"How Japan Can Prevent its Industrial Sector from Hollowing Out?"

May 21, 2002

Mr. Yoshio Terasawa
Chairman, The Tokyo Star Bank, Limited

I joined Lone Star Japan in 1999, after a long career - in business in the US, at an international organization, and in politics in Japan. Lone Star is an investment fund. Its investors include public and corporate pension funds, university endowments, and national and local governments. Lone Star has actually invested about Ä700 billion in Asia, most of which has been in Japan, principally in distressed assets. Lone Star saved a failed bank in Tokyo and re-started operation in June 2001. Now I serve as chairman of the new bank, The Tokyo Star Bank, Ltd.

We know that Japan is now having difficulties economically. The growth rate of the economy this year will be zero if not minus, but I believe that the future of Japan is bright if structural reforms actually take place. The pension fund managers and investors in the US believe this too, as indicated by the large amount of capital they bring into Japan.

I don't believe we have to be afraid of 'hollowing out'. A shift, or 'hollowing' of labor-intensive industries to countries where wages are far lower than in Japan, is inevitable. It is even natural. We should welcome this trend. What the Japanese have to do is to nurture and develop new, more value added industries to replace 'hollowed out' ones.

In manufacturing industries, Japanese companies are competitive in making cars, precision instruments, electrical products and so on. They have been successful with added values in global markets. I believe they will continue to do so in future.

In contrast, Japan has delayed in developing globally competitive industries in regulated service sectors, relative to the US and Europe.

So, it is especially significant, even inevitable, for Japan to develop new, globally competitive industries in service sectors. We should do that to replace the holes after having 'hollowed out'.

On this needed structural reform, the Japanese government, and sometimes, even management in private sectors, like to delay and avoid taking radical steps. Instead they favor 'soft-landing'. It is viewed by the rest of the world as a lack of willingness.

Japan can no longer develop truly competitive service sectors in this manner, or by itself _ I mean, with usual kinds of Japanese management and Japanese capital alone.

Japanese people are aware of this. Gradually, a new trend toward a more global, market-oriented approach is emerging. Nissan is such an example.

Very fortunately, Japan has a hard working intelligent labor force under a stable, democratic government and administration. This is welcomed by foreign investors.

This is where we, Lone Star, are making investments and developing activities. I believe such foreign capitals can contribute to make Japan become more active. Lone Star, a global investor, firmly believes in the future of Japan. Lastly, I would like to touch on the issue of non-performing loans. Although the problem of bad loans itself has nothing to do with structural reform, in my view, the solution to this profound problem is key to leading the Japanese on the road to recovery. The fundamental solution to this problem should be left to the market. It is very essential that those distressed assets and loans should be traded by market players. First, the banks should get rid of the bad loans by selling them into the market. Then, the government should take measures to help the banks financially.

The role of the government is to facilitate and develop the market. In other words, in the game of the market, the government ensures that the ground is in good condition and takes part as a judge. But it is not appropriate for a judge to participate in the game as a player. It is professional players who play a professional game.

This will help revive the Japanese economy and stimulate it to more activity. It is also important to eliminate, not just relax, but eliminate, a large number of unnecessary and burdensome regulations, to make our economy truly global and more market oriented. We all know that transparency and accountability are two key concepts to support the market economy. Although it may take some time, we all know that Japan will eventually implement a free, fair and global market.

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.