I would like to thank Prof. Rowen and Prof. Aoki for inviting me to a conference with such distinguished participants. I am not so sure why a politician like me have been invited. I am just a "rank and file" politician, and may not be qualified to talk about the "changes in polity," because I am not in the heart of either political struggle or policy making process after being kicked out of the negotiating table with the opposition parties last fall, together with my close colleague, Nobuteru Ishihara, son of the newly elected Governor of Tokyo.

But, I would admit that I have been deeply involved in a series of reforms for the last several years, not just in finance but in the way governance works in Japan. Although I may not be able to convey you a deep academic analysis of what is going on in Japanese Politics, why don't I try to show you some observations on possible changes we might be experiencing and some additional measures that we have to introduce to push those changes for the better governance of Japan.

In the last summer, while I determined that Japan must depart from the "too big to fail" illusion for banks under the governmental protection, bureaucrats argued that the nationalization law might be unconstitutional. They insisted that 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, politicians, maintained 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 so seriously refused the enactment of the banking nationalization law as to employ constitutional claim. They didn't want to take any responsibility to order ailing banks to stop banking business, since they had kept forbearance policy on banking for a long time and to leave fundamental problems unsolved. It was "conventional wisdom of continuity" that governed the behavior of the bureaucrats, therefore we, politicians, had to replace their conventional belief with new wisdom.

This episode illustrates a simple fact that the bureaucracy cannot voluntarily admit its past policy errors and, even worse, it tends to continue to make mistakes in order to conceal the mistakes, unless outside power, namely politicians, can change it. Then, I have a question. Is it a mere illusion that Japanese bureaucrats are supposed to be the most sophisticated and make no mistakes?

Traditionally, the Japanese way of governance of the nation has long considered to be built upon the presumption of relative intellectual sophistication of bureaucrats, businessmen, and politicians, and of course, politicians stay at the bottom stratum. The roles of each were given accordingly. The smart bureaucrats drafted policy, businessmen emulated for not only economic rewards but also reputation within the policy framework drawn up by the bureaucrats, and even their behavior was 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 often from valor or muscle.

The relationship between politicians, bureaucrats and business leaders has long been referred to as the "iron triad." In those days, the LDP enjoyed the comfortable majority in the Japanese Diet. 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 started crumbling down. However, even Prime Minister Hosokawa stated in his inaugural address that he would succeed consistently past policies taken by the government, literally accepting the fact that bureaucrats have ultimately decided the policies of Japanese government for years.

After the LDP formed the ruling coalition in 1994 with the Socialist Party and Sakigake, the relationship between politicians, bureaucrats and business leaders became somewhat 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.

The recent relationship between the LDP and bureaucracy is often accompanied by LDP politicians' mistrust in bureaucracy. In the hearts of LDP politicians lies such a feeling that stems from bad memories of the days 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 to stop tragedies in acting against the transfusion of HIV (Human Immuno-deficiency Virus) contaminated materials. 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. Although, as a system, the ruling party, which has been the LDP for the most of the time, has gave the bureaucracy, in nearly every case, "a de-facto approval" without any serious scrutiny with enough information into each issue for each decision making, upon a conviction that bureaucrats never make mistakes. Now, 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. Again, bureaucrats do make mistakes, surprisingly, too often.

In my recollection, in the days of "Total Plan for Financial Revitalization" from April to July 1998, I believe a desirable relationship among politicians, bureaucrats, and businessmen emerged temporarily. Various constructive policy ideas are discussed in an open circle provided by the LDP, and politicians decide directions and asked bureaucrats to materialize the directions, even if the policy are against the bureaucrat's past direction. Such policy includes an establishment of due diligence practice of non-performing loans and judicial auction reform.

And the Diet session from July to October 1998, young politicians with better insights and expertise than those of the bureaucrats for banking issues, in both ruling and opposing parties, publicly conducted political debates, negotiated, and decided substantive political compromise without any bureaucrat's assistance, which was completely beyond the seniority-by-age practice in Japanese politics.

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. Therefore, first, check and balance among ministries, as well as between politicians and bureaucrats must be established. In the old regime, the Ministry of Finance had extremely strong power and substantively controlled politicians and other ministries, since 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 must be enhanced. Bureaucrats tend to have tried to monopolize information and cover up the decision-making process. Third, an establishment of institutional knowledge source, in other words, information power, on the side of politicians must be strengthened. In these respects, there have been fundamental changes in how politics work in my country.

Let me go on to details respectively. In terms of check and balance mechanism, recently, the Bank of Japan became independent under the new law, and the Financial Supervisory Agency was established. These are indeed important institutional changes, where any wrong policy may be checked in front of public.

In my view, there are more important check-and-balance mechanisms now in play in the Japanese politics. For one thing, that is politician's mistrust, more precisely, public skepticism, towards bureaucracy 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 is because, under the new electoral system of single representation of the Lower House of the Diet, individual LDP candidates represent the LDP in their own election districts, and therefore, they began talking about the LDP's policy, while they used to talk little about policy or his/her own policy.

The policy formulation process is becoming more transparent to voters than under the old regime of iron triad. 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, Koumeito 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. Interestingly enough, lines of discussion of parties often change their courses every Sunday by what is said on the TV by influential politicians. 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.

