Thank you for your kind introduction. It gives me a great pleasure to join the Trilateral Commission again. My task today is to speak about Japan's economic agenda on both the domestic and international areas, but I assume many of you have already been sick and tired of hearing about how and why Japan's economy has underperformed since the early 1990's. Especially after listening to President Roh's positive and future-looking speech this morning including the basic framework of his economic policy, you may feel all the more discouraged to hear about Japan. His speech was an impressive one with his strong political commitment to build a new Korean economic model with transparency and fairness that should invite ample foreign capital. Well, why don't I try to convince you about our future course of our eonomy, too..

1.State of the Economy

While the world economic outlook turns unpredictable against the background of geopolitical uncertainties, Japan's economy, amazingly enough, is now about to bottom out cyclically, thanks to progress in domestic inventory adjustment and corporate restructuring, although it is very slow. This is the third upward move in business cycle after speculative bubbles burst in the early 1990's. Corporate fixed investment in Japan, such as machinery orders, indeed is about time to increase, while many corporate boardrooms seem to have second thoughts about further investment decisions because of unforeseeable developments of the war in Iraq and a recent plunge in the stock market. What will determine the course of Japan's economy going forward? Let me make three points.

First, we have to be mindful of the fact that the present cyclical recovery can be smaller than the last two ones, which were supported by substantial fiscal stimulus packages. Compared with the first cyclical recovery in 1996 led by rapid expansion of cellular phone systems and telecommunication networks, and the second one in 2000 led by a world-wide information technology boom, we have no apparent driving force for business investment this time. System LSIs and home information appliances, such as digital camera equipped cellular phones and flat TVs, are the only examples of typical selling products, which indicate that economic recovery can apparently be vulnerable.

Second, the possible recovery in the manufacturing sector, therefore, will not guarantee sustainable growth for the Japanese economy as a whole. The manufacturing sector consists of only 25% of the Japan's GDP, while huge non-performing assets concentrate on the rest, i.e., the non-manufacturing sector, such as wholesale, retails, construction, real estates, and financial services. So Japan has to change its economic model from the manufacturing based economy into service industry based and consumer oriented economy with much higher productivity and profitability. This is what structural reform must be aimed at for sustainable growth in Japan.

Third, fragility in the financial system still centers on the weakness in Japanese economy. So the first priority must be placed on the banking industry reform. We already witnessed many countries to have carried out aggressive workouts in industries along with drastic change in corporate management of both banks and other troubled industries, just like here in Korea, and Japanese people both public and private already studied how to solve it. Then, why Japan seems so slow? I think the problem lies in the nature of Japan's politics itself, which has continuously delayed rigorous and painful resolution of financial mess.

2.Accomplishments of the Koizumi Administration

The incumbent Koizumi Administration was unprecedented in the sense that Mr. Koizumi won the LDP leadership race against the background of people's enthusiasm for reform. His slogan, "no pain, no gain for reform," did appeal! Two years have since passed and the Prime Minister's approval rating has dropped from 80% to 40 % or even below. What went wrong?

In my judgment, he has been putting an emphasis on two items. First, the U.S.-Japan Alliance. And in this sense I support him. Mr. Koizumi has not only supported the standing of the U.S. on the Iraqi issue, but also strengthened the domestic legal framework of national security by enabling the Self Defense Forces to be sent anywhere as far as the sources of terrorism exist. In fact, he addressed it in a prompter way after September 11th, compared with one of his predecessors' response during the Gulf War.

Second, the Koizumi Administration has been putting the highest priority on fiscal consolidation. He succeeded in cutting fiscal spending in the national budget, containing JGB yields below 1%.

However, by doing that, Koizumi-san was unsuccessful in making the economy grow faster. Economic growth was sacrificed for short-term fiscal balance. Regrettably, in my opinion, he has failed to set the right priority among reform items.

The Koizumi Administration has proposed a wide spectrum of reform items on his agenda, including privatization of government sponsored corporations such as postal services, fiscal consolidation, non-performing loan resolution, comprehensive tax system reform and strengthening national security. So far, however, every reform item seems to be compromised with so-called �eresistance camp' in the LDP. All the items are left incomplete, except for an effort for fiscal consolidation.

