Report of the Mission for Revitalization of Asian Economy: -Living in Harmony with Asia in the Twenty-first Century-

PREFACE: THE "MISSION FOR REVITALIZATION OF ASIAN ECONOMY" AND THE ROLE OF JAPAN

It has been two years since the currency crisis began in July 1997, and Asian economies are finally starting to show signs of recovery. However, there are still many issues to be addressed, including the continuation of economic structural reforms, if recovery is to be sustained. Asian countries must continue to reform and strengthen their economic systems if they are to rebuild their economies and achieve prosperity for the region in the twenty-first century. The year 1997 also marked the beginning of two consecutive years of negative growth for the Japanese economy, a phenomenon never experienced before in the postwar period. Japan must revitalize its own economy and achieve strong development in order to revitilize the economies of Asia.

Rapid globalization is increasing the interdependency of economies in a trend that cannot be turned back. The currency crisis has underscored just how deep economic interdependency is in the East Asian region. The recovery of the Japanese economy is extremely important for the recovery of Asian economies, and conversely, the recovery of Asian economies is also important for the recovery of the Japanese economy. Though conditions are difficult in Japan, the country still accounts for two-thirds of Asian GDP (gross domestic product), and as such has a significant role to play in meeting the expectations of Asian countries. After the currency crisis, Japan announced a total of approximately $80 billion in aid for Asia, including the New Miyazawa Initiative, and it has faithfully implemented this aid. Asian economies are over the worst and are beginning to tackle the issues that stand in way of new development. Now is the time for Japan to consider what role it can play in the future and how it should work in partnership with Asian countries.

The Mission for Revitalization of Asian Economy toured the region at the behest of Prime Minister Obuchi for twelve days, from August 27 to September 7. During that time, we visited six countries: South Korea, Vietnam, Thailand, Malaysia, Indonesia, and the Philippines. The Mission for Revitalization of Asian Economy had three objectives listed below. This Report was submitted to the Prime Minister summarizing its findings. Our objectives were:

(1) To study the issues and needs facing Asian countries now, two years after the currency crisis, as they are beginning to show signs of recovery;

(2) To assess the $80 billion aid program of Japan, including the New Miyazawa Initiative, and

(3) To identify, in light of the currency crisis, the issues that Asia must address in order to prosper in the twenty-first century and the role that Japan has to play.

The Mission for Revitalization of Asian Economy, equipped with knowledge and understanding gained from advance study sessions and the findings of preparatory teams that visited the countries concerned, met with a total of about two hundred people, including heads of state, major ministers, business leaders, and the mangers of Japanese companies with operations in the region. This report is based on those discussions. The report consists of concrete recommendations concerning the role that Japan should play in Asian prosperity in the twenty-first century in light of the experiences of the currency crisis. The recommendations are divided into four sections: people, goods, money, and information. In Part II, we describe the perceptions of the Mission that underlie these recommendations. Our findings are divided into: 1) issues for Asia, 2) issues for individual countries and the role of Japan, and 3) assessment of Japanese aid programs.

Japan stands at a major watershed. Ties of interdependency are deepening with Asia and with the world, and resource-poor Japan must further develop its external economic and social relations. Our population is aging, our birth rate is falling, and our population is declining. We must reform old systems, we must move forward rather than back, we must seek new growth and development, and we must be aware that efforts and sacrifices on our part will be required. If we are to continue to grow, we must relax and eliminate regulations and become a country more open to Asia and the world. It is imperative that we follow up on the "openings" of the Meiji Restoration and the postwar period with a "third opening" now. Opening Japan is urgent to the revitalization of our society and economy, to ensuring that we do not miss the historical trend of globalization. Opening Japan will also enable us to be a true and trusted friend to Asia.

We hope that the perceptions and the recommendations of this report will serve as guidelines for the prosperity of Japan and Asia in the twenty-first century.

PART 1: RECOMMENDATIONS FOR LIVING IN HARMONY IN THE TWENTY-FIRST CENTURY

I. JAPAN'S ROLE IN THE PROSPERITY OF ASIA IN THE TWENTY-FIRST CENTURY

1. Currency crisis as springboard

The currency crisis was an unfortunate event. But it was also a once-in-a-lifetime opportunity from the perspective of the constructive development of the Asian region, including Japan, from new, long-term vantage points. The currency crisis did a superb job of identifying economic weak points, clearly showing where reforms need to be made.

