Comprehensive Reforms for Japan's Domestic Demand-led Recovery

Fujio MITARAI (President & CEO, Canon Inc.)

Many people are concerned about the U.S. economy heading for a double-dip recession, but I expect the U.S. economy to head toward recovery around the end of the year, assuming of course that there are no more accounting scandals or terrorist attacks. Personal consumption in the U.S. is strong and individual investors will become more active if confidence in the stock market is restored.

However, the recovery will lack strength since a virtuous cycle, in which rising capital investment boosts employment and translates into higher personal consumption, is unlikely to materialize. Since globalization is driving capital investment overseas, the U.S. economy will quickly lose momentum.

This is bound to affect Japan's export-dependent economy. We can't expect an export-led rebound as long as the U.S. economic recovery lacks strength. I think Japan's economy has hit bottom, but it might languish at lower levels through year-end.

To boost exports, we have to replace existing products with ones that offer more added value and thus create new demand. In our case, new products developed over the past two years account for 60% of sales. This is why our exports to the U.S. did not slow in July and August. Whether exports will underpin Japan's economy depends largely on the ability of Japanese companies to continue to come up with an uninterrupted stream of value-added products.

In order for us to create a domestic demand-led recovery, comprehensive measures to lure defensive consumer sentiment away from savings are imperative. The tax system needs radical reform. The national pension insurance and health insurance systems must also be put on a sounder footing. Unless all these reforms are enacted in a package they will contribute little to an economic recovery. While improving the nation's finances is important, we should aim to do so over a longer term.

Given the circumstances, a complete economic recovery will have to wait three to five years. In the absence of comprehensive measures, the recovery could be delayed even longer, further cooling down consumer sentiment.

Companies should also start thinking about reforming employment systems to ease concerns about job security. Reduced working hours and work sharing are some of the possible options. The government should encourage businesses to offer a variety of employment alternatives.

References:

1."Gaiju danomi no keiki - Honkaku kaifuku saitande 3 – 5 nen," Nihon Keizai Shinbun, August 26, 2002.

2."Recovery distant as exports, confidence continue to slide – Value added products, more consumer spending crucial, Canon chief says," The Nikkei Weekly, September 2, 2002.

3."He put the flash back in Canon – How Fujio Mitari's East-West style revived the company," Business Week, September 16, 2002.