# Trilateral Commission Speech

- Author: Joichi Ito
- Date: 2002-04-09T11:00:00Z


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.






---

#### Categories

Reforming Japanese Democracy