SPEAKERS CONTENTS INSERTS
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49–008 CC
1998
JAPAN'S ROLE IN THE ASIAN FINANCIAL CRISIS
HEARING
BEFORE THE
SUBCOMMITTEE ON
ASIA AND THE PACIFIC
AND THE
SUBCOMMITTEE ON
INTERNATIONAL ECONOMIC POLICY AND TRADE
OF THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
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APRIL 23, 1998
Printed for the use of the Committee on International Relations
COMMITTEE ON INTERNATIONAL RELATIONS
BENJAMIN A. GILMAN, New York, Chairman
WILLIAM GOODLING, Pennsylvania
JAMES A. LEACH, Iowa
HENRY J. HYDE, Illinois
DOUG BEREUTER, Nebraska
CHRISTOPHER SMITH, New Jersey
DAN BURTON, Indiana
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN, Florida
CASS BALLENGER, North Carolina
DANA ROHRABACHER, California
DONALD A. MANZULLO, Illinois
EDWARD R. ROYCE, California
PETER T. KING, New York
JAY KIM, California
STEVEN J. CHABOT, Ohio
MARSHALL ''MARK'' SANFORD, South Carolina
MATT SALMON, Arizona
AMO HOUGHTON, New York
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TOM CAMPBELL, California
JON FOX, Pennsylvania
LINDSEY O. GRAHAM, South Carolina
JOHN McHUGH, New York
ROY BLUNT, Missouri
JERRY MORAN, Kansas
KEVIN BRADY, Texas
LEE HAMILTON, Indiana
SAM GEJDENSON, Connecticut
TOM LANTOS, California
HOWARD BERMAN, California
GARY ACKERMAN, New York
ENI F.H. FALEOMAVAEGA, American Samoa
MATTHEW G. MARTINEZ, California
DONALD M. PAYNE, New Jersey
ROBERT ANDREWS, New Jersey
ROBERT MENENDEZ, New Jersey
SHERROD BROWN, Ohio
CYNTHIA A. McKINNEY, Georgia
ALCEE L. HASTINGS, Florida
PAT DANNER, Missouri
EARL HILLIARD, Alabama
WALTER CAPPS, California
BRAD SHERMAN, California
ROBERT WEXLER, Florida
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STEVE ROTHMAN, New Jersey
BOB CLEMENT, Tennessee
BILL LUTHER, Minnesota
JIM DAVIS, Florida
RICHARD J. GARON, Chief of Staff
MICHAEL H. VAN DUSEN, Democratic Chief of Staff
Subcommittee on Asia and the Pacific
DOUG BEREUTER, Nebraska, Chairman
JAMES A. LEACH, Iowa
DANA ROHRABACHER, California
PETER T. KING, New York
JAY KIM, California
MATT SALMON, Arizona
JON FOX, Pennsylvania
JOHN M. McHUGH, New York
DONALD A. MANZULLO, Illinois
EDWARD R. ROYCE, California
HOWARD L. BERMAN, California
ENI F.H. FALEOMAVAEGA, American Samoa
ROBERT E. ANDREWS, New Jersey
SHERROD BROWN, Ohio
MATTHEW G. MARTINEZ, California
ALCEE L. HASTINGS, Florida
WALTER H. CAPPS, California
ROBERT WEXLER, Florida
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MIKE ENNIS, Subcommittee Staff Director
RICHARD KESSLER, Democratic Professional Staff Member
DAN MARTZ, Counsel
HEIDI L. HENNIG, Staff Associate
Subcommittee on International Economic Policy and Trade
ILEANA ROS-LEHTINEN, Florida, Chairperson
DONALD A. MANZULLO, Illinois
STEVEN J. CHABOT, Ohio
TOM CAMPBELL, California
LINDSEY O. GRAHAM, South Carolina
ROY BLUNT, Missouri
JERRY MORAN, Kansas
KEVIN BRADY, Texas
DOUG BEREUTER, Nebraska
DANA ROHRABACHER, California
SAM GEJDENSON, Connecticut
PAT DANNER, Missouri
EARL F. HILLIARD, Alabama
BRAD SHERMAN, California
STEVEN R. ROTHMAN, New Jersey
BOB CLEMENT, Tennessee
TOM LANTOS, California
BILL LUTHER, Minnesota
MAURICIO TAMARGO, Chief of Staff
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YLEEM D.S. POBLETE, Professional Staff Member
AMOS HOCHSTEIN, Democratic Professional Staff Member
C O N T E N T S
WITNESSES
Mr. James Glassman, American Enterprise Institute
Mr. Robert Grondine, American Chamber of Commerce, Japan
Mr. Peter S. Walters, Guardian Industries Corporation
Mr. Richard Katz, Senior Editor, The Oriental Economist Report
APPENDIX
Prepared statements:
The Honorable Howard L. Berman, a Representative in Congress from California
Mr. Robert Grondine
Mr. Peter S. Walters
Mr. Richard Katz, plus attachments
Additional material submitted for the record:
Executive summary of ''1997 United States-Japan White Paper'', submitted by Mr. Grondine
Executive summary of ''Making Trade Talks Work'', submitted by Mr. Grondine
Background information submitted by Mr. Grondine
JAPAN'S ROLE IN THE ASIAN FINANCIAL CRISIS
THURSDAY, APRIL 23, 1998
House of Representatives,
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Subcommittee on Asia and the Pacific, and
Subcommittee on International Economic Policy and Trade,
Committee on International Relations,
Washington, DC.
The Subcommittees met, pursuant to notice, at 1:32 p.m., in room 2172, Rayburn House Office Building, Hon. Doug Bereuter (chairman of the Subcommittee on Asia and the Pacific) presiding.
Mr. BEREUTER. [presiding] The joint meeting of the two subcommittees, the Subcommittee on Asia and the Pacific and the Subcommittee on International Economic Policy and Trade, which are chaired by myself and by Chairperson Ileana Ros-Lehtinen, respectively, will come to order. But it will be coming to order very briefly because as you perhaps have noted, we have the vote lights and buzzers that just went off. I think it's probably advantageous for us to go quickly cast a vote and then we'll return immediately. It is a Judiciary reform legislation on the floor today, and unfortunately there may be a number of votes but we'll do the best we can. We will be in recess for approximately 12 minutes.
[Recess.]
Mr. BEREUTER. The Subcommittees will resume their sitting. I do have an opening statement which I hope will help set the stage for our hearing today.
Less than 10 years ago, many in the American public and the Congress were obsessed with what was seen as the invincibility and preeminence of Japan's economy. Fueled by huge bilateral trade deficits between our two countries and dramatic Japanese investment in the United States, various American authors and commentators warned that Japan Inc's lobbyists were manipulating the American political and economic system to destroy U.S. business and industry. One of the more highly charged moments of that time was the angry bashing of a Toshiba radio on the steps of the Capitol by several Members of Congress.
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Then something happened that abruptly changed America's preoccupation and obsession with a menacing Japan. The American economy began to grow and unemployment levels declined. Inflation remained checked and the stock market began its unprecedented and nearly unabated climb. On the other side of the Pacific, a crippling banking, financial, and monetary crisis began to emerge. Meanwhile, highly regarded Japanese bureaucrats couldn't find out how to jump-start the Japanese economy. The government once again started running significant budget deficits after several years of retrenchment, and a lifetime employment concept ceased being a reality for Japanese workers in the corporate sector.
It is predictable but unfortunate, I believe, that the images of Japan we see emphasized are so erratic and volatile, ranging from the invincible Rising Sun to a sobbing chief executive of a bankrupt Japanese corporation. Regrettably, the Clinton Administration has not made a serious attempt to promote a balanced and informed public understanding of Japan's situation and its implications for U.S. interests.
Though the current financial crisis in Asia presents a serious threat to the U.S. national interest, it also provides an opportunity for the United States to pursue a more consistent and balanced trade and foreign policy agenda with Japan. Even more important, the crisis provides an opportunity for Japan to act responsibly and bolster the perception among the American public that it is a partner as well as an economic competitor.
First, we must acknowledge that Japan has properly assumed its responsibilities and acted to protect its self interest in the region in some meaningful ways. For example, it undoubtedly has been the largest contributor to the most troubled Asian countries, providing second-line credits to the three International Monetary Fund program countries, the Republic of Korea, Thailand, and Indonesia. That totaled at least the equivalent of $19 billion. Additionally, Japan has made substantial structural adjustment loans and extended export credits to Indonesia to help contain the financial crisis there.
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But there is a troubling side to all of Japan's effort and its traditional response to this crisis. The reality is that neither Japan nor any other country has actually dispersed second-line-of-defense funds for the basic IMF package, and that all of Japan's financial assistance, commitments, structural adjustment loans, and export/import credits are, even taken together, still an inadequate alternative to a strong Japanese economy. The primary question remains. Is the Japanese Government prepared to make the fundamental economic, structural, and regulatory changes necessary to strengthen its economy? The problems are so big and the Japanese economy is so large that only the Japanese themselves can solve these problems.
Japan accounts for about three-fourths of total East Asian gross domestic product, and therefore has the potential to play a leading role in pulling the region out of the financial crisis by serving as its engine of growth. The U.S. response to the Mexican crisis is a good example of how Japan could jointly serve the United States and Europe as the engine of growth for Korea, Thailand, and Indonesia, and serve itself as well.
The regional leadership role that I am calling on Japan to accept in H. Res. 392 is consistent with Japan's stated goal of promoting strong domestic demand-led growth and avoiding a significant increase in the external surplus. Yet it appears that Japan is slipping back into recession with zero growth likely for 1998, followed by as much as a 2-percent contraction in 1999. If these projections are correct, Japan's imports from the United States and other countries in the Asia-Pacific region will not grow sufficiently, and Korea, Thailand, and Indonesia will be forced to rely primarily on exports to the United States for growth. In fact, Japan's imports from most of its Asian trading partners dropped substantially from December 1997 to February 1998.
These weak economic fundamentals for Japan, coupled with a robust U.S. economy, have already weakened the value of the Japanese yen and therefore stimulated a rapid expansion of exports and a fast-growing merchandise trade surplus with the United States, which increased from $48 billion in 1996 to $55 billion in 1997, before the real impact was felt. It's on a record pace for 1998. Although the United States was able to almost unilaterally absorb Mexico's imports after the peso crisis, the United States cannot economically or politically, and I would emphasize or politically, absorb all of the additional imports from the Asia-Pacific region stemming from the financial crisis.
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U.S. officials representing both Republican and Democrat Administrations have long called for Japan to deregulate its economy and remove informal barriers to trade. More recently, U.S. Treasury and Federal Reserve officials have called upon Japan to take the tough steps necessary to reform the financial sector of the economy. Those official calls for deregulations are being belatedly and grudgingly heeded.
Under Prime Minister Hashimoto's leadership, the seemingly all-powerful Ministry of Finance bureaucrats have crafted an ambitious but problematic financial sector big bang. While this is a move in the right direction, knowledgeable observers have frankly been underwhelmed by the scale and the scope of this and other proposed reforms. To paraphrase Secretary Rubin, it is time for Japan to move beyond virtual reforms to real reforms.
Recently, Prime Minister Hashimoto has proposed additional spending stimulus and temporary tax cuts to attempt to keep Japan from falling into recession. Today we're holding a hearing to examine the Japanese problem and to determine if the recent Hashimoto policy decisions are sufficient to enable Japan to become the engine of growth necessary to solve that problem and to help pull the region out of the current financial crisis.
