrative reform and another a fiscal reform. Those were the two reforms that the cabinet embarked upon first. Let me tell you the conclusion. I think the timing was wrong. The opinion of the older members of the committee was that it was premature; it was too hasty; his efforts were made in too much of a haste. Additionally, the timing of issuing these measures was not right. So even though the budget was formulated, the budget was not implemented and the idea had to be abandoned in mid-course. But Mr. Obuchi determined to assume his responsibilities to do something about the economy, and this is why this committee was formed. He says that the economic prospects for self-supported recovery are still uncertain; it is not clear. But later on, the report says that against the backdrop the sharp decline in the birth rate and the rapid aging of the population, the pace of which has not been experienced in other industrial nations, et cetera, the Japanese system, the engine of the country's astonishing high growth in the postwar era has turned problematic. There is a concern about the prospects for employment and also about the future of pension plans and the wage system, the Japanese employment system, and the social security system. Probably it is losing sustainability. So we do need a new safety net, and this is what we're talking about, the need for new kinds of safety nets.

Secondly, the Japanese social system, which has held high regard for across-the-board equality, has generated a bloated public sector, because the emphasis was on equality and equity in the Japanese society. This caused the bloating of the public sector and inefficiency in terms of resource allocation. There was a need for an overall revamping of the public sector. And here comes the reference to you. We used to maximize the use of market principles for more efficient use of resources, in terms of capital and labor, to create a new system. Also the Japanese economy had a strength in terms of its unrealized capital gains. The strength of Japanese management was supported by unrealized capital, but now it has eroded and people are not able to assume risks. And the Japanese system was also based on land as collateral in terms of its financial intermediation but is now malfunctioning. Japan's abundant savings should be best mobilized for economic development in the 21st century. Therefore much greater efficiency is needed in Japanese economy.

And later on, three lines from the bottom, it says we see no way out, because households and the corporations have lost confidence in the future. Loss of confidence is the main point in this paragraph, page 2. And it talks about strategies for reviving the economy. As I said, economic players have lost their confidence, and therefore -- I hope you're following me on page 2 -- they need to be able to regain their confidence in the future. And for that, a new type of Japanese system has to be created. And all the existing systems have to be revamped fundamentally. Fundamental structural reforms are indispensable. And further down in the paragraph, it also says that there have been credit crunches and credit contractions. But the evidence suggests that household financial assets amount to 1,200 trillion yen and net external assets of 100 trillion yen. So financially, the Japanese economy is supported by a strong financial foundation. Semiconductors and LCD's and precision machinery are seeing better days, including small- and medium-sized companies.

We have a high quality labor force. The Japanese economy enjoys a high quality and diligent labor force supported by international high standards of education. These good aspects of the Japanese system have to be retained, while a new and more functional system has to be developed so that Japan's potential and the fundamental strengths can be realized and brought to the fore.

For your information, let me say that if you compare the Japanese economy with the American economy, population-wise Japan is half the size of the United States. And as you know, the United States has the dollar, which is the international currency; they can issue currency at their will; they have printing machinery as well as the minting machinery. In terms of the size of the economy, Japan is again half the size of the United States. And so as a country without resources, Japan is faring rather well.

In Asia, in terms of GDP Japan accounts for 70 percent of the Asian GDP, at least according to government statistics. But markedly it is 60 percent that Japan takes up in terms of the Asian economy. China has a very large population and a lot of resources, but they account for only 13 percent; including Hong Kong they are 15 percent. So in comparison, Japan's percentage, 60 percent, is very high compared to China. Korea is improving very rapidly these days, but still, their GDP, in terms of Asian GDP, is 7 percent. And Thailand comes next at 2 percent. So again, disproportionally Japan has an enormous strength or power economically speaking. This is the point I'd like to remind you of first.

