FROM THE OFFICE OF PUBLIC AFFAIRS

           Good evening.  I am pleased to join the Japan Society tonight, to talk about our hopes for a great ally and economic partner.  The longstanding and strong friendship between our nations is a bulwark of global stability, and has been an engine of global prosperity. 

As an example of our partnership, I am very pleased to announce tonight that the United States and Japan have reached an agreement in principle on the text of a new income tax treaty.  The proposed treaty reflects both the deepening economic ties between the United States and Japan and the globalization of our two economies. 

 The proposed treaty reduces barriers to trade and investment between the United States and Japan through substantial reductions in the source-country withholding taxes imposed on cross-border dividends, interest, royalties and other income. 

  Most significantly, the agreement includes the complete elimination of withholding taxes on royalties, on certain interest, and on certain inter-company dividends.   Given the importance of this agreement, its announcement is being simultaneously released by Minister Shiokawa in Tokyo at this very moment.

Achieving a new and improved tax treaty with Japan has been a priority.  We are pleased to have worked together with our Japanese partners to achieve an agreement that will benefit the economies of both our countries, and I look forward to signing this important agreement without delay.

            This new proposed treaty agreement also makes a larger point.  There was a time, not long ago, when powerful and emerging economies alike were seen foremost as competitors, as if domestic economic growth in one had to come, to some degree, at the expense of growth in another.  Today we know that such a view is not only false, but counterproductive.  Economic growth in one nation drives growth in its trading partners.  Individual firms may compete at the expense of each other, but such inter-firm competition is the wrong model for countries where of course the operative principle is comparative, not absolute advantage.

            Through trade all nations benefit from each other’s prosperity and in turn create more prosperity.  Thus, improving opportunities for trade benefits all.   Likewise, reducing trade barriers helps the citizens of all participating nations and is a powerful driver of future growth.  For hundreds of millions of poor in the developing world, escaping from poverty requires more robust growth in the world economy and more free trade.  That won’t happen unless leaders of the industrialized nations take steps to strengthen their own economies and shun the temptation to restrict trade.

            Today the industrialized nations of the world are growing far too slowly and everyone suffers as a consequence.  This was one of President Bush’s key messages at the G8 summit last week: that the United States wishes economic success for all its partners, and that the developing world in particular needs faster growth from all of the more advanced economies.  It has been the policy of his administration to encourage economic growth at home and abroad. 

            Nowhere is this more important than in the leading industrialized nations, which through their trade and investment activities support growth throughout the rest of the world.  Our challenge today is that the leading economies are suffering from a growth deficit – their potential far exceeds their performance.  Returning these economies to high growth performance was a focus of the G8 meeting.

            In the United States, we have taken aggressive steps to get our economy on a stronger growth path.  We have focused on reducing the tax burdens on consumers who wish to spend or save, and on encouraging companies to invest in new jobs and equipment.  With the President’s Jobs and Growth plan now in place, I am confident we are going to see steadily increasing growth here in the United States in the coming year, and with it, more jobs higher productivity, and performance much closer to our long term potential.  The developing economies have the potential to perform much better as well, and we need to find the keys to unlock that potential. 

            In the developing world, the President’s visionary Millennium Challenge Account will sharply increase aid to countries that promote policies for good governance, economic freedom, and investment in health care, education, and infrastructure.  Under this program, we will reward governments that produce results for their people and empower the private sector to drive growth.

            The plain fact is that development assistance has not been accompanied by a proportionate pickup in the prosperity and living standards of poorer countries.  We can do better with development aid.  Today, our aid programs are falling far short of their objectives of lifting poor countries out of the terrible blight of poverty.  We can and must do better.  That begins by changing the focus from in puts – the amounts of aid – to outcomes – the results of that aid.  Such an approach promises a much brighter future for the poor peoples of the world and as we know so well today based on decades of experience, good policies precede economic success.

            The reconstruction of Iraq, while it is a unique case, illustrates many of these principles.  The Coalition Provisional Authority is working to create a national infrastructure in a country that has lacked any semblance of modern economic or political institutions for at least twenty-five years.  The Coalition is laying the foundation for representative government, rule of law, and a market economy.

            I said at the beginning of this speech that the relationship between the United States and Japan has been an engine of global prosperity.  The world needs that engine running on all cylinders.  Japan remains the world’s second-largest economy, and by far the largest economy in Asia.  Japan has also been an active partner in humanitarian projects worldwide, such as the reconstruction of Afghanistan and Iraq.

            Japan’s economy, however, has struggled for a decade, following four decades of awesome growth.  We all know the diagnosis by now: a distressed banking system with too many non-performing borrowers; persistent deflation; and a rigid and overly regulated economic structure that discourages risk-taking, competition, and innovation.

            The prescriptions for the ailments are well known, too.  And the needed action is not unprecedented.  The U.S., for example, had trouble with economic rigidity in the past.  Our transportation industry was bound-up in antiquated regulations for decades, as I know well.  Economists talked about the problems for almost as long, until the government finally acted to deregulate transportation in the late 70s and early 80s.  The benefits of that deregulation have only increased over the years in the greater flexibility of the American economy, its competitiveness, and its resistance to shocks.

