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U.S. relations key to the economic revitalization of Japan

Interview - July 23, 2015

With the ratification of the Trans-Pacific Partnership (TPP) imminent, Chairman of the Japan-U.S. Business Council Kunio Ishihara outlines why closer economic ties are in best interests of both countries.

KUNIO ISHIHARA, CHAIRMAN OF THE JAPAN-U.S. BUSINESS COUNCIL
KUNIO ISHIHARA | CHAIRMAN OF THE JAPAN-U.S. BUSINESS COUNCIL

Japan is going through an exciting time at the moment. In a period of global economic requisition, the country is making the difficult choices to reorient its economy for a more globalized world. As Prime Minister Abe said, “This is a once-in-a-generation reform that is taking place”. Would you say so? Why do you think that Abenomics will succeed ending two decades of poor economic growth and deflation and bring Japan back as one of the pillars of the global economy?

Well, as you mentioned, we’ve suffered from a deflationary mindset, which continued for 20 years. This deflationary mindset has deeply penetrated the hearts and minds of the Japanese people at large.

With the progress of deflation, as time goes by, the value of cash goes up, so, it’s better you don’t do anything, and you just wait for the future.

You have anxiety about the future as well and therefore there’s a genuine attitude against taking risks, as it’s better to do nothing in this economic environment.

This way of thinking has spread among the general Japanese populace as well as the business management community.

However, when you look at the world with its ongoing process of globalization and innovation, you feel the disparity.

So, in this context, what can Japan do? What will happen to Japan if we do nothing about it? I think conversely, there is a growing sense of crisis among the Japanese people at this point in time.

Public debt is mounting in Japan and people wonder whether we have enough in the budget to repay this burden of public debt.

We know that the demographic situation is such that the population is decreasing so I think people have started to think “what can we do to eliminate this problem?”

I think there’s a general sort of realization of these factors and then, at a time like that, Mr. Abe came into the political power, and then Mr. Kuroda was appointed as the governor of the Bank of Japan.

Mr. Kuroda has come up with the bold monetary policy. Mr. Abe is implementing the fiscal policy.

But after all, what counts would be the last arrow, the third arrow, which is the growth strategy.

In order to implement growth strategy, our structural problems will have to be removed and solved, so things which used to run Japan have to change.

In order to implement this structural reform, we had to face up with what is called “bedrock regulations”.

At this point in time, we are now beginning to see the signs of real growth coming from what he has been doing.

If you look at the reality in this context, you will note the share price in Japan when the Abe government was launched, the Nikkei average was hovering around 9,000 yen, but very recently it has now gone over the 20,000 yen mark.

At the time of the Lehman crisis, the ratio of employment offers to seekers was as low as 0.4 times but now this ratio is 1.17.

It means that we have a short supply in our workforce. The wage, naturally, is something that is negotiated between the labor and the management, but there is the tripartite meeting of government, employers and workers at work regarding the wage question, and the private sector is now realizing that if we want to come out of the deflation mindset, workers’ wages will have to go up and the companies are having sort of positive attitudes regarding the wage question.

That’s why last year and this year, two years consecutively, we have seen a wage increase in Japanese companies that is now beginning to trickle-down to SMEs.

So, at last, we are beginning to see some signs that we are coming out of long-lasting deflation.

We saw some bright spots in the economy, so the question is this trend has to be sustained, so managers are beginning to have proactive attitudes in their management.

The third arrow, which is the growth strategy, is something that will have to be carried out by the private sector.

Private sector companies must be the main actors in implementing the third arrow in a proactive management style, and I think this is very good for the outlook of the Japanese economy, and I think this gives one factor that will bring in a greater probability of success from Abenomics.

What are the biggest challenges that are still facing the Japanese economy at the moment?

Having described the rosy picture of what’s going on in the Japanese economy, you’ve asked what the challenges are.

More than anything, what’s important is to have the steady progress of our regulatory reform and structural reform, but in the case of Japan there is another huge question, which is the fiscal consolidation.

We live in a society where the population is decreasing. We have an ageing population with low fertility; it means that the burden will be carried over to the next generations to come.

It’s a structural problem so the important thing is to have the compatibility between economic growth and fiscal health, so this compatibility is very important both for the government and the private sector.

Japanese society is ageing against the backdrop of low growth, which is putting a great burden on the fiscal situation in terms of the primary balance.

What we need is to have the objective of attaining a real growth rate of 2%, nominal growth rate of at least 3% and that path has to be on the right track.

In order to do that, of course, private sector corporations will have to do the tough work to achieve that.

But at the same time on the government’s side, we’ll need to mobilize everything including the TPP and other strengthening measures of growth potential of the Japanese economy.

As you know, we have the universal health insurance system in Japan and therefore, in terms of social security, we have a substantial good program in place.

However, partly because of the ageing population and partly because of the upgrading of the levels of benefit provided by social security, every year we are experiencing an expenditure increase in excess of 1 trillion yen for social security.