Without wishing to lead or pre-empt our panelists, I feel compelled to note that the judgment of the experts and the markets, for the most part both in Japan and abroad, is negative. Most of the promised $124-billion package appears destined to go to the construction sector, as in the past. As the Far Eastern Economic Review noted last week, ''Japan's pump-priming formula is a proven loser for creating lasting growth.''
It does seem necessary for Japan to prime the pump, even though their fiscal deficit is already high. But in my judgment, the Japanese Government needs a better formula, one that emphasizes permanent tax cuts. Japan's academic analysts and corporate leaders appear to agree on this. More important, I share the view that Japan needs urgently to undertake broader deregulation than it heretofore has contemplated. I agree with the observations of Clyde Prestowitz in the same issue of the Far Eastern Economic Review that ''the arteries of Japan's economy are presently so clogged that stimulus measures have little effect except in massive doses that tend to further distort the economy and weaken it in the long term.'' However, in the absence of these more basic measures, stimulus may be all that we can expect in the short run.
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This afternoon, we are especially pleased to have an excellent and diverse panel of four to aid us in our examination of these important issues. First, we will begin our hearing with the testimony from Mr. James Glassman, fellow at the American Enterprise Institute and a regular contributor on global finance and political issues to the Washington Post. In a March 3rd column, Mr. Glassman said the real story to Asian financial crisis is not funding for the IMF, but what Japan should do.
Second, we'll turn to Mr. Bob Grondine, member of the Board of Governors of the American Chamber of Commerce in Japan, and a 16-year resident of Japan. We look forward to your comments, your detailed analysis of the problems and proposed recommendations.
Third, Mr. Peter Walters, group vice president for Guardian Industries Corporation, will provide us with a case study of how Japan has frustrated one of the world's largest and most competitive flat glass producers from gaining significant market access in Japan.
Finally, we will hear from Mr. Richard Katz, senior editor of The Oriental Economist and the author of the upcoming book, ''Japan: The System that Soured—The Rise and Fall of the Japanese Economic Miracle.''
Gentlemen, your entire statements will be made a part of the record. We would appreciate it if you could individually limit your oral remarks to about 10 minutes so that we'll have plenty of time for questions.
I would like now before we turn to you to turn to my colleague, the chairman of the IEP&T Subcommittee, Ms. Ros-Lehtinen, for her comments.
Ms. ROS-LEHTINEN. Thank you so much. I would like to thank Congressman Bereuter for holding this hearing as a joint session, thereby enabling more Members to hear the varying views on how the Asian financial crisis provides an opportunity for Japan to fulfill its responsibilities as a regional and global economic leader. This hearing further affords an opportunity to place the resolution introduced by Chairman Bereuter on this issue within a broader context of policy recommendations.
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It is imperative that we evaluate Japan's actions, its culpability and contributions before getting carried away with discussions on IMF bailout plans and multilateral approaches to the Asian crisis. Before placing the burden of rescuing the Asian economies on the shoulders of the international community, and in particular the United States, we must focus on what can be accomplished from within the region.
Last week, the G–7 finance ministers and central bank heads issued a statement which called on Japan to ''implement quickly a strong program of effective fiscal measures and structural reforms.'' They underscored the need for Japan to undertake a comprehensive strategy to address the problems in its financial systems in order to generate growth in domestic demand and to open its markets to absorb a greater share of exports to help the Asian region recover from the financial crisis.
However, can these prescriptions for Japan's ailments provide the cure for the regional collapse? Can a revived Japanese economy translate into an improved economic outlook for other Asian countries? Some would argue it can be because of Japan's economic and political prominence in the region. Others would say that Japan is the cure because it was the cause of the currency problems in Thailand, Malaysia, South Korea, Indonesia and the Philippines, which began last summer. Japan's policies have led to questions over its ability to deal effectively with its domestic economic problems, much less contribute to the region's recovery. The credibility of Japanese leaders has eroded, with doubts mounting over whether Japan is even willing to implement radical deregulation and open its markets further.
Even those who praise Japan for its ''generous contributions'' to the IMF program countries and for the structural adjustment loans and extended export credits that it has granted to Indonesia, admit that the Japanese Government still seems ill-prepared to make the fundamental economic changes that are necessary to strengthen its economy and in turn those of its regional partners.
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Thus, while it is certainly a necessity and a very needed endeavor to discuss options and initiatives for Japan to stave off a recession, we must also focus on what the United States can and should do to help promote the adoption of critical reforms by the Japanese Government. Unless recommendations are backed by a definitive plan of action, they will remain mere suggestions without any progress having been achieved.
However, more needs to be done. To begin with, the Administration must move beyond its wavering approach toward Japan and follow a consistent policy to help bring about positive concrete changes. For this reason, we look forward to hearing the views of our witnesses today, not only on the measures that Japan should adopt, but on the course of action that we in the U.S. Congress or the Administration should follow to help achieve the desired results.
Thank you, Mr. Chairman.
Mr. BEREUTER. Thank you very much.
The Full Committee recently welcomed formally and with enthusiasm the newest Member of our Committee, Congresswoman Lois Capps. This is the first meeting that she has attended of the Asia and Pacific Subcommittee. We welcome you with equal or greater enthusiasm for the contribution that you will make. Thank you.
Mrs. CAPPS. And thank you. I am delighted to serve on the Subcommittee on Asia and the Pacific, the committee on which Walter, my husband, served. Thank you, Mr. Bereuter, for this opportunity, and to you, Mr. Berman, also for your leadership. It's nice to be on a committee with Ms. Ros-Lehtinen. This is something I really look forward to participating in. Thank you.
Mr. BEREUTER. Thank you. It's mutual.
I turn now to our distinguished colleague from the Asia and Pacific Subcommittee, the Ranking Member, Mr. Berman.
Mr. BERMAN. Thank you very much, Mr. Chairman. I echo your comments. It's great to have Lois Capps on the Subcommittee. She'll make a tremendous contribution. I think you'll find it an interesting subcommittee. This is one of the most interesting issues right now facing us. I want to congratulate the Chairman for calling the hearing and assembling a distinguished group of witnesses, and point out that he and I introduced H. Res. 392, which calls on Japan to adopt a number of economic reforms in light of the current Asian financial crisis.
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I have a statement which I will ask to be placed in the record, and yield my time back to you, Mr. Chairman.
Mr. BEREUTER. Without objection, that will be the order. I appreciate the gentleman's forbearance.
[The prepared statement of Mr. Berman appears in the appendix.]
Mr. BEREUTER. The gentleman from American Samoa.
Mr. FALEOMAVAEGA. Mr. Chairman, thank you. I also would like to personally welcome our colleague from California, who has joined us as a Member of our subcommittee, the Asia and the Pacific.
Mr. Chairman, you have alluded earlier to H. Res. 392. I would like to ask that my name also be included as an original cosponsor of this resolution.
Mr. Chairman, I have a brief statement, but I do want to personally also welcome our distinguished witnesses this afternoon. No doubt they are eminently qualified to share with us their views on the financial crisis now confronting some of the leading prominent nations in Asia, namely, Thailand, Korea, Indonesia, and Malaysia, and to some extent, supposedly, Japan.
I do want to commend you, Mr. Chairman, for calling this hearing with our colleagues on the International Economic Policy and Trade Subcommittee, the gentlelady from Florida. Mr. Chairman, several weeks ago our committee held a similar hearing on the overall situation with the economic crisis in Asia. I believe it was Treasury Undersecretary Mr. Summers that testified before the Administration. Mr. Chairman, to this day I am still not satisfied with some of the Administration responses that I received.
One of Mr. Glassman's fellow writers, I believe it was Mr. Jim Hoagland, as I recall correctly an article that appeared also in the Washington Post. The thrust of the article was Asia's financial crisis wasn't entirely Asia's fault. That is, supposedly in 1995, the World Bank issued such a glowing report. I don't recall if it was 1994 or 1995. It was called the Asian miracle, telling the world that investors and banks and everyone that there was a golden opportunity for investors from Western countries to invest in Asia.
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What is interesting, Mr. Chairman, is that some of these Asian countries have had records that are public knowledge, corruption, nepotism, in the highest levels of government. I mean governments kept subsidizing the major losses of these investments that are made from some of the major Western investors. The problem continued until now. Governments could no longer fund these bad loans that had been given.
The point, Mr. Chairman, now the American taxpayer is asked to add an additional $18 billion for the International Monetary Fund to service the needs of these Asian countries. The question is, as the second leading economic power in the world I believe, I am curious if Japan is helping out, given the fact that Japan, as I believe probably is the No. 1 investor throughout all of Asia. With all this, I have some questions myself, Mr. Chairman, concerning the IMF. I understand the top administrator of the IMF gets paid over $224,000 a year. Our President gets paid $200,000 a year to provide for some $1.6-trillion budget that we in the Congress and the President has to provide. There are a lot of other benefits that the staff functionaries at the IMF are entitled and are given to. I just question that if this $18 billion is well worth it. I will certainly look forward to hearing from some of our friends here on the panel. Thank you, Mr. Chairman.
Mr. BEREUTER. Thank you, Mr. Faleomavaega.
Mrs. Capps, do you have a statement?
Mr. Blunt, you are arriving just in time. Do you have an opening statement?
Mr. BLUNT. No. I don't, Mr. Chairman. Thank you.
Mr. BEREUTER. We welcome you and are pleased to have you as a cosponsor, Mr. Faleomavaega. We'll be happy to add you.
Now we would like to turn to our panel. The first one on our list today, and we'll proceed in that order, is Mr. James Glassman, fellow at the American Enterprise Institute. You may proceed as you wish.
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STATEMENT OF JAMES GLASSMAN, FELLOW, AMERICAN ENTERPRISE INSTITUTE Mr. GLASSMAN. Thank you, Mr. Chairman. Mr. Chairman, Madam Chairperson, Members of the Committee, thank you for inviting me here today to discuss this very important subject, the role of Japan in the Asian financial crisis. That role, I believe, is profound and is only now being recognized.
Jeffrey Usher, the editor of Grant's Asia Observer, an excellent newsletter, recently wrote, ''The crisis in Asia will not be over until the crisis in Japan is over. It is not the United States, the IMF, or the credit ratings that hold the key to Asia's recovery. It is Japan.'' I agree with that assessment.
Congress is currently debating whether to give the International Monetary Fund another $18 billion, but the IMF controversy is a side show. The real story, as I wrote on March 3 in the article that the Chairman referenced, the real story is Japan. Japan is responsible for the Asian crisis in three major ways. First, the Japanese exported their model of what I would call command and control capitalism, which actually can hardly be called capitalism, to Korea, Thailand, and other countries that are now suffering. This model involves government officials directing banks to lend money to favored and subsidized industries, to ignore market signals, and instead to respond to political or bureaucratic imperatives and suggestions. It also involves a kind of mercantilism or restricting imports and foreign ownership of assets.
Second, Japan made some terrible investments in the affected countries. Loans were made without proper appreciation of risk, in part because of the moral hazard problem that was established in Mexico with the IMF and U.S. bailouts, but for other reasons as well. Japan currently has $275 billion in loans outstanding in Asia, with about one third of that in Korea, Thailand, and Indonesia.