Now, page 3 in Japanese version. Here it talks about the competitive society with soundness and creativity and having safety nets prepared. We have to build a competitive society with soundness and creativity, and we have to leave behind regulations, excessive protection, and the so-called convoy system. When one talks about a competitive society -- Nikkei has not talked about this, but in other newspapers -- they argue that the creation of a competitive society was an odd idea; even though when we bought the idea they disagreed with us. But the competitive society has to be qualified with the adjective sound competitive society. In other words, it has to have a fair and equitable tax system and also education system to develop creative people; to allow initiative of individuals this must be fulfilled. A new system to enable this has to be created. This is indispensable for Japan. There will be some dropouts in this process, but a second chance has to be given, as you can read in this paragraph, so that security and safety can be ensured in this competitive society with soundness. In other words, what is needed is a secure safety net and also employment opportunities need to be ensured so that people can change jobs. And the legal system has to be changed so that regulations can be checked, ex post facto instead of prior. In other words, job security, judicial reforms consisting a new society of ex post facto checking of consequences, et cetera has to be created.

And point number three is the complete settlement of the bubble economy for once and for all. For the establishment of the financial system for the 21st century, the financial system is at the core of the economy, and line three states that financial reorganization has to be encouraged so that real estate collateral must be liquidated and bad loans have to be absolutely disposed of for once and for all. And to this end, it is urgent to establish a new system and revised institutions. These disposals hinge critically on whether property liquidation and securitization can lead to transformation of non-performing assets into cash-generating, productive assets.

Next, Japanese version page 4, it says a new financial intermediary system has to be created. Item number 4 is industrial revitalization of the vigor and international competitiveness. It gives you a lot of detail about what we are looking for in terms of a financial system. If you read this book in bed, you're not going to understand this because it is far too detailed.

Now it also talks about strategic infrastructure for the 21st century, and regional revitalization, urban revitalization, and improvement of the environmental and information infrastructure, and housing improvement. These will be priority areas for the nation in the 21st century. And investment therein should lead to the creation of new business and revitalization of local economies and allow for the maximization of private initiatives.

We are being very frank about pointing to these needs. Now I'll be skipping around. We talk about various scenarios including a scenario for crisis. Page 17 in the Japanese book. I may sound sketchy, but we're trying to create a competitive society which is both sound and creative, and we are preparing safety nets. We are not going to abandon the weak or the unfortunate when we talk about competitive society. It tends to remind people of discarding weaker people and severe competition, but the image needs to be understood as a means to making the whole society richer as a consequence. The entire society has to become affluent, but for that, entry opportunities must be equal, and under an appropriate set of rules both private and individual players have to bring in new ideas and innovative products and services through competition. In other words, there has to be competition in creativity, and the environment has to be conducive to that. In the past, in Japanese society, whether you worked hard or not, the consequence was the same in terms of your competitiveness and renovation. That would tend to create a moral hazard and will leave people becoming very lazy. Moral hazard means that people are going to be lazy, meaning that we are going to see stagnation of the economy. And as you can see this is going to cause a loss of vitality in the Japanese economy.

In order to make the best of it, we need to do away with excessive regulations and we need to do away with the equitable society. So each will be responsible. We should have creativity in the private sector to come into play, and that is considered to be extremely important. But even although you try very hard, let's say that suppose you're not successful, then you should be given a second chance. And to guarantee the national minimum of a healthy and cultural life to all citizens is a precondition for a competitive society with the soundness and creativity it needs to work well. And it says, if you just talk about competition, most people would not support the idea of implementing competitive principles without providing safety nets.

On page 18 in the Japanese version, page 20 in English, number 4. It talks about enhancing people's employability and making a shift toward talented labor leading industry in the 21st century. The most important aspect is the introduction of training vouchers, which would help the unemployed to obtain new skills. To be more specific, if you had been employed by an organization for more than 10 years, and wanted to go to a vocational school, graduate university, or whatnot, more than half of the cost up to the limit of one million yen will be covered. And that is what we mean by the training voucher we talk about here.

Let's look at page 23 in Japanese, page 26 in English, which talks about more or less the same thing. We'd like to create a society where those who try hard will be rewarded. And here we talk about tax incentives to maximize this. In other words, we're going to have a more flat, direct taxation system and drastic reduction of the sales tax, as well as corporate tax and inheritance tax, and direct taxes need to be reduced. Second, it says that the maximum rate of household income tax ought to be lower than that of the effective rate of corporate tax, with a view to avoiding tax reductions through incorporation. And I believe that is one of the very important points.

Now let's look at point three. Aiming at a neutral and simple taxation system, the tax base needs to be expanded. The problems of lowering the minimum taxable income and taxing enterprises with a net loss should be tackled and special tax allowances and reduced tax rates should be reviewed. And then we talk about the invoice method, and simplification of the tax system.

