Good evening, ladies and gentlemen. Thank you, Mr. Thomas Jones, for your kind introduction.

Before discussing Japanese pension reform, you might be interested in knowing recent developments in Japan's politics, which is so complicated that to discuss this issue is daunting even to politicians, who seldom get daunted. But let me try to explain it briefly.

Although the LDP has maintained a comfortable majority on the three parties' coalition basis, we should still admit the fact that the LDP has suffered a major setback in the last election in June. And, if we overlook the important changes that are taking place deep down in people's minds, we will surely suffer an even more severe loss in the coming Upper House election next year. The election results illustrate the fact that we lost not only the support of urban voters, but also that of working people and taxpayers in local communities that have benefited from public work spending. In response to the outcome of the election, in particular the fact that people rejected the bad habit of distasteful "LDPish" politics, my colleagues and I launched the New Group for LDP's reform. Fiscal spending failed to work as a sweetener to the voters any longer. Thus, our group decided, at the end of this month, to go to local cities and towns, not just urban cities, in order to not only convey our candid messages but also listen to frustrations and objections of local supporters. I think we need to go back to the basics of the politics.

1.Pension Reform Agenda

Now, let me start with pension reform.

Before coming to New York, one bureaucrat at the Ministry of Health and Welfare said to me, "Japan's pension reform is steadily under way". But all of us, politicians, know that the gloomy prospect of pension issues has always been on top of the list of concern among people, and still is. Pension is the issue discussed most seriously at whichever meetings in the constituency we go to. And everybody is feeling that pension reform is stuck with little prospect. Every conscientious politician tries to understand pension reform, but jargon masks fundamental issues, so that discussions tend to be limited to a handful of experts.

You may be surprised, however, if you know that the original pension reform agenda in Japan, including establishment of defined contribution plan and comprehensive defined benefit plan reform like legislation of Japanese version of ERISA, was initially proposed by a handful of politicians, myself included. The agenda was first put on the LDP's platform of deregulation several years ago, against the background of three elements for consideration, 1) need to create pension portability in order to enhance labor mobility, 2) a fear of under-funding of private pension plans, and 3) need for revitalization of Tokyo capital markets.

Despite the initial leadership with respect to pension reform, however, I think recent developments indicate that both politicians and bureaucrats are at a standstill without seeking any practical solutions to the fundamental pension system problem.

2.Public Pension Reform

The public pension system reform may be a good example for this state of affairs.

The Public Pension Reform Act passed the last Diet session this March. The Act contains a 5% reduction of future income proportional benefits based on re-calculation of the actuarial balance reflecting the recent demographic changes. This is enabled by several important changes, such as a delay in pensionable age to 65 years old, and a termination of wage-index calculation on pension benefits. Therefore, future pension contribution rate will be decreased to around 20% of incomes, which was estimated to go up to around 26% without the proposed reform.

While no one considers this public pension reform to be sufficient at this stage, no politician has proposed any fundamental reform, which needs to be done because of the rapid decrease in birth rate that is already below the reform bill's underlying assumption. It is true that the Governmental Economic Strategy Council under the late-Prime Minister Obuchi officially proposed in February 1999, 1) the basic part of public pension system should be fully financed by tax revenue, and 2) non-basic part of public pension, which is income proportional benefits, should be privatized. But there is no practical proposal regarding how to implement these policies e.g., large-scale tax rate hike and fiscal spending that will be needed to cover the benefits under "pay as you go system" to be paid without any new contributions coming in, which is said to be over 300 trillion yen if we privatize it.

I believe these issues must be placed at the center of national policy discussion until 2005, when baby boomers will begin to retire in Japan. The problem of under-funded public pension becomes a common agenda throughout the OECD countries, among which Japan has the most urgent problem. We should create a good model for public pension reform. Because a solution only lies in a reduction in benefits and an increase in contributions, the toughest question here is how we could politically persuade both current and future pension beneficiaries who might otherwise be entitled to larger benefits. I think that we, politicians, must address this issue to people for the benefit of long-term prosperity.

3.Defined Contribution Scheme

Let us move on to the Defined Contribution Bill that will be re-submitted to the next session of the Diet. The scheme, if passed, is expected to enhance portability of pensions, as well as benefits to the self-employed, who are not practically entitled to corporate pension plans in the current pension system.

Let me first mention that the Bill may possibly fail to pass even in the next Diet session, because of political bargaining between the coalition parties and the opposition over the Bill and other controversial Medical Reform Bills. Although the opposition may not necessarily be opposed to the introduction of defined contribution plan itself, they protest to the passing of the Medical Reform Bills, saying that those Bills do not include the fundamental reform measures that they insist the Bills must contain. If the opposition parties take the Defined Contribution Bill as "hostage" for the Medical Reform Bills, the Diet may close this session before the Bills are passed.

One hope is that public needs for passing the Defined Contribution Bill are so serious that, last week, Japan Federation of Economic Organizations, Keidanren, held a large conference in order to appeal for the inception of defined contribution system. We must make every effort to pass the Defined Contribution Bill in the next Diet session.

