[NISHIOKA] We are somewhat behind schedule after Mr. Higuchi's very enthusiastic presentation. The theme for this session is, Proposals for a Japanese Corporate Renaissance. We'd like to start by introducing the gentleman at the far right.

Mr. Glen Fukushima, the president and representative director of D. Little Inc. and also the president of the American Chamber of Commerce in Japan.

And next to Mr. Fukushima is the chairman and CEO of Kao Corporation, Mr. Fumikatsu Tokiwa.

The next gentleman is Mr. Jiro Ushio, chairman and CEO of Ushio Inc.

The gentleman directly next to me is Mr. Yoshiro Yamamoto, president and CEO of Fuji Bank Limited.

I am Nishioka of Nikkei.

To start with, we would like to ask all the panelists to speak for 15 minutes each, stating their basic position in regards to this theme. This will compose the first half of the session, and then we'd like to continue with a panel discussion.

The order will not have to be formalized, so perhaps we'll just follow the order of the introduction that I have just made, and first I'll ask Mr. Fukushima to give his presentation.

[FUKUSHIMA ] As a regular reader of the Nihon Keizai Shimbun, a long admirer of IMD, and as a graduate of Stanford University, class of 1972, I'm very pleased to participate in this distinguished forum, and I want to congratulate these three great institutions for putting together this program.

This morning's topic is "Proposals for a Japanese Corporate Renaissance." As an outsider, I'm a bit hesitant to make recommendations or proposals to Japan, but since I've been asked to do so, I will respond. I'd like to draw on my 30 years of experience in the US-Japan relationship, beginning with coming to Japan 30 years ago in 1969 as an exchange student, and including my experience at USTR, AT&T, the American Chamber of Commerce, and since a year and a half ago, as a management consultant.

Since I have only 15 minutes, I'll try to condense my comments. For those of you who would like an elaboration, I would recommend that you take a look at the book that I recently wrote called "2001nen, Nihon wa Kanarazu Yomigaeru." And in "Nihon Keizai Shimbun Keizai Kyoshitsu" of September 23rd of this year, I've put forward some of my thoughts about the need for Japanese companies to enhance their competitiveness.

First, I think it's important to have a sense of historical perspective on the Japanese economy. As Jack Welch said yesterday, you may recall it was exactly 20 years ago, in 1979, that Ezra Vogel published "Japan as Number One." Ten years ago, "Business Week" reported on a public opinion poll indicating that when the American public was asked, between the Soviet military threat and the Japanese economic challenge, which was the greater threat to America, 68 percent of the American public answered it was the Japanese economic challenge. Now, however, I think there's a tendency, in the United States and in Japan, and around the world, to overly state and focus excessively on the problems that Japan faces.

Also I think it's interesting that 10 years ago, the Japanese view was that the United States was struck with a British disease, hit with a twin deficits of the budget deficit and the trade deficit, and the future of America was very dark. But there are clearly business cycles and huge swings in the pendulum both in the reality of the economies but also especially in perceptions of the nature of the Japanese economy. I think just as there was a tendency around the world to overestimate Japan in the 1980's, there has been a tendency in the 1990's to underestimate Japan's strengths.

I'm one of those who believe that within the next two or three years Japan will be able to revive as a strong economy. What are the elements of such a revival of the Japanese economy? I think there are basically three factors that are important in Japan's revival.

The first is a favorable world economic environment. And on this score I think there is positive news. Many of the Asian economies that have suffered from the financial crisis are starting to recover, at least on a flow basis, if not yet a stock basis. A year ago there was serious concern about Russia, Brazil, and Argentina, but at least for the time being, these economies are holding steady. There are some mixed conditions in Europe, but in the United States in particular, we see a very positive continued strength of that economy. And so I think the world economic environment, these countries as well as the upcoming new round of multilateral trade negotiations under the WTO, developments with APEC for liberalization and growth, I think the world economic environment is reasonably positive for Japan.

The second set of factors is appropriate Japanese economic government policies. Here there was considerable criticism last year about the slow and inadequate response, especially as seen from the outside, with regard to the Japanese government's policy responses. However, in the past year, there have been significant steps taken both on the side of tax reductions, public works expenditures and trying to deal with the non-performing loans. So that, as Mr. Higuchi mentioned in his presentation, we've seen growth for two successive quarters, and most likely the 0.5 percent growth for '99, the target, will be met or exceeded.

But there's still much to do on the micro side of economic policy in Japan with regard to promoting competition. And here I mean especially the active enforcement of the antimonopoly laws to ensure competition as well as the removal of certain laws and regulations that inhibit competition. So on the level of Japanese government policies, there has been significant progress over the last year or so. Obviously, Japan is faced with some serious longer-term problems with regard to demographics, the aging population, the pension program, and government deficits. But I think that over time, many of these issues will be dealt with.

So the third set of factors that I think are important in a Japanese economic revival is corporate efforts, efforts by individual Japanese corporations to revive and to strengthen their competitiveness. One can see in the United States as well that these three sets of factors -- that is, the favorable world economic environment, government policies, and corporate efforts -- have together contributed to the revival of the U.S. economy in the 1990s, as compared to the 1980s.

With regard to corporate efforts, I'd like to list several things that are important for Japanese companies. Obviously, there is diversity among companies, but I think in my year and a half of consulting very closely with American, European, and Japanese companies, I have derived certain conclusions about patterns in Japanese corporations, and I would offer the following ten items very briefly as areas that Japanese companies might want to focus on.

The first is the need to formulate company-specific strategies that are clear, coherent, and consistent. This may sound obvious, but I sometimes find in Japanese companies that there is still a "convoy system" mentality of thinking about the industry as a whole as opposed to the company and the need for the company to have its own distinctive, coherent strategy.

A second issue is the need to create mechanisms and incentives to implement that strategy, not only what to do but how to do it. It's number four of Jack Welch's comments yesterday; he mentioned the "four E's." The fourth 'E' was execution, the need not only to have a good plan and a strategy but also to execute, implement, and realize that strategy.

The third set of factors is introducing objective criteria and measurements for the efficient use of capital. Mr. Higuchi mentioned cash flow analysis. That's one method that can be employed to use capital more efficiently by Japanese companies.

The fourth set of factors is the need to consider joint ventures, mergers, and strategic alliances from a global perspective. Again, this is something Jack Welch focused on yesterday.

The fifth is instituting performance-based personnel and compensation systems.

A sixth is to utilize fully diversity in the work force, whether it's women, foreigners -- that is, non-Japanese citizens -- and the elderly.

A seventh is to seek independent views, whether it's outside consultants or outside board members. This was examied in the discussion yesterday about corporate governance, but it is the need to have objective third-party outside involvement in trying to ensure that corporations and management are living up to their responsibilities to shareholders.

An eighth area of focus is the need to reduce what in Japan is called "min-min kisei," that is, the regulations or restrictions that companies impose on each other, thus making it difficult for the market to operate and for competition to operate freely.

A ninth area is relying on market forces to make procurement more transparent, based on economically rational criteria.

And the tenth is the utilization of information technology strategically to cut costs and distance and to enhance efficiency in information flows. This is something that I am sure will be discussed in some detail this afternoon in the last session chaired by Professor Okimoto on the impact of the Internet on global management.

I've briefly listed ten points. I could speak for hours about each of them, but given the remaining five minutes, I will just summarize. The really key point is that all of the above needs to be done on a company-specific basis as opposed to an industry basis. Second, execution is key, execution with speed and with a sense of urgency. And in many ways, I think in order to effectively implement these changes requires a significant change of mind-set.

