It is both a pleasure and an honor to be invited to speak at this most distinguished school of the United States. It was two decades ago that I was studying political science at John F. Kennedy School of Harvard University, while my friend Akinari Horii was studying finance here at Wharton. In those days, finance was the subject of choice of the most intelligent Japanese students. Japan's economy as well as finance was top rated by global standards, while its politics did not receive as high a reputation. Two decades have passed, and the rating of Japan's economy, especially its financial sector, has become much lower so as to level with Japan's politics. Please let there be no misunderstanding. I am not insinuating that Akinari's intelligence has dropped to my level.

Japan's economic problems in recent years notwithstanding, I think it fair to say that the configuration of average politicians, businessmen, and government officials in terms of knowledge has remained unchanged in Japan. On average, bureaucrats are more knowledgeable than businessmen are and politicians stay at the bottom stratum. I should quickly add to it by saying that central bankers are the most intelligent of all. By the way, I suspect this would also be the case in the United States. There are a number of Ph D economists and political scientists in the executive branch of the US government, while not so many in the business world and fewest in the political circles. As far as Japan is concerned, at least, there is reason for this configuration. Bureaucrats become bureaucrats after their intellectual qualifications are tested, and well-educated businessmen are more likely to succeed and therefore stay in the business. In other words, there is some mechanism, which screens candidates for bureaucrats and businessmen on the basis of intelligence. Obviously, the requirement is toughest for academics. In contrast, politicians assume office when they are elected. Voters vote for their fellows and peers. People vote for candidates who demonstrate interests and concerns similar to their own. This voting pattern ensures the belief of the elected to reflect that of the electorate. Indeed, this constitutes the basis of democracy. The elected do feel and think in a similar way to the electorate, while bureaucrats work aloof from the average citizens.

The Japanese way of governance of the country was built upon the presumption of relative intellectual sophistication of bureaucrats, businessmen, and politicians. The roles of each were given accordingly. The smart bureaucrats draft policy, businessmen emulate for not only economic rewards but also reputation within the policy framework drawn up by the bureaucrats, and even their behavior is often guided by bureaucrats. The roles of politicians were limited. Politicians were usually preoccupied with specific interests and troubles of their constituencies. Oddly enough, they lobbied the bureaucracy for their constituency, especially at the Ministry of Finance, which drafts the budget. On rare occasions, they were given opportunities to decide upon issues bureaucrats found difficult to solve because of conflicts within the bureaucracy as well as amongst supporters. Such political decision making implied that the outcome did not result from deliberations but valor or muscle.

The relationship between politicians, bureaucrats and business leaders was often referred to as the "iron triad." In those days, the LDP - Liberal Democratic Party - enjoyed the comfortable majority in the Japanese Parliament. Therefore, bureaucrats tried to influence legislation through talking to ranking politicians of the LDP. Businessmen also approached both the LDP and bureaucracy for their own interest on the assumption that the relationship would never change. Thus, a relationship like "You scratch my back and I scratch yours" used to be observed widely in Japan. This was the old regime, which lasted for four decades until 1993, when the LDP split, lost the majority and stepped down as the ruling party.

Under the Hosokawa administration, the LDP was in the opposition, and the iron triad crumbled down. Even after the LDP formed the ruling coalition in 1994 with the Socialist Party and Sakigake, the latter of which later merged into the Democratic Party -- or now the largest opposition, the relationship between politicians, bureaucrats and business leaders became elusive. Sometimes the relationship gets jarring just as I experienced during the past few years, when I was engaged in legislation of financial services deregulation, revision of the Bank of Japan Law, establishment of the Financial Supervisory Agency, and the Financial Revitalization Law which enabled the government to nationalize, or to prepare bridge banks for, ailing banks.

