Joi Ito's Web

Joi Ito's conversation with the living web.

We have formed a Japan chapter of Computer Professionals for Social Responsibility. Shinji Yamane, who has been working on this project for quite a while will be the chair. Kazuo Fujimoto will be the secretary and I will be the treasurer initially. I am trying to get CPSR to help me show the technical problems with the National ID program that Japan is trying to implement. We have a local movement protesting the national ID.

I gave a presentation at the RSA Japan 2002 conference. The talk was about privacy. Here is the presentation in pdf format.

I was invited by Yotaro Kobayashi, the chairman of Fuji-Xerox and the Keizaidoyukai to give a speech at the Trilateral Commission about reform in Japan. I didn't know what the Trilateral Commission was when Kobayashi-san called me. A quick google pulled up a lot of rumors about it being a secret society to control the world.

The Trilateral FAQ says:

Is the Trilateral Commission secret?

A. Not at all. Right from the beginning, the Commission's membership list and informational materials on its aims and activities have been available to all free of charge. Each of the Commission's task force reports is publicly available, as is the publication providing extensive coverage of each annual plenary meeting. Information on the Commission's funding and major contributors is also available. The agenda and a list of participants for each plenary meeting are regularly distributed. Press conferences are held during the meetings, and draft task force reports are customarily made available to the press. Only the discussions at the meetings are kept off-the-record,・to encourage frankness and maximize the learning process for members.

The conference was a lot of fun and a great chance to get feedback from some influential people about my thoughts as well as hear frank comments from them about their own thoughts. We had to cross a anti-war picket line in front of the State Department on the way to dinner, but other than that there were no problems.

Following is the text of the speech I gave. The speech was later picked up by the Asian Wall Street Journal. Thanks to David Farber for distributing the speech for feedback on his mailing list before I gave it and thanks to all of the people who helped me edit it.

Japan Reform and Recovery
Panel Comment by Joichi Ito
April 7, 2002
Trilateral Commission Annual Meeting
Washington D.C.

Acknowledgements

On the bus on the way to dinner last night, I overheard someone say, "The panel tomorrow on reform and recovery in Japan should be a short one. Maybe I'll have time for a nap." Well, I don't know about the recovery side, but reform is certainly moving forward. The fact that you have a 35 year old college drop-out entrepreneur instead of a 70 year old banker telling you that Japan is OK is evidence of that.

I would like to briefly describe what I think is going to happen to Japan, where we are now in that process, and what do we do afterwards. I would like to qualify my remarks by saying that I am not an economist or a historian, but I will make up for in honesty what I lack in knowledge and experience.

I believe that the primary problems facing Japan today are a dysfunctional or absent free market, an aging population and an impaired national balance sheet due to excessive and persistent bad debts. I believe the bad debt issue is being thoroughly discussed and considering the fact that it is probably about 1/12th of the financial savings of Japan, I believe the solution is a procedural one. The intense sense of urgency necessary to move reform ahead quickly as it has moved in countries such as Korea is hindered by the cushion of high savings.

I believe Japan has the resilience to rebound from a hard landing if we do it before the aging of Japan makes it impossible. I believe that Japanese entrepreneurialism after WWII shows that, given the opportunity, Japanese can be entrepreneurial, focused and efficient.

One of the biggest differences between the current crisis and the post-war period is that in 1950 there were 12.2 working-aged Japanese for every retirement-aged Japanese (although many were still engaged in primary industries such as farming). In 1995 there were 4.8 and according to the 1998 UN population projection based on a no-immigration policy, Japan will have 2.2 working aged Japanese per retirement aged Japanese in 2025 and 1.7 in 2050. It will be very difficult to revive a country when over a third of the population is retired.

The problem that needs to be solved for Japan to have a true productivity and growth revival is that of building new businesses that it can be competitive globally considering the recent changes in the global markets. Japan can no longer be competitive in manufacturing long-term considering the emergence of China and other competitors in Asia. Although Japan is still weak in these areas, a shift towards IT, bio-tech and service businesses is the only alternative. For this reallocation of human and financial resources to occur, a major change is required in Japan. Japan has historically been prone to reforms based on central planning rather than allowing free market forces to develop new industries. A market-oriented shift is the most efficient and appropriate. It is important to realize that in Japan, industries that have developed without government interference have been the most successful. The automobile and consumer electronics industries have been quite successful, but the sector of the economy that has been the most tightly controlled, the financial industry, has failed.