The currency crisis hit many Asian countries almost simultaneously. This is an indication that the countries of Asia are developing into a community. No longer just a collection of individual countries, their economic and social ties are growing stronger. These countries see the currency crisis as an opportunity for reform, not just in the economic sphere but also in the political and social spheres. This strong desire for reform was clearly evident to the Mission in its discussions with heads of state and other leaders.

2. Asian countries share a common fate

Asia includes countries at different stages of economic development and with different social systems. On-going efforts will be required for this part of the world to increase its interdependency as a single economic region. If we are lax in these efforts towards integration, we may invite more region-wide upheavals similar to the currency crisis. It is therefore important to understand how and in what sense this region, including Japan, is a community with common fate. Obviously, as already stated, geographical proximity is important. The currency crisis demonstrated that shocks to one country easily spread to others. But importance as an economic region is not limited to geographical proximity. As economies become more global, regional economies are taking on important roles as coherent economic units. The formation of regional economies that has been seen in Europe, North America, and South America needs to take place in Asia as well, although the form may be different.

The rapid growth in Asian economies since the eighties has integrated the Japanese economy deeply into the region, as can be seen from the overseas activities of Japanese companies, the divisions of labor within the Asian region, and the strengthening of relationships in the financial area. This growing interdependency among Asian countries will bring untold benefits to Japanese society as it matures and ages. However, the deepening of interdependency does not always proceed in ideal forms. The reason why the region was hit by currency crisis in the first place was that there were many distortions in many forms in its economic development. There were biases in the cross-border movement of people, goods, money, and information, and while innovation may have been sparked in individual countries within the region, they were unable to turn it into solid comparative advantages. Another factor was the failure of countries in the region to adapt their economic management in an appropriate and timely manner to the historical changes that globalization and computerization are bringing to the world economy. As will be discussed below, it will take regional efforts to correct the failures of the past and put the region on a new growth path. Japan has a large role to play in this. These are efforts and initiatives that will bring substantial benefits to Japan and to the countries of East Asia.

3. Partnerships in the twenty-first century

What we need to do now is to build a new relationship with Asian countries that is grounded in long-term perspectives for the twenty-first century. Now, at the turn of the millennium, we have the perfect opportunity to discuss issues and ideas from long-term vantage points. We must rethink everything from the ground up, even those things that the common wisdom has so far said were impossible. We must consider what is truly required by Japan and by the East Asia region.

More important than what kind of support Japan can provide for Asia is how, given the strong desire for reform in Asia, Japan itself will change, and what sort of changes will be sought from Asia. The New Miyazawa Initiative and other assistance programs have made significant contributions to recovery from the currency crisis, and have won high praise. Everyone is fully aware and fully appreciates the major contributions that direct investment and economic assistance from Japan have played in the development of East Asian economies so far. These efforts must continue.

But what the twenty-first century will require is not unilateral assistance and investment. A symbiotic relationship in which Asian countries function as mutual partners to be established. Japan must actively accept goods and personnel from Asia. Our relationship must not only be in the realms of trade and investment, but in the realm of people, where we must use exchange and interaction to add depth and breadth to our ties. In our visit to Asian countries, many people emphasized the importance of building two-way relationships. Only through these efforts will we be able to bring dynamism to our training programs and our manufacturing. For East Asian economies to regain their dynamism as an economic region, for East Asia to achieve prosperity, each country must have solid mechanisms for developing human resources and goods, and exchange and interaction must be broadened throughout the region so that countries are able to mutually complement each other.

4. Flow of people, goods, money, and information

The basic factor to be considered in any discussion of the rebuilding of Asian economies is the flow of people, goods, money, and information. It is essential, if Asia is to maintain and develop its vitality as a single economic region, that all of these elements are able to move actively across national boarders. The development of Asian economies in the late eighties and nineties was called a miracle, and this miracle was driven by the movement of money and direct investment. There were also substantial movements of people and information. Unfortunately, the movement of people, goods, money, and information was unbalanced, limited, and prone to distortion, and that is what ultimately resulted in currency crisis.

We must discuss what is necessary to correct this, what policies will be needed to bring further energy to the movement of people, goods, money and information. We must also be aware that these movements within the region take place within the large context of the globalization and computerization of the world economy.

5. Short-term funds as a contributing factor to crisis: diversifying financial channels

One of the principal causes of the currency crisis was the over-dependence of many East Asian countries on international short-term funding, something that numerous commentators have pointed out. Short-term funds do have an important role to play in trade settlement and other areas, but a flow of funds that is too biased towards them will not produce healthy financial markets. The region must develop a wider variety of financial channels, including medium- and long-term financing, long-term bonds, equity-based financing, and direct investment.