The recent relationship between the LDP and bureaucracy is often based on LDP politicians' mistrust in bureaucracy. It obviously stems from LDP experience under the Hosokawa administration, when bureaucracy seemingly tried to damage LDP in the opposition. In my opinion, however, this is only a superficial part of mistrust. Deep down in the mind of politicians as well as business leaders and average voters, there lies a far greater mistrust in bureaucracy, which had long been believed to be in the upper echelon. Yet it has not only been incapable of solving problems, but has also been at times the actual source of the problems. In the 1990s, there were too many errors and mistakes made by bureaucrats. To name but a few examples, the Ministry of Finance pursued forbearance policy and left the banking problem unresolved, which made the banking system more unsound and unstable than prompt resolution would have done. The Ministry of Health and Welfare was too slow in acting against the transfusion of HIV (Human Immuno Deficiency Virus) contaminated materials to stop tragedies. The Ministry of Finance successfully persuaded the coalition parties into increasing tax and social security burdens in 1997, when there was only a nascent economic recovery and the Asian financial crisis erupted. Politicians as well as voters have come to realize a simple reality, i.e. knowledge of bureaucracy does not ensure good governance of the country.

In order to achieve better performance, Japan has to build a mechanism through which wrong policy is checked and right policy promoted. The past mistakes mentioned above demonstrate the necessary elements for checking wrong policy. First, check and balance between major players. In the old regime, the Ministry of Finance had extremely strong power. It controlled the national budget, tax and customs, public-sector financing, banking, securities industry, macro-economic policy and international finance. Second, transparency of policy formulation. Bureaucrats have tried to monopolize information and cover up the decision-making process. In these respects, there have been fundamental changes in how politics work in my country.

With respect to check and balance, the Bank of Japan became independent under the new law, and the Financial Supervisory Agency was established. These are indeed important institutional changes, but in my view, there are more important check-and-balance mechanisms now in play in the Japanese politics. For one thing, that is mistrust between bureaucracy and politicians I mentioned a minute ago. In addition, there is an emerging check-and-balance function within the political circles. That is because publicly announced policies now carry with them by far the greater significance in party politics within the LDP than under the old regime. This may sound odd, for policy has always been important for any political party. Let me remind you, however, of the fact that bureaucracy drafted policies from grand design to details until recently. Even after policy was drafted on the LDP platform, individual LDP candidates used to talk less about their party's policy than their own policy. Under the old electoral system of the Lower House of the Parliament, i.e., multiple representation of a district, each LDP candidate fought for election against other LDP candidates and had to differentiate his/her views from others. In order to appeal to special interests group, too, individual LDP candidates sometimes set aside his/her party's policy. Under the new electoral system of single representation, however, there is little room for this kind of election tactics available for politicians. Individual LDP candidates represent the LDP in their own election districts, and therefore, they began talking about the LDP's policy, not necessarily policy of their own.

The policy formulation process is now more transparent to voters than under the old regime. Because the LDP is still a minority in the Upper House, all important policy issues are discussed and agreed upon by the coalition parties before they become policies of the government. This policy making process began in 1994 when the LDP returned to the ruling party together with the Socialist Party and Sakigake. The LDP's partners have since changed to the Liberal Party for coalition, and depending on issues, Komeito for alliance. In each coalition government, policy discussion has not been made behind the curtain of the LDP but on the open arena. The upshot is that a political show goes on in front of voters, or more precisely for this matter the press. For example, on every Sunday morning, there are three TV channels, which put on air programs of political debate, in which politicians appear and discuss issues. A decade ago, it was not politicians but bureaucrats that showed up on such TV programs. Amazingly enough, these programs now attract much more viewers than bureaucratic shows a decade ago. I am not sure whether politicians are popular or simply amusing to watch.

I believe such policy discussions, on the one hand, contributed to formulating the right policy on a number of occasions during the past few years. For example, without discussions on the party level, I doubt that reform of the Ministry of Finance would have gone as far as creating an independent banking watchdog. Legislation for banking nationalization and bridge banks of 1998 is another example. On the other hand, unlike under the old regime, where a certain behind-the curtain negotiation was easier, there is now no big room for bargaining of "apples for oranges." Hence, less likelihood of quick easy fix on any important policy, the issue of US bases in Okinawa being a prime example.

Having said all this, I have to admit that there is still some inclination in part of the LDP towards recidivism into the old bureaucratic supremacy. Let me remind you of the fact that most of the ranking LDP members have established their political career under the old regime, i.e., with the aid of bureaucracy. Within the LDP, you have to be elected a number of times to get a senior position, for example, five times to be qualified for a minister. Actually, this seniority-by-age practice is still widespread throughout the country. You'll have to live long in order to become CEO of a major corporation in Japan. Since last year, when I was lucky enough to become responsible for drafting the banking legislation, I have been called a "new breed in the Parliament" or sometimes a "brat in the Parliament." However, I am 48 years old, a father of two brats in the university.