In addition, during the series of local elections just ended, there were a growing number of open policy debate contests for candidates organized by local students and volunteers all over the country. I strongly hope Japanese voters continue such grassroots populist movement to give more influence on our policy-making process.

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 accompanied by alternative source of information other than bureaucracy, 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. Without such open discussion there might have been still forbearance policy on banking today.

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.

Having said all this, I have to admit that there is still some inclination on the 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 still have to be elected a number of times to get a senior position, for example, five times to be qualified for a minister. Since last year, when I was lucky enough to become responsible for drafting the banking legislation, I've been called a "new breed in the Diet" or sometimes a "brat in the Diet." However, I am already 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 changes of recent years in policymaking process by furthering effectiveness of check-and-balance mechanism, a greater degree of transparency, and politician's stronger knowledge power. In order to avoid recidivism, more precisely, first, we should start with barring bureaucrats from appearing Diet sessions and increasing parliamentary vice ministers and junior ministers in order to have better governance on bureaucracy. This was almost already agreed between LDP and other parties, and the law will hopefully be enacted in the current Diet session. I strongly hope that policy competition mechanism among politicians will function and seniority-by-age practices in politicians may disappear. Also, C-Net, just like C-Span in the U.S, and Diet Internet TV channel will surely increase the exposure of each politician to the general public.

Second, we should make bureaucracy more accountable for its actions. The Bank of Japan began to disclose minutes of their policymaking process and Ministry of Health and Welfare has begun to open all their advisory boards to the press ever since the HIV incidence. Ministries can perhaps emulate these practices, e.g. at least 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.

Third, we should promote the activities of independent policy research institutes, which cover not only economic policy but also areas from defense policy to social security policy. Actually, with close collaboration with my friends outside of politics, I am about to launch a parliamentarians' league to help introduce policy incentives to facilitate the establishment of think tanks for independent policy studies. This is because my own experience of series of deregulation of financial market for the past several years that culminated as "Tokyo Big Bang" and drafting banking reform legislation last year tells me that politicians need an able staff of legislative assistance in and out of our offices to work effectively. The problems on current think tanks tend to represent specific interests within business groups or an administrative turf. As far as I am concerned, I was lucky to have several friends outside the bureaucracy, who helped me in my efforts to prepare drafting Big Bang scheme and banking legislation on an ad hoc basis. Unlike US senators and congressmen, however, we have only one permanent assistant for policy studies paid by the government. Obviously, legislative assistance function in order to help write laws as well as to collect independent information must also be strengthened in both houses.

Fourth, a system of political appointee by the Prime Minister should guarantee better governance upon bureaucracy. This could be one of the answers to the question why reform progress in Japan is so slow, compared with other countries that adopt same Parliamentary system such as England, New Zealand, or Australia. If bureaucrats independently appoint a private person to join the administration, which has occurred in the past and now legislated, it only serves as an excuse of bureaucrats.

Fifth, we should establish a new recruitment policy that ensures right non-elected elite in a right position who has real concern about nation's interests and strategies, by mobilizing bureaucrats beyond their particular ministry. It is my opinion that current bureaucracy system is just like "Octopus Jars," where octopus, namely bureaucrats, can only have narrow range of vision and interests of each ministry. I hope an introduction of political appointee and enhanced mobility of bureaucrats can stimulate non-elected elite with the highest IQs so as to offer them better chances to become true crusaders for Japan.

Lastly, but not least, current electoral system of single seat system adopted in Lower House might have to be reversed. While single seat system had some positive effect in forcing candidates to talk about policies, typical candidates have to listen to all kinds of interests within their districts. You have the same problem with Congress. But what is different between the U.S. and Japan is the statutory power balance between two houses, i.e., our Lower House has much more power over Upper House. That's why all of the candidates have difficulties in support for the necessary reform program, such as Postal Savings reform. I don't think it is a productive way to continue the election system, where we cannot bar an expansion of Postal Savings which inherently cannot be a true risk-taker to help develop new growing businesses.

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.

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. We are still in the crisis and a policy we take will be tested in the future.

However, it is my regret that since the new coalition was made in late autumn last year, where it has been a common practice that only a handful of higher ranking party leaders of LDP, Liberal Party and sometimes Koumeito decide most of the policies with no active policy debate among rank and file LDP politicians. In these days, policies have been negotiated often from the motivation to maintain the parties' political position, such as distribution of coupons. I have a serious doubt that we cannot confront structural reform if the current policymaking way continues.

Structural reform is a formidable task. No one but politicians must take the ultimate responsibility for any future results that will come from the fundamental changes of Japanese social and economic structure. First, it is within political judgement to go through increasing layoffs and a possible reduction in real wages by the workforce restructuring. Second decision-making process in bureaucracy takes a long time and we may lose a chance for quick and real change. Third, the power balance among ministries can often distort results of debate among bureaucrats. Therefore I believe that the framework of decision making taken in the Total Plan in April 1998, as I mentioned before, would be a better form.

Last week, in order to strengthen an effort by Obuchi Administration that initiated "Competitiveness Commission," LDP launched "Special Study Team for Economic Revitalization and Industrial Competitiveness." I believe that it is integrally up to politician's determination whether the structural reform would succeed or not. I would appreciate it, if I could continue to learn from your wisdom with which to go through our difficult times.

Thank you.