The “Quintuple Distress” and its impact on the industrial circle

ITOH Motoshige: Since the Great East Japan Earthquake, we have often felt that the government’s actions are slow when it comes to the recovery of the damaged areas and the policy issues that Japan needs to face, and we almost question if they are actually betraying national interests by being too caught up in their own political matters. What are your impressions on the current state of Japanese politics?

HASEGAWA Yasuchika: Exactly like you say. As the loss of ruling party control in both houses is almost a given, unless they resolve the problem of the ruling party not even being able to pass a bill on its own, the earthquake recovery and every other policy issue will grind to a halt. Another unfortunate thing that we see happening is that members of the National Diet, who are supposed to think about national interests, look as if they are only thinking about their own electoral districts. I wonder how many ideas they have on how they could enhance the nation’s presence or interests within greater global society.

Itoh: Talks of cutting corporate tax are likely to be put off, and the nation’s decision to participate in the Trans-Pacific Partnership (TPP), which the government said it would make by the end of June, has been postponed for earthquake reasons. What the industrial circle often refers to as a “Triple Distress” includes (1) Japan’s disadvantage in accessing foreign markets, such as South Korea, because the nation lacks an Economic Partnership Agreement; (2) high corporate tax; and (3) high wage costs. A strong yen makes it quadruple, and with the threat of electrical power shortages now making it a “Quintuple Distress,” we feel that major corporations are concluding that they can now no longer continue what they have been doing in Japan. If this state continues, the Japanese economy–and ultimately society itself–could face seriously tough circumstances.

In the larger picture, it is already clear that we now have to open the nation up to broader fields. But you ask individual citizens, and few would answer how much that would benefit them. A person operating a farm in Hokkaido, for example, would be seriously impacted by milk coming in from Australia. Since these types of effects are concentrated on localized concerns, political interests play out and prevent things from happening.

One exception, under similar circumstances, was postal privatization. Like today, people back then could not quite understand the merits to privatization. But Prime Minister Junichiro Koizumi made it political, demanding, “This is important. Are you for it, or against it?” And he made it happen. This is political entrepreneurship. Yet, we have so many issues today other than the TPP, such as pension reform and raising the consumption tax, and we cannot decide all of them in an election. Resolving them under the current state of a divided Diet may be difficult.

Hasegawa: If the government cannot fix the division in the two houses for some time, the ruling and leading opposition parties had better start cooperating with each other on priority issues that serve the national interest. I just cannot understand how the LDP, which held the ruling position for half a century, could suddenly start objecting to all initiatives just for the sake of objecting once they fell from power. Likewise, if the DPJ found that things had turned out differently once they assumed power, they should have considered serious revisions to their manifesto. In the way that former French President Fran輟is Mitterrand made a graceful change from leftist to pragmatic thinking, if a ruling party opens the safe and finds nothing there, it should simply consider practical policies that meet the needs of the situation.

When I became chairman of Keizai Doyukai, my utmost priority was to help guide this nation to its path of stable growth during my term. In tackling all the challenges facing the nation, such as the declining population, declining birthrate, and aging society, though I am active in helping to reform regulations and promote innovation, so many restrictions exist that it could take about 10 to 20 years–or 2 to 3 years at the very earliest–for any effects to kick in. So, what should we do at this point in time? Seeing the current state, where over 60% of the world’s GDP growth is achieved by economies other than Japan, the United States, and Europe–in other words, newly emerging nations that account for a mere 25% of the world’s wealth–it is evident that our nation and businesses must collaborate to gain their share of the growth pie. We cannot keep our nation closed and just fight internally to claim our share of the pie. We have to open up to the world, and to understand this necessity first and foremost.

Would Japanese agriculture be okay if we stayed out of the TPP?

Itoh: As for the TPP, many people voice objections and do not seem to come anywhere near a consensus.

Hasegawa: In terms of the TPP, there are people who immediately escalate the argument by setting up a “conflict” between primary and secondary industries. In my view, all industries–primary, secondary, and tertiary alike–are important industries for the government. No one is thinking of letting a secondary industry eat up a primary industry; rather, the secondary industry should be looking to offer primary industries assistance to help it become more efficient. Today’s agriculture employs IT for a variety of purposes, using computers to analyze differences in past years’ rich and poor harvests or to manage temperature, fertilizers, and water to find the optimal methods of increasing yields. We are already seeing trends of collaboration between primary and secondary industries, and so we are hoping that people will resolve this unproductive conflict and develop cooperative relationships.