Third and most immediate, Japan's own economy has been stagnant now for about 8 years with growth over the last 4 to 5 years, with the rare exceptions, of barely 1 percent annually. It will get worse. Earlier this month, the OECD projected a recession in Japan this year with growth of minus .3 percent. Retail sales so far this year are down 5 percent compared to a year earlier. Automobile sales are down 22 percent. The retail sales index is below its level of 1989. Small business sentiment is at its lowest point in at least 15 years.
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I could go on, but the Nikkei stock index is probably the best reflection of business conditions. It has fallen from roughly 40,000 at its peak 8 or 9 years ago, to below 16,000. Unemployment in a country that prides itself on lifetime employment has hit a post-World War II record of 3.6 percent. An interesting question is when our Dow Jones industrial average, now a little over 9,000 and measured by a different index standard, will exceed the Nikkei in Japan, when their rising unemployment rate will exceed our falling one.
I can tell you unequivocally that if Japan could invigorate its economy, the problems of Korea, Thailand, and Indonesia would quickly dissipate. IMF help is only temporary, an emergency infusion to help solve a liquidity problem. Indeed, I believe that IMF intervention could exacerbate the problem in the long term by encouraging more risky lending of the sort that we saw in the past few years. But the IMF aside, for Asia to get out of its current disastrous state, it has to grow out of it. It can grow only with help from Japan. Meanwhile, Japan's decline is accelerating. This is very serious.
But let's not forget that Japan remains not just Asia's powerhouse, but the world's second largest economy by a wide margin. Its net external assets amount to $750 billion and it has enormous foreign currency reserves. But it is not generating domestic demand. Over the past year, imports to Japan from the rest of the world fell by $32 billion. Exports rose by only $2 billion. This is not a case, at least at this point, of Japan shoveling goods out the door at low prices and sending them to the rest of the world. That could become a problem. The problem is a lack of demand in Japan.
So what can be done? Let me suggest three remedies. First, Japan needs to restructure its banking industry. Sell off the bad loans, raise the cash that can be used for more loans. Right now, there is an extreme credit crunch in Japan. Japan needs something like our RTC to sell off the bad loans, which according to Japanese authorities amount to $600 billion. To give you an idea, Citicorp, the worldwide giant, has $184 billion in total loans.
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Second, Japan must open its markets up to the rest of the world. In banking and consumer investing, for example, simply a greater presence of American companies and other foreign companies would have a beneficial effect. But it has to take down trade barriers and other restrictions.
Third and perhaps most important, Japan needs to make its monetary policy more stimulative. Even though the money supply has expanded at a fast rate, it is not enough. The Japanese Government must say that higher prices are an objective of monetary policy.
Now a fourth remedy for Japan could be fiscal stimulus, significant tax cuts, unlike the tax cuts that have gone before. There are some, including my colleague John Makin at the American Enterprise Institute, who feel that this will not work. David Malpass of Bear Stearns, another very close observer, also feels that this won't work. I must say that I have become convinced over the past few months that a fiscal stimulus in Japan is likely to have only a short-term effect. It's very hard to convince households to spend the cuts, especially when they can't be convinced that the cuts are permanent.
Therefore, the most important short-term step is to stimulate money growth. The most important long-term step has to be to renounce the model of command and control capitalism that Japan invented and has spread to the rest of Asia and has caused so much damage.
I would say, Mr. Chairman, that your resolution, H. Res. 392, makes many of these same points very cogently. Thank you. I will be happy to answer questions after the other witnesses speak.
Mr. BEREUTER. Thank you very much, Mr. Glassman.
Now we would like to hear from Mr. Robert Grondine. Am I pronouncing it correctly?
Mr. GRONDINE. Closer than anybody else recently.
Mr. BEREUTER. Give me your correct pronunciation. Governor of the American Chamber of Commerce, Japan. How do you pronounce it?
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Mr. GRONDINE. Grondine.
Mr. BEREUTER. Grondine?
Mr. GRONDINE. Yes. Thank you very much.
Mr. BEREUTER. Please proceed as you wish.
STATEMENT OF ROBERT GRONDINE, GOVERNOR, AMERICAN CHAMBER OF COMMERCE, JAPAN
Mr. GRONDINE. Thank you. My name is Robert Grondine. I am a member of the Board of Governors of the American Chamber of Commerce in Japan (ACCJ), in which capacity I appear today. I am also the executive partner for the law firm White and Case, which is based in New York. I have lived and worked in Japan for a total of 17 years, and been active with the ACCJ since 1982. During that time, I have had the opportunity to see a lot of these issues come and go. We are sincerely pleased to be given the opportunity to testify here today. We have come to Washington every year, at least twice. On our most recent trip in March earlier this year, we had the occasion to visit with Mr. Bereuter and Mr. Berman. We appreciate very much those opportunities to make our views known.
For those who don't know the ACCJ, we were formed in 1948 with 48 members. Today we have 2,800 members, representing over 1,000 companies working in Japan. We feel therefore that we are uniquely qualified to identify challenges to fair competition for American businesses and generate suggestions to help resolve those specific types of problems.
Most large American companies doing business in Japan are our members, across the entire spectrum of manufacturing, finance, service industries, agricultural sectors, and others as well. We do have as well many medium-sized and small companies who are members, and a large number of American entrepreneurs who are creating businesses in Japan and offering unique products which perhaps even aren't offered here as yet, but who bring to us an interesting perspective on that side of the Japanese economy as well.
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We work closely with the American Embassy and Washington agencies. We also have the opportunity frequently to deal with Japanese Government agencies and Diet members. Over the past 4 years, we have had the opportunity five times to make our views known directly to the Prime Minister. I have had the opportunity and the honor to do that three times myself in Japanese. So since I have never appeared before a congressional panel before, if I revert to Japanese, I am only going back to what is more familiar to me.
Mr. BEREUTER. If you revert to Japanese, you are in trouble because we are not going to understand you, I'm afraid.
Mr. GRONDINE. Thank you. We do very much appreciate, Chairman Bereuter, your efforts and Chairwoman Ros-Lehtinen's leadership in these areas. We do agree very much with the prior speaker on the H. Res. 392 and the efforts that you are making in that direction.
I will just try to briefly summarize my written statement and ask that the full statement be entered into the Committee record. Given the nature of our volunteer organization and the fact that we work through 42 committees, this testimony has been prepared by the Committee and I really hesitate to redact it at all because I know I am going to miss some things. A lot of specific references are included in the written testimony, so I really recommend that everyone review that. It's not very long, from the perspective of a lawyer anyway. So I would like to just summarize briefly some of the points that we have.
Mr. BEREUTER. All of your formal statements will be made a part of the record, as well as a couple of supplemental documents that some of you are submitting.
Mr. GRONDINE. Thank you very much.
As has already been said, the first important point that we do like to stress whenever we come to Washington is the sheer size of the Japanese economy. A number of the figures have already been cited, so I won't go back through that. It is important to always keep that fact in focus when you look at how to resolve the problems in Asia.
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Japan recently has been making the case that they have already made the most significant monetary contribution to resolving these issues in Asia. It is quite interesting to see, to me personally, this effort being focused on, the $30 billion, the $37 billion, whatever the measures are to calculate all of the different aspects of the monetary contributions that Japan is making.
If you will recall after the Gulf War, Japan was very hurt that they didn't get credit for having made such a large contribution monetarily to the effort. I personally would say that stressing the Japanese monetary contribution to the resolution of this current Asian crisis will not get them credit again this time either. Saying that we already paid at the office and therefore we don't have to do anything else, solely based on such direct contributions, is not the full or proper answer to the situation.
As was already noted, the robust American economy may receive dramatically increasing imports from these countries. On my way here from Tokyo, I was in Los Angeles in the last couple of days having fun in Mr. Berman's beautiful district. I noticed an article in the Los Angeles Times just in the last couple of days noting that imports into Long Beach are up by 34 percent by volume this year. We can not watch only the dollar value of imports. When you factor in that the currencies in Asia, including Japan, have been devalued by a very substantial amount, anywhere from 20 to 50 percent or more during the past 12 months, if you are just saying that the imports have not gone up by dollar value, you are missing the point. The volume necessary at this time to maintain that dollar value is substantially increased. That's what this 34 percent by volume figure touches upon. And what affects the jobs in the United States? Volume, not necessarily price. You have a huge increase in volume coming into the United States already as we see from these figures.
The ACCJ believes that for the sake of Japan's long-term prosperity, for stability in the region and for the continued health of the U.S.-Japan bilateral relationship, Japan must carry through a two-part program. The first part is macro economic measures to stimulate the stalled Japanese economy. Second, strong deregulatory steps and significant market access improvements are required that will open the Japanese market to competitive domestic and foreign goods and services and force inefficient sectors of the Japanese economy to reform. That effort will bring in imports both from the United States, as well as from the other Asian countries, and help Asia to grow out of the current crisis.
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Over the past number of months, perhaps a year or two, we have seen a heavy emphasis from the U.S. side on macro economic issues and perhaps less emphasis on micro issues. As a Chamber of Commerce, we are focused primarily on micro economic issues. We are happy to see that there perhaps is now more of a shift to at least some equal emphasis of both sides. You can't solve the problems solely by macro policies. We believe that you have to get into the real every day activities. The deregulation side is equally, if not more, important than the macro measures.
Today I would like to just touch upon deregulation measures which could lead to greater market access, continued bilateral efforts to achieve full market access and implementation of existing trade agreements. First, I would like to touch briefly upon inadequacies in some of the current economic reform efforts. In relation to deregulation, Japanese efforts have met with some progress in many respects, but those efforts have fallen short of the types of broad-based actions that really would lead to meaningful deregulation. Here you can't always just mention these short-term small improvements.
In my own case, our law firm opened their office 10 years ago in response to one improvement. We have grown to 30 lawyers there. Some people would say that's great success. We think it's not much at all. The potential is what one needs to focus on. An example later on that I will talk about is Motorola as well. Since there has been a huge expansion in the cellular market in Japan, people say Motorola has been terrifically successful. Our ACCJ vice-president, Skipp Orr, who is a vice-president as well at Motorola, Japan, says they don't believe that at all. The potential is far greater. We must maintain an overall view of what the deregulatory efforts are achieving in relation to the potential of the market, not just against a small historical base.
Part of the problem in dealing with Japanese deregulation is always a significant difference in the understanding of that term between the United States and Japan. From the U.S. perspective, we always look at deregulation in the context of focus on the consumer, what will bring the consumer better benefits, force greater competition, and therefore improve the entire environment.
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On the other hand, in Japan the process is focused virtually totally upon improvement of manufacturers' competitive position in the market, particularly internationally. In some ways, this goes very much against the interests of foreign exporters to Japan. It improves the Japanese position on a global basis, and it doesn't focus on the benefits to consumers. We as people who are trying to export into the Japanese market really want to focus on the benefit of consumers, broader competition, and easier access. We believe that that will improve the Japanese situation for all countries exporting to Japan, including the Asian countries as well.
As we have seen from some of what we believe to have been the successful trade agreements in the past, the benefits have not come just to the United States, but have been broadly enjoyed by all exporters to Japan. So we feel that the Japanese deregulation effort needs to be stepped up as one part of the broader integrated response to the Asian financial crisis. It needs to be improved. We see that deregulation in Japan was at its peak perhaps when the yen-dollar relationship hit 80 in 1995, generating a palpable fever to deregulate. Then it really was a fever, but it has really cooled very substantially. We don't feel the same effort or the same intensity in deregulation efforts in Japan that we saw 2 years ago. We would like to see that fact focused upon much more strongly from the U.S. side.