Being a brat in the LDP, however, I always want to pounce upon LDP recidivism into bureaucratic control. I believe Japan has to institutionalize the new political reality for further effectiveness of check-and-balance mechanism as well as a greater degree of transparency. One way is to bar bureaucrats from appearing parliamentary sessions. This is now discussed between LDP and its coalition partners, and I hope that will be realized. Another idea is to make bureaucracy more accountable for its actions. The Bank of Japan began to disclose their minutes even before the new law became effective. I suspect they did so in order to fend off pressures from their earlier controller, the Ministry of Finance, as well as politicians. This practice can perhaps be emulated by ministries, e.g. all the minutes of advisory boards and councils be disclosed. In addition, collection of public comments can be made compulsory to make any recommendation by any ministry valid for policy consideration.

My own experience of drafting banking laws last summer tells me that politicians need a able staff of legislative assistance to work effectively. As far as I am concerned, I was lucky to have several friends outside the bureaucracy, who helped me in my efforts to prepare banking legislation on an ad hoc basis. Unlike US senators and congressmen, however, I have only one permanent assistant for policy studies just like most of the other members of the Japanese Parliament. Obviously, legislative assistance function must be strengthened. One way of doing so is to promote the activities of independent research institutes.

It is often pointed out that Japan is now at a critical juncture. I am of the same opinion, having seen drastic changes in the global political and economic landscape, prolonged economic recession at home, and the political disarray during the past several years. History tells us that large institutional changes take place only within a short period of time and the new institutional frameworks remain long. This is the case of the Meiji Restoration of 1868 and the post-World War II beginning in 1945. In these two occasions, Japan sought to establish the non-elected elite for guiding the rest of the country. Subsequent to drastic changes, both stability and prosperity were realized on that basis. However, that system of elite leadership proved to plant the seeds for future troubles. I now believe that democracy could avoid reaching a wrong answer more easily with an effective check and balance mechanism. Without it, Japan might commit once again the same mistake that our predecessors made in a catastrophic way in the 1930s.

The financial panic of 1927 and the Great Depression of 1929 spread poverty over the rural areas of the Japanese archipelago, from which soldiers came. Consequently, soldiers became upset, felt victimized and angry at the status quo. After several attempted coups, the military took over the government, under which bureaucratic control was tightened. Democracy was suppressed, and bureaucrats began drafting and implementing all policies, leading up to the devastating war.

I am not suggesting that such a devastating development is in the offing now in Japan, but we have to be mindful of the current economic conditions, which resulted from the largest boom and bust of asset prices since the 1920s -30s period. At the moment in Japan, deflation is going on, and the unemployment rate is renewing its record high in the post-World War II period, although much lower than the pre-war record, and it was only a few months ago that the rate became higher than in the United States. Under these circumstances, the Bank of Japan has implemented monetary policy of zero interest rates, unprecedented even at the times of the Great Depression in the United States. The government of Japan has stepped up its fiscal spending, and as a result, the budget deficit is reaching ten percent of GDP.

In recent months, Japan's economy appears to have stopped deteriorating, but I am not so certain if it will begin to recover anytime soon. Against this background, structural policy has drawn attention with good reason. As I said a few minutes ago, I have been engaged in legislation of structural reform in the financial system. Much more will have to be done. In this endeavor, I always keep it in mind that a short-term remedy of a present crisis entails a model, which will lay down the course of the future. In fact, a number of important laws were enacted in the wartime 1940s, including the old Bank of Japan Law, which was enacted in 1942 and lasted for 56 years; the old Food Control Law, which had effectively banned rice imports for 53 years until 1995; and the Tenant Protection Law, which became effective in 1941 and today continues to thwart prompt resolution of real estate related loans.

Faced with the formidable task of structural reform, ladies and gentlemen, I sometimes become daunted. On such occasions, I usually come to this country to talk with my friends. I do so because I know this is the land of opportunities, which gives people a hope for the future. I also know that in the 1980s when Japanese businesses were buying up property in the United States, it was said that America was a land of opportunities if you were Japanese businessmen. Those days were gone, and I am not a businessman but a politician. I would appreciate it if I could continue to borrow your wisdom with which to go through difficult times if not receiving votes or campaigning funds.

Thank you.