For unlisted medium-size companies, on page 27, 5th. There is a very high inheritance tax being levied. Oftentimes we say agriculture is important; small- and medium-size companies are important, and those are set forth as policy by the government. But if you run SME, has there ever been preferential inheritance tax? Never, never. What about in agriculture? If you inherit a large plot of land, there is probably no case where the heir pays inheritance tax. It's lopsided. The action and the words do not match. Thus we talk about the SME's here. Let's say the father does well and works hard and has done a good job. And when the son or daughter inherits the business, then they will be taxed heavily and this might be responsible for them to lose motivation. And if we continue that, that's not going to motivate people. That's what we talk about on page 27 Number 5.

We need to look at the size of the companies and reduce it substantially, it says. If it is not listed, the tax burden is heavier; the .... business succession under the current tax system, where they are making a good profit. For example, their stock share prices are high in the market.

Let's look at the Internet, for example. We've introduced e-mail, and the Internet plays a large role. That's why a few extra sentence have been inserted into the report, because these issues need to be addressed as soon as possible.

Please refer to page 25 in Japanese, page 29 in English. Policies to enhance employability to ensure job security. Restricting human resources to a particular company or organization longer than necessary damages economic potential and hinders efficient allocation. When labor moves readily to industries and companies with higher productivity, reflecting the concurrent structural changes in the economy, an increase in productivity and economic revitalization ensues. And then it talks about the importance of getting rid of the traditional employment policy, and so forth. Official support to enhance the employability of individuals is necessary, and thus the training voucher.

Point 2, private worker dispatch and job placement services need to be, in principle, liberalized. When we look at worker dispatch, we have mostly the official job placement agencies. But in a sense they limit job offerings to those that can be offered by public job placement agencies. When we did the study we found that there has not been much progress. Thus, although we did not include it in this report, except for prostitution and drug trafficking, we decided that all job offers should be able to be placed through the placement agency. Of course, anything that is of an antisocial nature should also be excluded, and all other the jobs and professions other than those three categories need to be placeable through placement agencies. I think this was a new thought from the Minister of Labor.

My apology for talking about prostitution and drug trafficking so early in the morning. But if you look at point 4, institutional neutrality in the labor movement should be instituted for promoting measures to make pension qualifications possible. Portability within the pension system is important so that you can assure neutrality in the labor market. That's very important. It's more than natural, but it is not being executed.

And the following measures, temporary for up to two years, are necessary to eliminate unemployment. If you would, please, look at the report where it mentions significantly strengthened assistance in creating businesses by the involuntary unemployed. Point 2, to broaden unemployment benefits to enhance incentives for the unemployed to get a job soon by offering a bonus benefit to workers who have become unemployment, with a shorter period of benefits and so forth. In other words, we're going to provide more incentives for them to want to be employed.

So far we have had people who did not have full-time employment, and we had unemployed people with large families to be supported. But they would be given unemployment benefits only for six months, regardless of their status. Thus, I think we need to seriously consider whether the person is the breadwinner or not. And at the same time it's equally important whether he's looking for employment or not. So point 3 is to augment unemployment benefits to income earners with families who are involuntarily unemployed, considering the number of dependents. Whether you have a big family of say five, or are single, if the benefits are the same, that doesn't seem quite right.

Now we're going to skip around some. Let's be more specific. From the perspective of management, what do we want to do? Please refer to page 38 in Japanese. I'm sorry for skipping some portions.

This is in regards to establishing the legal system to make possible the development of urban areas. We should give preferential treatment to those who are interested in developing the area outside. And on page 45 in English, you see the operation of the auction system. It takes time. Here we need to review the short-term rent system. And at the same time we need to introduce a forceful management system and further abolishment of the lowest price sales system.

If you have any question on this, I'd like to come back to it.

Page 40 in Japanese. The promotion of liquidation and securitization of performing real estate. We talk about the SPC law, and this is something that is not easily implemented. So it needs to be revised.