As I mentioned earlier, one of the best examples of deregulation through bilateral efforts was in the cellular area, where in 1994 the agreement on access between the Japanese and the U.S. Governments for the cellular phone trade took a situation where sign-on fees were at least about $1,000 and there were only about 500,000 cellular phones in the market, to today where the sign-on price is about $75 and there are more than 30 million cellular phones in the market now. However, as we said earlier, Motorola sees that as not a total success but somewhat mediocre in terms of the potential for the market. The telecommunications market needs to be focused on much more broadly.
Another difference in terms of the view of deregulation has to do with transparency. Right now Japan is focused on adopting a freedom of information law. But this law does not get to the heart of the problem. The heart of the problem is the absence of any kind of rulemaking process which is open and transparent in Japan. There have been discussions in that respect recently. There are some informal undertakings by the Japanese Government, I understand, to adopt a broader comment period which should be helpful, but that should be institutionalized, not just on a voluntary basis.
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With respect to fiscal stimulus measures, we applaud what is being done, but we also recall that over the past 5 years there have been $500 billion of other stimulus measures. We agree that there should be permanent tax cuts and investment which is made in terms of pump priming and which should be geared toward more productive areas for future benefit in infrastructure.
Now that the lights are on, we have to speed up even more. It's lucky they talk fast in Tokyo. With respect to the big bang, I would like to mention that our members are quite enthusiastic about these deregulation efforts. Even though we see that in some sectors these changes are not sufficient; for example, they really need to be better in insurance, fund management, and other areas, but overall the effort is having major positive impact. These ''big bang'' efforts represent probably the first time that there is a broad-based effort by the Japanese Government toward deregulation of an entire sector. We want to push that effort because we can use that example to spur greater deregulation in other areas on a broader basis rather than one rule at a time.
I also brought a viewpoint that we have just adopted in relationship to year 2000 compliance. We have significant concerns in this respect in the Japanese market, particularly in financial areas because there has not been transparency. The Japanese Government has not been taking a lead here. International financial institutions are very concerned that the Japanese problem in 2000 may be another disaster in the making. I would like to submit a copy of our ACCJ viewpoint on year 2000 compliance for the record.
What needs to be done? We need meaningful deregulation as we talked about before, relentless hard work in this respect. Turning on and off policies in relation to Japan, not paying attention, is the death knell of progress. We have to have continued effort and continued focus on specific steps that we want to have taken.
We do publish every other year our ''U.S.-Japan Trade White Paper''. We have been doing this since the late 1970's. I have submitted for the record a copy of the executive summary of our latest report. It goes into great detail in relation to 40 different sectors of the economy. So again, I would suggest and hope that you could take a look at that.
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[The summary appears in the appendix.]
With respect to the need for full implementation of bilateral agreements, I have also submitted the executive summary for our study, ''Making Trade Talks Work, Lessons from Recent History,'' which was very well regarded and was indeed the first time that anybody had on a comprehensive basis looked at and evaluated the major U.S.-Japan trade agreements.
[The summary appears in the appendix.]
I think I'll try and stop there and leave the more specific points to questions from the panel. Thank you very much.
[The prepared statement of Mr. Grondine appears in the appendix.]
Mr. BEREUTER. Thank you, Mr. Grondine. I know you have lots of information to provide us. The supplemental material will be examined. I appreciate your effort to bring it to our attention.
Next we'll hear from Mr. Peter S. Walters, group vice-president, Guardian Industries Corporation. Primarily your testimony, I believe, will give us an example of what one firm, your own, faces in the way of difficulties in moving into a Japanese market. We welcome your testimony. You may proceed as you wish.
STATEMENT OF PETER S. WALTERS, GROUP VICE PRESIDENT, GUARDIAN INDUSTRIES CORPORATION
Mr. WALTERS. Thank you, Mr. Chairman. With your permission, I'll just briefly summarize my full statement that has been provided to the Committee.
Mr. Chairman and other distinguished Committee Members, thank you for the opportunity to appear before you today. My name is Peter Walters. I am group vice president of Guardian Industries Corp. of Auburn Hills, Michigan. That's a Detroit suburb. Guardian is a major worldwide manufacturer of flat glass products used mainly in the construction and automotive industries.
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It is our understanding that PPG industries of Pittsburgh also supports H. Res. 392. As many of you know, PPG is also a leading global manufacturer of flat glass, as well as many other products. Together we represent the two major U.S.-based manufacturers of flat glass.
Guardian has worked over the past decade to establish a foothold in the Japanese market. PPG has been in Japan for over 30 years. Together we still account for less than 1 percent of the Japanese market, 1 percent. This is astonishing in light of our substantial market shares in every other market in which we compete. Guardian's initial market entry strategy in Japan was one that had worked well elsewhere. But from the outset, we met a stone wall in Japan. With minor exceptions, neither glass distributors nor fabricators would purchase our products, despite our price advantage of 30 to 50 percent. It soon became clear that the problem was Japan's distribution system. Each of the three Japanese flat glass companies, Asahi Glass, Nippon Sheet Glass, and Central Glass, maintained an exclusive network of distributors. The three operated as a cartel and had steady market shares of 50, 30, and 20 percent respectively, dating back to the post-war period.
Guardian created a sales subsidiary in Japan and opened a network of warehouses. PPG entered into a joint venture with a Japanese trading company to handle marketing and sales in Japan. Neither approach has worked. In June 1993, the Japan Fair Trade Commission found that anti-competitive behavior existed in the flat glass industry. However, the JFTC decided not to impose penalties, ostensibly because the glass companies had already agreed to take reform measures. These industry measures accomplished little.
In recent years, the U.S. Government has worked hard to break down the obstacles to market access in Japan. In the 1992 Bush-Miyazawa Action Plan, the Japanese Government acknowledged the problem in the flat glass sector. Unfortunately, the election period intervened and there was little consistent followup. In January 1995, U.S. Trade Representative Micky Kantor concluded a flat glass agreement with then-MITI Minister Hashimoto, today Prime Minister. The 5-year agreement spelled out the responsibilities for all parties to create an open flat glass market. We believed at the time that this agreement if properly implemented would be helpful. We are now more than halfway through the 5-year life of the flat glass agreement. I must report that the results have been disappointing.
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Things looked promising for about 6 to 9 months after the agreement took effect. Then there was a very pronounced turnaround. Sales rapidly increased by some 50 percent, but then rapidly eroded to pre-agreement levels, where they remain today. There are no signs that this pattern is likely to change.
We are at a frustrating point. The Japanese insist that the market is open because they have declared it open. Meanwhile, our salesmen report continued anti-competitive behavior in the marketplace. In our view, the Japanese Government needs to tighten its implementation of the anti-monopoly law. Clearly a hands-off approach by the Japanese Government will not achieve a competitive glass market.
Comprehensive deregulation is in Japan's interest. The Japanese people are embracing deregulation and change despite reluctance from politicians and bureaucrats. Excessive regulation, closed markets, prohibitive high taxes, and ineffective anti-trust laws represent a crippling drag on Japan's international competitiveness.
Japanese consumers, not Guardian or PPG, would be the main beneficiaries of an open and competitive glass market. But as long as the Japanese distribution system is locked up by vertical restraints, the Japanese glass cartel has no incentive to innovate and no reason to listen to consumer demands.
The U.S. Trade Representative's office, our embassy in Tokyo, and the Departments of Commerce and State, have worked hard to keep the pressure on Japan. The Administration has had the strong support of the Congress, including your support, Mr. Chairman. Despite these efforts, there has been little progress, especially during this period of a growing bilateral trade deficit. It should be in Japan's interest to resolve as many outstanding trade issues as possible. Flat glass is certainly resolvable. Japan can not afford to be perceived as a country that does not live up to its agreements. For several months, we have worked closely with the anti-trust division of the Justice Department and the Office of U.S. Trade Representative to develop a new proposal for anti-trust compliance plans modeled on the U.S. consent agreements. We support this new and innovative approach to addressing anti-competitive practices in Japan. We urge Congress to stand behind the U.S. negotiators.
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Mr. Chairman, H. Res. 392 does an outstanding job of highlighting the cost to both the global economy and Japan itself of a continuing failure to address its economic problems. Guardian and PPG strongly support passage of the resolution in both Houses. I would be delighted to answer any questions when appropriate today. Thank you, Mr. Chairman.
[The prepared statement of Mr. Walters appears in the appendix.]
Mr. BEREUTER. Thank you, Mr. Walters.
Next we'll hear from Mr. Richard Katz, contributing editor of The Oriental Economist Report. You may proceed as you wish.
STATEMENT OF RICHARD KATZ, CONTRIBUTING EDITOR, THE ORIENTAL ECONOMIST REPORT
Mr. KATZ. Thank you, Mr. Chairman. I also am going to summarize my written testimony.
I have some bad news and some not-so-bad news about Japan's future role. The bad news is this: as you say in H. Res. 392, the best way Japan could help the rest of Asia is to get its own house in order. I don't see that happening for several years. Japan's problems are not simply the hangover effect of the late 1980's financial bubble. They are deeply woven into the very fabric of the private political economy, with vast private sector collusion, price fixing, anti-competitive activities, et cetera. Deregulation would only touch a part of that. So it requires wholesale reform. The cost of that is estimated at something like 10 million lost jobs. Now reform would also create 12 million new jobs, but there's going to be a time interval in between. The political effects of that, you can imagine.
Therefore, there will not be wholesale reform in Japan, I don't think, for several years. What that means is the following: Without reform, the fastest Japan can now grow, if they're running at full capacity, is something like 2 percent a year. That is the supply side problem in Japan because the productivity is so feeble.
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It has also a demand side problem, which is another syndrome of the same situation, which I call economic anorexia. The private demand in Japan is chronically too deficient to absorb what Japan produces. They can only grow if they either run a massive budget deficit or they ship the excess to the rest of the world in the form of trade surpluses. When they can't do either one sufficiently, they cannot grow. That has been the situation during the 1990's. Therefore, actual growth is far below the potential. It's maybe 1 percent growth. That is not going to change for several years to come. That is the bad news.
The not-so-bad news is that people in Japan have finally begun to recognize the situation is so bad that something should be done. There are things that can be done today that will have immediate positive effects while we wait for the long-term reform. Already people are telling Prime Minister Hashimoto either move off the dime or move out of the office. The Keizei Doyukai Business Federation has called for his ouster. Therefore, there is political pressure to do something. Under those circumstances, I believe that skillfully applied and judicious suggestions from the United States could help tip the balance in favor of some positive moves.
What are these positive moves? I have five immediate suggestions that could be done today. First is cleaning up this banking mess. The banking problem is a symptom of Japan's deeper problems. It's not the cause. But nothing else can be resolved unless that is addressed. We addressed the savings and loan crisis in this country, which was a far smaller problem, but still a very big problem. We addressed it via the RTC. Who now remembers that this was regarded then as such a big crisis? It was barely a blip in the economy because it was addressed quickly. Assets were allowed to fall to market levels. They were sold off, gotten rid of, et cetera.