Many people blame the illiquidity of the equity markets on the ignorance of the Japanese people or the tax structure causing Japanese to keep their assets primarily in savings rather than in equity. In fact, the figures are even worse for new businesses, studies showing that only 1% of the population invests in start-ups. I believe that the Japanese people are in fact quite intelligent, the figures reflecting a very well founded belief that the markets are rigged against them.

The Japanese stock market has been a rigged market geared towards large institutions and "insiders", cross shareholdings making it even more opaque. Fund returns (ROI) are terrible and companies difficult to understand due to inadequate financial disclosures.

This has caused foreign investors to be wary of Japan, foreign investment per capita in Japan being $97 in 1999 compared to $1034 in the US, $199 in Korea and $1793 in Singapore. Notwithstanding, it is interesting to note that foreign investment in the Japanese stock market exceeds investments by Japanese individuals, clear evidence of distrust.

Japan has developed an educational system that filters an elite group of obedient and intelligent people to populate the government agencies and the large companies who are consequently awarded with a career of low risk and high return. The not-so elite end up in small business or even worse, new businesses, forced to take the high risks for lower return. This has caused a society where it is socially disrespected to be an entrepreneur. The total entrepreneurial activity in Japan is less than 2% of the population according to Global Entrepreneurship Monitor, whereas the in the US it is around 13%.

The "elite" in Japan who have been mandated with guiding Japan's resource allocation and direction maintain their power through a tight network of relationships and social contracts. These contracts fueled much of the productivity early on, but now hinder greatly Japan's ability to change. The collusion between bureaucracy, politics and business which was hailed as Japanese great strength is now its enemy.

Most employees in Nissan knew what it would take to turn Nissan around, but top management was unable to execute these changes because of the social contracts in place. The current CEO, Carlos Ghosn, although he is a great leader, made his biggest contribution by defaulting on social contracts

These networks of relationships cause business in Japan to be more about relationships and less about running efficient companies in productive markets. A reset of this power structure will create a risk/return model which is the core of a healthy market and new business growth. It will allow young people like me to take risks and create new businesses instead of spending our lives trying to climb the ladders of power inside of large Japanese companies.

I am not a nihilist, but I am comfortable with a certain level of anarchy, and I believe that this is necessary to create the true bottom of the market which will be the platform of rebuilding Japan. A soft landing with a false bottom will not root out the entrenched corruption and will not set in motion a true open and free market. Japan missed the opportunity to create such a market after the war because the American military government, in order to fight communism, allowed the old Japanese power structure to remain in pace. The current crisis may be a very important next step in a restructuring process that started with the Meiji restoration.

I want Prime Minister Koizumi to destroy the system. Many people of my generation call him "Koizumi the Destroyer". "Scrap and build" has become a popular phrase in Japan, but I believe that when we use that phrase most Japanese tend to focus on the build side and not enough on the scrap side. I would like to make no escape routes and suggest that we not talk about building until we finish scrapping. Many of my elders call me irresponsible to talk about scrapping without a plan in place, but I have yet to see a plan that has worked out the way economists have predicted, for that matter, any other planners have predicted. I believe that unleashing the entrepreneurial spirit in Japan on to a free and open market has a much better chance of success than some methodical plan created by economists and bureaucrats based on today's assumptions.

The key is to do it quickly. I do believe that things are moving in the right direction. Although Prime Minister Koizumi's popularity is waning, he has made it possible and popular to talk about destroying the system and has made it possible for people like me to say things like this at places like this today. The financial crisis is imminent, the political system is destabilized and there is a consumer confidence crisis.

Because of the rigidities built into the system, necessary change will force many large companies to collapse and the basic fabric of Japanese trust will be damaged causing a continuing increase in the crime, unemployment and the suicide rate short term. (Suicide in Japan is 30,000 per year vs. traffic accidents which kill only 10,000 per year.) I believe that an increased role of women, immigration, a proper representative political system with an elected prime minister, financial literacy and self-esteem will be essential elements of rebuilding Japan into a globally integrated and productive country. Although many Japanese are trying to back-pedal on the commitment to implementing global best practices since Enron, I think that foreign investors such as Ripplewood and foreign CEO's such as Carlos Ghosn will help Japanese understand that companies can be competitive without being trapped within the fabric of traditional Japanese relationships. I believe that Japanese business has some great unique traits such as the hard working stick-to-it attitude of Japanese workers and the ideological flexibility that allows quick changes when necessary, but I believe these Japanese features will be of most value to Japanese business once we prove that we can manage a free and open market with global best practices.

trilatfloor2.jpg
This is a picture from my seat on the floor at the Trilateral Commission conference during a break. Interesting that I was seated next to Tim Collins... ;-)

trilatbath2.jpg
Here is a picture of my bathtub at the hotel. Pretty bourgois, huh? ;-)

Some thought I wrote to a discussion online about privacy based
on our discussion yesterday. (12/20/2001)

A lot of this taken from the EPIC Privacy Law Sourcebook

Privacy is a very difficult word to define, Justice Brandeis of the US Supreme Court said that privacy was the "right to be left alone." In Japan, Ruth Gavison says privacy has three elements, secrecy, anonymity and solitude. Article 13 of the Japanese constitution says:
All of the people shall be respected as individuals. Their right to life, liberty, and the pursuit of happiness shall, to the extent that it does not interfere with the public welfare, be the supreme consideration in legislation and in other governmental affairs.

