Download The Emerging Economic Entity of East Asia

The International Symposium to Commemorate the New Start of JETRO
“ Toward an East Asia Free Trade and Economic Zone”
The Emerging Economic Entity of East Asia
Keynote Address by Osamu Watanabe,
Chairman and CEO of JETRO
26 November, 2003 at Keidanren Hall
I would like to extend my heartfelt appreciation to all of you here today, including
Senior Vice Minister of Economy, Trade and Industry Shinya Izumi and Vice Chairman
of the Japan Business Federation (Nippon Keidanren) Kenji Miyahara for finding the
time to attend this symposium commemorating JETRO’s new start.
I am delighted that we have been able to hold this symposium with the participation of
so many outstanding individuals, including Prof. Motoshige Itoh of the University of
Tokyo.
JETRO, since its inception in 1958 as a government-affiliated corporation, has spent the
years dealing with the demands of different eras, moving from export promotion to
import promotion. On October 1 this year, JETRO was reborn as an independent
administrative agency. Although the implications of this change are many and varied, to
put it in simple terms, whereas the daily running of JETRO and management of its costs
and budget had been left to the government to oversee and implement, the new JETRO
now receives mid-term goals from the government and is left to compile its own plans,
but with the responsibility of attaining those goals and ensuring that the results are
successful. Our success in achieving these objectives will be stringently audited by an
evaluation committee established at the Ministry of Economy, Trade and Industry. The
results of the audit will even determine my salary and bonus as chairman and CEO of
JETRO.
It is now incumbent on the staff of JETRO to work diligently and under principles of
self-responsibility, and to take the credit for successes and take responsibility for failure.
It is my intention to expend all efforts toward working together with the staff of JETRO,
responding to the various needs of the new organization and complying diligently with
the wishes of our clients. In this endeavor, I would like to ask you for your continued
support and encouragement.
Although I just entered JETRO in July of 2002, my relationship with Asia goes back
much further. Beginning in 1964, I worked at the former Ministry of International Trade
and Industry (MITI) for 35 years. One of the periods that remains etched in my memory
is the Asian financial crisis of 1997 to 1999; I am well aware of the trials and hardships
this caused for the countries of many people gathered here today at this conference. At
that time, I was an administrative vice-minister at MITI and, although the period was a
tough one domestically, I recall working very hard to formulate Japan’s policy for
providing assistance to our Asian neighbors. With the cooperation of many of you here,
as well as the initiatives of the individual countries, we overcame the crisis. So today, I
take this opportunity to express my respect for the steady development achieved in the
years since.
I subsequently left my post at MITI. Since last year, as a member of Prime Minister
Junichiro Koizumi’s Task Force on Foreign Relations, my colleagues and I have shared
the responsibility of formulating a series of proposals concerning economic partnership
agreements with ASEAN countries and a number of Asian foreign policy issues. So,
given my long and close relationship with Asia, I am very much looking forward to a
fruitful and incisive symposium.
First of all, I would like to discuss the current situation concerning the Japanese
economy.
For a long period now, people in all sectors in Japan have been enduring hardship. But I
believe that after more than ten years of recession, the Japanese economy is in the final
stages of moving towards recovery. However, it should be noted that on two occasions
in the 1990s, it appeared that Japan was moving to recovery and on both of those
occasions the recovery failed to materialize. But the third time is a charm, as we say, I
feel that we will achieve a true recovery this time.
Years of restructuring by the private sector are now bearing fruit. Revenues and capital
investment are both on the increase. However, while the results of restructuring are
having a positive effect mainly on large companies, the results have yet to permeate
small and medium enterprises, or SMEs. In the two times when the Japanese economy
failed to recover in the 1990s, the Japanese government had thought that the economy
was about to turn around and hastily introduced financial reforms from a
macroeconomic perspective, and also moved to correct the nation's massive fiscal
deficit. Private-sector companies, including consumer (city) banks and others, also saw
the economy picking up and scaled back or even discontinued their restructuring efforts.
As a result, the disposal of non-performing loans and other restructuring came to a halt.
This time, however, at the very least for another year or two, we need to see continued
macroeconomic and structural reforms, coupled with corporate efforts to dispose of
non-performing loans and engage in restructuring without changing course. This is the
lesson that we must learn from Japan’s two previous failed recoveries.
It follows that the process of reducing non-performing loans will continue for another
year or two, and naturally this will have a deflationary effect on the economy. I hold the
belief that the Japanese economy will recover and that a thriving economy will be with
us a year hence, or possibly a year and a half from now. These are the vital steps that I
believe need to be taken if we are to lift the economy.
However, I also believe that once we cross that bridge, there will be bright signs on the
horizon. This is the feeling I have gotten over the last two years or so, as companies put
new business models in place to leverage integrated operations in East Asia, which has
not only stimulated corporate activity, but also generated profits.
