Lessons Learned: Charting a Way Out of the Current Economic Crisis

November 17, 2008

Speaker:
His Excellency Ichiro Fujisaki, Ambassador Extraordinary and Plenipotentiary of Japan to the United States of America

Presider:
Gregory Boyko, Chairman, Hartford Life Insurance, K.K.; Director, Japan Society

Japanese Ambassador to the U.S. Ichiro Fujisaki spoke on what to do to find a way out of the global financial crisis, and reflected on Japan's stature and role in the world economy.

During the past 10 years or so, "world stability was kept up because growth was there, Ambassador Fujisaki said. "All the developing countries, including emerging countries, were developing so quickly" that "it gave a sense of stability." But "now we no longer can take that for granted. That is the biggest problem, how to cope with this."

What's needed first of all is to restore confidence, and here "Japan has some experience as you know, good and bad," he said. "We are seeing credit crunches, but this is not brought about by lack of funds. It's brought about by the fact that banks can no longer trust each other. It's rather difficult to say in front of some bankers here, but I'd say that."

In Japan in the 1990s it was hard to find out which were the nonperforming loans and how big they were, "because banks, of course ,did not want to be identified that they had so much in nonperforming loans. And also people, just like here, were not so happy to extend lending hands to bankers. Golden parachuting didn't exist in Japan," but even so, "bankers are elitist people, and ordinary people were not feeling much sympathy towards bankers."

And "there was some hesitance on the bankers' side as well" when it came to accepting public funds to shore up their capital, he pointed out. "So the only way they were able to receive was that the better-performing banks were persuaded to receive as well."

"It's a bit like the Ali Baba story from the Arabian Nights, when someone was hidden in the pot" and "you would put a cross on all the pots, so that you would not know which one Ali Baba was in."

The government eventually injected about $500 billion into the country's banks, "quite sizable in view of the fact that Japanese GDP is one-third of that of the United States," Ambassador Fujisaki said. This included $100 billion to buy up bad loans, $120 billion to new bank capital and $100 billion to insure deposits; nonperforming loans on the banks' books shrank from a high of 8 percent to 2 percent today.

"One defect was that, as you know very well, it took too long a time. We say 'lost decade' but really it was too long," he said. "We commend that the U.S. has come up with an emergency economic package very quickly" after the G7 finance ministers' meeting in October.

To compare America and Japan is by no means to see identical economic maladies, the ambassador said. Levels of leverage are much lower in Japan. There is no domestic mortgage securitization industry, and consequently Japanese financial institutions have avoided the excesses of American subprime lending.

Yet despite these differences, in his view the remedy for the U.S. is the very same remedy that Japan has come to embrace: "You have to have predictability, you have to have transparency, you have to have fairness, you have to have speed."

Labeling today's troubles as "really difficult" or "once in a century" is unhelpful, he added. "Maybe I'm using words that are a little too strong--but I think that this is the first message of the restoration of confidence," that America needs to avoid doomsday language and to focus on "a road map to get out of the recession."

As he makes his rounds in Washington, Ambassador Fujisaki said, he brings with him a chart that measures the contributions of Japan and other major countries to the world economy along several dimensions, ranging from energy and food self-sufficiency to contributions to the UN budget, overseas development aid, Iraq and Afghanistan reconstruction, R&D expenditures and patent applications.

The data in the chart reflect Japan's relative poverty in terms of natural resources, he said. The average Japanese farm is 1.7 hectares, or about 4.2 acres; the average EU farm is 17 hectares, and the average American farm, 172. Ignoring nuclear power, Japan's energy self-sufficiency rate is 4 percent, versus 61 percent for the U.S., 87 percent for the UK, 27 percent for Germany, 8 percent for France. "If you add nuclear, you would add 10 percentage points to each country except for France, for which you would add 40 percentage points."

Yet "thanks to our business people, our GDP is still second in the world" and ranks close to that in Europe and the U.S. on a per-capita basis, the ambassador said.

And "what are we doing with this gross domestic product?" he asked. Japan is the second-largest contributor to the UN budget and gives the UN as much as the UK, France, Russia and China combined. In aggregate over the past 10 years, Japan ranks second in overseas development aid despite recent cuts in Japanese government spending.

Fifteen years ago, trade with Japan accounted for 60 percent of the U.S. trade deficit, but that is down to 10 percent today. "Japanese companies have transformed from exporting industries to investing industries; we are creating about 600,000 jobs directly" in the U.S. today.

In addressing the current crisis it's critical not only to boost confidence, but also to try to stay in control, the ambassador continued. To explain his point, he called on his experience studying for a boating license while serving in Geneva not long ago.

When it comes to boating in a river, there are several options, each with its own risks, he said. If you try to go exactly with the flow of the water, "the problem is you don't know where: it's the stream that decides the direction" and the speed. If you try to resist the stream at every moment, "then you're sure to be left behind the stream; not only that, but you could be toppled as well." If you paddle fast to get ahead of the stream, "this gives you the best speed," but again, the direction is not yours to determine.

The best option "is to try to stay in control. Sometimes you go on the stream; sometimes you resist it and try to go to an exact point at the exact time where you would like to go. This is what we need to always keep in mind."

Thus "Japan has been saying that we should try to introduce a bit of more supervisory element in the IMF, we have to have an early-warning mechanism, we have to have a more regional rating system, we have to have the accounting system adjusted as well--but these are adjustments," he emphasized. "It's not a scrap and build. We need to fortify them as necessary but not abandon them as some leaders in Europe or the emerging countries are saying."

