AMB. FOLEY'S SPEECH AT FOREIGN CORRESPONDENTS' CLUB OF JAPAN

[USIA]

USIS Washington File

20 January 1998

TEXT: AMB. FOLEY'S SPEECH AT FOREIGN CORRESPONDENTS' CLUB OF JAPAN

(Economic recovery led by domestic demand needed in Japan) (3200)

Tokyo -- The most effective contribution that Japan can make to Asian
recovery is the achievement of vigorous economic recovery in Japan
based on domestic demand-led growth, according to Thomas S. Foley,
U.S. Ambassador to Japan.

During a speech to the Foreign Correspondents' Club of Japan January
20, Foley said the economic policies required to bolster confidence
and restore growth in Japan are a moving target, and the United States
hopes the Japanese government will "take steps sufficient to bring
about a vigorous economic recovery led by domestic demand."

Foley said measures to strengthen the Japanese financial system are
also critical to restoring growth in Japan and confidence in the
region, but in his own experience, he thinks it's important to "move
quickly to close truly insolvent institutions, while at the same time
protecting depositors and restoring confidence in the financial
system."

"In addition to achieving economic recovery, Japan has the challenge
of bringing about more vigorous and sustained growth. Creating a
stronger and more dynamic financial system is a key part of reaching
this goal," Foley said. He also said that thorough and fundamental
deregulation is also key to unleashing the innovative potential of a
modern economy, because deregulation does not just benefit companies
trying to enter the Japanese market, they benefit the Japanese
companies and consumers even more.

"My government urges Japan to deregulate because we see Japanese
regulations as forestalling access to its market by foreign firms.
When a potential trader is barred by unnecessary regulations or
defeated by uncompetitive practices it is not only the trader who
suffers. Consumers and that market and ultimately the entire
international trading system also bear the consequences," Foley said.

Foley also said the Economic Planning Agency estimates that Japan's
"failure to deregulate costs Japan over 1 percent in GDP growth
annually. A 1 percent increase in GDP in the world's second largest
economy translates into a lot of missed investment opportunities and a
lot of jobs which were not created," he said.

Following is the text of Ambassador Foley's speech, as delivered:

(begin text)

Ambassador Thomas S. Foley's Speech
to the Foreign Correspondents' Club of Japan

Tokyo, Japan
January 20, 1998

I am very pleased to be before you this afternoon. I learned that when
my predecessor Fritz Mondale spoke to you just as he was departing
Japan a little over a year ago, he made a public confession that he
actually liked reporters. He said that as man in public life, he had
made it his practice to read and listen to those whose job it is to
report and comment on the news. "American democracy could not
survive," he said, "and America could not grow and progress without a
free and skeptical press." That is true of Japan and it is true of any
democracy in the world.

I have been on the job here for less than two months and I can report
to you that I find it as stimulating a job as I have ever had. I also
consider it an honor to wear the mantle of such dedicated stewards of
the U.S.-Japan relationship as Mike Mansfield, Michael Armacost and
Fritz Mondale. I can report to you that Mike Mansfield at 94 years old
is as bright and as active as he ever was. He is a great example of
what one can achieve in later life -- along with President Bush
jumping out of airplanes and Senator Glenn about to go into space
again. Mike Mansfield is a tremendous example of good living and a
clean heart.

As I begin my own term that there is no shortage of challenges in the
U.S.-Japan relationship. It was almost a hundred and forty years ago
that Commodore Perry landed in Japan, so our relationship is a long
one. Our relationship has been based primarily in recent years on a
very strong security relationship. Another area of U.S. Japan
relations that I think needs emphasizing is the important Common
Agenda that Prime Minister Miyazawa and President Clinton undertook in
1993 when the President visited Japan. The concept of the U.S. and
Japan working together, as the world's two most advanced science and
technology centers and certainly the two largest economies in the
world, to make a massive contribution to the improvement of economic
development, the environment and to medical science is something I
think is enormously exciting. The economic relationship, fundamental
as it is and interconnected in myriad ways, is now marked by issues
that are macroeconomic as well as financial. This has become
particularly evident in the last six months, as financial market
crises have affected several East Asian countries.