This problem of priority has implications for macro-economic performance in Japan. Let me take for example the typical official line of the administration's economic policy. That is, "get over deflation AND THEN, carry out structural reform." As far as I know, the administration officials are taking the meaning of price deflation and structural reform separately. But in reality, price deflation is nothing but a result of a GDP gap between demand and supply. That is why we need to carry out structural reform by both cutting supplies in unproductive sectors and increasing demand for productive sectors. A cause for price deflation exactly lies in the slower speed in Japan's domestic industrial reform. Japan has to carry out domestic structural reform in order to overcome price deflation. As long as the Koizumi Administration defines the structural reform as simple pain and pays little attention to strengthening productive sectors, I suppose, Japan cannot get out of the economic mess of today.

3.Recidivism to Socialism

While the attempts for the reform by the Koizumi Administration are beginning to stall, I think Japan is facing a new kind of challenge, that is, �eInward Looking' trends emerging in both the private and public sectors. Let me take three examples of this inward looking tendency.

First, a rapid contraction in the market economy. The size of short-term money market has shrunk by as much as 55% since 1998, under the influence of zero interest rate policy as well as quantitative monetary easing policy taken by the central bank. In the government bond market, the central bank buys up 14.4 trillion yen annually, which is equivalent to almost half the annual budget deficit. Also in the stock market, the largest buyer during the past three months was the central bank, which has been buying corporate stocks from commercial banks for the purpose of removing fragility in the commercial banks' balance sheets. Lastly, dollar-yen exchange market is heavily influenced by frequent government interventions. These financial markets are increasingly dependent not only on governmental support, as I have just mentioned, but also on government activities, such as restriction of short sales.

Secondly, traditional business practice has come back. In the case of major banks' capital augmentation in recent months, some mega banks reinforced cross shareholding practices between banks and borrowers, rather than acquiring new capital through public offering. In addition, some policymakers now go so far as to plan to stop mark-to-market accounting with regard to cross shareholding, in order to disguise losses from further decline in the stock market. By the same token, they strongly oppose to introduce an accounting method for impairment of fixed assets, so as to avoid recognizing unrealized losses from real estates. Recidivism to market manipulation is surfacing as business shun away from the reality of global market economy.

Third, an increasing number of policymakers are now striving for weaker yen. While I do not necessarily deny the benefit of taking the advantage of a weaker currency, it is also likely that as long as Japan continues to bear the burden of the current inefficient capacity and excess liability, the weaker yen will have only a limited support for the economy, but we might end up exporting beggar-my-neighborhood policy to other trade partners.

I think these characteristics of inward looking tendency can be seen these days in other countries as well. A fear of world-wide competitive exchange rate devaluation like the 1930's is one concern. Another concern is a possibility that a serious divide we witnessed in the U.N. Security Council with regard to the Iraqi issue has some influence over trade conflicts within WTO, which will inevitably lead the world economy into hazardous regionalism. A nightmare of regionalism and economic blocs is the direction that we must avoid at any cost. Particularly Japan benefits most from the free global trade system, and at the same time, Japan's economic growth itself is a crucial factor for stability of Asia. In light of this, Japan has an obvious role to play in economic fora in the post-Iraqi war period.

4.Conclusion

To sum up, the agenda for Japan in the international area is: Do not stop globalization, and the domestic agenda is: Do not stop structural reform toward sustainable economic growth. I really hate to repeat such boring sentences, but I have to do so, because we are confronting a real challenge to globalization and domestic reform.

With numerous daunting problems, Japan has moved only slowly during the past decade. This is because the problems are of structural nature that requires strong political will to fix them. I believe it is of utmost importance to establish a new political core, which attracts reform minded, and yet non-ideological, people who could serve as a powerhouse for building up new Japan. As a person living in politics, who must have a responsibility for a nation's future, I strongly believe the new Japan will come only if it revitalize not only our economy but also our democracy, i.e., our policy making process or decision making process as a nation.

Thank you.