I've spoken about what individual Japanese companies in Japan can do to try to enhance their competitiveness and thereby contribute to the revival of Japan's economy. I believe that Japan possesses some fundamental underlying strengths, whether it's strength in manufacturing in terms of quality, performance, reliability, miniaturization, and the price of products produced either in Japan or abroad by Japanese capital companies. Clearly Japan has a very strong social infrastructure, including a highly educated, disciplined work force. There is also, I think, still in Japan a positive national mission to succeed economically. Some in Japan would argue that this mission has faded or has weakened in the last several years. I think that perhaps if one compares this chronologically or historically in Japan, it's somewhat weakened, but compared to other industrialized countries around the world, I think Japan still maintains a high sense of national mission to succeed and excel economically.

Also, I think Japan has demonstrated up to now a tremendous flexibility and adaptability when it feels the need to do so. When it feels a sense of urgency, a sense of crisis, I think Japan has responded to the world environment, whether it's during the Meiji period or after World War 2 or responding to the Nixon shocks or to the oil crises or to the Plaza Accord. So I am reasonably confident, based on at least the last 150 years of Japanese history or even beyond, that Japan has the capability to adapt and the flexibility to adjust to the changing world economic environment.

But I think the one thing that's different now from many of these incidents in the past is that it's really necessary for the Japanese private sector to take the leadership in helping to revive the Japanese economy rather than sitting back and waiting for the government to take action to do so. Although, as I mentioned, I think the role of government is important, fundamentally at this point with many of the laws and regulations the framework having being set over the last year or so by the government, I think it's really up to the private sector in Japan to take the initiative.

Now in the last minute or so, let me just say that I think that there will be a certain degree of convergence among the industrialized countries in management, in part because of technology and especially because of the information technology. However, I think that there is excessive fear or concern among some in Japan that by adopting certain ways of doing things more efficiently and adopting certain elements of, say, corporate governance that we heard about yesterday from the United States or Europe, that somehow Japan is going to become like the United States, that Japan will somehow cease being Japan. I'm fully confident based on, again, Japanese history, that Japan will find its own unique solutions to becoming more efficient and more productive and more competitive while maintaining its core values and culture. again, I would say that at this point, it's really up to Japanese corporations, on a company-by-company basis, to enhance their competitiveness and to thereby contribute to the revival of the Japanese economy.

I think I've spoken for exactly 15 minutes, so I'd like to pass it on to Mr. Tokiwa.

[NISHIOKA] Thank you very much.

And then I think we'd like to immediately ask Mr. Tokiwa.

[TOKIWA]The Japanese economy is now said to have hit the bottom and is showing a sign of recovery. However, we are still quite uncertain about our future. Private consumption which is said to comprise 60 percent of the GDP is still stagnant and employment is a very serious problem, and the yen has appreciated and stock prices are in a very fluctuating stage.

Under these circumstances, various companies are engaged in structural reform efforts and we should not loosen the rein of the restructuring effort at this moment.

As was mentioned by Mr. Higuchi, we are seeing many aspects of the Japanese economy still falling apart. So the economic mechanism that was effective at the time of rapid growth, the managerial style and the way of doing business that were effective in those days have become obsolete; they are no longer able to catch up with the rapid changes in the environment. It's not a question of whether the mechanism is good or bad, but it is simply that the times have changed, and therefore a patchwork reform will no longer be effective. But now is the time that companies will have to transform themselves to a new existence, and the framework of wisdom of the companies will have to be totally renewed, in other words, we should create a new framework of wisdom. And that is why it is said that now is the day for the second start of the corporate activities.

Then, the environment of the economy and management, and how the times themselves have changed, I think it can be depicted by two key words: globalization and advanced informatization, and further progress of these aspects. I say further progress of these aspects. When we look at the '80s and '90s, the globalization and informatization had a different meaning there. In the '80s, investing abroad and internationalization were the caption, and we didn't use the word "globalization". However, today companies will have to look at their business on a global base and people are feeling that the global market is one, and so it is no longer investing abroad or internationalization.

Also, speaking about informatization, we have now come into the digital age from the past analog age. And the software is becoming more important than hardware, and now people are looking at their business as a system. So these are the major changes that we have observed during the decade.

And if we combine these words of globalization and advanced informatization, it simply means that now we are seeing the emergence of a network society -- where those visible networks and invisible networks, like human being, products, money, and information are covering the globe itself. And this has urged us to change fundamentally the mechanism of our business and the way we conduct our business. In this network society, everything changes in an interrelated manner, and they are changing each other.

What is outstandingly conspicuous today in this regard is M&A and corporate alliances. There is this corporate restructuring taking place in various industries in a mega-integration direction. On the other hand, we are now seeing the creation of new business by a combination of companies of different industries. And so in sense of mega-integration, as is often reported in the newspapers, in the field of information and communications, automobiles, oil, finance, chemicals, the examples are almost infinite, and in almost all industries these integrations are occurring. And coming to the new creation of business through combination, we are seeing a case where companies in distribution, sales, finance, and information are all coming together and creating new business which did not exist in the past. Such new terminology like "hubless company" has appeared on the horizon so that people are thinking that a hub is no longer necessary in corporate activities and business is conducted on the Internet.

What we can say in the midst of these circumstances is that we are now seeing the bipolarization of volume on one hand and quality on the other hand. So I would like to specifically speak about this volume and quality.

Now the expansion of volume in pursuit of raising efficiency, I think we'll come to a dead end sometime in the future. It depends on the industry, but if all companies are integrated into three or four groups, or five or six groups, I think that would be the limit. Against this kind of development, the pursuit of quality that emphasizes the uniqueness of the company, in terms of the diversity of the quality and high quality itself, I think, has no limit; everybody can pursue it all the way. And the market could be saturated in volume, but the market will never be really mature in terms of quality. So I think it is very important to shift from the pursuit of volume to the pursuit of quality.

I may be somewhat digressing, but I see a very good example of pursuing quality in the wildlife in nature. When we look at nature, when a species increases in number, then quality controls the volume. And there's always this natural balance kept between the volume and the quality. I think that is the way nature is being run.

On the other hand, it's not that only the strong wildlife survives; each individual species has its own unique quality, and they compete, and they coexist. They are not competing in terms of size or strength, but they are competing in terms of their quality or, should I say, uniqueness. And from this competition there occurs this natural selection and this is what constitutes an appropriate ecosystem.

In the network society, what is important is quality. Whether the quality is high or low, I think that is the future society that we will have to live in. Chairman Welch from GE was with us yesterday, and a company such as GE, IBM and other giant companies are the topic of today. But they're not the only company in existence. From a society where quality is regarded as most important, I believe we'll be able to see something new emerging. I think young companies will start to pop up. And I think in this network society we are at last able to establish the kind of society where quality is most important. And of course the government's involvement with private sector activity should be as little as possible. And the role of the government is to ensure that a company will be able to engage in fair and free competition. The government will have to structure this kind of mechanism. So in that line of thought, when we look at deregulation, I think the speed will have to be greatly increased, and this is something that I would like to ask the government to do.

Then how can a company come up with high quality? Well, it starts with R&D, and goes all the way from production to sales. When we look at the respective functions of a company, I would say that Japanese companies have a very strong potential. As Mr. Fukushima just said, the people are highly educated and have very high level of knowledge in technology. But what is important here is that in the global market, strength does not ensure your success. Being strong and being a winner are two different things. And I think this is the aspect where Japan will have to do its best. Japanese companies, regardless it is their own capability or the capability owned by the other companies, will have to incorporate these capabilities into their managerial concept and establish a system, make them into a package and translate them as their weapon as a company. And I think this is the aspect of Japanese companies that lags behind European and American companies.