We recognize and appreciate the contributions that Japan has made to
financial stabilization programs in this region, and the close
cooperation that we have enjoyed with the Japanese authorities in our
responses to the Asian financial crisis. But as we have said, and as
the Prime Minister himself emphasized in Kuala Lumpur, the most
effective contribution that Japan can make to Asian recovery is the
achievement of vigorous economic recovery in Japan based on domestic
demand-led growth.

We welcomed and applauded the Prime Minister's decision to implement a
2 trillion cut in personal income taxes, along with the other tax and
budgetary measures that were announced in December. These are
important steps towards boosting Japanese domestic demand. But we must
recognize that the economic policies required to bolster confidence
and restore growth are a moving target, and we hope that the Japanese
government will take steps sufficient to bring about a vigorous
economic recovery led by domestic demand.

Measures to strengthen the Japanese financial system are also critical
to restoring growth in Japan and confidence in the region. The
proposals by the LDP, including the strengthening of the Deposit
Insurance Corporation, are constructive steps. Our own experience, and
I think the experience of other countries, indicates that it is
important to move quickly to close truly insolvent institutions, while
at the same time protecting depositors and restoring confidence in the
financial system.

In addition to achieving economic recovery, Japan has the challenge of
bringing about more vigorous and sustained growth. Creating a stronger
and more dynamic financial system is a key part of reaching this goal.
Thorough and fundamental deregulation is also key to unleashing the
innovative potential of a modern economy, and it is this longer-term
issue on which I want to focus today.

Deregulation does not just benefit companies trying to enter the
Japanese market. Japanese companies and consumers will benefit even
more. The cellular phone agreement is an excellent example of the
positive results of opening a protected market to competition. In just
three years, cellular phone subscribers increased by 85 percent.
American and Japanese equipment suppliers saw major increases in their
sales. The greatest beneficiaries, however, were Japanese consumers
who enjoyed dramatic reductions in the prices of cellular phones and
service.

In a speech on the progress of Japanese deregulation to the Reform
Club in New York last year, Masaya Miyoshi, President of the Keizai
Koho Center, cited statistics from Japan's Economic Planning Agency
which demonstrated that deregulatory measures in the fields of
distribution and telecommunications between 1990 and 1995 generated a
net annual increase of 7.3 trillion yen in aggregate demand. This is
the equivalent of 1.6 percent of nominal GDP of one year. Now that's a
significant demonstration of the positive economic impact of
deregulation. This considerable increase occurred during a period when
the Japanese economy was still coping with the aftereffects of the
burst bubble.

What accounts for the reluctance to enact the changes which will
provide Japanese consumers and manufacturers so many benefits?
Japanese decision-making which rests so heavily on the need to find
consensus, is one of the culprits. The search for consensus can
frustrate deregulation because of the need to gain support from the
same bureaucratic and business sectors of the economy which tend to
resist change. In his New York speech, President Miyoshi characterized
the Japanese system of capitalism as suffering from "systemic
fatigue," but he also acknowledged that the influence of what he
termed a deeply rooted "traditional conservatism" was slowing
regulatory reform.

It is not just hard for Japan to change. It is hard for any society to
shift from the old, comfortable way of doing business to a new and
unknown way of doing business. As someone who was in the Congress when
our deregulation issues were being debated, I can attest to the fierce
battles which occurred between those in favor and those opposed.

Deregulation in the United States initially focused on the heavily
regulated transportation industry. In the 1970s, a coalition of
conservatives, liberals, consumer advocates and market-oriented
economists emerged to challenge the regulatory cartels which had grown
up around land and air transport. Air travel was considered an
essential public service so for 40 years the Civil Aeronautics Board
barred the creation of any major new airline. Carriers could fly only
those routes awarded them by the Board. The regulatory agency approved
all fares. And strings were attached to this system for the airlines.
Airlines had to provide service on routes which were unprofitable.
Over time, the airlines became insulated from competition. The
regulated airline industry had little incentive to lower costs. Then,
when costs did rise, the airlines sought price increases and the
regulators resisted. This depressed industry profits which in turn
impeded new investment and perpetuated the high costs and poor
service.

