Good afternoon. I wish to thank you for this opportunity to discuss the situation in Japan and to offer special thanks to Mr. Prestowits, for inviting me to this influential conference.

I said influential, since I remember last year in this conference Mr. Koichi Kato, then Secretary General of Liberal Democratic Party, stated that ailing banks must exit from the banking system orderly. All of the Japanese media reported the speech and his plain message actually gave a shock to Japanese bankers. It was only one year ago that lawmakers, including me, started breaking "too big to fail' illusion shared among bankers who had kept forbearance policy and left fundamental issues unsolved. We established the Financial Revitalization Committee that nationalized two money center banks last autumn and injected public funds of 7.5 trillion yen into 14 money center banks at the end of March 1999. You might see Japan as the country that is moving forward, as long as the banking policy is concerned.

An optimism about the Japanese real economy has begun to grow these days among Japanese investors, consumers, and within the government, as equity prices have rebounded from their earlier low, short-term interest rates effectively fallen to zero, and the earlier rise in bond yields has been checked.

A caveat should be placed against this emerging optimism. During the past eight years, direct impetus from conventional macro-economic policy measures has phased away too easily, which illustrates that Japan's economic problem is more structural than cyclical. If you believe the current positive movements in the financial market is sustainable, you have to show evidence how structural reform in the economy will continue, and how we can minimize its negative effects.

Then, what does the desirable structural reform exactly mean to Japanese people? This is one of the most frequently asked questions. Let me start with banking issues.

In the legislative debate of Financial Revitalization Law for a bank nationalization, bureaucrats initially persisted that this law might be unconstitutional, because Section 29 of the Japanese Constitution states that private property, in this case ailing bank's equity, must not be compulsorily taken over by the government. And we, the legislators, argued that the Constitution recognizes expropriation as legitimate, such as compulsory land purchase by the government, for the benefit of public welfare, and an exit of ailing banks clearly enhances public welfare.

I can understand why the bureaucrats refused the enactment of the banking nationalization law. They didn't want to take any responsibility to order ailing banks to stop banking business, since we had allowed them to keep forbearance policy. It was their "conventional wisdom", therefore, we, politicians, had to replace their conventional belief with new wisdom.

This implies, structural reform should start with reviewing conventional wisdom. Even if Japanese people properly recognize the necessity of structural reform, they may not want to take any risk of replacing their conventional wisdom, because it might hurt their own vested rights.

My central concern lies exactly at this point: First, can all politicians stand by corporate restructuring which will occasion massive lay-offs and a reduction in real wages, ahead of national election in October 2000 at the latest? Second, will politicians be tough enough on small subcontractors, whose jobs are likely to be cut by the restructuring of large companies? Third, isn't it difficult for politicians to oppose the Postal Saving reform in the present election system of single seat representative district? Fourth, does the present governmental guarantee program for small business loans only impair private banker's willingness to take risks? If so, how can Japanese businesses get out of these governmental guarantee measures? Fifth, why is there no evidence that the restructuring of public-capital-injected banks is accompanied by fundamental shifts from traditional regulated banking except for Japanese version of 401k? Do the banks still want to stay in the world with subsidy, safety net, and protection? Sixth, how can protected small securities firms survive the lifting of regulations on trading commission?

I am afraid a momentum towards structural reform might slow down because of the emerging optimism about Japan's economy that simply relies on the current governmental emergency measures.

No one should be complacent with mere nationalization and capital injection in the financial sector. These measures are just like Band?Aid treatment and offer no fundamental solutions. So, first, banks must not continue to sit on non-performing loans even after adequate provisioning. Second, markets for distressed loans and collateralized real estate must be jump-started in order to facilitate the sale of non-performing assets. It is the mission of the nationalized LTCB and NCB to start aggressive sales of these loans. Third, orderly exits of unsound financial institutions whose restructuring seems infeasible must also be carried out.

All of these must be done fairly quickly. Japan's economy might resume its downward trend again, when the effects of massive fiscal and monetary policy stimuli fade away.