The approach of translating strength into value is something that Japanese companies do not do very well, but this is something that each individual company will have to make the best use of their core competence, regardless it is technology or production or marketing. First, the company will have to confirm: What is their core competence? And that at the center, Japanese companies will have to most effectively integrate other capabilities that they have and transform them into their weapon of competition and come up with a clear-cut management strategy. I think that would be the basic ingredient for a company to come up with high quality, and I believe that that would be the competition strategy of a company. And as a result of that effort, new quality and new business will emerge.

In pursuit of quality, I think another indispensable aspect is the joint cooperation between the industry and the academia. This is something already being voiced today, but I think the terminology is just walking ahead of us and is not really being implemented. At least we haven't seen any outcome from that, as Mr. Fukushima has said and also Mr. Welch has said. But what we need here is execution. In terms of industrial and academic cooperation, real effort for execution is necessary. I think this would give us a new breakthrough and would enable technological innovation and perhaps will give us some means of a driving force of economic activities. So what we will have to do is, management policy will have to shift from the pursuit of volume to the pursuit of quality, in other words not only emphasizing the expansion of the volume but we will have to realize a corporate management where quality is regarded as most important.

And what enables this high-quality activity in corporate activity is wisdom, and I shall not try to define what is wisdom, but my image is that it is a thing like the mechanism of work, the approach to work and know-how, or mind-set, and in a more general sense, corporate climate. These are what I regard as corporate wisdom. But the reconstruction of the framework of corporate wisdom, I think, will be the means for finding a breakthrough for the corporate resurgence here in Japan. In this network society I believe those companies with a full sense of wisdom will be most prosperous. For the recovery of the Japanese corporations I would again like to emphasize this word, wisdom.

Now we're speaking about the recovery of Japanese companies, but as we move into the 21st century, I think companies will have to give full thought about the following two aspects. The first one is: Are the companies still to pursue the expansion of volume and should they be influenced by the increase in the GDP at the level of 1 percent or so? Should the Japanese economy stay at that level? Or, another aspect is, rather than emphasizing the percentage of the GDP, shouldn't Japanese corporations try to pursue ways of improving the quality of people's life and quality of the society? I think we will individually have to confirm which path we want to choose towards the 21st century.

[NISHIOKA] Thank you. And next is Mr. Ushio.

[USHIO ] Beginning with Mr. Welch yesterday, many have talked and many ideas have been floated. I'll try to be brief.

We're seeking Japanese business renaissance and seeking the 21st century business model for Japan. And I think there are two big issues here. First of all, after the Second World War, the Japanese economy has been referred to as a global miracle. With high economic growth in a short period of 30 years Japan has become an industrialized country. What has been the feature of this process and how can we bring this over to the 21st century? This is the point we're missing in our discussion, I think. This may be an abstract argument, but the postwar economic development has been supported by the perfectionism of Japanese business. Japanese, by nature, are very much perfectionists. You sponsor events, and you know that you are regulated by schedules that go by increments of 30 seconds. Like Mr. Higuchi was saying, we're very punctual; in preparing scenarios we are very thorough; we have to be fully prepared almost to the dot and that has been the feature of the Japanese economy after the war. Japanese are also very clean. Scientifically we are clean, but emotionally we also tend to be very clean; we like to be clean. You don't find a Japanese drinking tap water in a restroom, because even though it's the same water out of the tap, emotionally Japanese people think that restroom water is not clean. That's a good thing.

And also localization, so to speak. In other words, if something happens, you go to the actual scene of the incident, and they are proud of being able to be out there in the factory, so to speak. German people are like that, too. Jack Welch, I think, is also like that. He focuses on the actual frontline. Gemba, the Japanese word, is actually used in his company. To minimize the unnecessary managerial involvement, actual production, actual sales are more important. So hands-on attitude is what they pursue. The hands-on system has also been a feature of the Japanese economy based on self-sacrifice. And even though the yen at one point was as high as 78 yen, because of their hands-on attitude, they stuck to their life plan, and therefore were able to survive. There were many manufacturers who withstood this high yen situation. In foreign countries, they would rather go abroad if their currency was going high. Of course many Japanese companies did go abroad at the time of the high yen, but still, a lot of them remained. So staying with your factory, so to speak, to the very end is a Japanese attribute.

Also, groupism has been very strong amongst the Japanese. Instead of individualism, you want to stay in the pack. If you want to have lunch, in the United States everyone will choose a different dish, but in Japan a group of people will choose the same food, and share. The group spirit is very important. And respect for science has been a very strong trait in Japan. So these are some of the Japanese attributes. But these has been losing ground in the past decade or so.

There was a time long ago when we could not even imagine an incident like the JOC nuclear incident. Just yesterday, there was news that blood transfusions has caused two AIDS cases. These incidences were not imaginable in days gone by, because of the perfectionist attitude in Japan, people would be always there, hands-on at the factory or at the hospital wards to do the thorough checking. That has been the factor that has supported the postwar economic growth. But we have to look back on this Japanese tradition; the top executives have to go back to their origin, so to speak, to see what people are doing out front on the factory level. The lack of this is a negative factor for the Japanese economy in the 21st century. The top executives remember their young days, and they take for granted that this spirit is still alive and strong. But actually young people do not have this mentality, and therefore, they don't follow the leadership of the executives. Therefore they lack execution power, even though the plans may be good. Because in management, execution is just as important as plans, but whatever execution power that we used to have in Japan is no longer with us. We have to revive this.

In Asia, for instance, when people from Asian countries come to Japan, arriving in Tokyo they are relieved because Tokyo is so clean and safe, they say, "Yes, Japan has been known for high security and cleanliness." There was never a health or sanitation problem in Japan. These are some of the strong points that we have to look back on and make sure to revive, as we move into the future.

Now yesterday and today, structural reform has been a point of discussion: How are we going to change ourselves? There are things that ought not to be changed, because they have been losing ground. If we're going to change, we have to change to go back to the past. But then there are things that require more innovative change to follow the trend of globalization, because it's now taken for granted that we are competing on global soil. Globalization is the call of the day, and you have to think of cost in terms of global cost. If you cannot reduce your cost, then you have to add value, and that will entail an increase in price. How can we survive the competition? Well, it's a question of quality improvement. And given the trend of globalization, we have to be more open and more open to market principles.

Back to Japan, their policy on the yen is controversial nowadays, but basically, strong yen will increase Japan's assets altogether, so it is a welcome situation. But strong yen only works when 80 to 90 percent of the Japanese market is open. In reality, about 50 percent of the markets are, in one way or another, closed, thanks or no thanks to government regulations, because of business practices and customers. The markets are not fully open. And yen is strong only where the market is open, which is 50 percent. This is not a natural situation. If you're going to accept the appreciation of the yen, then the assumption has to be that 80 to 90 percent of the markets are open.

I will also add, for us to survive in the international market -- Glen Fukushima referred to the question of procurement, but additionally in terms of management strategy, business management, in all behavior and all of our actions, we have to go for disclosure. And once information is disclosed, this must be followed up with accountability being realized, and business management has to be able to live up to this requirement for accountability.

In Japanese tradition, secrecy, has been a good virtue; a secret affair was considered a noble thing for anyone to be involved in. But disclosure means you are exposed, that people will be able to see everything. In the United States, in terms of stock options, wages are made public. But in Japan these are considered to be secret pieces of information. You don't want to expose all the names involved when you try to introduce stock option programs, for instance. That's part of the Oriental culture, the virtue, the esthetics of secrecy. In Japan, for instance, you are not supposed to brag about your talents. If you are talented you will be good anyway; you don't have to talk about yourself being good or excellent.

