Atsushi Saito's speech from the program TSE’s Saito Offers Strategies to Challenge Global Competition

New York Japan Society
May 28, 2009

Atsushi Saito
Tokyo Stock Exchange Group, Inc.


I am honored to have the privilege of speaking to you today. This is my third speech at the Japan Society and this time I have been invited by Mr. Sakurai, President of the Japan Society, to speak on topics carried over from the panel discussion lead by Dr. Hal Scott of Harvard University, which was held by the Japan Society earlier this spring in Japan.

Today I would like to address three topics.

First, I will address the some problems with measures taken in response to the current crisis. Then I will highlight some issues in corporate governance including, including responses to the crisis. Finally, I would like to express my personal opinion on how Japan should move forward from here.


1. Problems of measures taken in the response to the current crisis

In reaction to the current financial crisis, people on the streets have denounced and criticized market-oriented economies, capitalism, and the U.S. style of economy. However, I doubt that the alternative to the current economic system which these critics demand, would lead us to happiness and stability. It seems to me that, at least, the substance and long history of vigorous arguments by Adam Smith and Hayek, or Marx and Schumpeter, and also Keynes and Friedman have not been properly considered.

If I may dare to say it, I am simply shocked at how easily some arguments about spirit can be made, such as rejection of the pursuit of rationality since the Renaissance and denial of Darwin’s theory of evolution.

Politicians, who exploit the current economic dissatisfaction to strengthen their positions, prevail in any time. And, in this day and age of information technology, the voice of the masses can constitute a kind of authority, and the politicians are prone to rushing toward populism by accommodating the masses.

We regret to see the phenomenon of a degenerated age where there is less discussion about the long-term fundamentals of the economic system, and even academics are willing to change their assertions on a whim in Japan.

Is the market-oriented economy really such a bad system that it has put people in this mired state? As far as I know, Adam Smith stipulated very high moral standards and the establishment of rules for justice as indispensable prerequisites for the existence of the market-oriented economy.

Putting it another way, can we say that the Wall Street activities that ultimately caused the current financial crisis were really the result of the market-oriented economy?

Ironically, the basic factors of the market-oriented economy, such as information disclosure, fairness and honesty, and open market principles, have been trampled upon. I believe that repeated actions of concealment, greed and ignorance are typical examples that arise from anti-market ideology.

President Obama remarked that the market’s “power to generate wealth and expand freedom … can spin out of control” if left unwatched, and that there is a need to strike a balance between a free market and government intervention.

I share his sense of values and agree that America needs to return to its traditional roots and move away from the current mindless focus on money and consumerism.

It seems to me that the current state of the global economy is one in which the gods of the market have been angered and are now exacting severe punishment on Wall Street for having abused market functions solely for its own benefit. In this regard, it seems that market mechanisms are indeed working.

We cannot deny that there were a small numbers of mammonists or dogmatists who praised the almighty power of the market while belittling the function of governments.

However, many pioneers have noted that modern corporate organizations that have emerged since the 19th century are social entities based on the idea that these entities are bound not only by shareholders but also to a variety of stakeholders.

Therefore, operations conducted by corporations as private entities are naturally considered to be governed by the state, as they are deemed to be social entities. In a sense, it is obvious that the idea of state capitalism is affirmed, if only partially.

At least, Japanese society has such an awareness and culture, and when looking at the policies of the Obama administration, there seems to be a signal of changing direction toward state capitalism.

As President Obama mentioned in his inauguration speech, to return not to “... the path for the faint-hearted — for those who prefer leisure over work, or seek only the pleasures of riches and fame.”, but rather to that of “… the risk-takers, the doers, the makers of things — some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.”

I gave the following opening address in the presence of many members of staff and market participants before the opening of the first trading session of this year on January 5th.

“In addition to finance and the economy, there are major concerns which are threatening the sustainability of the human race and the Earth, including global warming, lack of resources and energy, and shortages of food and water, to name a few. Furthermore, we have problems that have accumulated that are peculiar to Japan, such as a declining birth rate and growing proportion of elderly people, as well as issues with our pension plan, medicare, and fiscal deficit.

Since these problems are tightly coupled with each other in a very complex system, they cannot be resolved so easily. However, having said that, there is a danger that we may found ourselves overwhelmed and trapped by inaction, and may loose the power to discover a way out from these difficulties.