You can break down privacy into four concepts,

Information Privacy or "data protection"

Bodily privacy such as drug testing and cavity searches

Privacy of communications (Article 21 of the Japanese constitution: Freedom of assembly and association as well as speech, press and all other forms of expression are guaranteed. 2) No censorship shall be maintained, nor shall the secrecy of any means of communication be violated. )

Territorial privacy such as intrusion, searches and ID checks. (Article 23 The right of all persons to be secure in their homes, papers and effects against entries, searches and seizures shall not be impaired except upon warrant issued for adequate cause and particularly describing the place to be searched and things to be seized, or except as provided by Article 33. 2) Each search or seizure shall be made upon separate warrant issued by a competent judicial officer. )

20 years ago, the OECD (Organisation for Economic Co-operation and Development) develop 8 guidelines for governments and companies to follow regarding privacy. These guidelines serve as the basis of privacy discussion today.

Collection Limitation Principle
There should be limits to the collection of personal data and any such data should be obtained by lawful and fair means and, where appropriate, with the knowledge or consent of the data subject

Data Quality Principle
Personal data should be relevant to the purposes for which they are to be used, and, to the extent necessary for those purposes, should be accurate, complete and kept up-to-date.

Purpose Specification Principle
The purposes for which personal data are collected should be specified not later than at the time of data collection and the subsequent use limited to the fulfilment of those purposes or such others as are not incompatible with those purposes and as are specified on each occasion of change of purpose.

Use Limitation Principle
Personal data should not be disclosed, made available or otherwise used for purposes other than those specified in accordance with Paragraph 9 except: (a) with the consent of the data subject; or (b) by the authority of law.

Security Safeguards Principle
Personal data should be protected by reasonable security safeguards against such risks as loss or unauthorised access, destruction, use, modification or disclosure of data.

Openness Principle
There should be a general policy of openness about developments, practices and policies with respect to personal data. Means should be readily available of establishing the existence and nature of personal data, and the main purposes of their use, as well as the identity and usual residence of the data controller.

Individual Participation Principle
An individual should have the right: (a) to obtain from a data controller, or otherwise, confirmation of whether or not the data controller has data relating to him; (b) to have communicated to him, data relating to him (i) within a reasonable time; (ii) at a charge, if any, that is not excessive; (iii) in a reasonable manner; and (iv) in a form that is readily intelligible to him; (c) to be given reasons if a request made under subparagraphs (a) and (b) is denied, and to be able to challenge such denial; and (d) to challenge data relating to him and, if the challenge is successful, to have the data erased, rectified, completed or amended.

Accountability Principle
A data controller should be accountable for complying with measures which give effect to the principles stated above.

I think these priniples are generally very good, but there are several technological changes that make things quite different from when these guidelines were originally written. Data is no longer stored in large mainframes and are distributed so "destroying" or "protection" information is almost impossible.

Security is also impossible to assure.

ID can be forged and it is very difficult to make sure that only authorized people can have access to the data.

Therefore, I believe that they key to protecting privacy in a networked environment is to limit the amount of information we create. This can done by created limited or ID subsets such as pen names or the ability to have anonymous transactions. Marketing and profiling can be conducted locally, for instance.

This is where the Japanese kokumin bango issue comes in. One of the big problems with the current law is that there is an IC card/ID card associated with it. Germany has decided that a national ID like this is unconstitutional. Korea has recently stopped it as well. Althought there is a lot of data about us on the network, (we should try to create less) the new law makes it very difficult not to carry a picture ID with your number on it around with you. Although it is not written in the law, lawmakers are already contemplating tagging of genetic information, medical records, arrest records (even if you are not guilty) etc.

One last point is that abuse by commerical interests, individuals and government are also very different. One of my main fears is that broadly defined laws that allow the government to collect data without a mechanism for anyone to check what it is being used for has the possibility of abuse without the ability to monitor.

I'll give some more examples of things that might happen later...