Japan is actively pursuing the internationalization of the yen, and this will provide the countries of East Asia with a new financial channel. An international yen will make it easier to raise funds from yen-denominated ("samurai") bonds, and to invest in yen-denominated assets. From that perspective, we must work even harder to internationalize the yen, but the fact is that the yen will not achieve internationalization unless it is a currency that Asian countries find easy to use.

Short-term funds are subject to wide swings based on changes in international financial conditions and market sentiment. In that sense, the key point in building more diverse financial channels will be creating channels that facilitate the inflow of long-term money. Several countries told the Mission that they wanted to build up their domestic bond markets. This desire to build markets is occurring simultaneously in Asian countries, and there is much that Japan can contribute to this, particularly in providing institutional cooperation and funding to encourage these efforts. Asian countries, for their part, will need to develop bond markets that are open to the entire East Asian region and to the world, not just isolated, domestic-only markets. Regional cooperation and sound competition will be required to accomplish this.

Equity-based funding channels are equally important as bond markets. Equity investments have advantages not found in bonds and financing, because investors provide stable, long-term funding as they take on risk. This may take several forms, everything from major East Asian companies engaging in equity-based fund-raising on the securities markets of Japan and other countries in the region, to the development of investment funds that provide money to smaller companies and ventures throughout East Asia.

6. Human resources hold the key

In the flow of people, goods, money, and information, it is people, human resources, that hold the key. The movement of people, goods, money, and information is mutually complementary; if one of them stops, it creates large distortions in the others. But it is human resources that hold a particularly important place. Cooperation within the region on the flow of human resources will have vast impact on the flow of goods, money, and information.

For example, local human resources will be extremely significant to Japanese companies doing business overseas. The quality of their local staffing, and the quality of the human resources at the local firms that subcontract for parts and raw materials will have a major influence on the management of offshore Japanese companies. Countries that have not accumulated much in the way of human resources cannot expect to achieve long-term industrial development. The contributions that Japan has to make in this area are not insignificant. Japan could, for instance, send in experts in technology, accounting, marketing, and law for small business development. It will also be extremely important to provide cooperation for human resources development in the form of intellectual assets for marketization and assistance for economic structural reform. Japan has already begun programs of these sorts at many different levels, but human resources assistance should be further expanded from Asia-wide perspectives. These efforts would improve the investment environment for Japanese companies and reenergize direct investment as well.

Human resources assistance has an important role to play in capital flows. We will first need to develop people able to appropriately assess the results of smaller local companies in order to create funding channels such as equity funds to invest in smaller Asian companies. There are many possibilities. These people could be trained locally, or people trained in Japan could be sent in. Either way, there is no reason to expect investment funds to flow in without this kind of human resources support.

7. On-going dialog towards stronger cooperation

Healthy international relations are often compared to a bicycle. If you do not keep pedaling a bicycle, it falls down. Similarly, healthy international relations require constant dialog or they fall apart. We must continue with dialog aimed at strengthening cooperation within the region if Asian countries are to achieve sound development. From that perspective, it is important that members of the Association of Southeast Asian Nations (ASEAN) maintain the momentum for expanding trade and investment in Asia created by the ASEAN Free Trade Area (AFTA) and ASEAN Industrial Cooperation Scheme (AICO).

One point repeatedly emphasized in our conversations with heads of state and government was the importance of building early macroeconomic warning systems. The experiences of the currency crisis have created a strong desire for systems to monitor the movements of short-term funds and strengthen macroeconomic policy coordination. The close macroeconomic interrelations of Asian countries have been demonstrated by the simultaneous currency crises in the region (the contagion effect). It is therefore desirable to establish a forum for discussing macroeconomic monitoring and to continue dialog on early warning systems and other macroeconomic coordination. It is conceivable that this macroeconomic dialog may at some point involve discussions on emergency regional financing facility schemes and common currency baskets.

Continuous dialog is also necessary in the area of trade. In 1994, APEC adopted the Bogor Declaration charting a course towards trade liberalization, and dialog must continue in APEC aimed at its achievement. At the same time, however, it will be necessary to discuss accelerating liberalization with countries in the region who have the potential for more active liberalization. From that perspective, the joint research project on concepts for a free trade area that has been initiated with South Korea is a project that should be fostered and developed, and an idea that could be expanded to Singapore and other countries in the future. Japan should actively take the initiative in strengthening cooperation as it listens to the concerns and ideas of other Asian countries.