Itoh: Back when Japan had not yet signed a Free Trade Agreement (FTA), there were moves of launching a “people’s conference” to discuss Japan’s economic collaboration agreement. Since I was neutral to all interests, I took on the role of chairman for this conference. Chairman Okuda Hiroshi of Keidanren, a nationwide business association, and President Miyata Isami of the Japanese Central Union of Agricultural Cooperatives (Zenchu) from the agricultural side stepped up, and voices arose from the agriculture side to “take positive action toward economic collaboration” and from the business side to “understand the agricultural issues.” Creating these opportunities for discussion is important, but with the TPP case, it seems that the conflict is stronger than ever.

Hasegawa: Particularly now, after the Great East Japan Earthquake, there is an air of putting the TPP talks on hold. But if we do enter negotiations now and request a delay in tariff deregulation since our primary industries are suffering from the effects of the disaster, I don’t think any nation would say no to that. We cannot possibly take a step toward a new direction by thinking “It’s impossible” without even trying. What’s more, would Japanese agriculture really be okay if we stayed out of the TPP? Back in the days after the Uruguay Round, the government, in compensation for restricting imports with high tariffs, set up an import obligation called Minimum Access Rice, which resulted in a growing surplus of old and stored rice. The government even spent six trillion yen in the name of strengthening Japanese agriculture, yet the nation’s self-sufficiency ratio kept falling throughout that time.

The Ministry of Agriculture, Forestry and Fisheries (MAFF) again estimates that our nation’s self-sufficiency ratio (calorie base) would drop from 40% to around 15% if we participated in the TPP. But would it rise to 50% if we didn’t? When over half of the people employed in agriculture are over 65 years of age and the industry lacks successors, we cannot possibly have productive talks if they just keep saying, “Sure, the industry has no prospects, but no TPP for now.”

Itoh: That is exactly right, but the people in agriculture do not seem to understand that. Yet, I happen to be a vice president of a nonprofit organization that supports professional agriculture, and the people who attend its symposiums are very positive about deregulation. They believe that it is the only way for Japanese agriculture to survive. I truly believe that such internal change is indispensable, but the louder voices come from part-time farmers and the ones with ties to the Agricultural Cooperatives of Japan (JA).

Hasegawa: Any good ideas you could offer us? (Laughs.) As I see it, the one thing that they cannot emotionally accept is the deregulation of rice. The TPP does say no exceptions, but if there are always exceptions of a percentage point or two, we should make rice an exempt item. South Korea, in fact, has chosen to do so. Japanese vegetables, livestock, flowers, and fruits are highly competitive, and even our milk shouldn’t lose to competition so easily, for freshness reasons. This may be a method to resolving the current deadlock.

The American model that can uplift the global economy

Itoh: On the other hand, when we look at the Japanese industrial circle and businesses, I feel–and this may sound a little rude–that even the companies running businesses in the U.S. and European markets are slow in their global expansion. Under the current “Quintuple Distress” situation mentioned earlier, would it not be better if businesses took greater risk than they think they should to enter foreign markets? I am also hoping that the TPP will serve as a wake-up call.

Hasegawa: I understand how you feel. But from the viewpoint of a business manager, we cannot afford to remain immobile until the wake-up call rings. It is true that humans tend to take things seriously only when they are forced into certain situations. That’s why leaders must indicate what the future could be like and get people motivated.

Itoh: It would take a communist government to stop a company from leaving.

Hasegawa: And businesses ought to leave to other countries. That may cause the nation’s industry to hollow out, but I think some of that is inevitable. The reality is that companies are bringing wealth back from other countries to pay tax in a nation with the highest corporate tax in the world. The government’s role is to redistribute those taxes and create a safety net. While businesses have a certain level of responsibility to create employment, their top priority is to achieve economic growth, and to do that they have to enter growing markets.

Itoh: Hollowing out reminds me of the term “Jidosha ippon-ashi dahou (Dependence on the automobile industry)” that the Ministry of Economy, Trade and Industry (METI) stated last year in its industry structure vision. Now they are saying we should aim for a “Yatsugatake” structure (analogizing to a mountain range with many peaks). Japan’s core industry after the war has shifted from textiles to heavy industry to electronics to automobiles. But the nation has been too dependent on automobiles for the last 20 years, and if that has to go abroad now, a new industry to support Japan must arise from within.

Hasegawa: I really think it is time that service industry and the government think about globalizing our services, as it comprises over 70% of our GDP. Yamato Transport and Kumon Educational Japan are two of many businesses doing well in Asia. No matter how advanced our manufacturing industry is, the reality is that developing nations will eventually catch up.

Itoh: So the key would be to open up the nation for the sake of vitalizing the service industry and to internationalize?