Second, even if the Bill is passed, the defined contribution scheme that the Bill contains may still be insufficient in terms of tax treatment. The allowance level for income tax deductions of defined contribution pension premiums is not sufficient. In addition, the Bill disapproves so called "matching contribution" in the cases of both employer contribution scheme and individual contribution scheme. One of my colleagues in the Diet cynically said that we must be content with it for the time being however small it may be, and we can make it bigger later on. This indicates why the speed of reform has been very slow in Japan. Anyhow, the income tax structure at all three stages of the time of contribution, investing periods, and the time of receiving benefits, will need to be overhauled in order to make the defined contribution scheme full-fledged, and again, this requires political leadership.

4.Defined Benefit Plan Reform�cToward ERISA ?

Let us move on to the issues of private defined benefit plan. As you may know, there are two types of defined benefit system in Japan, 1) employees' pension funds and 2) tax-eligible retirement annuities.

This mid-August, four governmental Ministries suddenly made it public a plan that these two defined benefit systems be merged into a new comprehensive corporate pension system so that two different systems can merge smoothly in the case of corporate merger. However, I am as puzzled as you are about why this proposal was made public at this time.

A key to the answer lies in the central government ministries' reform that will be implemented in January 2001. Neither in the pension policy nor in aging policy, is there any reason. Currently, the former system, employees' pension fund, is supervised by the Ministry of Health and Welfare, but the latter system, tax-eligible retirement annuities, has no explicit authorities but the Tax Bureau of Ministry of Finance. In fact, as a legal framework of tax law, the Ministry of Finance is in charge of the latter tax-eligible retirement annuities, but in terms of fiduciary responsibility or disclosure requirement, we have had no consistent legal authorities for both systems. On account of recent low interest rates and a surge of corporate bankruptcies, a number of pension funds and retirement annuities have gone bankrupt, with no appropriate protections of pension beneficiaries' right.

Several years ago, I made a proposal to introduce a consistent and comprehensive rule to protect beneficiaries of a corporate pension scheme with the requirement of strict prudent investor rule, like ERISA, and this proposal was in fact incorporated in the governmental deregulation plan. However, that proposal has been put in the air because of the clashes between the Ministries involved. The recently proposed comprehensive system will be made possible by the major overhaul of the central government ministries, where the Ministry of Finance will release jurisdiction of tax-eligible retirement annuities, and the newly created Ministry of Welfare and Labor will have jurisdictions of both the pension systems. This illustrates the way the Japanese government policy is constructed by bureaucratic considerations, which I sometimes call "Octopus Jars," where octopi, namely bureaucrats, can't see and don't want to see anything outside of the closed octopus jars. I believe political leadership must be effective in proceeding with reform agenda to crack down the octopus jars.

5.Asset Management Industry

Now let us look into the issues of asset management. The funds of the National Pension and Employees Pension Insurance have been 100% deposited to the government's Deposit Fund controlled by the Ministry of Finance until today. In order to introduce a more effective market mechanism, we decided to reform the Fiscal Investment and Lending System thoroughly, and by the passing of the reform act of 2000, the pension money, along with postal savings and insurance fund, will be managed independently by a fund, which will be newly established in April 2001. Accordingly, the door to the pension asset management will be opened more widely to foreign asset managers as well. The basic asset allocation policy is now under discussion, but as a matter of principle, I think this is a kind of an experiment how the governmental body could manage huge public pension assets totaling 130 trillion yen without incurring both conflicts of interests and market distortion. The key will be the disclosure requirements of both asset management performance and its investment process, including asset management fee.

Finally, I would like to emphasize the importance of the pension asset management industry in the capital market.

The market pressure from global institutional investors does not only enhance the efficiency of resource allocation in the economy, but also puts disciplinary effect on corporate governance. It is said that in the United States, an introduction of ERISA with strict prudent investor rule in 1974, changed corporate dividend policy, since many institutional investors stopped holding stocks that gave out no dividend. In Japan, with the collapse of the main bank system after the speculative bubble burst in the 1990's, management of Japanese corporations seem to have lost the guidance with which to run their companies. I believe the market pressure will increasingly be crucial in indicating better strategies for corporate management. In this regard, we should ensure proper functions of rules and regulations, including strict accounting standards and securities law enforcement.

In addition, maintaining "fair playground" is crucial for the government. For example, in the areas of pension asset management, unnecessary regulatory burdens, such as 5,3,3,2 requirement, have already been abolished, but review must go on. At the same time, we have to establish more concrete prudent investor rule that is based on fiduciary responsibility as well as disclosure rules to maintain the fair capital market. I think the asset managers' accountability practices to the plan beneficiaries, especially in the case of defined contribution scheme, will have to be tested in terms of establishment of true fiduciary duty in Japan.

The market pressure monitors not only performance of the business sector, but also that of the government function. In fact, through sovereign rating and their investment judgement, institutional investors have an influence on governmental policy decision. Especially, we, politicians, should always be reminded of "cost" of the governmental function.

I think it is symbolic that Harvard College vs. Amory decision of Supreme Court of Massachusetts in 1830, which set the standard of classic prudent man rule, had its background of the plunge in the price of the Treasury Bond, which reminds me of the current circumstances surrounding the rating of Japan's Government Bond, and Japan's fiscal policy.

6.Conclusions

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 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 once created, that framework remains long. This is the case of the Meiji Restoration of 1868. I believe at the same time political leadership always plants seeds for the future. I strongly hope political leadership will accomplish the pension system reform, which is tough, but absolutely necessary for our own as well as our children's future.

Thank you.