8. No prosperity for Asia-or Japan-without an open Japan

It is hard to term Japanese society sufficiently open to Asian countries. Japan requires a third "opening," an opening to Asia on the many different levels of people, goods, money, and information, an opening that is commensurate to the growing desire for reform in Asia. We will be unable to build a true partnership with Asian countries unless we open Japan, and we must understand that opening Japan will also produce results that are desirable and beneficial for Japan itself.

The Mission would like to underscore the important of "opening" in the area of people. The time has come to seriously consider actively bringing in human resources from abroad to supply the people who will provide medical and nursing care and fill other needs as our society ages; these people are currently lacking in Japan and it will be next to impossible for Japan to provide sufficient human resources for this domestically. Were we to make effective use of Asian human resources in this area, it would be extremely significant for the strengthening of our economic ties with Asian countries.

It is also important that we expand the exchange and interaction of our young people. We must have as varied human interfaces as possible in order to maintain close, constructive relations with the countries of East Asia. This will require that as many people as possible visit each other. Support for exchange and interaction among young people is the most realistic way of building these relations from long-term perspectives. It is urgent that we improve our systems for accepting foreign students so that we are able to take in large numbers of students from Asia at our universities. The overhaul of Japanese universities will need to transform them into more practical institutions, and there are many hurdles to be solved particularly in the creation of practical universities that provide business schools open to Asia.

Language will present large hurdles in human-level internationalization. Given the wide-spread use of English in Asia, we need to completely rethink English language education in Japan. We must also make it easier for people in Asia to learn Japanese by establishing Japanese language education institutions overseas. We must also create an environment in which young Japanese people are able to learn Asian languages, so as to further mutual understanding with the region.

Also important to the facilitation of the flow of people, goods, money, and information will be more better, larger transportation networks, and simpler, faster immigration, quarantine, and customs procedures that are able to more efficiently meet essential objectives in these areas. Transportation access and government services are of decisive importance in the interaction of human beings. Japanese infrastructure and government services are, unfortunately, backwards in these areas. "Opening" will not occur unless we improve our infrastructure and increase our manpower. The government must be decisive and active in accomplishing this.

II. SPECIFIC RECOMMENDATIONS

1. People

Japan must reinforce human resources development support and human exchange and interaction by fully enhancing its environments for both the sending and receiving of people. We must formulate comprehensive programs to actively promote two-way interaction between people in Japan and Asian countries, and we must make a concerted government-private effort to achieve this.

(1) Cooperation for human resources development in Asia

(a) Reinforcement of human resources development cooperation for the Asian private sector

The most important task before us is the development of the private-sector human resources that form the foundation for economic development. It is not exaggerating to say that human resources development is the key to improving industrial standards and energizing economies. In Asian countries, smaller companies account for the vast majority of industry, and developing human resources at these companies will be important to the region's economic development. Human resources development should be oriented towards developing expertise in "soft" areas like law, accounting, sales, and marketing, not just on improving the individual technologies of individual companies. In Japan as well, it was smaller companies that provided one of the major driving forces in economic growth, and there is much that they have to contribute to the developing countries of Asia. The Mission expects that technology levels and expertise will be transferred to Asian countries by actively sending in Japanese personnel in these fields.

(b) Reinforcement of human resources development cooperation using the energy and expertise of private Japanese companies

As economic interdependency deepens between Asia and Japan, the quality of the human resources available locally becomes an extremely important factor in the development of international business by Japanese companies. Improving the level of the human resources both in their own operations and in those of their subcontractors becomes a matter of life and death for Japanese firms. There are therefore high needs and incentives for Japanese companies to engage in human resources development in Asian countries.

It would be possible to draw on the incentives and energy of private companies to achieve market-based, effective, and efficient cooperation for human resources development by supporting the efforts of Japanese companies to develop the human resources on their own staffs and on the staffs of their partner companies. These efforts would also be of significance to the people in Asian countries who wish to master the high technology and management levels of Japanese companies, the local companies that wish to win business with Japanese companies, and the Asian countries that wish to attract Japanese companies.

In the Japanese manufacturing sector in particular, many technicians and others who have been active for years on the front lines of the operation are forced to retire when they reach a set age. These people still possess excellent skills, are still healthy, and are still able to work. It would be possible for them to contribute to Asia by actively passing on their skills to young Asian technicians and engineers.

We should, for example, make substantial enhancements to the "Senior Volunteer" system run by the Japan International Cooperation Agency (JICA). To provide more organized human resources development, "Senior Volunteers" should be sent in groups rather than as individuals. At the same time, we will need to encourage recipient countries in Asia to provide better environments for them, including residence rights and tax breaks.