While we may need to accept some partial correction of our sense of values and ethics which have arisen in the world during the last 30 years, we should also strive to establish appropriate policies based on a firm belief that economic efficiency assures an equality of social position and equal opportunities across society, while assuring that we prevent economic freedom from threatening an individual’s right to their own way of life.

In other words, we need to stop the emergence of the idea that, if a threat of crisis, a fear of unemployment or an economic sacrifice by the general public, can be however temporarily kept away from us, that even the market-oriented economy based on freedom and equality can be sacrificed.

I believe that Japan has the power and an ability to create a well-disciplined new capitalist society where both freedom and equality are firmly secured.

We must not return to the failures of the last century, of selfish fights among controlled and totalitarian nations.

Fortunately, Japan is a unique country in that it still has a tremendous amount of money which maintained in household savings accounts, despite the credit crunch that has spread all over the world. The time has come when the preparedness of thrift and savings by the Japanese people is working effectively and successfully.

I am confident that the role of the financial capital markets will again be recognized as contributing to the accumulation of individuals’ assets through the supply and circulation of healthy industrial capital.

Japan must overcome the harsh conditions of its shrinking population and an ageing society through restructuring toward a larger government to some extent.

For the last 20 years, we have advocated and explored ways to advance ourselves beyond our current industrialized society which is heavily dependent on its export dominated industrial structure. Ironically, looking at our GDP in the last 10 years, where structural reform has been lauded every so often, the ratio of exports to the GDP has grown from around 8% to 18%.

I do not deny that products made in and exported from Japan, constructed in large industrial plants utilizing advanced technologies, have claimed a certain global competitiveness and brought about national prosperity. However, if we carefully examine this structure, it is easy to see that it cannot be sustained in the future.

Most Japanese industrial products have flowed indirectly through China, or directly from Japan to the U.S. consumer market which has ballooned to 10 trillion US dollars.

The foreign currencies, essentially US Dollars, earned through this external trade are converted to Japanese Yen in Japan. Thus, the interest rates in Japan did not rise due to abundant domestic liquidity.

On the other hand, from the perspective of the U.S., while it was accumulating a huge current account deficit, the people of the U.S. essentially ended up not paying a single cent to buy products from the world. However, it is also a fact that because their US dollars became someone else’s US dollars and then were returned here via foreign investment in the U.S., the U.S. subsequently became a debt-ridden country.

The resulting phenomenon is, while the current account deficit of the U.S. reached 6% of GDP and the savings rate remained at zero, the people of the U.S. were still able to buy houses and consumer goods as they wished, and at the same time, Japanese and Chinese foreign exchange reserves rose to one or even two trillion US dollars.

The global economies equilibrated on this unsteady and abnormal balance. This balance collapsed with the current credit crunch. I guess that having consumed voraciously while being supported by lending from foreign countries, the U.S. must now face challenges such as shoring up its current account balance and restoring its saving rate and eventually its spending power will be cut significantly.


2. Corporate Governance

Now, moving to the next topic, I would like to touch upon an issue of corporate governance that will probably be of hot debate in both Japan and the U.S.

Ideally, corporate managers all over the world have strong morals and a sense of mission, and hold a strong conviction to the idea that “the raison d’etre of a corporation lies in its contribution to society as a whole, and that human selfishness should be restrained through our sense of duty for the good of society”. This, however, is not how things are happening in the real world.

The reality is that corporate governance can be done properly by placing corporate managers under someone’s supervision, having authorities regulate them, or in some cases, subjecting them to punishment.

Since the current crisis, the idea of morals, self-control and honorable poverty peculiar to Japan’s culture has been attracting people’s attention in Japan. In a sense, it means that fundamental capability for governance arises from the company’s going concern value.

According to a study by Professor Yanai of Waseda University, there are a total of 3000 companies that were established more than 200 years ago in the major European countries. In Japan alone, over 100,000 companies have a history of more than 100 years, and further, surprisingly, 3000 companies have over 200 years of history.

As a result of strict admonition against the business practice of maximizing its own profit at the cost of the market or expanding operations unreasonably by riding on the waves of transient booms, these corporations have endured through the years by quietly, but simply, maintaining the quality of their products and gaining the trust of their customers.