I'm afraid to say this before Mr. Higuchi. There was once a very popular commercial: a man drinks xxx beer quietly. Quiet is important; you don't talk about xxx beer being good beer. Americans were surprised: Why could this commercial sell beer? Maybe this person was drinking xxx beer against his desire since he didn't make any comments about the beer he was drinking. But this was a popular commercial in Japan. A man is supposed to drink without ever uttering a word or making comments. Japan is a homogeneous society by tradition. And this kind of commercial did not win any award in international competition because nobody outside of Japan understood the virtue of this particular commercial. But now we are living in a global world, so we have to go along with this trend; we have to change.

In Keizai Doyukai, I've been an advocate of globalization. Globalization means one has to be determined to live as a part of the world. You cannot go your way alone any longer; you have to be resigned to the idea of living as one in the world. And Glen Fukushima has told us about the introduction of IT, which is very important. Japan, in this respect, is different from the United States. Yesterday Jack Welch was talking about someone 30 years of age being given an important position if he was willing and talented. It's better than the lifelong employment system if the company is only in 5th- or 6th-ranking position. But so far, we have not shared Jack Welch's philosophies. The IT question, information technology, has been utilized in the United States in sales, in procurement, in funding, in business management, and in inventory management. IT is everywhere, part of their day-to-day operation.

Those who are 60 years old or above are literate only in printed medium. But 20 or more years ago, all of a sudden there was a world of video and television, a visual world. Now it is the Internet world. So there's a three-layer structure in terms of generation gap between those who are literate in printed medium and visual medium and Internet. But in terms of IT, networking is in 95 percent of what we are talking about. So, in the United States, about half the business community is less than 45 years of age. When I went to the United States for the first time, I took a lecture in system engineering. What were they talking about? The systems, I didn't understand. It was 1956. So the United States is 20 years ahead of Japan in terms of networking concepts. Introduction of IT was very easy in the U.S. context, without any resistance.

Recently the U.S.-Japan businessmen's conference was held. Mr. Armstrong and Mr. Burns, and others of the major American companies were there. They said that 70 percent of the U.S. GDP growth is productivity growth due to introduction of IT, and they were very confident about this. I checked around, and indeed it is due to IT, particularly Internet usage to gather information to promote sales, so that sales per salesman are three or four times better than the Japanese productivity levels. So the introduction of IT will promote a revolution between generations. So it's a generation revolution, so to speak. And in terms of Japan's structural reform, in terms of legal system we have to look at this issue. Competition will result in a most equitable result. Do you believe that? Not many Japanese would believe that. You talk to the government officials, and those brains would believe that they are the ones to plan things. Free competition and its consequences would be too risky, 80 percent of them say so. And in key basic industries, or industries which have been formed by the convoy system so far, with discipline in order, there's a loose kind of collusion which brings about better results, it has been so believed. But in 1995, when yen rate was at 78 yen, electronics and automobile industries were exposed to fierce competition. But they worked hard enough to survive the situation, so they came to terms with the idea of competition. Competition is tough, but they can bear this. That is, however, in a limited number of industries. Not everyone shares this view. A structural reform means introduction of competition, and through competition players in the global stage will be chosen. And we have to be determined and prepared to go this path, go this way.

The last point I'd like to make is that Japan is going through this phase of change. What we have in store, our strength has to be maintained. What needs to be changed through structural reform will be changed. Common sense in Japan may be non-sensible outside of Japan. We should abandon this. Ken-ichi Takemura, a Japanese commentator, often talks about this, that Japan's common sense is not conventional wisdom outside of Japan. This coalition between three political parties in Japan, which hold a majority, but the public opinion now is: What are they going to do? Yes, they have been able to form a large majority. So what? In principal large numbers may be a good idea, and it's the public who chose through elections. With a giant ruling party, however, people don't know what they're going to do, and there's concern that this large coalition party may not do good things for the Japanese public now.

Also there is this question of small- and medium-sized enterprises. They need help, not because you feel sorry for small, medium enterprises, but in the past the belief was that the large companies were supposed to help small companies because they were small. But that's not common sense outside of Japan. A small good is large evil; large good is small evil, is a saying, as it goes. And if we are bound by this very kind of Japanese ideas, and if we apply it to security, for instance, idea will again build a world of militarism. And so, this kind of uniqueness has to change.

Now business people have to focus on future markets, and the general public's view of the market is that there's going to be globalization, therefore we have to follow global common sense. In the 1960s or '70s, yes, Japan had miraculous growth; there was the Japan Productive Center, which dispatched missions or teams of 300, 400 to go abroad, to learn from Peter Drucker, for instance, reading American business management books. So thanks to that, Japanese business philosophy has come very close to the global business standards.

It is due to Japanese curiosity of everything new. People who had no interest in computers are now interested enough to buy new computers, boosting the computer market. But now, that's not the case. They have lost confidence; they don't know what to do. I think, therefore, we have to be willing to accept diversity and show them that diversity is the way to go.

So once again, there are strengths that we must maintain, but also there are changes as we see in globalization; we have to, therefore, structurally change altogether. I would add to that that Japanese are not good at identifying problems, but when the problem is shown to them, Japanese people are good at working out solutions. To identify problems, you need a horizontal sort of mentality. If you stick to a vertical perspective, you may not be able to see the problem altogether. So if the companies are vertically compartmentalized, you are not able to see the problem that the company is facing. But once the problem is clearly identified, Japanese companies are capable enough to work on the problem, and spending perhaps one year, they are sure to come up with good solutions. And for this, leadership is important, to suggest and identify what the problem is all about. Thank you.

[NISHIOKA] Thank you very much.

Last but not the least, and thank you for waiting, Mr. Yamamoto, please.

[YAMAMOTO] Already three very famous speakers have spoken and made excellent points. Thus, I'd like to talk about the financial issues which in general are not often taken up. There is criticism that financial issues are not taken up enough. Thus, I'd like to talk about reconstruction of the financial industry, and in what way is it going to be useful for the reconstruction and revitalization of Japan? Those are the two points I'd like to talk about.

First of all, how can we revitalize the Japanese financial industry? We've just announced the integration of the three banks, and this will be one of the topic that I want to talk about. We need to recognize the existing environment. The three panelists have talked about the globalization of the economy, and we also talk about globalization of our financial industry, because on the other side of the economy is the financial industry. Financial industry is a bit separated from the real economy at the moment, but in any case, the financial industry will have to do away with national boundaries and do away with the space and time horizon. Thus, we need to globalize further our industry. Just like compared to the manufacturing industry, we need further globalization in industry.

We talk about globalization of the Japanese market and we talk about opening the Japanese market, so that the world Wimbledon phenomenon is often talked about, that maybe we don't need any Japanese financial institutions any longer because foreign capital institutions can take their role here in the Japanese market, although this could be an extreme. No. We are not going to allow that. It is not going to be through regulations, but it is going to be through competition that we're going to be better.

IT revolution was again mentioned by another panelist. Especially, if we look at banks, deregulation is important, and deregulation has a major role to play in our industry.

Thirdly, I want to talk about deregulation. Deregulation is justified because we are to change the economic infrastructure in the industry. This is true not only in Japan, but deregulation has been carried out rapidly around the world during the last 10 to 15 years. It is not that our market was regulated, whereas the European and American market were deregulated. It is just a phenomenon of the last 10 to 15 years in all the markets.