(2) Open Japan to the people of Asia

(a) Formulate and carry out a long-term, large-scale programs for human exchange

One of the things that sets Asia apart is its diversity of culture. This same cultural diversity makes it necessary to intentionally and actively promote human exchange in order to strengthen mutual understanding and perception of community. If this human exchange results in the emergence of new cultures and values based on Asian diversity, then this will be a new source of attraction in the information age. The economic interdependency between Japan and Asian countries has reached the level that it should be termed an "economic community." Japan must therefore announce a general human exchange program for the twenty-first century that will promote human exchange at levels commensurate to economic exchange, and we must work to forge strong bonds with Asian countries by engaging in human exchange at all levels of society. It will be particularly important in the future to formulate and carry out programs to actively invite the talented young people who will serve as the future leaders of Asian countries to study in Japan as a means of promoting greater understanding of our country.

(b) Enhance foreign student acceptance

We need not belabor the fact that foreign students will play a central role in exchange and interaction among the younger generations. Japan began its "100,000 Foreign Students" program in 1983, but has still only achieved about ?T0% of it. There are many conceivable causes behind this, and the Asian currency crisis is certainly one of them, but the solutions will be to enhance our environment and systems so that young people in Asia have a desire to study in Japan. These efforts should increase our acceptance of high school level foreign students as well as college-level. Doing so will expand the opportunities that Asian young people have to study abroad and also be effective in developing a sense of community with Asia among Japanese high school students and their local communities. We must also provide a wider variety of opportunities for exchange, opportunities that go beyond the school to provide for human exchange at the community level and for greater opportunities to master skills within Japan.

(i) Enhance domestic education (establish business schools)
Reinforce foreign student programs and scholarship programs.
Establish mutual recognition of common credits between universities in Asia and Japan.
Establish business schools and other professionally-oriented universities.
Expand the range of English-language instruction offered at universities.

(ii) Enhance domestic environment (provide housing, etc.)
Build systems to provide foreign students with information on universities etc.
Enhance living-related support for foreign students (for example, visa acquisition and housing, including more dormitories where interaction with Japanese students is possible), particularly for foreign students studying at their own expense.
Provide information on work opportunities after graduation.

There are strict restrictions on the immigration of foreign workers, even when they have expertise and skills that Japan could use.

Japanese society is aging rapidly and nursing care is becoming a major social issue, but there is currently no visa status for people providing nursing care and similar services.

Japan has a shortage of people able to provide nursing care, and many of those who require it do not have the financial means to obtain it. The problems are growing increasingly serious in nature, and it is time to rethink our systems. We should recognize "nursing care provider" as a visa category, substantially expand our recognition of certifications granted by the governments of other countries, and relax visa requirements and immigration screening criteria. Visa requirements and immigration criteria should be relaxed for nurses as well. These kinds of measures are completely different from allowing unrestricted inflows of foreign workers. It is essential for the vitality of the Japanese economy and society that we think more flexibly about the range of foreigner workers with special expertise and skills that Japan will accept.

(d) Relax the constraints on human exchange (eg. use Haneda as an international airport)

A major factor limiting exchange between Japan and Asia is air transportation. An example comes from South Korea, an important neighbor. The flight from Tokyo to Seoul requires about one hour and fifty minutes. It is very short. But in actuality one spends a full day in transit. Narita Airport comes under restrictions and constraints. By itself it is not up to the task of energizing the flow of people between Japan and Asia. At some point, a third airport will be needed for the Greater Tokyo area (in Tokyo Bay), but in the meantime, for Japan to open itself to Asia, we need to capitalize on the convenience of Haneda and turn it into an international airport. Travel between Japan and Korea will be increasing between now and the World Cup games in 2002. Now is the time to allow shuttle flights between Haneda and Kimpo, and that requires allowing Haneda to be used as an international airport.

(3) Assistance for the socially vulnerable

The currency crisis and subseuqent structural reform processes had vast social effects as well as economic effects. They demonstrated the need for better relief measures for the socially vulnerable: women, children, the poor, and the unemployed. After the crisis, Foreign Minister Surin Pitsuwan of Thailand proposed a regional safety net, and Japan should strengthen its cooperation for relief measures for the socially vulnerable. We should, for example, provide more active assistance for children unable to attend school, and more active cooperation for the establishment of unemployment insurance systems and vocational training centers for the unemployed.