In the environmental arena, "we are now trying to help developing countries, including China, India and other countries, not to follow our steps. We have not come to this stage very smoothly. We were hard hit by pollution" in the 1960s and 1970s, "and we don't want other countries to follow."

"Companies that have to worry about the bread of tomorrow cannot really be so mindful, so it's the responsibility of the government to really work hard," the ambassador concluded. In Switzerland, "in 150 years, the glaciers diminished by 50 percent, but out of that 50 percent, 15 percent was reduced in the last 15 years. This is a real crisis and we really have to work together, Japan and the U.S., and I think we are really ready to work with you."


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Presider Gregory Boyko of The Hartford began the Q&A:

How do you see protectionist policies playing out in the coming year, given the current financial crisis?

Before 1994, if a single World Trade Organization member country wanted to block the submission of a trade complaint to the WTO, it was blocked, Ambassador Fujisaki commented. With the mid-1990s reforms this has turned around 180 degrees: now, if one member country wants to make the complaint, it gets submitted. So "of course there could be some protectionist movements as well, but I think we have a better legal framework than before."

Members of the audience joined in:

Would you agree that Japan's creative industries like anime and manga, which include ordinary people who create their own works and market them through digital media, can boost small businesses in these times?

"In time of crisis, those who are most vulnerable are developing countries and small industries in developed countries," said Mr. Fujisaki. Within the framework of WTO subsidy rules, "I think these small industries have to be helped."

"As for the anime industries, yes, they are very important industries. This is not your question, but after I came here, there was a big conference of otaku in Baltimore," the Otakon conference, which the ambassador attended; "I saw some in Japan, but all these American people, really in that, was something very encouraging and I really liked it as well."

How should the U.S. rescue of the auto companies play out?

"Japanese companies here in the U.S. are American companies already, so these companies should be treated as American companies," the ambassador said.

Japanese automakers "have been in a way fortunate," he added, because when Senator Muskie of Maine proposed tough auto-emissions rules in the mid-1970s, "Congress wasn't ready to accept--but because pollution was so severe in Japan, in 1978 the Japanese government introduced a law to cut down NOx" from cars by 90 percent.

"It was really the Muskie law, ahead of the U.S." by some 15 years, he said. "And that gave a lot of advantage to Japanese companies, which resisted a lot, at the beginning, the introduction" of these greenhouse-gas emissions limits, "but in the end it paid off."

Subsidiaries of Japanese automakers are already making low-emissions vehicles in their American plants, Ambassador Fujisaki added. If "GM or Ford or Chrysler are trying to make them, I think that these are very welcome, and if there's anything that Japanese companies can be of help, I think they'll be happy to extend their help as well."

"Of course there's a competition between the companies. There are some things that cannot be shared. But all in all I think it's good that environment-friendly cars are designed and used, so I think companies should help each other on that as well."

The Bush administration rejected the Kyoto Protocol. Do you anticipate that Obama as president will sign it, and what steps are you taking to ensure that he will do so?

"We are now in a stage of designing post-Kyoto" principles, Ambassador Fujisaki said. "We don't expect the U.S. to join Kyoto. Well, if they can, it's okay, but what I think we would like to see is that the U.S. join in the effort to come up with a fair post-Kyoto framework."

"If the U.S. and China are not in, that's already 40 percent" of global CO2 emissions as of 2006. "We can't have a system without the U.S. or China or India," a system with "all these major countries against it."

With President-elect Obama saying that he'll shift American resources from Iraq to Afghanistan, will Japan be asked to put up a greater share of the burden in reconstructing Afghanistan?

A greater priority will be extending Japan's Indian Ocean program to refuel ships engaged in anti-terrorism work, which is one of two first-priority efforts of the Aso cabinet, the other being Japan's economic stimulus program, the ambassador responded. Given DPJ opposition, it won't be easy to get the extension passed, but this has to be dealt with first before other aid issues are taken up.

In the U.S. a wide segment of Americans are angry at Wall Street for getting us into the crisis that we're in now. Is there a similar sentiment among Japanese, and if so, how will it affect the relationship between our two countries?

"This is a rather difficult question, not because it's delicate politically or anything, but because some of us blame the U.S. for spending too much and not making enough reserves. But at the same time, it is true that China, Japan and many other countries have been able to export and invest because these people were spending. So everything is balance. You cannot just have a one-handed discussion."

***

In closing remarks, Ambassador Fujisaki said:

"My belief--I've been saying this for 10 years, and I said it here as well, in this room--is that in U.S.-Japan relations, we have to keep in mind three no's."

"One: no politicization. You should not over-politicize issues. You should try to find it early, identify the problem and try to solve it rather professionally as possible."

"Two: no surprises. There's no pleasant surprise between two countries. It's an unpleasant surprise if there's a surprise, and people are offended. We still cannot forget the Kissinger visit to China--after 40 years. We should not surprise each other."

"Three: no taking for granted. Often, Americans think that you are helping Japan, you are guarding Japan; Japanese people think oh, we are extending the biggest host nation support," providing bases for U.S. military forces and so forth.

"Both are right and both are wrong."

"I'm always saying that it's a bit like a relationship between a couple. The wife thinks she's doing everything at home, the husband thinks oh I'm doing everything, and both sides feel a little uncomfortable."

"Both are wrong. We have to think that the other side is really doing a lot for you, and have to appreciate that."

--Katherine Hyde