What about competitive conditions? We often say that Japanese financial institutions are poor in quality, and if we resort to overseas financial services, that would be better. However, to be very honest with you, if you look at the differences in the services -- by the Japanese and their counterparts -- I must admit that there is a difference at the moment. I shall be honest.

One of the reason is that deregulation came into play later. I have served in one of the councils of the government, where we had a lot of discussions on these issue. But as was said, we talk about the industry and not about the individual companies. Thus, if we talk about the financial industry, we talk about the state of the industry as a whole. And that is one of the results why deregulation came into play much later than that of other countries, which is so important for individual companies. Furthermore, there is the issue of bad loans which has taken time to be resolved. As a result, new innovative actions have not come into play as a major force. That again is another reason why we have the gap in the competitiveness with our foreign counterparts.

It is true that deregulation came into play earlier in Europe and the U.S., and in the early 1990s American banks were having some difficulties. I've heard this directly from the top management of an American bank. But they said they were extremely lucky, because in 1992 the economy picked up dramatically in the United States, and supported by the boost in the economy, their revenues and profits have increased, which pushed their efforts further. The same is not true in Japan. So, it is a fact that the American banks were able to address the issue of bad loans in a shorter time than Japan, so that they were able to introduce innovation.

Let's look at Deutsche Bank. They went ahead and purchased American banks, and Citibank and Travelers, which are from different industries, have had some tie-ups, and you see a lot of action. At the same time, these are coming to play at a very fast pace, which is another characteristics of the U.S. industry.

The third point I'd like to communicate is the competitive conditions. In other words, there is the entry of other industries into the financial service industry due to the deregulation. For the traditional players like ourselves, it is a threat that there is this entry from the other industries. If you look from the perspective of the national economy, this is a major positive move, because we're going to enhance competitiveness. But we are the traditional players in the industry, thus centering around capital, we have to shift the management resources.

What about the Japanese financial institutions, especially banks? How are they trying to address these issues? When we announced the integration of the three banks, I'd like to tell you what we did as an example. What is the objective? We'd like to make a solid foundation so that we could establish in Japan an organization that can compete globally. One is to enhance efficiency. We had regulation because there were so many banks and there were excessive management resources put into play into the industry. I have been talking about that there is an existence of overbanking. Thus, there was a limit as to pursue efficiency on part of one single bank in terms of bank outlets and systems. Thus, what is necessary is to integrate these so that we would drastically improve efficiency, and that would be one way out.

The second is to change the business portfolio on the part of banks. For traditional commercial banks, we cannot expect the kind of growth we used to enjoy. Investment trust and asset management and allocation and new types of financial services need to be rendered by Japanese bank if we wish for growth -- that is, substantial growth. Thus, we need to shift our capital from the commercial banking activities to others. How do we do that?

In order to beat the competition, as Dr. Welch has said, it is not going to be good if you are ranked as the fourth or the fifth. That is not good for the shareholders; that is not good for the employees, nor the people working at the bank. You need to create critical mass. If you are going to be in the industry, you should be profitable enough and you need to become a major player in the industry so that you can attain the critical mass. But that is not something that can be realized by a single bank.

The third is the IT revolution. When we talk about the IT revolution in the financial industry, what do we mean? During the last few years, IT introduction has been the key for success, because IT investment has been made in a major manner, and we'd like to do it more or less in the same manner as our American counterparts have done. It is not something that you can do overnight, because we need to draw analogy of the joint efforts that we saw in the introduction of IT.

What do we want to do? We want to change the personnel system so that we change the culture of the company itself. Earlier, Mr. Ushio talked about what we need to change and what needs to stay. The employees' mentality was the seniority system, the system of groups, and we had capable people, but their energies were not being put to the fullest use, and we are reflecting on that. So we need to get away from the groupism so that each individual will be evaluated based on his individual performance, so that they will have the best opportunity to make the best use of their capability. That's going to be the source of energy. That's why we decided to integrate the three banks.

I am running out of time, but... In order to revitalize Japanese companies, what is the role to be played by the financial industry? That is a topic that I'd like to have a bit more of your time to discuss.

During the last few years, the Japanese economy has been stagnant. One of the reasons is because of the instability of the Japanese financial system -- and I'm not going to deny that. In this process, we need strong financial institutions who are the players in the financial system. And we are fully aware that we need the strong players. We also believe that would serve the national interest. That's why public funds have been channeled towards the Japanese financial institutions.

The functions of financial institutions. I'm sure you use different functions, so I'm sure you have the hands-on experience. There was the format and the businesses that the financial institution could engage in in the days of regulations. But now we talk about unbundling of the services, so that services would be unbundled for each function. And after the unbundling we're going to bundle by amalgamating similar functions. And that is the future direction we believe that the new financial institutions are going to pursue. And that is how we want to be of service to you.

Let's take venture capital. That is one important business. As Mr. Fukushima pointed out earlier, this is the time for companies to play a major role. Thus, we need to change the tax system and the legal system, and we need to more strongly advocate that changes are necessary.

There's another thing I'd like to share with you. What is the relationship between companies and financial institutions? I believe that this may be better if it's taken up in the discussion, but I'd just like to cite the problems.

The system of main banks. There are different definitions of main banks. But foreigners, when they analyze the Japanese environment, they came out with the word, main banks or the keiretsu or the group of companies. These are the words that have been coined by the foreigners. But it means cross-holding of the shares and extension of loans based on the cross-holding of shares and so forth. That's what it means. And as quid pro quo they enjoy some advantages. And I think that is, in a sense, the definition of main bank. Cross-holding of the shares has lessened dramatically during the last few years, and the loans extended to companies have decreased. If you look at the overall picture, many of the main banks have no borrowings at the moment. In other words, if you look at the relationship between companies and banks, there is a drastic change at the moment.

The second thing I'd like to say is that the civil procedures law is being reviewed at the moment, so that review of the bankruptcy law is also under way. We're going to model after Chapter 11 of the U.S.

This is a tough story for creditors, I must say. If these laws are enacted, then we're going to see a different change as to the ratio in which the lending will be extended to corporations.

Last but not the least, we often talk about the role of the state. What is the role to be pursued by the state? As someone mentioned earlier, they need to create the environment so that competition can be facilitated. There is a strong discretion on the part of the government, and if that is to continue, then there would be disinvestment, so that there will be relocation of funds to Hong Kong and other markets inclusive of overseas in general. What is the role that we are to play as financial institution? I think we need to further discuss this issue in detail.

I do apologize in having used a bit more than the allotted time. Thank you very much.

[NISHIOKA] Thank you very much to all the panelists. We have heard a round of expression of basic positions and views.

Now we'd like to resume our meeting, and we're going to the latter part of this panel discussion.

We would like to conclude this panel discussion as scheduled, at 12:15.

Earlier, we heard the four panelists, and as this morning's newspaper reports, Asahi Bank and Tokai Bank will merge, and financial sector issue is the hottest issue right now. Well, looking back, it was in 1992 that Akio Morita, who passed away recently, sent an article to Bungei Shunju saying that Japanese management is at risk, and he sounded a warning that two uniquely Japanese management practices which are different from the global standard may cause Japan to be the odd man out. Probably he was saying that too strong a Japanese competitiveness may arouse too strong of a sense of threat on the outside. But now, after seven years, things have changed very much, and even Mitsubishi Heavy Industries is in deficit.

Now Mr. Yamamoto, the president of Fuji Bank is here, towards the end of your presentation, you talked about the relationship between business corporations and financial institutions. With the dissolution of cross-holding relationships and the dissolution of main bank relationships, what will become of this relationship between banks and business corporations?

