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Japan's economy - Can it be rescued and revived by "Abenomics"?

Remarks by Yasuhisa Shiozaki
Member, House of Representatives, Japan
Credit Suisse 16th Asian Investment Conference, Hong Kong
March 18, 2013

Good morning ladies and gentlemen. It is indeed a great pleasure for me to have this opportunity to speak at this esteemed gathering of Credit Suisse for top managers and investors from all around the world. I am especially happy to talk to you when investor's interest towards Japan is high on their list. Surprisingly enough, it is politics this time that drew investors' attention towards Japan, for the first time in many years.

As you all know, Prime Minister Abe, who delivered the keynote speech at this conference last year, visited Washington, DC in February and made a speech declaring "Japan is Back." Although his message addressed a wide range of issues, I would like to focus this morning on the economic front. Reviving Japan's economy is the top of the priority agenda for the new Administration and that is what you are most interested in hearing about.

1. Three arrows of "Abenomics"

Until a little while ago, the majority in our Liberal Democratic Party placed first priority on fiscal consolidation whereas I belonged to the minority camp which considered higher growth of Japan's economy the top priority. Using the theme that the greatest and most urgent task was the revival of Japan's economy, Mr. Abe swept to a landslide victory last December. Now the Abe Administration is powerfully proceeding with an economic policy package that as many of you already know, is called "Abenomics". The Prime Minister himself has said that he is setting forth "a bold policy package of a nature totally different from what used to be implemented". The question becomes, "how different"?

It is well known that "Abenomics" consists of three elements, which are often called the "three arrows." First, bold monetary easing aiming at ending deflation and achieving a 2% inflation target. Second, a flexible fiscal policy to sustain economic growth in the shorter-term. And third, a growth strategy to encourage private economic activities in the longer-run.

(First and second arrows)

With respect to "how different" these policies are, I think the first arrow, bold monetary easing, has a very new dimension. It took strong leadership for the Prime Minister to have the Government and the Bank of Japan agree to daringly overhauling our policy framework and achieving a 2% inflation target. To this end, in the Diet, we have just approved the nominations of a new Bank of Japan Governor and Deputy Governors. The new Governor, whom many of you probably know well, Mr. Haruhiko Kuroda, the former president of the Asian Development Bank, said firmly during his confirmation hearing in the Diet that there is substantial room for further monetary easing. I do believe the Bank of Japan will take bold steps to clearly end deflation, which has lasted for more than a decade, and to achieve a 2% inflation target at the earliest possible time.

As to the second arrow, a supplementary budget amounting to \13 trillion, worth more than US$140 billion, has already been approved by the Diet. This fiscal stimulus is expected to create 600 thousand new jobs and to lift the growth of Japan's economy by 2% in the coming year. With this fiscal expenditure, uncertainties over Japan's economy have greatly receded and the sentiments both in the business and household sectors have significantly improved. I believe the change in government from the DPJ to the LDP has also had a big impact. But in the long-term, with an already huge public debt, there is no possible way to keep spending to support Japan's economy through fiscal stimuli. We have committed ourselves not to go back to the old LDP style of vested interests sharing. Thus, if there is any new dimension regarding the fiscal policy hereafter, it would be that we will not be "business as usual" and follow the same old ways.

The first and second arrows have been shot and we can already observe good signs in the economy. Investors, both domestic and abroad, have started to buy Japanese shares and the equity prices on the Tokyo Stock Exchange have substantially increased. Promising figures related to macroeconomic indicators such as the corporate productions and the household consumption are coming out.

(Third arrow)

The third arrow, growth strategy, is still on the way and is extremely important for the new Administration to make clear that the whole policy package is "totally different from what used to be implemented". Actually, this arrow addresses issues which were once called "structural reforms". That label sounds a bit old fashioned but it goes to the core issues which have plagued Japan's economy for decades. We have to strengthen the profitability of firms in Japan by eliminating factors which block competitiveness and innovation. If we miss the mark with this third arrow, I am afraid we may repeat not only "a lost decade", or " lost two decades", but "lost three decades".

Therefore, our government has a strong incentive to make this third arrow a powerful breakthrough to rescue and revive Japan's economy. A Headquarter for Japan's Economic Revitalization has been established in order to craft a comprehensive policy package and an Industrial Competitiveness Council has been established under it. The Prime Minister himself chairs the Council and its members are the related cabinet ministers and private sector experts. It will formulate growth strategy plan by early June, focusing on areas like scrapping and building of businesses, the enhancement of human capitals, infrastructure competitiveness, clean and efficient energy, health and longevity, agriculture, and scientific innovations.

From my point of view, scrapping and building of businesses is vital. Compared with other advanced economies, new business starts and old business scraps are extremely stagnant in Japan. This must be changed. We should stop easy lending to zombie companies by banks. Mutual stock holdings among firms and financial institutions should be an area to reform. Stock holding by banks might be another area. This "I-scratch-your-back-and-you-scratch-mine" type of interdependence is by no means good for profitability and productivity of Japan's economy. In order to remove this "conspiracy" among old fashioned businesses, I believe corporate governance should function more efficiently. Shareholders should not allow managers of firms and banks to maintain the status quo without serious considerations regarding efficiency and profitability. And a mechanism to accelerate shifts of business resources from low-profitable areas to more profitable areas should be established.

