Addressing international business leaders at the World Economic Forum (WEF) East Asia Economic Summit, Heizo Takenaka, Minister for Economic and Fiscal Policy of Japan, spoke passionately about the new wave of reforms the Koizumi government is in the process of implementing to stabilize the Japanese economy.

“I want to congratulate the WEF on behalf of all of the delegates here in this room, for taking the initiative to invite to this meeting probably the first politician in the last decade in Japan who has had major, major responsibilities, who can engage and will engage in a frank, open, direct discussion on these key economic issues,” said Kenneth S. Courtis, Vice Chairman Asia of Goldman Sachs in Japan.

Over the last 10 years, the Japanese government has attempted various different economic policies in hopes of stimulating growth, but to no avail. “Our economy was not revitalized,” Takenaka said. “We often use the term lost decade. The average growth rate in the 1990s was a little higher than one percent. This can be compared with the growth rate in the 1980s, higher than four percent.”

The failure of the Japanese economy to regain the momentum of the 1980s is due to the inadequacy of the traditional levels of economic policy that were attempted by previous governments. But since its formation in April of this year, the Koizumi government has moved beyond these traditional policies toward addressing and implementing much needed economic and structural reforms.

“At the beginning of the year we had a very drastic administrative reform focusing on the central ministry agency system,” Takenaka said to participants at the World Economic Forum East Asia Economic Summit 2001. “Before that we had 22 government agencies, now these 22 ministries have been integrated into 13 ministries.”

The end result of the administrative reform was the creation of a new cabinet office consisting of the Council on Economic and Fiscal Policy board, which Takenaka now heads. With a mandate to assist and support the prime minister, Takenaka said that Koizumi in effect has his own machine to realize his policy. “In a sense, Koizumi is a very lucky person—he is the very first prime minister who can make use of this machine system,” he said. “Through lively discussion on this council, we are now conducting a new type of reform policy.”

Takenaka said that the government was looking at policy measures to strengthen the supply side of their economy. Traditionally the Japanese information technology industries and the automobile industries have been characterized as productive, efficient, and globally competitive. Other sectors, namely the agricultural and banking sectors, are characterized as low productivity, government regulated sectors.

“But so far, under very strong influence of competitive industries, the total economic performance of Japan has been kept well. Domestic transfer from the competitive to inefficient sector also created equalization of people’s income level,” he said.

However, competitiveness in these sectors is now to declining, and some companies have began shifting their production basis overseas, especially to China. Takenaka said that this has brought about a loss in people’s confidence for the future, and has in turn weakened private consumption in general. The solution to this problem would be, he said, to strengthen the supply side of the economy.

As for the total process of structural reform, the Koizumi government published its blue-print, entitled “Basic policies for micro-economic management and structural reform,” in June of this year and a very specific timetable indicating when policies will be implemented. Phase two is to now work to realize more fundamental institutional reforms, like pension system reform, tax system reform, and budget system reform, through new legislation. “The second stage of reform will be the core part of the Koizumi policy and also a tougher process to be implemented,” said Takenaka.

Another problem is the non performing loans that plague the Japanese banking industry. Two policies are being implemented to alleviate the problem, that is, providing some additional incentives for banks to accelerate write-offs of the non performing loans and creating a new scheme in which reconstruction of heavily indebted businesses become much easier. “Non performing loans are a serious problem, but this is indicating some companies, some business sectors are suffering from heavy debt,” he said. “I believe this will have a very constructive impact on the rehabilitation of the Japanese economy.”

Japanese consumer prices have decreased for two consecutive years. The Japanese economy is in a serious situation of so-called deflation, shrinking price phenomenon. To halt this trend, Takenaka said that cooperation between the government and the central bank is needed.

“Now the government is supposed to promote de-regulation so that additional demand is created. A central bank is expected to provide enough liquidity for the market. Although this is a new challenge for the Japanese government, we are going to promote this kind of new policy mix between the government and central bank,” he said.

“Based upon this effort, I believe we will be able to reconstruct the Japanese economy,” said Takenaka. “For the coming two to three years will in itself be an intensive adjustment period. But after that I believe we will be able to go back to normal development growth path.”