[YAMAMOTO] Well, this is a very good opportunity. I tried to enlist some of the problems by saying that main bank system is changing, and I termed it as a main bank system as if this is a kind of established mechanism. As if by written definition, this might be the impression you have obtained. But what happens is that each business corporation consults with their main bank in various aspects of their business and regard their main bank as the last resort of funding or financing. This is a very pragmatic relationship. Critics or the scholars and others consider the main bank as if it is the total unity holding the total equity of the business corporation. But that is not the case, in fact.

In the process of global competition regarding the basis of corporate existence -- that is, the shareholder's right -- it is no longer possible. In other words, if a bank holds 5 percent interest in a certain company and extends 20 percent of the funding of that company, and being a main bank, the main bank will look after the business corporation to the very end. This may be the image of the main bank, taking good care of business corporations. If the plan for the reconstruction and revival of the business corporation meets the economic rationale, then banks will be on the side of the business corporation, rather than the side of the creditors. But if the plan of reconstruction goes against economic rationale, then the main banks will not take side with them.

We represent many clients, so I could only put it in a general way, but we have the debt equity swap type of description. That is, we have to ensure that accountability and transparency will be achieved and not undermine the position and rights of shareholders. Executive officers in charge of the management should be fulfilling their legally sanctioned responsibility. And that is the mission we have to ensure that that will be done.

About the mission of the new three-bank combination, or the four financial institutions, the relationship and credibility are very important. Therefore, we will continue to place high stock value on such a relationship and credibility. But the economic reasoning or rationale and the legality are the very basis of our consideration.

[NISHIOKA] Now as the management of a business corporation, what do you think of your relationship with the banks in the future including the matter of cross-share holdings? And we also often hear about the reorganization of each business sector. What do you think of this?

[USHIO ] The situation is very diversified and in a state of flux. In fact, in some sectors, such as financial institutions, we had the convoy type of protection. But now that The Fuji Bank, Limited, The industrial Bank of Japan, Ltd. and Dai-ichi Kangyo Bank will be combined in the future, and in a certain manufacturing sector or trading firms -- you see, when those three major banks get together, then half of the manufacturing companies or trading firms could be combined. Well, in the past, we tended to blame the financial institutions saying that when sector reorganization is possible, but because of the way financial institutions are set up, it was not possible. We would have to take the initiative in the industrial reorganization. And the newspapers are very actively reporting on this. Recently we feel that we should be expeditious about that. As Dr. Welch mentioned, in each sector number one, number two, or number three can survive and others will have to think about combining with the stronger ones. So this financial reorganization becomes a very strong trigger.

Ten years ago, equity financing became very active, and the top-ranking companies would go for equity financing for capital procurement. So the main bank system lost its significance. The very strong main bank system's significance rests with smaller or weaker corporations. Therefore, on the part of banks, those clients you would like to have would go to direct financing. But with an abundance in capital for lending, well, here and there, you can find the typical Japanese mutually conciliatory relationship of providing funds for capital increases to help out the banks or the business corporations. But with the decline in the main bank system, it has now become possible for three major banks to be integrated. With a very strong fully established main bank system, it might not have been that easy. But because of the financial Big Bang in Japan, the banks which we thought would be the last to combine decided to take a major step. It used to be unthinkable that the presidents of major banks would appear on TV and talk about their actions. It's almost like Sayuri Yoshinaga, the serene actress, appearing nude. So the way it used to happen was that other players would start doing here and there, and the three major ones would show up at the very end. But now, this decisive step is almost like a very European step, taking the initiative.

[NISHIOKA] What is your view on this, Mr. Fukushima?

[FUKUSHIMA ] You're asking about the main bank and system?

[NISHIOKA] Or the cross-shareholding, the decline of the cross-shareholding system and what sort of impact it would have on the Japanese industrial scene. Reorganization in order to promote the restructural reorganization.

[FUKUSHIMA ] I think there will be major change and transformation, but generally speaking, I don't think change would be as rapid or drastic when viewed from outside. Probably taking due time. If purely American type of competition were to be realized, that would trigger social concerns, such as employment instability and so forth. So competition will probably be regulated within a set framework. And the government and the general public would seek that.

In financial institutions or telecommunications, the American type of drastic changes would not come about that quickly in this country. But it is another matter whether that is necessary or not.

As I mentioned at the outset, Japan will go through necessary changes, but in very Japanese ways. As far as speed is concerned, most likely more moderately and slowly than otherwise.

[NISHIOKA] Mr. Tokiwa, what do you think?

[TOKIWA] Well, as I said at the beginning, the network society is a driving force for change. It is a network, so from top to bottom and horizontally, they are changing everything; the combinations and order are being changed. I think it is going to occur not only in the financial sphere, but in various spheres. Supposedly you should expect for anything to be possible by anyone. Starting from there, we will have to think what we are going to do. I think that is what is required for the renaissance of Japanese companies.

And what's important here is: How do you distinguish your own company from other companies in the sense that you can't do everything alone? You will have to, first of all, clarify what kind of capability you have in your company and what aspects or resources should be outsourced. And through this you will have to establish your own system, and I think that system, at the end of the day, will win high ratings. It is a network, so there are many available functions outside and also in the market, and by coming up with the best combination I think you will be very successful. Bank is a very good example.

However, I was talking with Mr. Yamamoto during the break. The scenario is fine. There are so many discussions taking place. But the crux of the matter is: How is one going to create a corporate culture? Of course these mergers took place in the past, although they didn't draw much attention in the general public, but in various industries there were mergers. At that time what was most important was: How was one going to create a corporate culture after the mergers. Once we overcome that wall, I think the companies will become great. So a network society, I would say, though it may offer risks equally, is a society full of dreams, a very interesting society.

[NISHIOKA] Mr. Yamamoto, please.

[YAMAMOTO] I think there are two questions to be addressed. Number one is, Mr. Fukushima has said that in Japan everything takes so much time, and Mr. Nishioka has said that we just say the words but this is not reflected in actions; we do not execute. I think the announcement of our integration was conducted in this very room. In the week after our announcement, the deputy presidents of the three banks formed an integration committee. And already 20 subcommittees had been created, and several times a week, with specific agenda, they are conducting meetings and forming conclusions. We intend to announce the progress to the public later. We will have a holding company in about two years from now, and that holding company will be listed, and we will become an unlisted company. So it will take about a year and a half. People say that is too slow. But next year, we will be sending market segment-by-segment staff and product-by-product staff to the holding company and integrated management will be conducted. And of course there is the legal situation, they may each appear to be an individual bank, but in the true sense, we are going to be one bank.

So I think employment is our only concern. I have spoken about the situation, and we are going to shift the capital to the business that has very high growth. In total we are planning to reduce our workforce by 17 percent in the next five years, including recruitment from outside. Some people might wonder if we can actually reduce our workforce by that margin. We feel, however, that we will not be causing any job insecurity to our people.

Second, regarding corporate culture, we've spoken about our personnel system. In our bank, last year, we established a job line where the former seniority system was eliminatated and another a job line where the seniority system is still in place. This was kind of a culture shock to our employees, but in the new bank, a totally new personnel system will be established. In that sense we would like to introduce a new, first of all. And second, in order to do away with the past culture of banks, we intend to establish business groups and we will have all these business groups compete with each other. Thus, the sense of belonging will not remain with the bank that they have come from, but the sense of belonging will be to the group that exists then. So we are coming up with a different idea, and of course I totally agree with the view that the culture has to be changed. And I would say that this perhaps could be kind of an experimental case for changing the culture. We cannot go back to the old days, so we are creating a new corporation.