So, we have to do something about the current social security system, which is a very tough thing to do.

The future of the Japanese social security is uncertain and if the system is unsustainable, then what will happen to the future generations?

The current workers are paying taxes and the social security premium, but there is no guarantee one day they will be able to enjoy the benefit of this system, so we have to do something about this current situation which is so urgent. 

I would like to ask about your creative solution to Japan’s demographic issue. You said 65 is not old, and I completely agree with you on that, and that encouraging ICT education for the older population will make them more productive, more efficient and would help productivity. Could you elaborate on this and about how you feel that this could be the answer to Japan’s demographic issue?

The ideal status would be that we have a large number of vibrant and energetic senior citizens – not only the fact that they live long, but they have to be able to work and provide something meaningful to society.

How can we increase the group of people who are able to work until the age of 75? I think while people are working within organizations there has to be an interest on health management, how they manage their good health.

Also, they have to be knowledgeable about preventing diseases so that improving these programs has to be positively participated by the elderly workers.

My ideal situation would be first of all, people will help themselves, it’s self-help.

And then, next stage would be the health and assistance coming from surroundings, from society, from the community, and if you can’t do anything about it, if you really have a problem then, the National Government will come to help.

So, it’s self-help, communal help and then the public help. I think that would be the ideal way and elderly population should be positively participating in this regime by thinking how responsible they can be in terms of their future and how good and how vital and they can really continue working to this end.

We call our society an ageing society but it should not mean that we are going to have a society with a bunch of elderly people, but we want to create a society where people have a healthy life with longevity.

Ambassador Kennedy has said that the depth and richness of our partnership affects all sectors of government, business, education, science, and that there’s always potential to do more and to explore new opportunities together. How important are institutions such as the Japan-U.S. Business Council to the development and further enhancement of U.S.-Japan relations?

We witnessed the growth of the Japanese economy. We were able to live after the war in peace and contribute to peace-building in the world.

I think this was possible thanks to the partnership that we were able to form with the U.S. One of the most important elements was the cultural exchange between our two countries.

Going forward, we would have to have multifaceted and multilayered exchanges happening between Japan and the U.S.

To that end, I think the role to be played by an organization like the Japan-U.S. Business Council would be so large – the council where management of the companies in both countries get together and discuss various matters. It’s a very important role.

The first Japan-U.S. Business Conference was held in 1961, 54 years ago, and this year in December will be the 52nd annual joint conference. Few organizations of this nature have lasted this long.

Many things have happened in the past of 54 years between Japan and the U.S. We went through good times and bad; nevertheless we continued our Conference; continuity is the father of success.

That is the phrase that reminds me of the long history of the Conference. So I think we are partners that must continue for the coming 50 or 100 years. 

What are your top priorities at the moment? Where are you focusing your energy, where do you see areas that could still be further strengthened?

If you ask for the top priority that would be the TPP, next comes energy. Energy is one of the top priorities for both countries.

As you know, in Japan, because of the nuclear power plant accident, all nuclear power plants have been decommissioned so the energy question is a very serious problem for us.

On the other hand, the U.S. went through the so-called shale revolution and it’s about to become an energy exporting country.

Japan would like to have a stable supply of energy, so in a way the U.S. and Japan have a complementary relationship.

In terms of direct investment for the last two years, Japanese FDI to the U.S. has superseded that from the U.K. to be the top source.

It means that the Japanese companies are investing in the U.S. and creating jobs, which some attribute to number between 700,00-800,00.

So you see between Japan and the U.S. we have such a multifaceted and close relationship.

There are various schemes that are regarded as priority areas. Actually, under our organization, we have four working groups.

The first one is on energy, the second one on financial services, the third one is on healthcare and the fourth one is on travel and tourism, a recent creation.

We are in the process of discussing the agenda items for the upcoming December Conference.

One idea is cyber-security. We know that the digital economy has arrived and therefore cyber-security could be one of the things that we can discuss.

You’ve asked for certain areas where we can work on further improvement between the U.S. and Japan.

I want to start from the fact that the relation is already very close, as evidenced by the successful visit of Prime Minister Abe recently, we have a close and globally significant relationship.

One problem is the FDI coming from overseas to Japan inter alia from the U.S.

I hasten to add that there are maybe some issues on the Japanese side, for example, the size of the market or the so-called non-tariff barriers that may exist.

Prime Minister Abe is calling for measures to make Japan the most business-friendly market in the world. I think that we need some policy measures to achieve that.

In other words, Japan has to become an attractive place for other countries to invest. There could be a concrete measures that one can think of, for example, reducing corporate income tax, as well as simplifying various administrative procedures.

Also, there’s a problem with the lack of English speaking capability on the part of the medical or health care deliverers.

Talking about the investment coming from Japan to the US, I think there’s a general tendency of concentrating in so-called old industries.