The airline industry's experience with deregulation has been
extensively analyzed and the results are remarkable. A Brookings
Institution study says that the airlines have achieved a 24 percent
decline in costs per unit of output since deregulation in 1978.
Another study estimates that airline fares are now actually 25 percent
lower than they would have been without deregulation. This despite a
45 percent increase in fuel costs! Airlines, freed from the Civil
Aeronautics Board's route restrictions, organized "hub and spoke"
systems, feeding passengers to major transfer points that provided
more connections and more frequent service than before. In 1978, about
14 percent of all passengers had to change airlines to reach their
destinations. By 1995, this figure was reduced to about 1 percent.

The trucking and railroad industries were deregulated at about the
same time as the airlines. Prior to 1980, the Interstate Commerce
Committee reviewed and approved virtually all pricing of interstate
carriage of goods by railroads. That year, the industry was freed to
set its own rates and to determine whether to invest in rolling stock
or dispose of it. Since then, rail freight traffic has increased by 42
percent. A decline in costs plus increases in productivity has
produced a 53 percent decline in inflation-adjusted freight rates.
This in an industry which 20 years ago was considered moribund.

Trucking has seen a similar increase in productivity and decrease in
costs. Trucking rates have dropped by 30 percent adjusted for
inflation. The U.S. Department of Transportation estimates that since
the Motor Carrier Act of 1980 was passed, the savings from lower
freight rates and improved service total approximately 10 billion
dollars a year.

The impetus for deregulating the telecommunications industry was
different from the transportation industry. For railroads, airlines
and trucking, a consensus emerged that regulation was acting as a
barrier to consumer benefit. The AT&T case stems from anti-trust
litigation. When the Justice Department first brought its case against
AT&T in 1974, the company had been treated for years as a natural
monopoly and it controlled almost all U.S. telephone service, local
and long distance, as well as the production and supply of all
telephone equipment used in the United States. The settlement reached
in 1982 resulted in AT&T's divesting itself of all local operating
companies which could provide only local service. However, other firms
could enter the long distance market and compete with AT&T. AT&T in
return was free to enter other electronic businesses such as
computer-related services. The telecommunications industry is a
remarkable example of how deregulation prompted competition and market
access which in turn has spawned the development of whole new
technologies. The deregulation of the telephone-equipment market
resulted in the fax machine becoming ubiquitous. Between 1987 and
1995, sales of fax machines jumped from half a million to 4.2 million.

At the time of the 1982 court order, there were fears that the poor
would lose their phones because local phone rates would rise in
response to the loss of the subsidy provided by the profitable
long-distance service. What happened was that the phone companies
reduced their costs, so phone rates remained stable. By 1995, the
share of U.S. households with phones actually rose from 92 to 94
percent.

Competition was a major spur to laying fiber optic cable. In 1985,
there were only 215,000 kilometers in AT&T's system. AT&T's
competitors, Sprint and MCI, had more. AT&T responded. By 1994, it had
laid 2.09 million kilometers of fiber cable. Analysts say that it was
competition which spurred the major long-distance providers to lay
fiber optic cable on an accelerated timetable. This acceleration, of
course, coincided with the rapid expansion of computer technology and
has allowed the United States to become the most wired nation on the
globe. Electronic commerce is growing rapidly. Today, over 5 percent
of all airline tickets are sold on-line.

I am not arguing that deregulation is painless. It is not. Jobs are
indeed lost in industries where regulation has stifled competition and
protected inefficiency. Since 1980, employment in the railroad
industry has dropped by over half. Some of those jobs were the
clerical jobs required to provide all the forms and tables and
statistical paperwork the regulatory body required! More importantly,
however, deregulation also creates jobs. More people work in the
airline industry today than did when the industry was deregulated in
the late 1970s. And I don't need to tell you how much the
telecommunications industry has expanded since deregulation of the
telephone industry coincided with the computer revolution. If it were
not for the dramatic decrease in long distance charges, would the
Clinton Administration's goal of having every classroom in America
on-line by the year 2000 be a realistic one? I doubt it.