[USHIO ] One question. I wonder if this difficulty of corporate culture also exists in the United States. Or you don't have that problem?

[FUKUSHIMA ] My company works on post-merger integration business offering as a core. In the United States, whenever a company is to be merged, problems always emerge. But looking in from the outside, what I feel about Japan is that the Japanese labor market does not have such a high turnover rate, and so the sense of belonging is strong. Being in the same company for 20 or 30 years, people get used to the corporate practices, the technical jargon used in that company and the atmosphere. It is very strong. It is very difficult for such a company to join together with other companies. But in the United States, there is very high mobility of the employees; they move from one company to another. So in that sense, the strong sense of belonging in an organization does not exist as much as it does in Japan.

Further, Western companies, as Mr. Welch also said yesterday, are used to mergers and acquisitions, so when they integrate with another company they know the procedure, the order of the process and the manner. The most famous case is Cisco Systems. They are acquiring a company on average once every six weeks, so they have developed a manual for these M&A's, and they describe the appropriate personnel system, IT system, and how these systems can be most effectively and efficiently established after the merger. They have ample experience. I think Japanese companies also do have experience, but not so much as that of the United States. So I think it is a question of the order.

[NISHIOKA] Integrating the cultures of different banks within Japan is difficult. Therefore transforming Japanese bank culture to become more like the American culture would be even more difficult.

For business renaissance, people talk about the need for Japanese companies to change, to become more like American companies. If you were to choose between Japanese and American-style management, the call is in favor of the American system. But take Mitsubishi Heavy Industries for example. Would they remain a Japanese company even if the Japanese archipelago were to disappear? Or, would you say that the distinction between American and Japanese management is not relevant? Fukushima-san?

[FUKUSHIMA ] Well, seeing this from the outside, in the case of Japan, the continuity of an organization seems to be very important. In the case of the United States, you launch a company, you sell the company, and then you start up another company. So the continuation of a corporation is not given that much priority in Japan. And the nationality of the capital is not relevant. This is a difference between Japan and the United States. Of course it is a question of degree. The Wimbledon phenomenon, so to speak. The expression is of course English, but this expression is actually used only in Japan. Last night I attended a dinner with top executives of the financial industry in Europe including some representatives from the U.K. I asked them whether they had heard the expression, "the Wimbledon phenomenon" and none of them said they had. The term is an interesting example of how the nationality of capital is still considered very important in Japan.

[NISHIOKA] Mr. Ushio, because you mentioned the Wimbledon Games?

[USHIO ] Seven or eight years ago I had an opportunity to talk with Bill Emmot. He introduced me a few bankers in England. At the time, 30 percent were Japanese banks, 30 percent were U.S. banks, and about 30 percent were British banks. There was no such expression as Wimbledon phenomenon. And I asked, "What do you think of this situation?" He replied that it was a good trend because professionals have seen their salaries increase and employment has been on the rise. Only the top executives were in a sorry state of affairs.

Now British banks account for 30 percent, but 50 years ago 80 percent of the capital of British banks was Continental European capital. So even in Japan, maybe in 50 years' time 80 percent of Japanese banks might be of foreign capital. And indeed, London is changing at an enormous speed in regards to foreign capital and growth. However to be a strong company in Britain, the foreign capital realizes that management has to come from Cambridge, for instance. So presidents and chairmen are recruited from among graduates of Cambridge. That's a good trend. Japanese banks in the future will become 60 to 70 percent American or European. That's a good trend. The English gentleman that I was talking with thought nothing of such a trend in the U.K. So in Japan as well, wait 30 or 40 years, maybe Singaporean or Hong Kong banks will become Japanese-capital banks, Japanese-funded banks. Regarding the users of bank services and banks themselves, I think a lot can be learned from the U.K. experience.

[NISHIOKA] Mr. Yamamoto, do you have a comment about this?

[YAMAMOTO] If for instance there is an American bank conducting consumer banking operations in Japan and they are partially successful, it was very much of a challenge to do so. There has been a deregulation, so first-class services can now be attained right here in Japan. So this kind of challenge and stimulus is very important and good for us.

In the case of the U.K., they created a system of competition for the benefit of the U.K., but we don't have such a competitive system in Japan. We never said we should create a barrier against foreign competition, but still there are a lot of walls and barriers within and amongst the industries, which is hindering the appropriate level of competition, the tax system being one example. So this so-called Wimbledon effect, if it happens, that's good. It is not going to have a negative effect on the national economy.

[USHIO ] Young people, such as a few college students who are with us just now, decided to go to Deutsche Bank instead of working with Japanese banks. All three of them found jobs with non-Japanese employers. That is the attitude of many young people. In 20 to 30 years' time that Deutsche Bank may come under the fold of, say, IBJ or another Japanese bank. Then they will be, in turn, coming back to Japanese employment, so to speak. So you should be tolerant and take a long term perspective.

[FUKUSHIMA ] Let me say just one thing. In the financial service or communications industries in Japan, I think there have been many changes and there will be more changes, but in terms of the size and speed of the changes, again seeing it from the outside, from the eye of the outside, observer, the whole process is still painfully slow.

Just one example. In the one year period between 1997 and '98, the number of mergers and acquisitions in Japan increased by 38 percent, almost 40 percent in a one year period. Now this was a drastic change to the Japanese mind. But if you look at the numbers more closely, the increase was from 671 to 929. In the same period between '97 and '98, in the U.K. there were 2,278 cases; or in the United States, there were 11,400 cases. In terms of the monetary amount involved, in the U.K. it was 50 times larger than the Japanese M&As. In the case of the United States it was 564 times larger than all of the M&A cases in Japan in 1999.

[NISHIOKA] I think many of you are very encouraging with regard to what you said to Mr. Yamamoto, but changing the tone of discussion, Mr. Tokiwa? You suggest that a change is needed in terms of the framework of intelligence. What specifically did you mean by changing the intellectual framework?

[TOKIWA] Well, Mr. Ushio was talking about this earlier. People working out there are more important. But they have to take a second look at what they are doing with regard to their responsibility and their job assignment or job responsibility. They have lost track of what they were supposed to be doing because of the economic miracle. The recent JCO nuclear accident points to this need. I shouldn't be talking about the unfortunate experience of some other industry, but still...

There are a lot of group activities going on in the Japanese job arena to make kaizen or job improvements. But does it suffice just to make improvements on existing pieces of work? Maybe something new is required. But that's not the mentality of these group activities. They have asset, but they have to increase their assets; they have to create wisdom anew. If people change their mind-set to this way, I think that will be a new strength of Japanese business out there on the shop floor, so to speak. Does Kao take any specific actions in this respect? Yes. We've made several initiatives. First, trying to reduce our costs, and then business reengineering kinds of changes, so to speak. But so far, all the efforts have been separate and at different locations, or different sites. But what we've tried to do is to integrate all these efforts together so that Kao as a company can seek a new way of doing business. At least we've tried to do this. So the people on the shop floor level will not work only amongst themselves but try to form a linkage, a network with their colleagues in different locations or at different job sites. So business reengineering, I think is being carried out by all companies. But what I'm suggesting is that we should elevate the level of effort one step higher.

[NISHIOKA] Mr. Ushio, at the outset you talked about things that shouldn't be changed and things we need to pass on. But if we leave those as is, maybe we can't change. So how do we harmonize between those that need to be changed and those that don't? With the premise that it's going to be a linear formula, then you might say that you can not make changes. Are you going to make the best of your strength and are you going to reduce your weaknesses? Is that the only way out?

