I am honored to be invited to this seminar with many distinguished guests. I have always insisted that Japan must, and can show a leading model of reform in the context of globalization at the crossroads of the East and West. In seeking for a new opportunity in the new century in Asia, we are at a critical juncture of coping with the reform.

1.Koizumi Initiatives

Japanese politics is now experiencing a historic moment. The new Prime Minister of Japan, Mr. Junichiro Koizumi, was elected two weeks ago, through an unprecedented process of primary election conducted within the LDP membership.
Before the election, only a few expected Mr. Koizumi to win, given the old factional structure entangled within the LDP. It was truly amazing that grass-root LDP members voted for Mr. Koizumi even though this may mean that their vested interests be endangered as a result of Koizumi initiatives, which included a wide spectrum of reform; economy, politics, administration, and social reform.
One can point out two characteristics in the agenda presented by Koizumi administration.
First, no pains, no gains. The new Prime Minister insists that there will be no economic rebirth without reform. This is a clear declaration of departure from the "lost decade," when we have worsened the misallocation of economic resources by increasing conventional type of public works spending and non-performing assets. In particular, throughout these three years, private risks associated with financial crisis were simply transferred to sovereign risks. As a result, we will be accumulating our debt outstanding for central and local governments to 645 trillion yen by the end of this fiscal year. Now with this new administration, Japan has a window of opportunity to overturn the continued evil habits.
Second, direct election of Prime Minister. Factional politics by the LDP for many years have prevented people's will from selecting their preferred leader. A recent poll which shows that over 80% of the people support the Koizumi administration implies that voters are longing for a departure from the old factional politics. Indeed, since Mr. Koizumi was overwhelmingly supported in the primary election of the LDP, he has a good cause for introducing a direct election system of Prime Minister. I think this suggests that the LDP reform will continue even after the Koizumi administration.

2.Missing Links on the Economic Reform Agenda

Let's now turn to the contents of reform, which have top priority in disposal of non-performing assets and industrial consolidation. While the Koizumi initiatives cover a wide agenda, there are several key elements to be further addressed. Let me point them out briefly.
First, we should start with recognition of grave magnitude of Japan's non-performing loan problem in the banking system. Although the new administration declares to focus on disposal of non-performing loans, in reality they are only proposing to put the Emergency Economic Package issued on April 6th in practice, which involves only off-balancing of 12.7 trillion yen loans within next two years to borrowers who are in danger of bankruptcy.
In my view, this should only be an initial step in disposing huge non-performing loans accumulated on the balance sheets of Japanese banks. More than 80 trillion yen of so called category II loans, or substandard loans, on a self assessment basis, which is equivalent to 16% of GDP, concentrates on the real estate, construction, and retail /wholesale sectors. This magnitude is grave in light of the history of asset bubble, i.e., 3% of GDP in the cases of U.S. in the early 90's. Aggressive workouts of those industries, therefore, must be carried out, where not only institutions like asset management corporations (AMC) may be used, but also public and private capital injection will be needed to cover huge potential losses in banks' capital. Further political commitment is surely required in this process before it becomes too late.
Second, strengthening the capital market. In order to enhance productivity and profitability of Japan Inc. in the next decade, a proper pressure should be always placed on corporate management through an establishment of corporate governance and strengthening of capital markets. Thus, inducing household savings, which are now concentrated on bank deposit and postal savings, into risk capital can be a driving force in corporate restructuring process. A creation of a strong Security Exchange Commission (SEC), capital gain tax cut, and mutual fund system reform will better function as a device to promote mature capital market supported by individual investors.
Third, priority among reforms. I think market participants now share a consensus view that non-performing loan disposition should come first and fiscal consolidations come second, until Japanese economy bounces back. It might be dangerous if the new administration put too much emphasis upon fiscal consolidation rather than disposal of non-performing loans. Thus, the priority among reforms should be shared within the cabinet members.

3.Mid-Term Priority

As an example, let me briefly talk about my priority in the next 10 years, which consists of three steps. In the first 2 years, I think we should concentrate on cleaning up bad assets of banks and corporate and industrial structural reform.
These measures may entail painful adjustments. More efficient safety-net should be designed to put an emphasis on productive policies like on-the-job training programs, professional education vouchers, and incentives for job change.
Instead of simply spending for public works, I am proposing to privatize and sell governmental assets, including airports, highways, public utilities, government-held real estate and stocks, wire-wave frequencies and national universities, in order for both offsetting deflationary effects and financing the cost of establishing a safety-net.
The following 3 years should be focused on restoring the primary balance of the national government budget by cutting inefficient public works, along with strengthening capital markets and real estate markets.
Then, the last 5 years, we will fulfill fundamental reform of social security, pension, and tax system. Our ultimate goal is to prepare a program to maintain long-term sustainable growth, which is accountable to voters. It must be so accountable that every child of ours will be willing to pay for our country. That's why I always insist on the importance of restoring Japan as a reform model for our child generation.

4.Closing Remarks

Japan and its politics are now moving toward a new stage of challenge with the new administration, a new stage where those with similar ideas and visions are determined to stand up for the future. At the same time, to carry out a difficult reform it always requires strong public support. We all share the recognition that our markets in this region are highly integrated today, with Japanese economy so big a share. Only with such a reform in Japan and a full recovery of Japanese economy, the second miracle in Asia can happen. I ask you all here today for a support of our new challenge in creating a new model for the future opportunity.

Thank you.