2. Goods

(1) Emphasis on manufacturing

One factor in the Asian currency crisis was the fact that Asian countries had lost sight of the importance of "manufacturing" and instead invested short-term capital in non-productive real estate and financial assets, which created an economic bubble. Asian economic development is supported by Asian "manufacturing" skills. This is still an area where Asia has strengths, and so we must have an attitude of emphasizing "manufacturing." If one considers how, ideally, Asian economies should develop in the future, it is obvious that it will continue to be essential for them to accept foreign capital, but it also becomes more important than ever before to use this capital as a catalyst to domestic savings, to promote original innovations, and to allow manufacturing to steadily take root. These are issues that both manufacturing and non-manufacturing sectors have in common, but we propose that the overhaul should begin with "manufacturing," which is the most basic component.

(a) Develop human resources for manufacturing

"Building people" is an important challenge in "building things." Design drawings, manuals, and equipment are not enough to strengthen manufacturing; there must also be expertise to tie them together. Both those obtaining and those providing expertise need to make efforts, and systematic programs must be put in place to develop the skills of people who have a desire to learn.

Broad, deeply-rooted industrial development requires the development of the domestic personnel who will lead it. This requires better human resources not only at the level of workers, but also among the engineers and management people.

(b) Develop SMEs and supporting industries

The Asian region has shown signs of economic recovery ever since the currency crisis, but it is urgent that the region develop the SMEs and supporting industries that will provide the economic energy for self-sustaining development over the medium and long terms. SMEs and supporting industries in the Asian region lack technical and management-level human resources, and their paucity of management skills makes it difficult for them to raise funds. Overcoming these structural challenges will require policy-level support that draws on private-sector energy while making government resources available to promote the development of SMEs and supporting industries.

Japan must make full use of its experiences in assisting these efforts to develop SMEs and supporting industries in the Asian region. Our aid must be "aid with a face." In particular, it will be important that reform in Asia draw on strong, high-level government leadership, and within this context, success stories like the "Ishikawa Project" in Vietnam and the "Mizutani Project" in Thailand demonstrate the continuing need for Japan to send in high-level experts to provide concrete policy recommendations on the development of SMEs and supporting industries.

The policy side must provide not only planning but also programs that support the achievement of plans. It will be necessary to provide powerful support for private-sector efforts such as those to improve the functions of the SME organizations that are now taking root in the Asian region.

It will be extremely effective to make full use of the insight and experiences of the Japanese private sector in providing this assistance. "Senior Volunteers" should also be used.

Incoming direct investment has been a major driving force in the development of Asian economies. Though countries will continue to enhance their domestic savings and investment mechanisms, there is still a role to be played by imports of foreign capital and technology. It will be important in this regard that we work with recipient countries to enhance their investment environments (for example, their infrastructure) and energize their domestic industries so that they are able to attract foreign direct investment. Japan must also make efforts towards signing investment agreements that would promote investment.

(d) The role of Japanese companies

Japanese manufacturing firms have, through direct investment and other means, created networks in Asian countries and deepened their interdependency with Asian economies. They remained in Asia in spite of the currency crisis, and they continue to have a major role to play in Asian economies. In the future, it will be important for Japanese manufacturers to hold long-term perspectives of Asian development as they strive to grow their own companies.

(e) The ASEAN Free Trade Area (AFTA) and ASEAN Industrial Cooperation Scheme (AICO)

The success of AFTA and AICO will be vital to maintaining and increasing the momentum for expanding trade and investment in Asia. As trade is liberalized, it will be necessary for countries to develop competitive industries and comparative advantages. AFTA and AICO will make it possible to establish environments in which the markets decide how industries are to be located in the region. We expect that, as Japanese companies expand their business in Asia, ASEAN will continue to be liberalized and will refrain from resorting to tariff exceptions. The government of Japan will need to continue to encourage these efforts on the part of ASEAN.

(f) Emphasize agriculture, forestry, and fisheries

It is important to develop agriculture, forestry, and fisheries in order to feed growing populations, and the currency crisis reconfirmed the role that these industries have to play in providing social stability-it was to rural villages that the urban unemployed flocked. Japan will need to continue to provide active cooperation for these areas.

(2) Free trade agreements

Free trade agreements are one way to strengthen and deepen economic relations between Japan and East Asia, particularly South Korea and ASEAN. We should begin by discussing a bilateral free trade agreement with South Korea, and then move on to joint studies of similar agreements with Singapore and other countries that are enthusiastic about the idea, deepening discussions and understanding around the region in the process. Japan has already begun the negotiation of an investment agreement with South Korea. This should be signed as soon as possible, and work should begin on a mutual recognition agreement (MRA). Intra-regional integration (the development of common systems within the region) will be an important factor in sustainable economic development in ASEAN, and the Japanese public and private sectors should provide active support for this.