[USHIO ] No. I think we need to have a quadratic equation. Thus on one hand we need to leave things as they are, and on the other hand we need to innovate and change. We talk about QC circle, TQC, and we place importance on the proposals from the frontline, from the shop floor. And as a result, we have ISO coming into play, whether it is the 9000 or 14000 series. And because we had TQC activities, it was easy for us to introduce ISO-9000s and 14000s. We had QC circles; we had TQCs in place, but we didn't have the capability to set the standards that match global standards. We needed to introduce that from Europe and other countries. This is in the realm of intellectual property, ISO for example. And this again, as you know, is a very important international standard.

We have legs and arms to move around, but in a sense, we didn't have a brain to come up with something like ISO. We didn't have the capability to propose something like ISO. On the shop floor, ISO is being introduced at a very fast pace. Especially for the 14000 series, it is being introduced at quite a high speed. So we need a non-linear formula so that will be able to streamline what needs to be streamlined.

[NISHIOKA] Yes, please?

[TOKIWA] What Mr. Ushio said is that we are good in solving problems but not delineating the problems. The same could be said for ISO. It's often said that when a global system is created, we don't activety participate in discussion but sit silently at a table. On the other hand, we say that we should be globalized. That could be one of Japan's weaknesses. In other words, we need to have the participation when the system is being established so that we will be proud to present the Japanese position. That's the kind of culture we need to create, where we take the initiative even when the system is put into placed. There are a great many international rules, but there are hardly any where Japan took the initiative. It was somebody else who came up with the system, and if we are a mismatch, we streamline and realign so that we fit in with the international system. However, as we approach the next millennium, we need to get away from this. We need to get away from this kind of mentality; we need to spearhead and take the initiative in creating global systems or rules.

[NISHIOKA] Mr. Fukushima?

[FUKUSHIMA ] Yes. I agree totally. Be it at the government or the corporate level or NGO level, I think the same could be said. In other words, up until recently, language was often cited as a problem. But more important is the cultural or the social system, especially the education system. In the present education system, people are not taught to make proposals, to argue, to discuss, and so forth. And education in Japan does not stress people being assertive. As others have said, as we globalize a country and as we enter into the Internet era, we need to make proposals, we need to take the initiative so that we will be emitting information.

[NISHIOKA] This may be deviating from the flow of the question, but there was something I wanted to ask Mr. Fukushima.

If you look at Japanese industry -- let's look at the semiconductor industry. That was said to be a leading and industry holding high expectations. Maybe because it was Mr. Fukushima who has taken a hard blow, this semiconductor industry looks far different from what it used to be ten years ago. How do you view this? Do you think that it is more or less the same concerning weaknesses as we see in other industries?

[FUKUSHIMA ] With regard to the semiconductor industry, I have a quick anecdote. It was in January 1996 that I left USTR. Andy Grove of Intel was one of the recruiters I met at that time. He offered me a position at Intel with handsome stock options. That was a very attractive offer. And what the Japanese semiconductor people said was that Intel has been doing well, but Hitachi, Toshiba, and NEC would catch up and surpass Intel, so they told me that the future of Intel was not bright. And that was said in Japan as well as in the United States. But if we look back, I think the stock prices have increased by 30-fold compared to that time. If I had ignoned experts and had joined Intel, I would have become quite rich and have had several millions of dollors. At that time the Japanese semiconductor industry was said to be very strong. And many American industries and companies were concerned. That was one of the triggers in starting the negotiation between the two countries on semiconductors.

Let's look at semiconductors. There seems to be a cycle. Thinking about it, where is the semiconductor going to be used? And how? In a stable environment, the Japanese way of mass production at low cost and incremental improvements is quite effective. However, in the past five years or so, I would say, with IT becoming increasingly more important, what are the products, parts, and components which will have the biggest growth? It is getting unclear as to what is going to be the growth factor. And there are so many uncertainties in this existing environment. In this environment, you have to have the venture spirit, as represented by Silicon Valley. And in a sense, it's a gamble, a bet. You may succeed or you may flop. It is either/or. But you have to be innovative to come up with something new. And I believe that approach and that method will be effective in the existing environment. In the last five to ten years, the Japanese semiconductor industry has faced many problems, but if you look into the future, as we look towards the 21st century, I think we need to have a more clear-cut image of how to use Internet. For example, by companies in order to become more profitable. As you know, the Internet-related companies have high stock prices but are not necessarily profitable. Thus, we need to think about what products and/or systems will be most accepted by the consumers. And that needs to be clarified. If that can be made clear, then the Japanese semiconductor industry will come up with highly value-added products and services, and they will be able to at least revive to a certain degree.

[USHIO ] I think he is speaking all in terms of semiconductors. As Mr. Tokiwa said, mass production was very important in the case, for instance, DRAM. But Intel came up with a different idea, the LC, to replace computers themselves. Because they were no match in DRAM, but they took high-risk options, they were successful then. During the high economic growth period, what Japan did was to emulate American precedents, so it was a low-risk high-return kind of experience. But since 1998 or so, what we've been seeing is a low-risk high cost and low return. And after the bursting of the bubble, what we are seeing is low risk, high cost, NO return. This is a terrible situation, so we have to be challenging enough to go for high risk enterprises and then reduce costs to at least a medium level so that we can enjoy at least medium-level returns.

No one has attempted to go with high costs. We are experienced with the low risks, so high risk, high cost will be no man's land for Japanese but we are in a time of transition. In the United States, many companies are used to high cost situations, and they have a science in managing costs. They have a front office supported by the back office risk management, and there is good communication between the front office and back office and they have a mid office, at the top of which is the management. And that kind of academic science has been developed very well in the United States. But we're not used to that kind of situation in Japan. Mr. Sakaiya has talked about a riskful society in the future, but people are critical of this. No one is at ease talking about risk, but we have to take risk for granted as a part of our business. At least the people in management positions of business, they have to be prepared to face risk. Risk is a part of business management.

[NISHIOKA] Thank you very much. We are running short of time, but I think we should entertain one or two questions from the floor.

[QUESTION] Tsunoda. I'm from Nagoya, a bicycle manufacturer.

Mr. Ushio, this one is for you. In your earlier remarks, with regard to this report prepared by Mr. Higuchi's committee, I think Mr. Higuchi's presentation itself was very insightful. And things are being accelerated, it was mentioned. But you suggested that there should be even more dynamism and we don't want to blame the government for the slowness of affairs. But Mr. Ushio, this mass approach that we have prevailing in Japan, how can we change this? The attitude of the masses in Japan, how can we change this? Do you have any radical ideas that would have an impact such as the arrival of black ships at the time of the Meiji Restoration, whereby the steel industry was developed to cope with such eye-wakening shocks?

[USHIO ] The black ships were very tangible, but what we're going to see is information on the Net which is not tangible. But information on the Net is changing very rapidly. Now I think that in the leading edge of the Japanese community there are a lot of people who are very advanced. So as long as we do not err in following the trend and changes in the market, as long as we keep track of the changes on the shop floor or in the market, we'll be able to follow. We lag behind because we tend to respect and honor the voice of the management. But we should listen to the people up in front, because those who are at the leading edge are indeed ahead of us. In fact, the young people are ahead of old people; women are ahead of their male counterparts; and the junior employees are ahead of the senior officials. We should not be bound by tradition, so to speak.

[NISHIOKA] Thank you. Time is up. We must conclude our session. And we should thank our panelists.