Critics of deregulation also claim that deregulation compromises
safety. Contrary to these claims, and despite dramatic increases in
commercial air traffic, air safety has improved and there has been a
significant reduction in accidents since deregulation. Similarly,
there are fewer accidents per track mile of railroad today then there
were before deregulation. And while trucking has expanded, it is a
safer industry today than it was 17 years ago!

Deregulation is not synonymous with abandoning rules which protect the
public. For example, when the U.S. Food and Drug Administration
announced that it would no longer require that tests for new
prescription drugs be done wholly in the United States, it did not at
the same time abandon scientific testing standards. Similarly, while
the banking industry was liberalized, bank surveillance standards were
strengthened.

The current deregulation debate in the United States involves the
electric power industry. Americans can soon expect to be swamped with
attractive offers to switch from their current energy company to
another power supplier just as they are being bombarded today with
offers from long distance telephone companies.

In just 20 years, what was once seen as a radical policy --
deregulation -- is now viewed as an accepted principle. It is
generally recognized that individual decisions made in a competitive
market are likely to prove more economically efficient than
government's control and regulation of those industries. Market
decisions are likely to encourage efficiency in production,
distribution and pricing as well as spur innovation and employment.

We have found that creating greater access to our domestic market
helps ensure vibrant productivity growth. However, deregulation works
if, and only if, meaningful competition replaces the regulatory
environment. Japan's Large-Scale Retail Store Law is an example of a
regulatory system which impedes productivity increases. The United
States would welcome its repeal, but is wary that local officials may
attempt to impose local regulations which would effectively maintain
restrictions on retail floor space and store location. Deregulation at
the national level should not be an invitation for reregulation at the
local level.

My government urges Japan to deregulate because we see Japanese
regulations as forestalling access to its market by foreign firms.
When a potential trader is barred by unnecessary regulations or
defeated by uncompetitive practices it is not only the trader who
suffers. Consumers and that market and ultimately the entire
international trading system also bear the consequences.

The Economic Planning Agency estimates that Japan's failure to
deregulate costs Japan over 1 percent in GDP growth annually. A 1
percent increase in GDP in the world's second largest economy
translates into a lot of missed investment opportunities and a lot of
jobs which were not created. Recall the results of the cellular phone
agreement. If there were any losers, they were greatly outnumbered by
the winners.

Twenty years ago, the average Japanese household spent over 30 percent
of its income on food. That figure is now 19 percent. Foreign pressure
to lower the barriers and eliminate the rules which kept foreign
agricultural products from Japan is the reason why Japanese families
now have more money for vacations, housing, clothing, education and
hobbies than they had before. And that percentage of income spent on
food continues to drop. Over the past four years, the annual survey of
sixty supermarket items shows that more items show a decrease in price
than an increase. But Japanese food prices could drop even further.
For example, if Japan simplified its plant quarantine system, Japanese
supermarkets could stock more imported fresh produce like lettuce,
apples and nectarines at lower prices.

In his inaugural speech, President Clinton said that the way to create
jobs is to embrace change. I know Japan is a more conservative country
than mine, and that it is wary of radical change. Jobs are needed, new
jobs for the next generation of workers. For several years, Japanese
companies have scaled back their hiring and fewer graduates have found
jobs with Japanese companies, jobs which promise advancement and good
salaries. It must be disheartening for Japanese parents after
considerable sacrifice for their children's education to see the new
graduates faced with bleak job prospects. Japan's young people deserve
an economy which offers them challenging employment which will
contribute to the economic well being of their country in the next
century. And the well-being of Japan is the well-being of the world.

I look forward to hearing from you during my tenure. I am confident I
can benefit from what you say and write. Thank you very much for
listening to what I have had to say.

(end text)