These companies have continued to survive due to the fact that, the “Guiding precepts of family” have been at work. These precepts are, with some exceptions, mostly family teachings. Although these may have highly exclusive aspects, this system has worked based on the fact that the companies’ insiders traditionally monitor corporate responsibilities and the manner of corporate management.

The majority of these “guiding precepts of family” has warned of the greedy pursuit of profit, and embraces the aesthetic of the nobility of virtue in human beings through self-discipline. It can be said that they sought a more spiritual feeling of satisfaction than Western civilization.

In contrast, for modern companies which have sprung up as the result of business expansion, the Anglo-American way to enhance corporate ethics has been to utilize external parties known as shareholders. A common evaluation standard becomes necessary for external parties to easily understand, and since the largest issue for the company is “profit”, the responsibility of corporate management is clearly expressed in the words “maximization of profits”.

While this is a difficult issue, there is a reason why we feel a need for third-party monitoring or shareholders’ monitoring or a certain extent of disciplinary intervention by regulatory authorities for listed companies.

In the history of Western countries, ever since the Renaissance, mankind has achieved today’s progress through a process of denouncing irrationality and non-scientific approaches, and pursuing rationality and truth by relying on the power of the natural sciences.

In that process, there was a continuous discussion of how the state of economies and corporate management should be and at the same time we tried to pursue the best method to evaluate the real value of companies and to maintain a rationalistic economy. However, it seems that the world has grown somewhat tired of this and instead craves some form of irrationality.

There is already a movement in the global markets to throw out, even if temporarily, the world of rationality that has been built up over its long history, in a bid to avoid the current crisis.

Increasing exemptions from mark-to-market accounting principles made the real difficulties of the financial crisis indistinct, and massive amounts of non-performing assets are being unloaded to external bodies known as SIVs in order to expunge them temporarily from company balance sheets, but no one dares to evaluate these assets.

Just as if they found a rod to hold on to in swift rapids, the world stock prices have started to rebound. The market is now trying to find a new stability while no one criticizes the enormously ballooned balance sheets of the central banks and as if currencies have not been damaged.

It might be a case of “There’s nothing to be afraid of if everyone crosses at a red light together”, but there is still a chance that someone may get run over. If we are not careful, we might end up paying for more than we thought. Our generation must perceive, within good reason, that the continued use of camphor injections or heart stimulants to alleviate the hardships of the crisis will eventually cause us to be overwhelmed by the inflation related pain of rising interest rates.


3. New Way Forward for Japan

In the future, if we cannot rely on abnormal and unsound over-consumption in the U.S., we will need to find new markets of demand. One policy might be to rouse domestic demand in Japan and an alternative would be to utilize Asia’s economic growth.

While the GDP growth forecasts of developed countries from 2009 to 2010 are all negative, the economies of China, of course, but also India, the Philippines, and Indonesia are expected to grow by about 2% to nearly 7%. In addition to improved literacy rates, their saving rates and foreign exchange reserves have reached considerably higher levels thanks to lessons learned from the Asian crisis.

Consumer demands in these markets are unlike those artificially-created secondary or tertiary demands in Europe, the U.S. and Japanese markets. These are instead primary demands of wishing to own items such as that first television set, car, washing machine and refrigerator, and we expect these demands will remain steady over the long term.

By investing Japanese capital in Asian countries and encouraging their production and consumption, we can prevent the Japanese Yen from skyrocketing and maintain a certain level of exports from Japan.

Further, above all, the Japanese Yen with its relatively improved purchasing power should not all be invested in U.S. bonds, but should be used toward the betterment of the quality of life of Japanese people.

In fact, it is Japan where measures are needed to stimulate demand for new housing, and drastic investment commitments are needed in the fields of medicare, environment and education, as well as policies to nurture the growth of new industries. Japan has already amassed considerable technologies in the field of environmental industries such as solar energy, nuclear power energy, development of low-carbon emission automobiles, and water-purification technologies, as advocated by President Obama, and this will probably be Japan’s most promising industrial field.

It is said that, of the total financial assets held by people above the age of 60, 150 trillion yen are excessive savings. By utilizing the tax system to transfer this to the young working population, I think we will be able to become a mature yet growing nation with a secure safety net.

With that, I conclude my thoughts on the current crisis.

Thank you for your attention today.