More open domestic markets are also crucial. The size of domestic markets will inevitably shrink along with our continuing aging population. We must maximize benefits from the global trade which will also lead to benefits for our trading partners. In this regard, Prime Minister Abe has decided to join the negotiation process of the Trans Pacific Partnership Agreement (TPP). Let me say that TPP is just one of several mechanisms which can be used to further open up Japan's economy. Simultaneously, we will keep working on EPA or FTA arrangements with other countries and regions. The most important goal here is to effectively strengthen Japan's long-term growth potential through structural changes that comes together with more market openings.

Further deregulation is another important challenge. Japan has long discussed deregulation and while you may believe that the situation has not changed remarkably but this time, let me repeat, this time, the determination of our government is a bit different.

I do know that there are many conflicting views on the issues noted above in Japan, and of course within the LDP. However, with Japan's quickly aging demography and the ever increasing steps towards globalization, it cannot be possible to totally deny more globalization and more deregulation. The basis for "an all or nothing" argument on these issues does not make any sense. There must be some point where you can craft a well balanced compromise from diverse opinions. It is one of the most important responsibilities of the ruling party to correctly find such equilibrium.

2. More arrows

The expression of three arrows originates from a historical story of one of the eminent warlords in the 16th century, before the era of the Tokugawa shogunate. The warlord, whose name was Motonari Mouri, had three good sons and he told them, before passing away, that an individual arrow could be easily broken but if three arrows get together, it becomes much harder to break them, implying that the three sons should closely cooperate and fight against their enemies together. The irony of the story is that even with the brother's cooperation, the Mouri family could not rule the whole country. Probably three arrows were not enough to achieve a lasting success.

This story might be an allegory for Abenomics. As I have explained, the third arrow, growth strategy, is vital and is the key to rescue and revive Japan's economy. But in order to make it effective enough, I believe the Abe Administration needs more arrows in its quiver.

In this regard, the LDP has established its own headquarter to draft new policy plans for economic growth. When Mr. Abe became Prime Minister the first time, I supported him as Chief Cabinet Secretary, but this time, I am on the party's side. As the Acting head of the headquarter for economic revival, as well as the Acting Chairmen of Policy Council of the LDP, it is my responsibility to provide the Prime Minister with further practical ideas for economic growth.

To show our seriousness and commitment to economic growth, inside the LDP headquarter, we have eight teams who cover macroeconomic policies, revitalization of regional economies, deregulation, productivity improvement, corporate governance, education, industrial policies, and research and development. We are open to and willing to listen to anyone who has creative ideas to revive the economy. I quite welcome your views as well. We collect information, evaluate, distill into practical policy plans, cooperate with the government and finally provide the administration with more arrows that can be used to help revive our economy.

Amongst these ideas, as I have already stated, an improvement of corporate governance system is fundamental and important. In order to make Japanese companies more dynamic, open, transparent, and profitable, a statutory independent director on the board of directors should be introduced. We should also achieve more diversity within the board members of Japanese firms. Financial markets with the full global standards are also essential. We cannot take too much time before adopting the International Financial Reporting Standards. Improvement of asset management policy of GPIF (Government Pension Investment Fund), with assets of over one trillion US dollars, must be realized by expanding the scope of investment such as private equities. Again, the key point is to induce smoother entrances and exits of businesses thereby improve productivity as a whole as we achieve a higher growth potential for Japan's economy. I am confident that many other strategies will be emerging from LDP headquarter.

3. Timelines

The Abe Administration and the LDP acknowledge a timeline. Naturally, one of the first milestones is the Upper House election scheduled for this summer. It is all the more important, because it is likely that there will be no national-level election within three years after that. In order for us to create a cohesive and effective government which can efficiently and effectively implement policies which will benefit Japan, it is desirable for our ruling coalition to enjoy majority status in both the Lower House and Upper House. Not having majorities in both Houses increases the risk that indecisive politics may return to haunt us again, and Tokyo Stock Exchange has already begun to price in such political stability of Japan.

Secondly, from the viewpoint of ending deflation, I believe this time, next year will be very important. Recently our government has been asking firms which have recorded good profits to raise the wages of their employees because one aspect of the current lingering deflation is the downward feedback between wages and output prices. That must be changed into an upward one where sanguine economic activities lead to higher profits and then to higher wages. Without such upward feedback, it is quite difficult to achieve a stable, mild inflation. I hope we will be able to observe such a situation in spring of next year. That will enable the Abe Administration to continue longer than a year, which is unfortunately very rare in recent years, but is a prerequisite to rescuing and reviving Japan's economy and placing it on a steady course based on the forthcoming growth strategy.

Last month, Prime Minister Abe said in Washington, DC not only "Japan is back" but also "I am back". Now we in the LDP are strongly backing him up, committed to rescuing and reviving Japan's economy. We are determined to show concrete results on each of the timelines.

Before ending my remarks, let me touch upon the 3.11 earthquake and tsunami devastation. Just two years have passed and the reconstruction effort is still underway. There are still 320 thousand people living in temporary housing, of which 160 thousand cannot yet go back home because of the nuclear accident in Fukushima. I would like to express my sincere gratitude to all of you for your concern and support since the earthquake. The Japanese will never forget the warm kindness shown to us during this time of hardship.

Recovery from the disasters goes hand-in hand with our efforts to revive the economy. Thank you very much for all of your help and we have to keep in mind that "A robust recovery in Tohoku, will only occur with a strong revival of the Japanese economy". And ultimately, we will recover confidence and pride in our nation.

Thank you very much for your kind attention.