Page 41 in Japanese, page 48 in English. Then what do we do? What about the investors? You might have a question about this. Unless there is investment, we cannot move ahead. We talk about giving incentives to investors, so that to promote effective use of land it is indispensable for those who wish to use the land to be able to acquire the land easily. And we talk about the abolishment of circulation tax and a review of possession tax and improvement of special measures regarding the purchase of commercial property.

I know I'm being very hasty, and I hope you will forgive me. I only have 40 minutes, you see. Please bear with me.

Page 50 in Japanese, page 59 in English -- reviving the vigorous and competitive industries. MITI has been talking about reviving industry and has established a committee. At the very end of the last session of the Diet session, the Industry Revitalization Law was enacted. I was summoned to the Diet and I spoke for about 30 minutes. In order to revive industry we need to create the framework to make that happen. The most important point is for the disposal of excessive facilities. If we keep them, they will be our shackles. It should be extended to 5 to 10 years in regard to the period of carryover of losses.

Furthermore, we need to come up with appropriate measures for M&A. That is covered on page 60, the second paragraph. We've talked about the abolishment of redundant facilities. Thus, be it the general public or the mass media, they felt that maybe we are sort of biased towards the steel industry. And they felt that probably we should focus more on SME's, for example. Thus, we are going to take up this matter from the 4th endeavor. But the representatives of SME's and other SME advocates are to be included in our efforts, and this is still under consideration at the moment.

Page 53 in Japanese, number 2. Assisting the establishment of new businesses and strategic technological developments. And first is the matter of assisting entrepreneurs. It is important to take measures for assisting entrepreneurs. And furthermore, consider the tax system. When a new business is started, naturally you don't have physical collateral. Thus, we shouldn't have the kind of financing in which land is set as a collateral. The report talks about how this could be addressed. For startup costs and so forth, there should be tax benefits. With venture businesses, there's a great deal of risk. Thus we should have the angel fund. We should facilitate the environment so that three years prior to listing, we should have a tax system that assists the angel exception of the initial beneficiary. In other words, for angel funds we need tax benefits. We also need to consider reserve funds.

Page 56 in Japanese, page 67 in English -- the 21st century and what we need to do as we head into the 21st century. It is necessary for Japan to foster new industries that will lead the Japanese national economic policies in the 21st century. Especially information, telecommunication, environment, medical services, welfare, biotechnology, distribution, and finance are expected to be important strategic areas that will grow rapidly and will provide high-quality employment opportunities in the growing mobilization of the labor force.

Biotechnology is one area where we have started. So far we have had five ministry involved in projects of biotechnology, and there is a lot of redundancy in consideration of budget requests. Thus, as far as biotechnology is concerned, all five of the ministers concerned get together so as to have an opportunity to discuss the requested budget. And that has been decided by the minister we just had a few days ago, although we have new faces in the new Cabinet now. So regarding a new industry, all the ministries come out with more or less similar requests, but we'd like to do away with that redundancy.

Another matter is the setting of the national strategies. What is important and how do we accomplish it? How do we concentrate research efforts? As you probably know, NTT have relocated their research facilities around Yokosuka. As a result, 80 percent of their research facilities are now located near Yokosuka. Waseda University has 230,000 tsubo of land in Honjo, Saitama Prefecture. For many years this land was left idle. What a waste! There is a bullet train railway station right in the middle of this plot, so they're going to use it for satellite telecommunication-related state-of-the-art research. This is said to be one of the focal projects to be advocated and supported by MPT. For example, biotechnology projects are carried out in many different prefectures, but why not concentrate their efforts?

Page 57 in Japanese, point 3, page 68 in English -- intensive incorporation of resources. Number 4, fostering of human resources and smooth mobility of labor. This is the portability that I referred to earlier.

Let's look at page 69 in Japanese. The topic is revitalization of the region and training of human resources in the 21st century. We need to open private universities and establish a center to improve efforts to coordinate between the private and the public sector. For that, we need to use the private funds.

At 11:20 a PFI committee meeting will be convened, at which time I will be formally asked to serve on the PFI committee. Most probably I will serve as the chairman of this committee. It's not that I want to serve on the chair, but I will probably be selected to serve on the chair by my colleagues serving on the PFI committee.