(3) Opening Japanese markets

Asian countries have a strong desire to see Japan expand its imports. During the Mission's visits, Vietnam, Thailand, Malaysia, and the Philippines expressed strong expectations for the opening of Japanese agricultural markets.

During the Uruguay Round agricultural negotiations, Japan agreed to reduce tariffs on agricultural products, expand most-favored-nation ceilings, and otherwise improve market access, and it has worked steadily to fulfill those promises. As mentioned above, there is a strong desire for Japan to further expand its imports in order to aid the recovery of Asian economies. In light of this, Japan should work more positively towards improving market access, thereby fulfilling its role as a member of Asia while also making full provisions for its own food security.

Further efforts will also be needed to improve access to Japanese markets for industrial goods and services. This is not just at the level of liberalizing trade and transactions, but also extends to reforms to business practices, for example, the priority that Japanese companies give to group profits.

There will be no horizontal division of labor in the Asian region without greater opening and greater absorption on the part of the Japanese markets that have such enormous weight within the region.

3. Money

(1) Efforts to stabilize Asian currencies

The experiences of the currency crisis have given all Asian countries a strong interest in financial and monetary stability. One of the challenges before the region, including Japan, will be to adopt appropriate foreign exchange regimes and create concrete schemes for emergency regional financing, for example, a currency basket that would include the yen. This should then lead to the initiation of discussions at regional fora such as the "ASEAN+ Japan, China, Korea" forum. Bilateral discussions should also take place at the same time in light of the fact that conditions are not the same in individual countries. We must also strengthen the analysis of Asian economies by Japanese government and private research institutes, and the publication of their findings.

(2) Internationalization of the Yen

Since the currency crisis there have been increased calls to expand the role played by the yen in Asian countries. It is extremely important for Japan's economic future that the yen serve as a leading currency in Asia, so this is an opportunity that we cannot afford to let pass by.

The yen will only be internationalized if market participants select it as a desirable currency. For that to happen, it is urgent that the government and private sectors of Japan work together to improve domestic financial and capital markets and enhance payments systems. Private companies and financial institutions must work hand in hand towards the expansion of yen-denominated transactions.

(3) Development of Asian bond markets

Learning from the mistakes that led to the currency crisis, Asian countries have voiced strong desires to develop their bond markets as a means of avoiding dependence on speculative foreign capital and tapping domestic savings.

In addition to promoting samurai bond issues and enhancing payments systems, Japan should provide support for efforts to develop bond markets. One way in which it could do this would be by using the guarantee services of the Japan Bank for International Cooperation (JBIC) for bonds issued by Asian governments. Japan should also promote studies and discussions among national supervisors and central banks so that regional cross-border payments systems can be smoothly established for funds and securities in the future.

Private financial institutions should quickly complete enhancements to their own financial positions so that they are able to restart their investments in Asia, and they also have human and intellectual contributions to make to the development of national bond markets.

(4) Establishment of early warning systems to prevent currency crises in the future

Among the chief causes of the Asian currency crisis were the fund-raising weaknesses of individual countries. To prevent crisis from recurring, we will need to strengthen the financial systems of emerging markets, and will also need to monitor large movements of cash from more advanced countries and provide appropriate responses as warranted by the situation.

Japan should be actively involved in the Manila Framework and other mechanisms for regional cooperation, and should take the initiative in establishing and developing within the Asian region highly efficient markets and effective financial intermediation services that are consistent with global financial systems.

(5) International standardization of corporate accounting

National organizations must work in close international communication and coordination to bring corporate accounting in line with international standards so that companies are able to adapt to globalization. It will be important for Japan to provide cooperation in this area.

4. Information

(1) Enhancements to information networks

The globalization of information is steadily advancing, and for Asia to overcome the currency crisis and prepare for the coming twenty-first century, it is urgent that Japan take the initiative in Asian informatization, creating a major trend that will enable the region to jump on the waves of informatization that are already reaching its shores. Positive initiatives by Japan in the area of information will also revitalize Asia, sending a strong message to the international community that the region will maintain its competitiveness in the twenty-first century.

(2) Support for Internet industries

Advances in data communications have rapidly raised the potential for new industries. One of these industries is the "Internet industry" (sometimes referred to as the content industry-the information, and particularly the graphics and audio, provided over the Internet) that is already growing in the United States and has begun to take root in Japan. We must put the proper conditions in place for the development in Japan of a concentration of Internet industries based on the cultural diversity of Asia.

