It is a pleasure and an honor to be invited to participate in this gathering of distinguished people. This is my first visit to Pebble Beach although I spent one year in 1967 in San Francisco. I didn't know Pebble Beach is such a nice place. No wonder my colleagues at the Japanese Parliament tried to block me from coming here. They know Pebble Beach and they wanted to come in my place.

As a keynote speaker, let me first begin by summarizing recent economic developments in Japan, and then, point out some of the issues I think we need to discuss in the later part of this session.

During the recent twelve months, economic performance in Japan has become worse. I believe Japan's economy is in deflation for the first time since the 1930s: Outputs have been declining, while the unemployment rate renewing the record high. On top of that, both prices and wages are declining.

Amid these deflationary pictures, you may see some bright spots. First of all, the emergency economic packages of November 1998, which amount to some \24 trillion. Thus the national budget FY 1999 increases 10% in public-sector investment on infrastructure and realizes huge \9 trillion tax cuts. I hope these stimuli would exert a positive impetus to the Japanese economy from a cyclical viewpoint.

However, quite a few caveats should be mentioned against optimism. First of all, Japan's economy is still on a downward trend. I am not confident if these fiscal stimuli prove to be sufficient to turn around the current downward trend. Secondly, owing to repetitive fiscal expenditures during the past eight years, the public debt of both the central and local governments are accumulating, which reflects to the recent increase of long-term rate. Thirdly, although on every occasion fiscal stimuli had some positive effects on economic performance, their direct impetus easily phased away, especially after the collapse of the Bubble. The fact that repetitive fiscal stimuli failed to sustain economic growth during the past seven years demonstrates that Japan's economic problem is more structural than cyclical.

At the core of the structural hindrance lies on the malfunctioning of financial intermediaries, which resulted from accumulation of non-performing assets in the banking system entailing the burst of the speculative bubbles in the early 1990s. During the past twelve months, we have taken initiatives in addressing this problem. We designed so-called Total Plan, and passed the Financial Revitalization Laws which enables the executive branch of the government to establish bridge banks for, or nationalize, failing banks, so as to facilitate quick exit of unsound banks and yet minimize disruptive influences on the financial system. Public funds as much as \60 trillion are pledged by the government to maintain the stability of the financial system. The Financial Revitalization Committee (FRC) has become committed to this job and we have already nationalized two large banks, LTCB and NCB. Also under the new laws, a capital injection plan for major banks will be outlined by early February. Pushed by government pressures, banks have slowly begun some restructuring like scaling down overseas operations, cutting remuneration for its executives and employees, and seeking alliances with other Japanese banks as well as foreign partners. All of these are right steps toward redressing the banking problem in Japan.

Despite the direction of change seems to be right, I can hardly be complacent, because this is only the beginning of the whole story. The core of the issue to be addressed is Japan's over-banking, which means over-lending on the bank side and over-indebtedness on the corporate side. As long as a bulk of non-performing assets, which amounted to \ 44 trillion in the 17 Japanese money center banks at the end of September 1998, remain on the balance sheet of banks, not only banks' cash flows remain weak, but there also remains a significant degree of uncertainty about banks' future losses in case asset prices decline. Therefore first, banks must sell off or charge off non-performing assets. Second, a larger amount of capital than reported \ 5-6 trillion must be injected to the banks, because banks' equity will definitely be wiped away if banks start an aggressive charge-off. And third, in order to facilitate this, markets for distressed loans and collateral real estate must be jump-started. I hope the nationalized LTCB and NCB as well as newly created Resolution and Collection Corporation (RCC), which is designed to function just like Resolution Trust Corporation in the U.S., will start aggressive sales of these loans.

From macro-economic point of view, current weak cash flow of banks indicates inefficient use of capital resources. In other words, misallocation of resources exists in the economy. So alongside the efforts on the part of the banking sector, corporate restructuring must be in place in the manufacturing as well as real estate sectors, where debts and contingent liabilities are too large a burden from a viewpoint of expected future cash flow .

Restructuring of the corporate sector can be roughly divided into three parts; debt, asset, and employment. Let me explain these categories respectively. First of all, declines in asset prices after the collapse of the Bubble still penalizes debtors. Thus excessive debt amount should be adjusted to a level agreeable to the market value of its future cash flow by a reasonable restructuring plan. In this sense, last year, LDP proposed "Real Estate Related Rights Coordination Committee Bill," which is designed to function as quasi-judicial authorities to facilitate private work out of distressed assets by selling collateral real estate and discharging loans from debtors. Unfortunately the Bill failed to be passed by the last Parliamentary session because opposing Democrats misconceived that the Bill was exclusively designed to offer a helping hand to ailing construction companies which support LDP politically. I agree in some sense, that we have to consider equality in debtors between corporations and individuals, or between large and small businesses. However, we also have to be mindful of the fact that we have no effective and efficient reorganization statute for the benefit of both corporations and individuals. In the U.S., you can recall a number of names of firms once applied chapter 11 proceedings but now known as flourishing business like Macy's. In contrast, in Japan, once the reorganization statute is applied to a corporation, business communities consider to be deceased. That is, no revival is easy in the social system in Japan.

Presumably, we need debt-equity swap, spin-offs, and M&A type reorganization scheme, with safe-harbor rules for corporate taxation and large share-holding prohibition by banks as economic policy tools. Especially, debt-equity swap has three explicit advantages. Firstly, current shareholders who have overlooked poor business judgement of the current CEOs can be penalized properly by issuance of new equities. Secondly, equity can attract new investors who have long-term interests, while creditors are inclined to short-term repayments. Thirdly, equity swaps might work well in the near future when financial intermediation takes place more outside the main bank structure, i.e., involving mutual funds, pension funds. Remember, in view of the beginning of pay-off for bank deposits in April 2001, Japanese consumers are likely to transfer their bank deposits to mutual funds, because deposit protection will be limited up to \ 10 million.

Let me now turn to the asset restructuring. Over-indebtedness mentioned above has been coupled with excessive capacity in capital stock. Old capital stocks must give way to new investment.

I believe, fiscal policy as well as tax system must be geared to enhancing investment in potential growing industry. For example, in the 1930's when the famous Finance Minister Korekiyo Takahashi took fiscal expansion by having the Bank of Japan purchase government bonds, most of the budget increase flowed into the emerging industries, i.e., auto, steel, power, ships, and chemicals, all of which were just about to grow. Thus, expansion of fiscal expenditure increased returns on investment in these growing industries, and private investment accelerated which brought about structural reform in industries. I think Japan's advantage is that we already have quite a few sprouts of emerging industries within the reach of current industries, i.e., alternative energy vehicles, advanced-telecommunications, healthcare, genetic engineering, and urban re-development. Now, the efficacy of fiscal policy is tested in a micro-economic terms.

In the course of structural changes, I believe, restructuring of workforce to be critical. It is important not to hinder changes by subsidizing old structure. In this context, I should mention two points. First, current governmental subsidies to firms to help them to hoard workforce may delay an inevitable decision toward corporate restructuring. Second, an increase in traditional public works spending tends to support no one but construction workers. The priority should be placed in increasing jobs in emerging industries.

As we face all these restructuring needs in debts, assets, and employment, we also have to put the measurement of restructuring in order. I am talking about accounting and disclosure rules. Will Japan be able to carry out all this restructuring? How soon? Now let our discussion begin!

Thank you.