Japan needs to say no more convoy system, i.e. bad banks should be allowed to fail. If the government recapitalization of banks is necessary, that should only be applied to healthy banks. Let the asset prices fall to market levels so that new investors can come in. No more spending of tens of billions of dollars in so-called price keeping operations to keep stock prices or real estate prices at artificially high levels. As long as they are at artificially high levels, people are afraid to buy for fear they will fall again. We did the opposite. We let prices in Texas real estate hit bottom. Then you could have recovery. So that is necessary.
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But if that's all that is done, that would be a recipe for disaster, for depression. Therefore, you need a macro economic safety net while this is being done. That means massive, massive fiscal stimulus. The measures taken by the administration of Hashimoto so far are insufficient. The Finance Ministry of Japan will tell you that they already spent so much money that fiscal stimulus will not work because consumers will not spend the money, that it is bridges to nowhere, et cetera. I disagree wholeheartedly.
As you will see in figure 3 on page 9 of my testimony, the record is very clear over the last several years. When the government has applied fiscal stimulus in public works, et cetera, the economy has gone up. Then it cut fiscal stimulus, it cut spending on public works, it raised taxes on consumers, and the economy went downhill. Now, the economy is too weak for fiscal stimulus to catalyze a self-sustaining recovery. That is surely true. But it can keep the economy afloat and at even 2-percent growth, it means something like $8 billion more in imports than with zero percent growth. So fiscal stimulus is necessary to have a modicum of growth and also as a safety net to allow the reform to proceed.
In my opinion, fiscal stimulus should focus on permanent tax cuts directed at individuals. You don't need corporate tax cuts. That would worsen the problem of economic anorexia. Corporations are raking in money with no place to invest it profitably. So they buy buildings in Tokyo that have no value. They build things in Thailand that have no value. Permanent tax cuts for individuals will be spent. Even if they spend only half of it, that's still more money.
To the extent that public works are used, there is something the Government of Japan can do today that will make tremendous change in both the immediate situation and long-term reform. Announce today that, from now on, for any public works the Government of Japan will only spend at internationally competitive prices, as opposed to the prices that the Economic Planning Agency of Japan says are two or three times world levels. They did the bidding themselves just to test it.
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What would happen if the government said only competitive prices for public works? This is 5 percent of GDP, by the way, we're talking about. Construction as a whole is 10 percent of GDP. What would happen? First of all, fiscal stimulus would get more bang for the buck. You get what you pay for. Second, you prevent public works from being used as a public allowance for the most corrupt sections and the anti-reform sections of Japanese business, as well as the politicians who get their under-the-table 3 percent cut.
Third, you can not have cartel high prices if you can't pass the price along to the consumer. Half of all construction business in Japan is public works. If the government paid competitive prices, then the contractors would be forced to seek cheaper imports, cheaper materials such as steel and cement from Korea, finished lumber from Indonesia, and perhaps even some flat glass from Michigan. Trade negotiations are fine, but the solution seems to me is to cut off the allowance. Competitive prices for public works.
Finally, the unemployment insurance system and the deposit insurance systems in Japan are umbrellas that work only if it does not rain. No wonder consumers are too afraid to spend money. While you go through the bank reform, you must shore up deposit insurance, but only protecting depositors, not bond holders, not stock holders. I believe something close to 2,000 banker crooks went to jail in this country as a result of the S&L fiasco. The Ministry of Finance will not even fire incompetent bankers when they give money to bail out their banks. Someone should be held accountable.
The people can not be gotten rid of at redundant jobs and transferred to new jobs—you can not have reform—if people are afraid of being thrown onto the street. You must have an unemployment compensation system that is sufficient and is fully funded. That would be much better use of government money than handing over capital to banks that don't deserve it. If that were done, people would feel safe in allowing this reform. Right now, much of the unemployment system actually subsidizes companies to keep on workers who sit by windows doing nothing.
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To sum up, these steps, particularly paying competitive prices for public works, the fiscal stimulus, they can be done today. They will set the stage for the longer-term reform. They are not a substitute for it. They are necessary, but not sufficient. I believe they would go a long way to keeping Japanese growth at a decent level. That would automatically increase imports in the rest of Asia and help the situation immensely. Thank you. I'll be happy to answer questions.
[The prepared statement of Mr. Katz appears in the appendix.]
Mr. BEREUTER. Thank you very much for your testimony and for the excellent testimony received from all of you. We scheduled this hearing to have this as the only panel. You gentlemen are up front rather than the panel from the private sector and the experts following the Administration. Often times it doesn't get the attention it needs.
We'll proceed under the 5-minute rule. I do need to tell my colleagues we can go to a second round of questions and we'll be happy to do that. However, Mr. Glassman has a 3 o'clock plane, so if you want to yield to each other so that you can ask him questions before he has to exit, we'll accommodate that.
First, under the 5-minute rule, I turn to my colleague, the co-chairman of this hearing, our distinguished colleague from Florida, Ms. Ros-Lehtinen.
Ms. ROS-LEHTINEN. Thank you so much, Doug.
What lessons can we learn from the Kodak World Trade Organization case and from testimony that Mr. Walters gave to us of companies like Guardian about the distribution system in Japan, the anti-competitive practices? What do you think are those lessons that we can learn from? I'll throw it open, whoever wants to take it.
Mr. GLASSMAN. I myself have no view on this subject. I think that to try to micromanage the Japanese economy is a futile pursuit. I really think that it's these more macro questions that we ought to be focusing on.
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If we can get Japanese consumers to increase demand for goods, they are going to do what consumers in this country do, which is demand the best goods at the lowest prices. I think that is what has to be done.
Mr. WALTERS. Let me just briefly respond to that. The distribution system in the glass sector is not unlike many other sectors in Japan, which is to say that there are distributors aligned with producers, and not only do they not buy imported products from America or elsewhere, they do not buy products even from the other producers in Japan.
It is my impression that Japanese anti-trust laws are strong enough in terms of their legal ability to enforce competitive practices in Japan. They, however, choose not to do so. So a whole host of problems exist that are related to the distribution system, which incidentally includes the way the construction contracts are awarded that was mentioned by Mr. Katz. It's very much a ''good ole boy'' network where company A takes the first project, company B takes the second project, company C takes the third, and then we're back to company A again. There is no competition in that system.
Actual enforcement of existing laws with some vigor would go a long way toward opening up the economy, at least in regards to the distribution system that you mentioned.
Mr. KATZ. The lesson I take from it is that you have to pick and choose your battles. I sympathize with Kodak's plight, and certainly the U.S. Government should respond when companies have a problem. But I'm thinking from the standpoint of what would be most effective in getting the Japanese market open. It seems to me the situation is that there are many many cases where there are forces in Japan itself which need reform of Japan for their own interests.
The U.S. negotiating agenda has been most successful when the U.S. desire for market access has coincided with those forces in Japan. Look, for example, at the recent financial insurance agreements in 1996 which opened up some of the financial service areas. One of the keys of that was not only the hard work of our negotiators, but the fact that the Japanese life insurance companies don't know how to make money. They can't make money in the current monetary and regulatory situation in Japan. The corporate pension funds, who need to pay off their obligations to their employees, can not pay off those obligations if they are tied to using those Japanese life insurance companies. So under the table, they gave support for part of the U.S. negotiating position of opening up those financial services. Once those were opened up, corporations like Honda and others took some of their pension business away from Japanese insurance companies, and gave it to firms like Goldman Sachs. You will find them investing with Fidelity, et cetera. This has tremendous ripple effects throughout the economy. If you create a situation where money begins to go to those who can make profits and does not go to those who can't, you begin to break up this ''ole boy'' network. Therefore, some of the developments in the financial services area have been very, very effective.
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The same thing in retail. Look at Toys R Us and the Large Scale Retail Store Law. Japanese customers are like anybody else in the world. They want value at good prices. Toys R Us is now the largest toy retailer in all of Japan. People went there. As I say, if you end controls on who gets the money from banks and where customers can buy, everything in the middle begins to shift as well. That's the lesson I would draw.
Ms. ROS-LEHTINEN. Mr. Grondine, why in your opinion is a strong Japanese economy a more important remedy for a sick Asia than all of the IMF assistance or Japanese-led financial assistance to the region?
Mr. GRONDINE. I am not sure I would say it's absolutely more important. I think it has a greater knock-on effect. One of the risks in terms of IMF——
Ms. ROS-LEHTINEN. Mr. Glassman was the one who had said that.
Mr. GLASSMAN. Yes. I was the one who said that.
Ms. ROS-LEHTINEN. That's right. Do you think so too?
Mr. GRONDINE. I believe that Japanese deregulation is going to bring in more actual grassroots development into Asia than just the absolute dollars that the IMF is putting out there. There would be a lot more trade and a lot more synergistic effects throughout the economies of all the regions because they trade with each other and there are a lot of parts manufacturers in all the countries to assemble these products that go out to Japan. We don't want to see them all come here. They have to go to Japan as well.
Mr. GLASSMAN. I essentially believe that the IMF bailout money is just a waste and that what is needed, it may be a short-term solution to some of the liquidity problems, but what's really needed is for the Asian economies to get back on track, to increase their growth. That is not going to happen with IMF money. That is only going to happen through the leadership of Japan.
Mr. GRONDINE. If I could just add one thing there. I think that you have to be really careful with IMF issues because we see in the Nikkei Dow average and the underwhelming effect that the Japanese stimulus package announcement has had on that, because they say that all of that new stimulus has already been factored into the Japanese market. I think the markets in Asia and other places in the world have already factored in that the IMF support is going to be there. In the short term it may be, as Mr. Katz was saying, the safety net that we need to get everything up and running to go and hit the larger effect of the Asian exports to Japan from the greater economic effect of deregulation in Japan.
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If you take that IMF support away in the short term, that may have a significant destabilizing effect on where the markets are right now.
Mr. BEREUTER. Thank you. I misspoke earlier. Mr. Glassman doesn't have a 3 o'clock plane. He has to leave at 3 o'clock for a plane later.
Mr. GLASSMAN. Yes.
Mr. BEREUTER. I turn now to our colleague from California, Mr. Berman.
Mr. BERMAN. He has to leave at 3.
Mr. GLASSMAN. Well, go ahead.
Mr. BERMAN. I've got 5 minutes.
Mr. GLASSMAN. I'm at your good graces.
Mr. BERMAN. I'm going too, actually, since we have a second round and since you have to leave, although it's unclear when——
[Laughter.]
Mr. BERMAN. I am going to ask you some questions in the first round because first of all I read you frequently, I watch you on television. You have the capacity of both getting me very angry and to make me rethink things, and once in a very rare while actually to change a view on something.
Mr. GLASSMAN. Thank you. That's a compliment.
Mr. BERMAN. I always wanted to ask this question with pundits, columnists, writers, thinkers. What were you saying about the Japanese economy in 1985, 1986, 1987, 1988? Because some of the themes from all of the witnesses today talked about the same issue. My guess is whoever was trying to sell flat glass in Japan was having a lot of problems, but it was never in the context of this is what's making the Japanese economy weak. All the very same features that are now being blamed for the Japanese economy in fact was probably said this was why the Japanese were wiping us out and cleaning our clock. I am just curious what you thought.