(3) Spreading Japanese language and culture through the "Asia Japan Center"

Advanced countries other than Japan endeavor to spread their own cultures through institutions like the American Center, British Council, Alliance Fran_aise, and Goethe Institute. By contrast, most of the Japanese cultural halls and culture centers in the world's major cities are small in scale. The people of Asia are enthusiastic about learning Japanese, but are often unable to find appropriate classes at appropriate tuition levels. We must enhance and strengthen "Asia Japan Centers," giving them facilities on par with the institutions of the major European and North American countries and full-staffed, free Japanese language education programs. Thought should also be given to organic links between the Asia Japan Centers and the foreign student programs administered by the government of Japan, and to building systems to provide information on educational opportunities to foreign students.

(4) Intellectual exchange with Asian countries

There are already many regular dialogs with some Asian countries, but it is desirable to have such intellectual exchange with others as well (among the countries visited by the Mission, Thailand and the Philippines were particularly enthusiastic about this). The Japan-Korea Forum plays a major role in our relations with South Korea, but it would be desirable to have a forum at which the younger generation could discuss common international undertakings by Japan and South Korea.

Progress has been made on mutual recognition of credits ("twinning") by universities in Japan and Asia as a means of expanding Japan's acceptance of foreign students and encouraging Japanese students to study in Asian countries. It is hoped that these efforts will strengthen cooperative relationships between universities in Japan and Asia and lead to full-fledged research exchange. The International Exchange Student Program, Japan Foundation, and yen loans and other forms of official development assistance have a role to play in this, but further enhancements and expansions to this aid will be required in order to further internationalize Japanese universities and promote intellectual exchange. New forms of assistance in addition to the current yen loans should be provided for this. Furthermore, Japanese support for research and development in other Asian countries will be a significant "investment" in the prosperity of the region in the twenty-first century. It will therefore be important to establish a research and development assistance fund in order to encourage the efforts being made by scholars and private organizations around the region.

(5) Fundamental reforms to English-language education concentrating on language as a means of communication

It is no exaggeration that English is the common language spoken throughout the world. In Asia as well, countries have their own languages, but they use English to communicate with each other. English proficiency is relatively low in Japan compared to other Asian countries, and the Japanese are often considered the worst English-speakers in the world. We must learn English if we are to function as a member of the international community and of Asia and communicate with other Asian countries. One of the major reasons why the Japanese are poor at English is that they begin to learn it at too high an age. English is a classroom subject in junior high school, just as mathematics or chemistry, and it becomes an important course of study directly linked to university admissions. From that point on, English ceases to be a means of communicating with people from other countries and becomes merely a subject of study necessary to master in order to get good grades on tests. By contrast, Japanese children who have lived in the United States during their kindergarten or elementary school years master English with surprising speed. This is because they learn English as "sounds" rather than as "letters." It is not "study" but a "means of communication" for them. We must begin to teach English at least at the elementary level in Japan, and preferably at the kindergarten level. It is urgent in this regard that we reform the way we train teachers and administer university entrance examinations (test for facility with English as a means of communication). In recent years, the Internet, which uses English as its common language, has made it possible to communicate with the entire world, and it is worth studying the possibility of using the Internet in classroom education.

5. Other issues

Measures to facilitate the flow of people, goods, money, and information

(1) Simplification and acceleration of immigration, quarantine, and customs procedures

Immigration, quarantine, and customs procedures should be simplified and accelerated. The use of different forms for different countries is inconvenient; uniform forms should be employed if at all possible. The need for visas should be eliminated if at all possible. If visas are required, they should in principle provide for multiple entries over a set period of time. For quarantine, country-by-country handling should be avoided except in outbreaks of mass contagion.

(2) Improvement of government services, promotion of complaint resolution

Japan needs to do more to improve government services and to simplify, accelerate, and increase the transparency of government procedures. Efforts should be made to promote the resolution of complaints by, for example, establishing a Complaints Committee composed of members from the embassies of Asian countries in Japan. Greater use should be made of the Office of Trade and Investment Ombudsman (OTO). It would also benefit the flow of people, goods, money, and information to standardize customs procedures and other government procedures, environmental standards and machinery standards.

(3) Facilitation of business activities and international trade (stronger anti-pirating measures)

Stronger public order and safety measures (better enforcement of anti-pirating statutes, exchanges of expertise among police agencies) are required in order to facilitate business activities and international trade. Frequent acts of piracy in the Straits of Mallacca and other East Asian waters threaten Japan's transportation routes, and cut coastal countries off from trade with their neighbors. Japan should maintain close contacts with relevant governments along the Straits of Mallacca and provide needed technical and financial cooperation to maintain the safety of maritime transportation.

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