Hasegawa: That is right. And we should work seriously not only on trade systems but also on language education. Our company (Takeda Pharmaceutical) employs students directly from South Korea and China, who are fluent in their native tongues, English, and Japanese. On the other hand, Japanese college students all want to enter major corporations but have very questionable English skills, and for some of them their Japanese skills could even be considered dubious. (Laughs.) Our nation needs to understand that this is the competitive state we are in. People wishing to join our company as employees other than medical representatives and plant technicians from 2013 will be required to have English skills of at least 730 points on the TOEIC exam just to take our entrance exam. We have also set up an endowment course at Waseda University, in which myself and other executives of Takeda Pharmaceutical will take turns lecturing 15 sessions, starting this October, about ideas on globalization and on M&A philosophy. I am hoping that such actions will help stimulate students.

Itoh: In terms of language education, universities have a large responsibility. But I have seen major changes in the last decade in a course that I lecture. In a seminar where I only allow students to use English, students from China and South Korea often start a stimulating discussion. That sparks pride among the Japanese students, who then join in and make an effort. I feel that the very act of bringing people in from a variety of nations provides the Japanese with positive stimulation.

Hasegawa: And I think that trend will continue even further. Particularly if we were to create products that target people at the BOP (“bottom of the pyramid” = low income consumers) in developing economies, we would have to develop products according to their needs and cultures. This would require local employment and language skills.

Itoh: And that is the time when we should further discuss the national model that Japan aims to become. Many of the U.S.-born Americans living in the world’s most globalized nation called the United States only speak English and have hardly ever gone abroad, yet U.S. businesses do well on the global stage. That is because they gather competent human resources from around the world. It is about time for Japan to become more practical and head toward such a national model.

Hasegawa: When we look at the relationship between population changes and economic growth in Japan, the United States, Europe, and China, we find that an increase in the working age population yields economic growth in every nation. When population eventually starts to decline, it slows economic growth as well, the exception to this trend being the United States. Since the nation accepts numerous immigrants and gathers competent brains from around the world, its economy continues to grow.

This not only helps its own economic growth but also uplifts the global economy as well. A certain percentage of students who come to study in the United States will return to their homelands, and those who return to a developing nation will put what they have learned to good use in helping to further develop the economies of their homelands. According to U.N. population statistics, the world’s population will reach 10 billion in 2080, and over 1 billion of the increase will be from Africa. Unless the continent’s economy develops to a sufficient level by then, the area may face the risk of becoming a nest of terror and crime. The American model would save that from happening, and I think Japan should start now to take a similar perspective.

Establish an East Asian Institute of Technology

Itoh: When we consider the new national model for Japan, do you think we should specifically focus our target on Asia?

Hasegawa: If Japan were to maintain technology as its core pillar, it should establish something like an East Asian Institute of Technology that would have campuses in Tokyo, Shanghai, and Singapore and would gather leading professors from Japan and around the world to offer courses only in English. It would have about an equal percentage of Japanese and local students. Japanese students would be highly motivated by studying with students from other countries. If fewer Japanese are studying abroad now, we should bring in students from overseas to provide stimulation. And if these students could land jobs in Japan, it would naturally meet the conditions on human resource acceptance that the TPP demands.

Itoh: The Ministry of Education, Science and Culture (MEXT) has started a project called Global 30 aimed at increasing degree-acquirable programs in Japanese colleges that are offered in English. The University of Tokyo has already launched many degree programs that are offered in English. But under the unsteady political situation, these moves have not made much progress.

Hasegawa: Some universities, like Akita International University and Ritsumeikan Asia Pacific University, have achieved a certain state of global diversity among their students. But it is difficult to gather people like that unless you make the effort, like Ritsumeikan, to assign a scout who travels around the world all year. Developing countries are in need of scholarships, so colleges will have to work with the government to promote their projects for them to be successful.

Itoh: That is right. The University of Tokyo is also discussing the establishment of a Campus Asia Plan. The university would partner with Seoul National University in South Korea, and Tsinghua and Peking universities in China, and students would spend their four years in two or more of the three countries, which would enable them to earn a double degree. This plan came about as an idea to take advantage of existing colleges.

Hasegawa: That is wonderful. Our government has the idea of defining this year’s college graduates as “new graduates” for the next three years because 10% have not yet landed a job, which is such a symptomatic idea. If the government is offering any support, it should spend some money to work with overseas institutions and let the graduates study abroad. South Korea is already taking such action. Policies that merely spoon-feed the people ultimately benefit no one.

Corporate tax must be lowered

Itoh: Why does the Japanese government always choose symptomatic solutions? It was the same with TEPCO. Considering the magnitude of the accident and the amount of damage TEPCO has to compensate for, they are clearly insolvent. That leaves only two paths to take. One is to apply something like a Company Resuscitation Law and freeze all assets. Another is to get the government involved and to fund and sustain the company.

But seeing all the discussions taking place now, we see that they are only dealing with what is in front of them with the grand assumption of “minimizing people’s burden,” and I feel that the power industry two to three years from now is going to look quite grotesque and so far off from what it should be.