Senior Vice Minister Izumi has already spoken of rapidly increasing economic
integration and intra-regional trade in East Asia. When the Japanese economy hit rock
bottom in the autumn two years ago, we heard many theories about the threat from
China and the hollowing out of Japanese industry. But since then, large, medium-size
and small companies have come to the realization that if business is taking place in
China, then it should be engaged and profits made. The issue was no longer one of a
threat posed by China, so companies large and small began to vigorously expand their
businesses in China. This was a step that in my view had taken two years to come to
fruition.
Japan’s cumulative investment directed into Southeast Asia is at 3.5 times the level of
that in China. Japanese companies have sought to maximize profitability by formulating
strategies according to which products could be best produced domestically, China or
the ASEAN region. This does not only apply to large companies. Small and
medium-size companies also are starting to invest based on their own judgment. I get
the impression that this strategy is already starting to be profitable.
In the first session of the symposium today, Prof. Itoh will lead a discussion on
corporate strategy in the East Asian business sphere. Corporate strategy does not only
apply to Japan and is not only about Japanese companies. All companies are currently in
the process of creating new business models for East Asia, a new center of growth. I
expect this to be a tremendously interesting session.
We often hear the phrase “China+1” (China plus one) these days. I believe that in Japan
as well, the key to the future will be network creation, and China+1 is a strategy for
networked production. At the same time, however, consumption is also rapidly
expanding in the region, so great expectations are also being placed on the region as a
future consumer market.
According to the JETRO White Paper on International Trade and Investment, the
middle classes in China and ASEAN are increasing substantially. Middle class here
refers not to the super rich, but to individuals whose income level is expected to
increase. In China, the middle class is defined as a monthly income of 2,100 yuan, or
about 30,000 yen a month. In terms of purchasing power parity, this corresponds to a
monthly income of 170,000 to 180,000 yen per month in Japan. This group is expanding
rapidly and already comprises about 10 percent of China’s urban population of 400
million. They are now buying consumer durable goods and cars. Including China, the
NIEs and all ASEAN countries, the region’s middle class stands at around 140 million,
compared with a total population of 1.9 billion, and it is rapidly expanding. It is
important, therefore, that Japanese companies expand their integrated business
operations in the region to take advantage of economic growth and realize greater
profitability.
I have heard it said recently that the Japanese economic recovery and the upturn in
business are largely dependent on exports. I also hear that this indicates that domestic
demand remains weak. While there is certainly some truth to this, it is somewhat
misleading to talk of exports to Southeast Asia. In a sense, they are no longer exports.
Instead, the region Japan once considered its economic sphere has given way to an East
Asian region that is more like a huge domestic market. Accordingly, the production of
goods in Japan and their export to China or Southeast Asia should be seen less as a
function of export and more as a domestic Japanese activity. Goods that are produced in
Southeast Asia and imported to Japan also should not be conceptualized as imports, but
rather as the domestic transfer of goods due to the integration of economies.
Discussions about export-led demand and weak domestic demand are of little meaning
for the new unified-business model that has appeared in East Asia.
Given such economic realities and the fact that economic integration is already with us,
what should governments and countries pursue? One of the greatest challenges is to
accelerate economic integration in an institutionalized manner, such that national
borders form no barrier to policy.
From 2005, ASEAN and Japan are expected to enter into comprehensive economic
partnership negotiations. In December this year the ASEAN-Japan Commemorative
Summit will be held in Tokyo. I strongly expect it will be announced that countries such
as Malaysia, the Philippines and Thailand will enter into bilateral free trade agreement
(FTA) negotiations with Japan. I expect that Indonesia will also enter into preparatory
discussions.
With the benefit of its long history, the ASEAN economies have already realized the
ASEAN Free Trade Area (AFTA) and are steadily moving in the direction of increased
competitiveness for the region as a whole, while removing the cross-border barriers. I
believe it is important for the members of ASEAN not to act like ten individual
countries, but to remove barriers and become a unified region, one that is mutually
complementary and competitive for regional stability. Asia’s future economic
development and stability rely on this to a large extent. This is why in the various
economic partnership programs between Japan and ASEAN, Japan must work to
accelerate these programs and expand its assistance, not only in countries that have been
fast to develop, but also in newer members of ASEAN, as symbolized by the Mekong
Region Development. Japan should play a significant role in assisting such countries.
The Institute of Developing Economies (IDE) compiled a report detailing the future
recovery track for East Asia. It was a joint project carried out with top economic
research organizations from the ten ASEAN countries over the past year and a half. We
submitted the report in July and it was announced to great acclaim at the ASEAN
Economic Ministers and Ministry of Economy, Trade and Industry of Japan
Consultations (AEM-METI) in September. Mr. Yamazawa, the former head of the IDE,
will be joining us for the second session to present the report and hopefully trigger a
vigorous discussion with our ASEAN research institute representatives.