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Mr. GLASSMAN. I never believed that. I was a very strong critic of people who believed that the Japanese system of industrial policy and of protectionism was responsible for the economy's success. Quite the contrary. It was always amazing to me that the economy was as good as it was despite that. The reason it was, I think, is that the Japanese people are enormously industrious. They have a lot of capital to back them up. I think the other reason is they made a lot of good choices. But I think that their system is now catching up with them, that it is not a good system. You can't base a system on allocations of capital based on the geniuses at particular ministries. Capital has to flow where the profits are. That's what we have certainly learned in this country. You can't direct it from Washington. That is essentially what's been going on in Japan. Eventually that system really had to come apart. I think that's what we're seeing.
Mr. BERMAN. Did it come apart because all of a sudden they were making bad choices or does it just have to come apart? Do you think people make bad decisions?
Mr. GLASSMAN. Sure. But markets make far fewer mistakes. Smart people do sometimes make bad mistakes.
Mr. BERMAN. The flip side of monkeys typing Shakespeare.
Mr. GLASSMAN. Which is?
Mr. BERMAN. Smart people making enough decisions ultimately have to make some bad ones in running this economy.
Mr. GLASSMAN. I think that's absolutely true.
Mr. KATZ. Could I add something on that point?
Mr. BERMAN. Yes.
Mr. KATZ. I disagree on that. I think what you have is what I call a dual economy in Japan. What we now regard as the Japanese model, I believe, was a wonderfully successful system for enabling a poor agricultural country, which Japan was back in 1950, or newly industrialized country, to catch up with the West. It worked up until about 1970 or so. At that point, Japan had to make a switch from industrial policy-led growth toward something more market-oriented as it became mature. This is something economists have been talking about for 150 years. It's not new. They did not make the switch.
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The crisis Korea is going through now is in a certain sense a more tumultuous example of what Japan went through back in the 1970's. Japan made the wrong choice then. I believe Korea will make the right choice now.
But the result of keeping that system which worked is like having mainframe computers in a PC world. It worked, but now it's the 1990's, it's not the 1960's. The result of that was to have what they call a dual economy. That is illustrated in Figure 2 in my testimony. The export sectors of the economy that we all know, autos, electronics, were helped to get off the ground by this industrial policy. They face competition on a world scale. Therefore, they had to hone their competitiveness to survive. They did. But that is like saying the whole Soviet Union is as strong as their nuclear arsenal.
The domestic economy of Japan is protected from imports. It's too weak to export, but it's protected from imports. Those protections against imports are the bodyguard for domestic cartels. Therefore, those sectors are horribly weak and inefficient. Now the strong sectors are being driven offshore. You buy Panasonic air conditioners made in Malaysia. Almost half of the Japanese cars now are not made in Japan. Japanese VCRs are not made in Japan. So the strong sectors——
Mr. BERMAN. And their internal protection measures didn't stop the flow of the jobs of those export industry jobs off shore.
Mr. KATZ. On the contrary, they helped push those jobs offshore. It's comparative disadvantage. Because they are protecting flat glass and cement and paper, they are driving computer chips and autos and VCRs offshore. So the strong are being asked to subsidize the weak but they can no longer do so. Yet, it's easier for them to leave Japan than to change Japan.
You think you have a problem? Toyota has a problem also.
Mr. BERMAN. One last question. What would have happened if we hadn't stepped up and the IMF hadn't stepped out with Mexico? I mean ultimately you are saying stop this IMF program even though it might be a way to leverage some of the things you started out advocating, at least in the context, well you were advocating them as to Japan. But regulatory transparency and all that.
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Mr. GLASSMAN. Yes. I think my problem with the IMF——
Mr. BERMAN. Spin out the alternative of doing what you say and what's going to happen in Asia or in Mexico would have happened.
Mr. GLASSMAN. Well, let me talk about Asia. I think that in Asia the problems will be solved by the creditors and the debtors themselves. I mean for example, everyone is congratulating Japan on putting up this money for the bailout. Well, where does this money go? It goes ultimately to the Japanese banks that made the bad loans in the first place.
What I would like to see is those banks negotiate with the people who owe them money and settle it in some way. The best way I think is to exchange debt for equity. That's a good way to do it. So that maybe American companies would own some banks in Korea. That wouldn't be a bad idea either.
But my big problem with the IMF really is this moral hazard problem that it creates. When you do bail outs, then the next time around the banks think hey, I am going to get bailed out. They don't assess risk properly.
Mr. BEREUTER. Thank you, Mr. Berman. I'll take my time now. I'll focus mostly on Mr. Glassman in the first round because of his exit here shortly.
We had comments about the social security, the unemployment system from Mr. Katz. I would like to have anything from you, Mr. Glassman, about that subject. I would also like you and then anyone else who has time, for which I have time, to comment upon these circumstances.
Not too long ago the Japanese raised taxes. It seems to most people, certainly retrospectively, this was a very bad idea. Second, when you visit with them, they seem very preoccupied with the size of their national debt with their annual deficit. This is the reason they give repeatedly for the failures to take the step that most of the world seems to be advocating.
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What would you say to these Japanese officials, Mr. Glassman? What are your comments about a social security system, a safety system of some kind at this point?
Mr. GLASSMAN. A safety net of some kind. I actually have not thought about that. I do think though that as Mr. Katz said, that if there are other hardships imposed, that it is necessary to have some kind of a safety net. I must say I'm not completely familiar with what safety net exists right now.
As far as the Japanese concern about their budget deficit, I think that's a legitimate concern. I think if we were getting advice from other countries that essentially would produce a larger budget deficit, if other countries were telling us hey, we know your budget deficit is 6 percent of GDP, we want it to be higher, I think we might resist those suggestions as well. I am skeptical about the effects of fiscal policy such as tax cuts and certainly more government spending on stimulating the Japanese economy.
I think the economy is in such serious straits that that sort of thing, unless it is massive, and it would be an interesting experiment, I am just not so sure that it's going to work. I would rather see monetary stimulus. I'm not even sure that is going to work. I mean really we are getting into a situation that's not that dissimilar from the 1930's in this country, where the expression ''pushing on a string'' was used. I mean it's much easier to cut off an inflation than it is to reverse the course of a deflation. Japan is already in a deflation. It's headed into a worse one.
Mr. BEREUTER. Mr. Glassman is about to leave. Would any of my colleagues, starting with Mr. Faleomavaega, like to use the balance of my time to pose a question? Then we'll take two or three questions from our colleagues who haven't spoken and pile them up for Mr. Glassman.
Mr. FALEOMAVAEGA. Just a real quick question, Mr. Glassman, since he has to leave quite shortly. I happen to agree with some of his basic statements about the situation in Japan, and that there is a very similar lining on how the whole banking industry throughout Asia seems to follow exactly the system that the Japanese follow. They have another name for it in Korea, I believe. But I wanted to ask Mr. Glassman, I believe the budget deficit in Japan is about $600 billion according to the latest estimates. I don't know what the national debt is. I know our national debt is about $5.5 trillion. Will that have any difference in terms of economic standing, in terms of our ability or inability to contribute to resolve the Asian crisis as opposed to maybe Japan can contribute more or less?
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Mr. BEREUTER. Keep that in mind. Mrs. Capps, Mr. Lantos, Mr. Luther, do you want to add any questions for Mr. Glassman? No from Mr. Luther. Mrs. Capps?
Mrs. CAPPS. Me? Shall I go next?
Mr. BEREUTER. Yes.
Mrs. CAPPS. It has been said that the Japanese system has come apart. I guess I would like to come away from this hearing with a sense of a kind of a singular economic effort that the Japanese Government must undertake to energize its economy and what role our government would have to do with that?
Mr. BEREUTER. Mr. Lantos, do you want to add something on my time?
All right. Mr. Glassman, do you want to try those two questions?
Mr. GLASSMAN. I believe, someone else on the panel could correct me, that the Japanese debt is 100 percent of GDP. It's a very high figure. I don't think that at this point there would be terrible economic effects to increasing the size of that debt, but I think there could be serious political effects in Japan.
I mean we are sitting here telling the Japanese what to do with their economy, which is always a risky thing to do. I think the Japanese probably as much as any other people, and probably more so, resist that kind of thing. So the idea of increasing their deficit beyond where it is, increasing their debt beyond where it is, is not necessarily something they are going to love to do.
As for the single most important thing to do immediately, I think it is to have a more stimulative monetary policy. We keep sending different kinds of signals to Japan. But there needs to be more money sloshing around in the system so that people will spend more money. It is not going to be easy. The Japanese are already pumping lots of money in and it's having almost no effect. I do believe, and people who know more about monetary policy than I do like my colleague Alan Meltzer at AEI, believe very strongly that that is the solution and if enough stimulus is applied, that the Japanese will get their economy moving again. So I think that's the single most important thing.
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In the long term, restructuring is the most important thing. But I think that has to come from consumers demanding higher quality goods at lower prices, and demanding an end to this system that my other panelists have talked about so eloquently.
Mr. BEREUTER. Thank you, Mr. Glassman. Thank you for your attendance.
Mr. GLASSMAN. Thank you, Mr. Chairman. I'm sorry I have to leave.
Mr. BEREUTER. I'll proceed in the normal order of the people who were here before the beginning of the session. The first person to arrive in the room was Mr. Faleomavaega, so you are recognized for 5 minutes.
Mr. FALEOMAVAEGA. Thank you, Mr. Chairman. I have just one or two questions I wanted to ask Mr. Grondine.
Mr. GRONDINE. Grondine.
Mr. FALEOMAVAEGA. Grondine, I'm sorry. I apologize.
Mr. GRONDINE. Everybody says it that way.
Mr. FALEOMAVAEGA. You indicated earlier that the American Chamber of Commerce in Japan, you have some 1,000 companies that make up the membership?
Mr. GRONDINE. Yes.
Mr. FALEOMAVAEGA. That's quite extensive. Have any of our American corporations doing business in Japan been affected by this Asian crisis and doing business in Japan whether directly or indirectly?
Mr. GRONDINE. There is anecdotal evidence among the members who have regional responsibilities who handle matters for their companies in countries other than just Japan. In terms of members who are focused only with their companies' efforts in Japan, I would say we haven't seen a lot of that impact in Japan yet in the sense that as we are saying Japan should be gearing up for taking more Asian imports that would create more competition in Japan for American exports to Japan. But the American exports are down now already because of absence of deregulation, as well as the change in the exchange rates which are a significant concern to our members.
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Mr. FALEOMAVAEGA. What do you think is the consensual opinion of the members of the Chamber in Japan with Mr. Glassman's observations? He was quite pointed and very forward in saying that the problem is not with the Asian economies but with Japan's inability to be part of the solution of the problem.
Mr. GRONDINE. I think we would agree. Fundamentally we would agree that Japan needs to open up more. Unless it does, we are not going to be able to solve the Asian crisis just separately and without any connection with Japan. It's not something that just some cash will make go away.
Mr. FALEOMAVAEGA. Do you think that Japan has carried quite well its enforcement of the corruption and some of the problems that have happened in the high places where things just did not work well? I mean you are forgiven, but you don't go to jail. I don't know if you can comment on that or whether the Chamber has a position on that. Of course we're not angels here in our own country. But I was just curious.
Mr. GRONDINE. The Chamber has positions certainly that government in Japan needs to be more transparent and open. That is why, as I mentioned before, we support very much efforts to tackle the rulemaking process in Japan, that the current focus on a freedom of information law is inadequate because it doesn't get there. From what we have seen, you need to open up that government rule-making and regulatory process in order to remove the ability of people to deal behind the scenes and engage in those kinds of corrupt practices.