Lastly, on page 70 in Japanese, page 84 in English, we discuss the Japanese economy, which is on a voyage through uncharted waters. In front of us, there is only the open sea. It is not dark sea, but a bright one of a future filled with hope and vigor. From Chapter 2 to Chapter 5, there are approximately 230 some recommendations. Once we form the country's structure, we will become a totally different country. In short, there will be big changes. We're going to be slim and lean and competition will come into play, so that new businesses will be continuously created.

Near the bottom of the page in Japanese, sixth line from the bottom, there is mention about Japan doing away with excessively fair society. We need to be fair; we need to be efficient; and we need to be transparent, as explained on page 85, the first paragraph. It's not that we are seeking a society where the winner takes all. Our society should allow individual freedom to choose, freedom where if one fails, he may rise to the challenge once again. By doing so, a truly stable society will be achieved.

The consensus of the members of the council is that we have experienced a number of difficulties in the past. In each case Japan has risen to prosperity despite these difficulties, which is quite unique in the world history. It is because the Japanese people have overcome the difficulties by responding appropriately to drastic changes in the environment and by transferring energy to the next jump. A detailed explanation appears on page 85 in English. It is true that we went through a major restoration after World War Two, and we are now far better positioned. The changing environment includes the arrival of the information and telecommunications networked society, the aging of the population, and so forth, and we have to make Japan into an attractive country and one filled with vitality.

My time is up. I like to talk, I'm a chatterbox. Usually I'm comfortable if I'm give 90 minutes but today I was given only 40 minutes. It was very difficult for me to express my thoughts in that amount of time.

Changes have begun. The report makes 234 recommendations in all. We have incorporated a list of laws relevant to the recommendations, appearing on pages 73 and 74 in Japanese; page 87 in English. We feel that there are some new laws that are needed, existing laws that we do not need, and some laws that need to be revised. As a result of the recommendations, the respective government ministries decided to take action on only 52.9 percent of the total cases. With follow-up efforts, however, the ratio has been increased to 56.5 percent. In other words, out of the 234, 134 will be studied by the government. Looking further into the content, there is the B category, the content of which is to be considered, accounting for up to 95 percent. These are all matters related to taxes.

As you probably know, there is a group headed by Mr. Kato which is the tax commission. And there is another very vigorous parliamentarian. I don't believe that the tax commission will be able to come up with any conclusion. In the C category, those matters having many obstacles, and there are 25 of them. This has been decreased to 22 recommendations. So these are my feeling. I believe there are probably more recommendations that should be grouped under C. When we came up with a total of 234 recommendations, not all of these were decided on by the Cabinet; these were not acted upon by the Cabinet because there was so much opposition by the ministries. We felt that it would be doing good if 10 percent of the total were to be realized. But due to making efforts, close to 60 percent will be realized. And since the tax commission is not in session at the moment, we believe that some 90 percent of the total will eventually be attained. Prime minister Obuchi will persist in supporting the efforts of the Economic Strategy Council. It had been our decision to disband this council. However, we were asked to come up with more recommendations.

When we talk about speed, the pace is very fast in Japan. Let me just cite an example. We have many hedge funds. Hedge refers to the hedge that surrounds a group of sheep, for instance. Now Sakura Bank and IBJ were involved in a controversy related to short-selling, and I went to Mr. Miyazawa, minister of finance, saying this was a big problem. We wanted to introduce a system such as the one in the United States. In order to sell short, under the current Japanese system they have to make a thorough check first, which is too time-consuming and will halve the stock price of the banks involved in just one day. We considered this to be a big problem. So we suggested changes and Mr. Miyazawa and I spent two hours discussing the matter and decided to suspend the current system and instead we would simply receive reports from the players, those involved in the short-selling instead of scrutinizing. Towards the final stages of the last session of the Diet, Sony stocks were moving very rampantly. Why? Because Sony was going to switch their stocks with one of their subsidiaries, which was newsworthy to increase the Sony's shares. But the law were not keeping pace with this change. At the very end of the session, a relevant law was passed. Action was delayed because a completely unrelated piece of legislation allowing a husband and wife to officially use different names was being worked on at the Diet at that time. But that was totally irrelevant to the Sony subsidiary stock exchange case, so we suggested that the Diet work on this more important issue. If we didn't give priority to this, the Nikkei average would have dropped maybe 2,500 to 3,100 yen. So my point is that volatility is so much that these things move very fast.