Setting New Goals, but Not the Old Way

'It's the economy, stupid." That expression from President Clinton's 1992 campaign couldn't have been more true than in Japan on July 12, when angry voters rejected ruling Liberal Democratic Party candidates to the nation's upper house of parliament. As a result, a stocky former diplomat named Koichi Kato had to step down last month from his post as secretary general, the party's No. 2 spot.

Mr. Kato and his boss, former Prime Minister Ryutaro Hashimoto, could not convince voters that the venerable LDP is able to rescue Japan's economy. The outcome is ironic because both men had promoted economic reforms - such as financial-rescue plans, stimulus measures, and tax cuts - that critical observers such as the United States government have demanded.

Before the election, Kato spoke with the Monitor on the future of Japan's economy. Excerpts follow:

You have spoken about your vision of the future of Japan, one that includes freedom of choice and the free market. Today, Japan is mostly seen as a state-guided economy run by consensus. How do you see the transformation coming about?

We have to make our government much smaller. The function of the government should be limited to the most-needed specific fields. And we have to introduce lots of deregulation measures. Secondly, we have to realize that deregulation through the monetary and economic-reform movement. [In my speeches I have wanted to emphasize that] the Tokyo Big Bang [financial-deregulation package] is changing Japanese society.

In Japan, quite different from the United States, the banks play a very important role in the economy; at present 65 percent of the capital for individual companies is provided through the banks, not equity finance through the market. So banks control every company, and the banks are controlled by the Ministry of Finance. This structure is very strongly developed and has penetrated into every practice of Japanese companies.

One example is a very big company whose president is a friend of mine. He was told by his bank - they have cultivated a close relationship for 20 years - that "we have to reduce our loans to your company. You can raise the money through the market by means of bonds, not loans from our bank." So the company raised the money.

But on the other hand, the president felt that the personal and private support from the bank was cut. This feeling of solitude troubled him long after he was told that finance is now based on "cold calculation" rather than on the very "warm" money supply from banks with which individual companies

have maintained very private relationships.

This sort of Japanese, and in a sense premodern, economic relationship is now being abolished and causing a lot of anxiety among managers of small companies and enterprises about the future.

Some well-known aspects of Japanese society may be lost as a result of deregulation: the egalitarianism and wide distribution of wealth. Do you think this process is going to change Japan fundamentally and lead to more Western-style problems?

For a very long time, Japanese society has been very egalitarian and consensus-oriented; maybe you can call it a quasi-socialist society. Even during the Nara period, 1,300 years ago, the emperors' tombs in Japan were humble compared with the tombs of the emperors in China. Very, very humble.

That tendency was accelerated by postwar Japanese economic and social-welfare policy. But that led to a larger role for the government so that every corner of Japanese society is regulated by the bureaucracy, which stifles the initiative and creativity of Japanese people.

So what we are trying to do is introduce changes in the basic character of Japanese society, from a state-planned, state-controlled, state- regulated market to a more free and individualistic society based on our conviction that the total accumulation of individual judgment is the best way to handle the society.

What we are doing now may make people more, I would say, happy and creative, but on the other hand give them more anxiety.

As you increase individualism and competition, it seems inevitable that you will increase unemployment and the distance between the rich people and poor people. How can you have it both ways, how can you have individualism and competition and also preserve the egalitarian aspect of the economy and the society?

Our society and our policy will guarantee a minimum social-welfare system. Health insurance is well established in this country. People are talking pessimistically about it, but I think the public pension system will be maintained. Of course there will be certain cuts, which are inevitable. And for the people who aren't employed, we have a "lifestyle protection system," for which we are now paying more than 1 trillion yen [$6.8 billion] every year. This protection is not so small.

Recently a Ministry of Finance spokesman said, "We in the ministry understand that we must be advisers and not policymakers and let the politicians write the laws themselves." But they have fought many of former Prime Minister Hashimoto's reforms. Do you think they are willing to let go?

Well, it's been a continuous struggle between politicians and bureaucrats during the past 30 to 40 years. Until 10 years ago, we left all the decisionmaking in the hands of the central bureaucrats because the goals of the society and politics were very clear. One was to catch up with America and European countries, and the second was "free nation" diplomacy - siding ourselves with the Western countries.

But the situation changed when we reached the goal of catching up. We had to create another target, and the bureaucrats cannot do that. So the decisionmaking power shifted to us politicians.

We haven't been ready enough to accept and take responsibility for that decisionmaking. But we have started to accumulate the expertise, and we have started to do it to a certain extent, like the case of the Total Plan for this solution of the bad-loan problem, which was worked out by the five to 10 very young Diet [parliament] members, not by bureaucrats.

Members of your party have cultivated relationships with bureaucrats and business people to get political money for the sake of their own careers. How is it that the LDP can now be the agent of change?

The political money we raise from the business community is decreasing. Until, I'd say, three years ago, approximately 80 percent of the money we raised came from businesses. Now it's only 20 percent; the rest are public funds. So we have become very independent in terms of money and political funding.

About our influence from the bureaucracy, during the one year when we were out of power four years ago, we really learned that the central bureaucracy is not our private think tank. They were working for the opposition parties. We had thought that it would be that way, but we couldn't believe it when we really saw it. That left us with a very severe stance regarding the bureaucracy.