As an attorney and not wearing an ACCJ hat, I would say that the efforts to date to curb corruption in Japan have not gone far enough. I am currently engaged in a back and forth in a Japanese publication with a senior managing editor from the Keidanren over the proper directions of corporate governance in Japan. There seems to be this longstanding policy of not sending people to jail. I believe personally that as in the United States, as was mentioned before with the RTC and with bid-rigging cases that were heavily litigated and prosecuted even in the 1980's, unless you have those penalties to show people that it really does not pay and the individuals have to be responsible, just allowing the president of the company to retire, he may cry for 5 minutes but then he gets put on as a high-paid advisor and he really doesn't suffer tremendously. Unfortunately, it's the nature of man, that you have to show people that there are real penalties in life.
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One basic business calculation, sorry, just please allow me another 30 seconds on this issue. If you can violate the anti-monopoly law and the penalties are not high, then you would do it every time. It's the same with enforcement of intellectual property rights and everything else. In Japan in the past and still today it pays to violate the law because there are not significant personal or corporate penalties. There have to be much more significant penalties and much stronger enforcement in order to correct that problem.
Mr. FALEOMAVAEGA. I attended a seminar recently with some of our colleagues who are members of the Japanese Diet. One of the things that became quite clear in my mind about this discussion is not just economics, but it goes beyond the economics.
Mr. GRONDINE. Yes.
Mr. FALEOMAVAEGA. It's always that sense I guess from my Japanese friends, have taken that tendency of being told what to do. The World War II, post-World War II mentality that it seems that we always have to up to the United States to tell us what to do, to the point that I think there's a sense of real strong pride and nationalism in saying don't tell us what to do. If we go to pot, let us do it the way we want to do it, but no more than we would have suggested to tell you, America, what you should do.
The corporate presence that we have in Japan, may I ask, Mr. Grondine, and I know that some of our corporate friends in Japan, when they are successful in dealing with the Japanese, whether it be through the bureaucracy or what, nobody talks about it. Now we have the likes of Mr. Walters here telling us on the products like glass he is having a very difficult situation.
I suppose it's the same with our country. There are some products or areas that we are very protectionist about. Is it any different in your experience in dealing with the Japanese people in doing business there?
Mr. GRONDINE. In my experience, I always think more and more that everybody the world over is the same. Every country likes to think it's unique in some ways, and we are. But the universality takes over much more in my view than the uniqueness aspects. So I would say that there are areas in the United States that are protected. I think everybody would agree with that. It's hard to escape some of those claims. The Japanese are very good at making them.
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But if you look at this issue in terms of more of the macro view of freedom of trade back and forth and trade flows, and where is it easier to do business, I think Japanese companies would almost universally say that they have a lot easier time doing business in the United States than many times in their own country. Certainly if you are talking about the No. 3 or No. 4 company in an industry sector, they will certainly tell you that. Honda made its name by building its brand in the United States. They were considered to be somewhat of an ''also ran'' in Japan for many years until they became much more recognized internationally. One might say the same thing about Sony. So these examples really do have an interesting gloss that they put on how you have to compete in the Japanese market.
Mr. FALEOMAVAEGA. Thank you, Mr. Chairman.
Mr. BEREUTER. The time of the gentleman has expired. The gentlelady from California is recognized for 5 minutes.
Mrs. CAPPS. I want to thank each of you, Mr. Katz, Mr. Walters, and Mr. Grondine. This is my first appearance. I have just come onto this Subcommittee on Asia and the Pacific. I have learned a lot from each of you and also from Mr. Glassman. It is a good introduction for me to be here today.
Just to follow up with a comment. Mr. Grondine, you mentioned and I think I have gotten the sense that Japan needs to open up more and you can say that, because you have been there a lot. My question is, what is the relationship of international pressure? Specifically the kind that would come from this country upon Japan. Is it helpful? Is it harmful in the areas that we have been discussing today in assisting or providing pressure, whatever the role is, to achieve the reformation of the economy in Japan?
Mr. GRONDINE. In some ways it's damned if you do and damned if you don't. We often get requests and people at the embassy in Tokyo also get requests from Japanese companies as well as sometimes requests even anonymously from the Japanese ministries for us to put pressure from the outside. The famous, or to some, infamous, Mr. Gaiatsu, was Ambassador Armacost. This pressure from outside is a very convenient thing because often it's used to help break log jams domestically, where the interests who are there have achieved somewhat of a stability and it's difficult to break through that to do something new, to force change. As we see the way that the April 9 stimulus package announcement by Prime Minister Hashimoto has been presented and spun, one of the justifications has been that they have to preserve their position in looking forward to the Birmingham G–8 summit next month. They have to be able to explain what they are doing and present a positive effort to meet their responsibilities in the world.
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Unfortunately for us as well as for Japan, sometimes it does seem as though foreign service is very helpful. You would expect in fact that domestically in Japan it shouldn't be as hard to make change as seems to be the case. But it is often helpful in the Japanese domestic mix of things to have outside pressure. We don't have at the present any other pattern which would lend itself to what we should do. The Japanese publicly complain about such foreign pressure bitterly, but they don't offer any new paradigms as to how to go about this dialog. One would hope that dialog could be done more civilly, more discreetly, more effectively. But it seems that the continuing Japanese pattern broadly has been one of delay in making large changes, with small steps if any being made voluntarily don't achieve the impact that is desired. Therefore, a continuing back and forth, finger pointing, and not so productive interactions which you worry about for the longer term will still be the pattern for the forseeable future.
In terms of achieving what we need to have done for deregulation in Japan and gaining movement in the short run, continued foreign pressure seems to be the only pattern that is currently available to us.
Mrs. CAPPS. Mr. Katz, would you agree?
Mr. KATZ. I think it works in some circumstances and not in others. First of all, the context in which it works is the fact that Japan is really a one-party state. There are opposition parties which actually would prefer to remain in the opposition. They would prefer to remain as small parties rather than actually bring down the LDP. It has something to do with the electoral system. I don't want to get into all that, but the point is that I don't care if it's Japan or Italy or some city in the United States where one party rules the place for decade after decade. That is a recipe for corruption, disaster and stasis.
Competition is as necessary in politics as well as in business, in my opinion. Therefore, often times the United States is referred to as sort of the unofficial opposition party. That is the Gaiatsu mentioned before, the foreign pressure. So when does pressure work and when does it not work? If you look at, say, the Structural Impediments Initiative that the Bush Administration did, you found in certain cases there were actually Japanese who wrote parts of that initiative, including some in land reform areas.
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Where the U.S. agenda coincides with the interests of a powerful constituency in Japan that wants reform for its own sake—maybe not for the same reason, but they happen to want the same thing—then outside pressure can work. That is providing it's not accompanied by overly harsh rhetoric, et cetera, that can cause a backlash. But properly applied kind of pressure can work.
This was a case in the retail store law. We saw that's a very, very big success story for both Americans and for helping to bring down the cartels in Japan. The financial negotiations are another case. The pension funds in Japan wanted it. In other circumstances, for example, trying to get more in anti-trust there is no constituency for that in Japan. It was a stone wall.
My belief, however, is that the crux of the political problem in Japan is that all of the safety net features that we do in this country or Europeans do through overt government programs like unemployment compensation, et cetera, or deposit insurance, are done in Japan in a covert way through high prices and industry associations that run cartels. High prices are disguised unemployment. It's disguised income redistribution. But some kinds of safety nets provide a safety net without destroying efficiency. The Japanese kind of safety net destroys efficiency, but it appears to keep jobs. People are afraid of losing their job. The problem is that the efficient sectors are being driven out because Japan is protecting jobs in the inefficient sector. Each party has its constituents in both the efficient and the inefficient sectors.
Ten years ago, things in Japan were going well enough so that American pressure to have wholesale change really would not work. Now it's come to the point where that system is no longer tenable. There are forces in Japan, the urban consumers, who would like to buy at cheaper prices. The exporters who need to have their costs cut. So the Ministry of International Trade and Industry, for example, just cut electricity rates by the year 2000 by 20 percent. There are people who would like to have these changes in Japan because they need them to survive. Those are potential allies. They don't want to be overt allies. At a meeting of the U.S.-Japan Business Council, Americans said why don't we work from the outside and you from the inside on the same agenda items. The Japanese companies said oh no, that won't work. Yet behind the scenes quietly, they will do it.
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So the right pressure applied in the right way for the right targets does work, but you have to pick your targets.
Mr. BEREUTER. Thank you, Mr. Katz. The time of the gentlelady has expired. It's my pleasure now to call on our other distinguished colleague from California, Congressman Tom Lantos, who has waited patiently for his 5 minutes.
You may proceed as you wish.
Mr. LANTOS. Thank you very much, Mr. Chairman. Let me first say what a pleasure it is to have our colleague join us on this very important subcommittee. Having made my first trip to Japan in 1956, I really must lay much of the blame to mistaken, timid, inappropriate U.S. policies for the mess that Japan finds itself in at the moment. During long periods when times were fat and good policies could have been instituted without too much pain, we did not urge those good policies forcefully enough. I think it's unbelievably naive to expect that in these lean times when in fact the social fallout could be devastating, good policies will be instituted. That simply is not the case.
With respect to Japan, as a professional economist, I find that we are dealing to a very large extent with collusive oligopolies. You mentioned, Mr. Walters, that in the flat glass industry the three domestic producers, one has 50 percent of the share, the other 30 percent, the other 20 percent. The two world-class flat glass manufacturers can not get above 1 percent. Well, this is an unacceptable formula. We are dealing with a tightly choreographed kabuki dance. We pretend that this is a market functioning somehow. Of course there is no market. There are arrangements which are pre-determined. Everybody knows his place. Sectors of the economy are paid off. There is incredible corruption. The American exporter and the Japanese consumer suffer.
We also find, since sooner or later they will be driven to some measures, that unless a healthy social safety net is developed, not a corrupt and inefficient social safety net, we are playing with social dynamite with devastating political consequences as we already see in Indonesia under different circumstances. It is not inconceivable that you will have riots in the streets if in fact the 10 million unemployed that you referred to, Mr. Katz, do in fact come into play, as it may sometime.
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I would like to zero in on the glass industry. I would like to ask you, Mr. Walters, since I take it your thesis is that basically the distribution system which is a closed distribution system which you have been unable to penetrate, needs to change. What specific measures do you feel the Japanese Government must take and we must take to open up this distribution system so American exporters have a fair share of the market? But do you think that it's a hopeless undertaking unless we move into some punitive measures vis a vis Japanese exports in this country, which I think is over the horizon when the present very satisfactory state of low unemployment gives way to much higher levels of unemployment in the United States, as I am convinced it will?
Mr. WALTERS. Well, from Guardian's standpoint in terms of what to do about the distribution system, we are left with no choice but to create our own distribution system. There is nothing else for us to do. So from the business standpoint, our whole strategy is to set up a series of warehouses around the country, make alliances with transporters and again to think about downstream fabrication ourselves in order to get deeper into the market and penetrate it closer to the final customer level because we can not attack it the way we would actually prefer to. So we are left with one strategy.