I think there’s a need for Japanese investment more to go to newer ventures and other innovative start-up companies, like those represented in Silicon Valley.

Considering the future, the most serious problem is the decrease in the number of the Japanese students deciding to go to the U.S. to study.

The current number of Japanese students going to the U.S. to study is 20,000 per year. Compared to 15 years ago, that number has decreased by about 60%.

If you consider the future of the U.S.-Japan relationship, I talked about the importance of people-to-people exchange, so a very important thing is that there are a lot of young Japanese people going to the U.S. and then from that point, look again at Japan in an objective way. This is very important in my opinion. 

I would like to ask you about your insight and your perspective on the TPP, which would be the biggest trade deal in history. Obviously, this goes hand-in-hand with relations between the U.S. and Japan. Could you give us your insights?

As we have been discussing, the most important thing for Japan now is the successful growth strategy to come out of the deflation.

The important move in achieving that would be to create a free-trade area. The Asian-Pacific Region is regarded as the front-runner of growth of the entire world.

In this context, it’s very important and there’s a great significance in trying to create free-trade areas where people, goods and money would circulate very freely.

Before expanding to 12 countries there are negotiations under way; there is a parallel consultation and negotiations going on between Japan and the U.S.

In this bilateral negotiation, problems are discussed and to be resolved, and then the results of those talks will be expanded to cover the 12 countries.

In this way, the bilateral negotiation is covering the auto sector and agriculture-related sectors.

As a result of such negotiations, the market access could be impacted and the influence will come to not so many few industries or sectors that will be impacted positively from the outcome of the negotiations.

As I said, out of the TPP negotiations, market access could be expanded.

Now, in this possible expansion of market access, there are two meanings or points of significance.

The first one, the TPP deals with the issues including intellectual property, problems associated with the state-owned enterprises and the rule of origin. In other words, the TPP negotiations mean the intent to create rules on trading investment, which is of the 21st century type at a very high level.

That’s the first meaning of TPP negotiations and it will have an important impact on enhanced competitiveness, which will produce positive results for Japan and the U.S. as well as other countries.

The second point of their significance is that once TPP negotiations are concluded then there will be an open outlook toward steps to possibly even further expand the TPP in what could eventually be a free-trade area covering the entire world.

In that sense, we can create a global economic sphere where people, goods and money would circulate very freely.

That will be useful for every single country in the region as well as the Asia-Pacific Region as a whole and for the planet.

To that end, it is crucially important to have a conclusion on TPA, the Trade-Promotion-Authority, as expeditiously as possible. 

Trust and confidence are vital to the success of Abenomics, but it can be said maybe that there’s a certainly real lack of trust and confidence or maybe understanding from international community about this transformation that Japan is going through. What would you say to those who maybe are hesitant about investing in Japan or partnering with Japanese firms?

Prime Minister Abe said, “Japan is back”. Is that 100% achieved at this moment?

I don’t know, but the important thing is that Japan has now shown that it has begun this movement toward such a state so that one may be able to say that we are back.

What is the proof of the fact that Japan is back? I think it only comes from the day-to-day economic performance.

I think the actual economic performance is the only way to convince other people that Japan is back.

So, the current reality of Japanese economy has to be explained in an easy way to understand, with the power of convincing to the audience out in the international community.

The only tool that we can use is the day-to-day performance of our economy.

It’s not easy to accomplish trust and confidence from the international audience but the important thing is that we achieve results continually.

I mentioned that continuity is the father of success so the government and the business community should all make their respective efforts so that they can really communicate this message.

Strong efforts and yet, speaking respectively, different possessions.

Talking about the activities of the business community, many Japanese companies are on investor relationship tours, because usually Japanese companies close their financial books at the end of March and so now the companies are out on the road.

The activities are very good opportunities for Japanese management to talk about the change that the Japanese economy is going through.

The level of confidence could be compared from last year to this year and they can talk about the awareness that they have regarding the wage increase as well as the introduction of non-executive directors, corporate governance, dividends, and capital policy.

They have opportunities to explain these to foreign investors and take advantage of this exposure.

They can explain to the international investors about what they do and not only to the international audience, but also they can explain their difference to domestic retail investors too.

So, I would say that Japanese management are currently very busy showcasing the situation to investors. 

COMPANY DATABASESee all Database >

FUJISASH CO.,LTD.

Manufacturing, Japan

ABLIC Inc.

Manufacturing, Japan

LEADER DATABASESee all Database >

Katsumi Ishizaka

CEO & President
Fuji Silysia Chemical L.T.D.

TSUTOMU YOSHIDA

Representative Director and President
FUJISASH CO.,LTD.

Nobumasa Ishiai

President and CEO, ABLIC Inc. Senior Managing Executive Officer, MinebeaMitsumi Inc. (Parent Company of ABLIC)
ABLIC Inc.

HIROSHI KOYAMA

MANAGING DIRECTOR
JUJO CHEMICAL CO., LTD.

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