Hasegawa: My concerns exactly. The current scheme probably comes from solving a simultaneous equation of stable power supply, compensation issues, and avoiding national ownership- which will be temporary. If they were to leave TEPCO as a TSE-listed company, it would be impossible to have it bear compensation of who-knows-how-many trillion yen under unlimited responsibility. The company would be unable to run a business, and it would have difficulty acquiring human resources.

In terms of power supply, nuclear power plants currently in operation will undergo regular inspections. If ones that enter inspection do not resume operation, we will have an even tougher summer next year than this year. No company can plan their business under these circumstances. Buying generators or storage cells as protective measures would require time, as ordering them now would take over a year to install. Western Japan was unaffected but was suddenly asked to cut down on electricity use, and everyone is confused. The government says it will promote recyclable energy but has no plans to promote whichever means under whatever kind of timeline. If they continue to leave everything in the air like this, it is only natural that businesses that consume a lot of electricity would leave the country.

Itoh: I have the same impression when it comes to the nation’s tax reforms as well.

Hasegawa: Unless we realize economic growth, this nation will never see a stable economy or society. That is why we must lower the corporate tax rate. When the rate is 24.2% in South Korea, 25.0% in China, 17.0% in Singapore, and 40.69% in Japan alone, our nation is never going to survive the tough competition. METI has reported that lowering corporate tax would allow the economy to grow and would increase tax income in the long run. No falsehood intended, but why is the government so concerned about a 10 trillion yen-or-so tax income and unable to do what it is supposed to do when it has already accumulated debt amounting to a quadrillion yen?

Itoh: Corporate tax is imposed on business income, with which companies create employment and conduct economic activities. On the other hand, consumption tax is imposed on added value. The global trend today is to keep corporate tax low to create advantages in global competition and set a higher consumption tax instead. Many nations have high consumption tax but are highly competitive because other taxes are kept low.

Hasegawa: And corporate tax is largely affected by the economy, so consumption tax is a more stable income. But raising consumption tax would itself have no meaning in the long run if it is done without enlarging the total pie. What we need to think of is expanding the entire pie; that is the only means to bring a bright future to this nation.

I often think these days: Why can Japan not do what South Korea did? That country, of course, got the wake-up call during the 1997 Asia Crisis when the International Monetary Fund (IMF) intervened. I am not saying that Japan should face a similar situation, but our current situation is very pitiful.

Correcting the disparity in the weight of one vote would be the first step

Itoh: So the question ultimately comes down to how the government must change. Are there any solutions?

Hasegawa: Today, our nation’s voting system allots more seats to regions with large senior citizen populations. This won’t create any new reforms. The Supreme Court ruled on March 23 that the 2009 House of Representatives Elections were unconstitutional, so our first step should be to correct the disparity in the weight of one vote. An immediate action should be, as I mentioned in the beginning, to limit policy issues to about three, set a deadline, and have the ruling and opposition parties sign an agreement. If they can’t do this, the existing parties will not be able to meet people’s expectations even if the ruling party changes. This being so, the young representatives should create a group or a new party to run the reforms and assume responsibility for the future of Japan.

Itoh: But it seems quite tough under the current system of single-seat constituency.

Hasegawa: Any organization or system, when sustained for a long time, possesses more weaknesses than strengths. A company can change its president or organization, but a nation cannot do so with equal ease. The United Kingdom, boasting a two-hundred-year tradition of democracy, employs various ideas in its system, such as taking time to select a candidate or not allowing candidates to run for a seat in the regions of their birth. Japan should also come up with such ideas.

For example, the medical industry that I work for has little opportunity for venture businesses to develop. Japan lacks the culture like in the United States where bio-ventures take risks to develop pre-approved medicine. So, as President of the Japan Pharmaceutical Manufacturers Association, I proposed a method of “forming projects within the pharmaceutical industry” to solve this problem. We have taken requests raised from expert meetings, medical circles, and patient organizations, and the entire pharmaceutical industry has been working on developing them. We decided that we would find sponsor companies for all requests by March and that Takeda would voluntarily accept any unsponsored requests. As a result, we have been able to meet all the requests that we received.

Itoh: I see that Japan has its own ways of doing things.

Hasegawa: In the United States, some people would do it even without others telling them to, but in Japan, we need some kind of a system. Particularly effective is an environment that takes advantage of peer pressure. I am not sure yet how we would transfer that mechanism to our government, but in any case, we cannot possibly re-establish our defunct government without restructuring the Japanese style of democracy.

Translated from the Special report: Urgent Suggestions for Japan’s Recovery: Seiji-ka yo, mo kokueki wo sokoneruna,” Voice, August 2011, pp. 46-55. (Courtesy of PHP Kenkyusho)