On the Japanese side, I suppose I share a certain degree of pessimism that I think has been evidenced here today about the potential for change. I will say that in one respect the economic dislocation that is now underway in Japan does offer opportunities for companies like Guardian who for a decade have been trying to penetrate the market, because the system as it previously has been designed and operated for the benefit for those in control, doesn't work as well today as it did 15 years ago. These companies are not making the kind of profits that they did 10 and 15 years ago. So it is likely, although that may be just complete hopefulness on my part, that many in the system are themselves beginning to question the wisdom of the way they have practiced in the past.
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So I am not sure beyond what I said earlier about much more stringent anti-trust enforcement which could coincide with people asking questions about whether or not this collusive system has worked as well today as it used to. Combine those two with our decision to develop our own distribution system, I suppose is the answer for us today in 1998.
Mr. LANTOS. Mr. Katz, would you add anything?
Mr. KATZ. Yes. Let me tell a story about a meeting I had with a fellow at MITI. MITI is a very interesting organization, the Ministry of International Trade and Industry. You have some horizontal bureaus which are responsible for the entire economy. Then you have got the vertical bureaus, which are mother hens to a particular industry that they want to protect. So you have got some people at MITI who say you must open up Japan, but then the sections in charge of petroleum refining or flat glass who want to keep it closed, and they stonewall.
Well, this fellow from MITI who runs one of their horizontal bureaus, said 30 percent of the costs in manufacturing are in several sectors where the prices are so high compared to international levels. This involves transportation—the whole port facility thing where again the United States had allies there—the energy industry, the telecommunications industry, the financial sectors, materials, et cetera.
When Toyota builds a car, think of the extra costs it has because of the higher electricity costs, the higher food costs that its workers pay, the rubber, the steel, et cetera. So they leave Japan. What happens to Japan's tax base? Japan's budget deficit is high not because they are spending so much, but because the revenue is so poor. So here is their official saying how do we bring Toyota back to Japan. This is not someone in Kentucky trying to attract Toyota. This is Japan trying to attract Toyota. How can you attract this tax base back? You have got to lower costs.
He was saying the reason why you have got to cut public works spending in Japan is not to cut the deficit, but to cut off the allowance to the construction industry and to the politicians on their payroll who oppose reform. That's why I had those proposals about saying Japan has to have international market prices for public works. It's become a very common theme now for the agencies of the government who are interested in reform—or the sections of those agencies which are often divided within themselves who are interested in reform—to compare Japanese prices to international prices. By doing this in the gasoline case after 10 years of struggle, they finally now allow gasoline imports freely. They finally are about to allow self-service gas stations.
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So in the interest of the government to be able to pay for the aging, there would be an incentive to say: let's stop paying two or three times as much as we should pay for public works. If you do that and if the construction companies can not pass their costs along, I assure you they have much less of an incentive to pay high prices to the flat glass cartel and to the cement cartel and to the steel cartel. It seems to me that the United States can find allies in Japan. There are people in Japan who do recognize the current system no longer works. The way is to make it impossible to pass those costs along. I think that will create forces that will help solve this problem.
Mr. LANTOS. Thank you, Mr. Chairman.
Mr. BEREUTER. We'll come back to you for another round if you would like.
I would like to recognize myself now. I have to comment about flat glass. It's said that there are three types of prevarication. There are lies, there are damn lies, and there are statistics. As an example of the latter, Mr. Walters, in March 28, 1996, Ira Shapiro claimed as one of USTR's success stories on Japan that our glass sales to Japan had increased 93 percent since the prior conclusion of a glass agreement with that country. But 93 percent or practically zero is still practically zero. You tell me that your competitor and you together have a little over 1 percent of the Japanese market. I guess there's a rhetorical question there, but we all know the answer.
Mr. Katz, what if anything will cause Japan to make the necessary changes to expeditiously bring it out of its 7-year economic slump?
Mr. KATZ. Actually, I don't think anything will expeditiously bring it out of its slump. I think it's going to take years because the political obstacles——
Mr. BEREUTER. Two years is what you said?
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Mr. KATZ. No. For real reform, I think you are talking about 5, 7, 8, 9 years. For thorough-going reform. I was talking about 2 years in terms of growth results from the immediate steps you can take today for fiscal stimulus, banking reform, et cetera. But for the thorough-going restructuring that Japan really needs to have self-sustaining growth at decent levels, it's years and years away.
Where are the political pressures? The two most important are aging and finance. Last year, one-third of all trades on the Japanese stock exchange were done by foreign investors. Goldman Sachs and Morgan Stanley are now I believe the two largest brokers on the Tokyo stock exchange. They don't advise their clients necessarily to put their money in the same companies that a Nomura or the former Yamaichi would have. They are much more interested in saying: who is earning money, who is not earning money. You are beginning to see in the stock market a division of higher stock prices for companies that actually know how to make money and lower stock prices for companies that don't. That is a new thing in Japan.
Unfortunately, the stock market is not yet a device for raising capital. It's more of a casino in Japan. But as those kinds of financial pressures grow that determine where money goes, that will affect the entire corporate setup. The way that occurs is that the country is aging very, very rapidly. It makes our social security problem look like nothing. That puts pressure on government budget deficits. They cannot solve that without increasing their productivity. Companies cannot pay their pensions unless they are able to invest in ways that make money, which means investing differently inside the country, hiring foreign investment firms to make money for them rather than domestic. So those financial pressures and those aging pressures together put pressure on the financial system that breaks up the ''ole boys'' club. It puts pressure on the budget deficit. It leads to considering what prices we pay. Those are the pressures that I think break up the system. But for those to become severe enough to cause people to really get moving, I think it's going to be years, I'm sad to say.
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Mr. BEREUTER. That means there is a lot of pain. A lot of that pain is going to be outside Japan, unfortunately.
We have at least a couple of votes, so I'll ask one more question, and turn to my colleague for the remainder of his questions. Then we'll be forced to adjourn.
Mr. Blunt is here. I'll yield my time to Mr. Blunt for questions.
Mr. BLUNT. Thank you, Mr. Chairman. I hope I don't ask any questions that have been answered. If I do, I'll be glad to just reference the transcript if I can get any advice that that's the case.
Mr. Katz, in your remarks you mentioned that the whole concept of price keeping, to keep the real estate markets, to keep the stock markets up, how much of that relates to the fact that the Japanese banks have substantial ownership interest in non-financial businesses?
Mr. KATZ. It does relate to it. The term they use is price keeping operation, which is a play on words on the peace keeping operation at the United Nations. When the Bank for International Settlements established the standard of a capital-asset ratio, the international banks had to have 8-percent capital to assets. One of the rules was that some of the capital could be banks: ownership of stocks. So if the stock prices in Japan are very high, then it looks like the Japanese bank capital is very high. If stock prices are low, the bank capital shrinks. If the capital shrinks too much—and because the banks are so weak they can't raise new capital—the only choice they have to do is draw down their assets. Therefore, you have a very severe credit crunch in Japan. As banks, the capital is reduced because the stock prices are reduced. Therefore they call in loans and don't make new loans.
The government solution to that was to say, gee, if the thermometer tells us it's too hot, let's change the thermometer instead of cooling off the place. So they said let's artificially spend tens of billions of dollars of taxpayers' money to raise the stock prices. Well, that used to work. It doesn't work any more, partly because of the foreign involvement now in the stock markets. Japan is going through a more mild version of the financial pressures that Asia is facing. They are spending about $250 billion in bailouts to these banks. They spent money to raise stock prices all in the hope of alleviating this credit crunch, which is causing bankruptcies, et cetera.
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My view is that if they would stop the price keeping operations, let the prices go to a market clearing level, let them hit bottom, private investors will feel confident in getting back in and buying stocks or buying real estate. If there's a credit crunch problem, let the bad banks go under, recapitalize the good banks as we did with the Reconstruction Finance Corporation in the 1930's. But don't give everybody money. Separate the wheat from the chaff. Let the healthy banks buy up the bad assets of the bad banks. Securitize assets. Goldman Sachs is now buying assets 10 cents on the dollar in Japan. Let the prices hit their level while you provide these other sources of social safety nets. Recapitalization of healthy banks, fiscal stimulus, et cetera.
So they are attacking a real problem, but I believe their solution makes the problem worse rather than better.
Mr. BLUNT. Mr. Grondine, do you want to comment on that, on that whole concept? Is there any thought of doing anything in the banking structure to where they don't own the substantial amount of assets that they now own in other industries, in other stocks? What's happening there?
Mr. GRONDINE. A number of major banks have announced that they are selling off a significant amount of their portfolio. One of the effects of the past stable share portfolios in banks and cross-share holding arrangements in Keiretsu has been to focus the stock market on a very small percentage of available tradeable shares. The so-called stable shareholders which in many ways have been the glue behind the Keiretsu groups and the collusive practices in the past, now because of pressures on returns are starting to fall apart, very slowly though. The effect of these practices in the past on the stock market has been that most of the shares listed on the Tokyo stock exchange don't trade broadly. In any particular stock, you would have only maybe 15 percent of the shares tradable, and therefore demand on any shares got focused on a very small portion of the market. That pushed the price-earnings ratios very high and contributed to the overall gridlock in the system.
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Now that that breaks down, hopefully for some foreign investors, and we see this in our practice right now, there is greater interest in making acquisitions in Japan as a new strategy for entry and to cut through a lot of the time and cost of creating your own distribution system with the reduction in prices on the TSE and banks selling off asset shares. There is more tradable stock available and there will be this year several major acquisitions in the market. There has been one already where GECC acquired the business of a Japanese life insurance company. There will be more. There is a lot of discussion of this trend and these new opportunities currently.
The situation demands change to invigorate the Japanese stock market in that manner. The banks really need to get out of those low-return stable shareholder portfolios. But the system had been there for a long time. So how they exit that position is a significant concern in the market, that it doesn't happen all at once and push the market down into a really significant further fall.
Mr. BLUNT. Thank you. You know we have been having the discussion as to how much of that kind of involvement would be appropriate for our banks. I think there is probably quite a bit to learn from what has happened in Japan.
Mr. Chairman, thank you for letting me have that time.
Mr. BEREUTER. Thank you, Mr. Blunt. Mr. Berman and I have conferred. We think that because there are at least two votes, we had better adjourn at this point. I did want to say in closing that I thank all of you for excellent testimony today. We have just scratched the surface of your ability to help us.
Mr. Grondine, I noted in particular a comment you made on the bottom of approximately page 6 where you refer to the lack of reciprocity and ask the Congress to examine the problem of reciprocal access and reciprocal behavior.
Mr. GRONDINE. Yes.
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Mr. BEREUTER. I would guess that Mr. Walters might have something to say about that.
If you have any very specific suggestions let me know, so you can share it with the Subcommittee. That's an intriguing lead to the potential solution.
Mr. GRONDINE. If I could just make one final comment. One of my favorite sayings is that unfortunately there are no silver bullets. People have been looking for them for 20 or 30 years now and nobody seems to have found it. One of the reasons why the Japanese economy and large trade surplus is where it is today, is they have worked like crazy, saved a lot, and done a hell of a job over the past 30 or 40 years. For us to push it in the other direction takes really relentless hard work, continuous effort and focus.
So with that in mind, certainly from the ACCJ, we would be very happy to provide any assistance at any time.
Mr. BEREUTER. Thank you. Thanks to all of you. This joint Subcommittee hearing is adjourned.
[Whereupon, at 3:39 p.m., the joint Subcommittee was adjourned, subject to the call of the Chair.]
A P P E N D I X
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