I have some doubt about willingness in corporate management to go beyond its conventional wisdom. One example; when I proposed debt-equity swap scheme for Japanese corporate restructuring in March, an initial reaction from corporate executives was just "rapture." They misunderstood that debt-equity swap was so powerful a rescue scheme that the government might help any companies with excessive debt, excessive asset, and excessive employment, so called "three ugly ducks" in the economy. The same illusion of governmental paternalism as the banking industry can be detected among the majority of Japanese corporate top management.

Therefore, I believe we must start with introducing a new Reorganization Law, which function as Japanese version of Chapter 11, as well as a new Arbitration Law for adjustment of smaller sized debt, so that we can accomplish tougher restructuring while minimize moral hazard compared with simple discharge of indebtedness by banks.

The list of desirable policies includes, debt-equity swap, spin-off, or management-buy-out type reorganization scheme, with escape clause treatment of corporate taxation and antitrust prohibition of bank's large share-holding. In this regard, I should note that Obuchi Administration initiated "Competitiveness Commission" and today LDP also launched "Special Study Team for Economic Revitalization and Industrial Competitiveness," in order to introduce these tools as quickly as possible. Particularly, I believe debt-equity swap has special advantages. First, shareholders can be properly penalized by dilution of shares. Second, equity can attract new investors, including foreign investors, who have long-term interests. Third, equity swaps might work well in the near future when financial intermediation takes place more actively outside the main-bank channel. In April 2001, remember, when deposit protection will be limited up to \ 10 million, Japanese savers are likely to transfer bank deposits to mutual funds type assets.

If massive corporate restructuring will materialize by using these methods, we should be mindful about three points. First, capital market function should be enhanced especially when the commercial banking channel doesn't work well. Without proper functioning in either banking or capital market channel, we would end up only with Postal Savings channel. I don't think it is productive way to allow Postal Savings to expand instead of damaged private financial intermediaries, because Postal Savings System inherently cannot be a true risk-taker to help develop new growing businesses in both legal and political senses.

Second, I believe workforce restructuring to be critical. Particularly it is important not to hinder changes by subsidizing the old structure. Current governmental subsidies to firms to help hoard workforce tend to delay corporate restructuring. Also, an increase in traditional public works spending tends to support no one but already excessive 6.5 million construction workers. The priority should be placed in increasing jobs in emerging industries through professional education programs.

Finally, structural reform requires not only private businesses but also policymakers to challenge their conventional wisdom. Japanese monetary policy and fiscal policy cannot be an exception, since their conventional functions are exhausting their effectiveness. For example, the Bank of Japan can challenge its creed of nominal rate control measurement and try reserve targeting or quantity easing.

Also, fiscal policy including tax policy should be geared to enhancing investment in growing industry, rather than boasting of its amount of public works outlays. In the 1930's when the famous Finance Minister Korekiyo Takahashi tried fiscal expansion, most of the budget increase flowed into the emerging industries, i.e., auto, steel, power, ship building, and chemicals, all of which were just about to take off. In fact, expansion of fiscal expenditure increased returns on investment in growing industries and private investment accelerated, entailing structural reform. On Japan's advantage, we have quite a few emerging industries, i.e., alternative energy vehicles, information-technologies-driven household appliances, advanced-telecommunications, healthcare, child care, genetic engineering, and urban re-development. Now, the efficacy of fiscal policy is tested in micro-economic terms. At the same time, this means a big challenge to the conventional political system.

In conclusion, I should briefly mention the reason why I have emphasized on the potential hindrance in the structural reform process by the current Japanese conventional wisdom: Because it matters to the governance of the nation. I believe Japan's democracy will be proved by how each Japanese can learn from the past errors made by forbearance, concealment, and governmental paternalism. To be candid, I am not confident whether guest speakers can announce triumphantly Japan's progress in the structural reform at the next year's conference. But at least, I strongly hope you can support our "true" endeavor to exit from the Death Spiral with new wisdom.

Thank you.