Economic Policies of the Koizumi Cabinet

Yotaro KOBAYASHI (Chairman of the Board, Fuji Xerox Co., Ltd., and Chairman, Keizai Doyukai)

The recent instability in stock prices reflects market uncertainty regarding the recovery of the Japanese economy. This uncertainty has in its background growing concern for the unsure prospects of structural reform. In particular, there have been strong expressions of anxiety concerning the management of financial institutions. Consequently, the shares of certain banks have come under speculative selling pressures.

Keizai Doyukai, which I am serving as chairman, believes that the capitalization of Japan's major banks has already deteriorated to the point where the infusion of additional public funds is unavoidable. In their public announcements, these major banks claim to have capital adequacy ratios in the 10% to 11% range. However, considering the shortage in reserves for bad loans and eliminating deferred assets with no liquidation value, real capital adequacy ratios are, it is feared, at dangerously low levels.

Keeping in mind the expectations that stock prices will decline further while non-performing loans continue to expand, we cannot help but say that the foundations of Japan's financial system are now quite fragile. Therefore, Keizai Doyukai has been advocating an infusion of public funds of a considerable scale to a wide range of financial institutions in order to restore the risk-taking capabilities of financial institutions.

On October 30, the government announced its "Comprehensive Measures to Accelerate Reform," an integrated program for countering deflation. This program identifies several important policy directions concerning the problem of non-performing loans. First, it prescribes a more rigorous assessment of bank assets. Second, it calls for the infusion of public funds when necessary. Third, it seeks higher standards of corporate governance for banks. Finally, the program establishes a goal for reducing the ratio of non-performing loans of major banks to approximately one-half of current levels by fiscal 2004.

Basically, I am prepared to give positive marks to the recent decisions as I view the program to be a first step towards the implementation of policies which are clearly committed to bidding farewell to the postponement of the disposal of non-performing loans. Restoring the risk-taking capabilities of financial institutions and stabilizing the financial system are the two musts in restarting the metabolic mechanisms of the Japanese economy.

New capital infusion will enable financial institutions to have room for developing new management models based on internal efforts aimed at improving profitability despite very rigorous supervision by the Financial Services Agency. Management should then be held accountable for the results therefrom. On its part, the government should urge financial institutions to strengthen corporate governance while avoiding specific intervention in management.

There is a widely held view that bank's management, who have allowed all this time high salary scales among other things, should leave if and when a new public capital is brought in. How management takes responsibility can differ from one bank to the next. The important thing is to establish clear management goals indicating "what will be done by when, and who will be held responsible." By accepting responsibility for the outcome of these efforts, banks would be able to gain the support of stakeholders and of society. Forcing individual managers to take responsibility by demanding their resignation immediately upon the infusion of public funds risks "favoring form over substance."

Among the announced countermeasures to deflation, the government has called for the creation of the Industrial Revitalization Corporation. Working alongside the Resolution and Collection Corporation which focuses on the collection of claims, the Industrial Revitalization Corporation would function to receive and to revive enterprises deemed to be viable.

The most important challenge facing the Industrial Revitalization Corporation would be how to determine whether a troubled enterprise is actually viable. There is some criticism saying that it is inappropriate for government to hold powers of life and death over individual enterprises. Another danger is that the Industrial Revitalization Corporation may be transformed into the "Industrial Protection Corporation" which would simply put non-performing loans in cold storage.

It is crucially important for the Industrial Revitalization Corporation to develop a framework for corporate restoration and revival based squarely on market principles. For this purpose, it should be prepared to make effective use of the know-how developed by private funds for corporate recovery. Japan has expended far too much time and manpower on discussing how to remove non-performing loans from the balance sheets. It is now time to concentrate our time and manpower on the actual task of revival.

Another serious challenge facing the Japanese economy is the problem of unemployment. Employment conditions have become increasingly severe in specific segments. These include regional industries which are highly dependent on public works investments, and small and medium-sized enterprises which are exposed to the full impact of the restructuring of major corporations and the credit crunch and credit withdrawal of banks.

The government has indicated that it will compile a supplementary budget for fiscal 2002 featuring 4.2 trillion yen of additional expenditures focused on urban revitalization and other public works investments, and employment-related safety net measures. Among these projected outlays, the bolstering of employment-related safety net measures is of crucial significance. While pain is unavoidable in structural reform, the government must prove its preparedness to respond to such pain. The effective and maximum use of private-sector know-how is also of vital importance in developing employment measures. Therefore, steps should be taken to promote deregulation and private-sector participation in job placement and counseling services.

The basic policy stance of the Koizumi Cabinet has been expressed in such mottoes as "No growth without reform," and "No fear, no hesitation, and no constraint." We call on Prime Minister Koizumi to stay the course and not allow these basic policies and directions to be changed. We also hope that Prime Minister Koizumi will turn to the nation to communicate and to explain in his own words his understanding and judgment of the current conditions. Unfortunately, we find the policy-making process of the Koizumi Cabinet to be lacking in this respect. Because of this shortcoming, the public has developed an impression of Mr. Koizumi as being an abrupt and self-righteous leader. In turn, this perception has amplified the public's sense of uncertainty and anxiety.

Under the continued leadership of Prime Minister Koizumi, we look forward to an unified cabinet, with all members acting as committed players on the "Koizumi team" to accelerate the process of structural reform and to bring about the revitalization of the Japanese economy.