It gives me a great pleasure to join the third meeting of the Asia Statesmen's Forum. Before I begin, I have to apologize that I could not participate in the second meeting held in December, because our chartered UN aircraft could not land on Mazar-i-Sharif Airport in Afghanistan, due to the unexpected repairing of runway. We visited refugee camp to encourage young Japanese NGO members working for humanitarian activities out there.

Today my task is to talk about economic renovation in Asia. In the aftermath of the September 11 attacks on the U.S., there was a consensus that economic slowdown in Asia, including Japan, would get deeper, but Asian economy seems to have bottomed out with the background of steady improvement in export.

Structural problems, however, still constrain the Asian economy, just the same as Japan. Reform must be necessary to restore its competitiveness. It covers a wide area of the society, ranging from external liberalization of trade and services, deregulation, mobilization of labor market, privatization, legal system, to corporate governance and disclosure system. Bearing in mind that the degree and the manner of the problems both in macro and micro level vary by each country, I would like to point out two basic questions.

First, does export-led economic model ensure the future prosperity in Asian countries? Some may insist that export is essential for Asian economies especially in avoiding foreign debt difficulties. I can share the sense of the issue, and in the short-run I agree to the point, but in the longer-run, Japan's experience indicates that export alone cannot achieve sustainable economic growth, at least aside from foreign debt difficulties. For example, economic uncertainty is now spreading as the U.S. market adrift with fragility, even if the export still seems to pick up. Japan's economy has experienced three short-term economic recessions during the last decade, and financial crisis occurred repeatedly during these recession periods, while each small recession was followed by a brief and weak cyclical recovery supported by the export and government spending. Private domestic demand has not gained strength during the decade, because fundamental structural problem still lies in the economy, which cannot easily be cured only by the export in the long run. Export is not a measure of economic growth, but an outcome of the strength of national economy.

Second, how we can react to the China's accession to the WTO and its growing economic capacity that pressures Asian economies, including Japan, to shift industrial structure as well as to increase in domestic unemployment.

While it is a fact that shifts of production lines to China bring unemployment in Asian countries, including Japan, it is always inevitable that a developing country will be catching up from the low-end merchandise. For developed countries, the only way to avoid de-industrialization is to shift their industries to high-end products and services. In fact we already experienced when Japanese manufacturers moved out to ASEAN countries with the appreciation of yen in the mid 1980's, Japanese companies maintained domestic jobs by transforming domestic production lines to higher grade. Also, the U.S. companies had overcome pressures of de-industrialization by deploying new information technologies, after the U.S. had severe trade conflicts with Japanese manufacturers, such as auto, steel, and semi-conductors.

In fact, overseas production rate of Japan is still under 15%, which is far below that of the U.S. or Germany, which is around 30%. In this sense, the real meaning of "the menace of China" may be attributed after all to a delay in the reform of low-end industries, which usually tend to have strong nexus to inefficient government agencies or political protection.

In this point, an interesting observation in Japan's politics would be a fact that we currently have a reformist Prime Minister, Junichiro Koizumi, whose famous phrase is "no pain, no gain." But so far it is rather difficult for people to find optimism in the course of reforms the Prime Minister laid out, while people share vague ideas that Japan has to somehow break standstill. It seems to me that after one year passed from his inauguration the Prime Minister has to compromise in a halfway through as the voice of social uncertainty and dissatisfaction becomes blaring with the pain. I believe the reform should create not only negative event but also positive effects, since an ultimate meaning of structural reform is simply a reallocation of domestic resources. An important question here is how people can feel benefited from the reform so that the reform can be reinforced in a democratic way.

Let me make three proposals of actions in this regard.

First, strengthen integration of regional partnership through Free Trade Agreement (FTA) measures. Since Asia is a region with diversity with various ethnic, cultural and religious backgrounds and it lacks multinational arrangement in terms of regional security, regional partnerships can generate benefits each other. That's what basic economics tells us. Also, I think in this way we can engage in managing sustainable and healthy growth of China and the other Asian countries. What is essential should be how each Asian country can find its own strength in the process of competitive selection through FTA measures. Moreover, various forms of regional financial market co-operations should be desirable in order to strengthen regional integration and mutual trust in currencies, just like Chiang Mai Initiatives that reinforced currency swap agreements among ASEAN plus three agreed in May 2000.

Second, we always have to be mindful of an importance of sustainable growth of domestic private demand in each Asian country. A lot of Japanese companies moved production lines to China from other Asian countries not only for seeking lower production cost but also with a view to a potentiality of Chinese domestic market. In facilitating domestic investment and consumption in Asian region, I believe Japan should effectively contribute toward regional growth. With the FTA measures, transfer of production line will be decided from more strategic viewpoint, which means each country in Asia including Japan can more easily find its competitive advantages.

Third, democracy in capital or equity distribution is essential in that context. Economic restructuring in the short term usually squeezes individual jobs but benefits corporate equities. Since a fruit of the reform may be distributed to equity holders, it would be desirable that individuals hold equities as many as possible in order to gain force of the reform. To be frank, in this regard Japan has failed so far domestically, while China seems to utilize the power of people's capital.

Lastly, a political leadership is crucial as a reform engine. Japan's political leaders must integrate the government and ruling parties, and at the same time the Prime Minister's office can better function, if it gathers best and brightest from both inside and outside of the bureaucracy.

In conclusion, we may have no clear-cut answer to that question as to how we can renovate Asian trade and finance. But we will have to find the Asian model for restructuring by ourselves, as we have done in the past, and that model will revitalize not only Asian economy but also Asian democracy.

Thank you.