            The U.S. has also encountered the problem of misalignment between real asset values and the book values of those assets.  The savings and loan crisis of the 1980s had the potential to throttle our economy.  For a long time, no one wanted to admit the extent of the damage.  No one wanted to take responsibility for it.  But in retrospect, one of the best choices policymakers made was to bite the bullet, gather up the overvalued assets, and put them on the market.  We got over that hump, and bounced back.

            Economies stumble.  Over the past few years, the United States suffered from a notable slowdown, following many years of high growth.  In our case, exogenous factors such as September 11, the bursting of the stock market bubble, and corporate scandals dragged us down.  But because of the flexibility of our system, along with swift fiscal and monetary responses, we have been able to keep moving forward, keep growing, under what might otherwise seem an impossible situation. 

            Flexibility matters because no one can predict the future with certainty – so the best policy is usually to allow markets to work.  The flexibility that we’ve hailed today is owed in large part to the policymakers who decided, for example, to deregulate transportation and liquidate nonperforming S&L assets so many years ago.

            In some ways, Japan today reminds me of the picture of the United States that emerged in the late 70s.  Growth was slow.  Our companies were inefficient.  Our economic system seemed brittle and stagnant.  Many critics were writing off the U.S. economy entirely, believing that the U.S. would be permanently eclipsed by Japan’s ascendance. 

            Yet during the stagnation, during the criticism, quietly at first, the American economy was evolving.  Managers and investors were studying Japan’s success, for example, and beginning to learn from Japanese quality control practices.  We were adopting new technologies, and new production processes such as just-in-time delivery.  We overcame our pride and our “not invented here” syndrome.  We learned from others, and we learned especially from the Japanese.

            We did not remake ourselves as Japan.  But we incorporated Japanese practices within American institutions, and we were better for it.  I say “we,” but I should be more specific.  Businesses that learned and adapted survived and prospered.  Those that refused to change have failed and vanished.

            Winston Churchill said something to the effect of, “America always finds the right answer – after it has exhausted all the alternatives.”        

            The fact is, the one and only constant of economic life is change.  To maintain success, an economic system must accommodate change, even as it maintains institutions of stability.  It must allow failures, and then it must allow and even encourage entrepreneurs and businesses to learn from those failures.  At times, the medicine is painful – but I believe it works.

            The United States is hardly alone as a nation that reversed a period of economic stagnation and decline.  Britain, New Zealand, the Netherlands, and no doubt others have done the same, each in its own way, but with the commonality that all adapted to change while preserving their national character.

            I’m not here to preach American answers to Japanese problems.  I’m here to say that we believe in Japan, and that we believe that Japan will take actions to overcome these obstacles, and return to a position of economic leadership and growth in the world.

            Japan must find Japanese solutions, not through isolation, but through openness, leadership, and a legendary will.  The solutions must meet the needs of Japan’s unique society and institutions to win broad public support.  Without that combination of leadership and broad-based support, reform cannot happen, nor can it hold.

            And amid the criticism and all the well-documented problems, there are signs that Japan has been changing.  This is a hopeful time.    

            In banking, Japan has created a basis for corporate restructuring, the Industrial Revitalization Corporation.  I am encouraged by the work of the Financial Services Agency under the leadership of Minister Takenaka.  I am especially heartened by the Japanese Government’s action to preserve the stability of the financial system in the recent case of Resona Bank.  The accelerated resolution of bad loans will provide a useful model as the Japanese Government considers a new framework this summer.           

            I am also encouraged that the Bank of Japan, under the leadership of Governor Fukui, is now working more closely with the government and improving communication with the market.  We have high expectations for stronger monetary growth as a means to eliminate deflation.          

            Prime Minister Koizumi has stated that there can be no growth without structural and regulatory reform, and he has committed to opening the Japanese economy to competition and efficiency.  I believe the Japanese economy will get a tremendous boost from policies that open up sectors to new entry and competition, and that make it easier to move labor and assets to where they are most productive.

            Japanese companies have shown that they can compete in world markets to the benefit of consumers in virtually every nation.  Their competition brings benefits such as lower prices, higher quality, and newer technology.  Japanese consumers should have the same opportunity to benefit from competition at home.        

            Let me close with a story from my personal experience with Japan, one that illustrates how our nations can address similar questions in different, valid ways and then learn from each other.  When I was the chairman of the Business Roundtable, a group of American corporate leaders from our largest firms, we launched a dialogue with our counterparts of Japan’s Keidanren, to learn from each other, and foster mutual understanding. 

            For our very first meeting, each was to prepare a list of national priorities for discussion.  The usual subjects appeared – trade, global warming, pensions and deregulation were among the topics.  But the number one priority for both groups was education.  We said to the Japanese, “we want to learn from your educational system— how do you achieve such universal literacy, competence, numeracy and achievement?”  To which the Japanese business leaders replied: “No, we want to learn from your educational system—how do you produce so many Nobel Prize winners, so much creativity, so much innovation?  How do you preserve opportunities for so many to get a second and third chance?”

            Clearly, we have much to learn from each other.  The United States welcomes a vibrant, rejuvenated Japanese economy, and we will support our friend and ally’s efforts to restore full growth.  The world has much still to learn from Japan, and Japan has much to contribute to global growth and security.

            Thank you.