It was decided that from this December a forum for FTA negotiations with the Republic
of Korea would be launched. China, which has already concluded a framework
agreement with the countries of ASEAN, will probably move towards a China-ASEAN
FTA from June next year, at a speed that will outpace Japan. I think these are
encouraging signs, because I have no doubt that Japan, the Republic of Korea, China,
Hong Kong, Taiwan and the ASEAN 10, possibly all of East Asia, will in the near
future—possibly sooner than we expect—conclude an East Asia Free Trade Agreement
to enable an active flow of people, goods and money.
What role can Japan play? This is an important question for the future of Japan. It is
most regrettable that in October this year Japan failed to conclude an FTA with Mexico
although negotiations are ongoing. Regrettably, it appears that the parties stumbled at
the final hurdle, failing to reach an agreement on farm trade issues. After the recent
Asia-Pacific Economic Cooperation (APEC) Summit, Prime Minister Koizumi stated
clearly that structural reforms should continue in Japan, and that the Japanese market
should not be closed to agricultural products. Japan must constantly bear in mind the
issue of agricultural products as an essential element of its domestic structural reforms.
Moreover, Japan and its agricultural policies must not impede the realization of a
regional FTA.
It is important for an East Asian FTA to be concluded without delay. The United States
is also moving in the same direction in the Americas, where a number of FTAs are being
concluded to advance economic development and expand investment. The EU,
meanwhile, is expanding from 15 members to 25. With these two emerging axes in sight,
East Asian countries should move toward their own economic integration, which would
also help the Japanese economy to grow and regain its economic vigor. The piece of pie
that Japan stands to gain from such independent economic vitality could be used, at
least in part, to enhance the competitiveness of its domestic agriculture. For example, it
could be used to provide money or compensation to farmers that fall victim to increased
competition, and thereby facilitate once-seemingly impossible structural reforms in
Japanese agriculture. The reason for delays in economic integration and FTAs is
because such a mechanism has not yet been realized, so I believe that such reforms
require political initiative.
Japan can do more. Once an East Asian Free Trade Area is achieved, Japan will have to
continue to demonstrate leadership and work actively as a co-leader in global economic
management. Japanese companies must establish networks that would facilitate their
shift into higher value-added industries, leading-edge technologies and service economy,
creating new networks that will enable other members of East Asia to move into fields
that Japan once focused on. The shift will require, however, that Japan attract
outstanding people, capital, technology and know-how to make this vision a reality.
This task must be achieved promptly, which is why Prime Minister Koizumi announced
his plan to double foreign investment entering Japan.
JETRO is actively dealing with these challenges. Firstly, we actively assist Japanese
companies already operating, or showing interest, in the East Asian market. But moving
into new markets can be very difficult, so JETRO provides assistance in various ways,
including support for intellectual property protection.
Secondly, JETRO leverages its think-tank resources centered on the IDE for enhanced
cooperation with economic research institutions in the ASEAN region. With the
proposed East Asian free trade area in mind, I think that a study on the desirable trade
and investment rules between Japan and China, the two major Asian countries, whose
combined GDPs represent 80% of East Asia’s total GDP, and their influence on the both
countries, as well as one on the entire Asian region, should be conducted. I firmly
believe that an East Asian FTA and free trade area could be materialized far quicker than
anyone thinks.
I would also like to promote taboo-free agricultural structural reform . Already a study
group has been initiated to see if some of Japan’s excellent products, such as rice,
vegetables and fruit, could be exported abroad, and this has gained the attention of
agricultural cooperatives and farmers across Japan. JETRO will actively pursue the
possibilities of agricultural structural reform.
Thirdly, JETRO is seeking to provide robust support for industrial development in East
Asia. JETRO has helped countries in the region develop their small and medium-size
companies and expand their supporting industries through activities such as supporting
the “One Tambon, One Product” project in Thailand. We are expanding such assistance,
especially for ASEAN's newest members. In this context, we believe it is extremely
important—particularly for the CLMV countries, namely Cambodia, Laos, Myanmar
and Vietnam—to comprehensively pursue the Mekong Region Development project. Of
course, the government of Japan is providing support through official development
assistance (ODA). But private-sector investment is also needed if the CLMV countries
are to develop their economic independence. It is incumbent upon Japanese companies
to take an interest in the region, but at the same time these countries must nurture their
SMEs and supporting industries to attract investment. JETRO is partnering with
Japanese companies to provide support for this undertaking. We are also making every
effort to encourage Tokyo’s interest in the Mekong Region Development. We will also
strive to support capacity building, to ensure that business people in the CLMV
countries are competent in international business.
There is much to do. While we have made achievements, we must continue to press
forward with everyone’s strong support and encouragement. The next one or two years
will be pivotal in the establishment of an East Asian business sphere. Speed will be
more important than quality or quantity. If we fail to act promptly, both Japan and East
Asia will lose the win-win game and East Asia will not be able to compete with the
Americas or the countries of Europe, which have already embarked upon integration.
We must channel our energies and make haste.
Today’s two sessions will facilitate discussion in these areas. As one of the symposium
organizers, I sincerely hope for a vigorous debate that all participants find worthwhile.
Thank you very much.