FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to speak to allof you today. Let me thank the Japan Society for inviting me andfor hosting this event. Let me start by saying a few words aboutthe importance and difficulty of building support for a strategyof American engagement in the international economy and then Iwill turn to the U.S.-Japan relationship, and the challenges weboth face in fostering growth.

Since taking office, PresidentClinton has pursued an economic strategy based on the firmly heldbelief that our economy is an integral part of the globaleconomy, and, thus, our economic well-being is profoundlyaffected by what happens abroad. In order to have the requisitepublic support for policies that reflect that view, such ascontinuing to work to liberalize world trade, renewingmost-favored nation status for China, and maintaining support forthe United Nations, World Bank, and other internationalinstitutions, it is critical that there be a shared understandingamong the American people of the importance of our engagement andleadership abroad.

I have a deeply troubled feeling,as I speak to different groups and spend time on the Hill, thatwe are losing that understanding, that there is a retreat fromsupport for policies that promote U.S. international engagement.I believe that it is absolutely vital to our national interest toreverse that retreat. As an organization dedicated to buildingstronger ties between the United States and Japan, yourorganization has the position, as we in government do as well, topromote that shared understanding, and I think it is criticalthat you do so.

Last month, I took a trip to Asiathat underscored for me the importance of our leadership andengagement abroad, and for building a better understanding ofthat importance. I traveled first to Tokyo, where I met withPrime Minister Hashimoto, who I had first met -- and argued, in afriendly spirit -- when he was Trade Minister. I then visited thePhillippines, where I met with the APEC finance ministers, andVietnam, where I witnessed the early stages of what could be aremarkable transformation.

My trip reinforced for me threeviews with respect to today’s global economy that arecritically important for the United States -- and Japan.

First, there is an emergingconsensus around the globe on how best to achieve economicgrowth: market based incentives, effective capital markets, soundfiscal policies, education, a reliable legal framework, and withhesitation on the part of some, open markets. I have heard thisin Latin America, Asia, and Eastern Europe. When I was inVietnam, I visited Hanoi and Ho Chi Minh City and met with thegeneral secretary of the Communist Party, the prime minister andthe finance minister. What struck me was that these officials --the leaders in what is still a communist country, a country thatfought a war with the United States only 25 years ago -- werekeenly focused on what constitutes a market economy, how you moveto a market economy and how to attract more foreign investment.Developing nations around the globe like Vietnam look to theUnited States -- and to Japan -- for guidance in addressing thesechallenges.

Second, global economicintegration is becoming a fact of life. Our economic success isincreasingly linked to the health of the global economy and thenations around the globe are increasingly creating regionalalliances, sectoral agreements -- and trade agreements of allkinds. The only question is whether we will be part of them, oron the outside looking in -- much to our detriment.

Finally, we -- and Japan -- canplay a crucial role in helping developing nations build wellfunctioning market economies and modern capital markets, or, asis the case in Vietnam, make the transition from state dominated,centrally planned economies to open, free market economies. Byfostering growth in the developing countries, we create biggermarkets for our goods and services and so promote growth in theUnited States and Japan.

All of this underscores theimportance of stronger ties between the United States and Asia,the most dynamic economic region on earth. We now export more toAsia than to Europe. Developing countries alone in Asia nowrepresent 24 percent of world GDP and their share of world traderose from 9.6 percent in 1981 to 16.1 percent in 1994. It isenormously in our economic and national security interest topromote political stability, economic growth, and peace in theregion, and to be an integral part of the Pacific region’strade and other structures. From the very beginning of theAdministration, the President has emphasized the importance ofintegrating ourselves with other regions in the world.

Central to our Pacific strategyare strong economic, political and national security ties betweenJapan and the United States. With our countries being the twolargest economies in the world and together representing onethird of world GDP, an effective working relationship between ourtwo countries key to the stability and prosperity of not onlyJapan and the United States, but the entire region and the globaleconomy.

When President Clinton came intooffice, he was determined to address the problems in our economicrelationship with Japan forthrightly, rather than papering overdifferences, as had sometimes been the practice. In four years wehave made real progress. For its part, Japan has acted to reduceits global trade and current account surpluses and they have comedown roughly 50 percent, reflecting, in part, policies by thegovernment to promote structural changes and to promote domesticdemand.

Our two nations have negotiated24 trade agreements during this period, and these agreements havecontributed to the 44 percent growth of U.S. exports to Japanover the last four years. Japan’s imports have risen from 7percent of GDP in 1993 to 9.4 percent last year.

We have learned thatdisagreements in some areas need not prevent strategic andeconomic cooperation on a wide range of important issues. We havea very strong relationship between Treasury and the JapaneseFinance Ministry and cooperate closely on financial market issuesand on issues in the G-7, the World Bank, the Asian DevelopmentBank, and the IMF.

Having said this, let me now turnto growth, because as I have said, growth in our two countries iscritical not only to our countries, but, because of the size ofour economies, to the health of the entire global economy.

Let me start with the UnitedStates. We have enjoyed five years of very favorable economicconditions, but we must not let that mask the economic challengesthat we face, if we are to succeed in the global economy in theyears and decades ahead, especially fiscal responsibility,successfully addressing education, the inner cities and otherareas crucial to future productivity, and providing leadership inthe international economy.

Japan, in contrast, hasexperienced a five year period of poor economic performance,which has exposed a number of challenging economic problems thatwere to some extent masked by the remarkable growth of thepost-war period.

Excessive government regulation,restrictive informal business practices, and markets that arerelatively closed to foreign competition reduce competitiveness,investment and growth. The financial system, ironically, may havesuffered from too little effective regulation, and anunwillingness to face problems, and so is still in the earlystages of adjusting to a very large non-performing loan problemthat has reduced its ability to finance investment that isimportant to growth. And, looking forward, Japan faces a dauntingdemographic problem, much worse than that faced by the UnitedStates and the other major industrial countries, which willrequire strong growth to generate the resources necessary to dealwith an aging population.

Japan faces these challenges withmany of the sources of strength that were so important to thedecades of rapid growth following the end of the war: a highlydisciplined society, a high savings rate, a strong commitment toeducation, and impressive efficiency in manufacturing. But as amature industrial economy, with a labor force growing onlyslowly, and no longer inexpensive relative to the West, andhaving already caught up to and in certain cases surpassed thetechnological best practices of the West, many of the sources ofstrong growth in the post-war period are no longer available.

I always feel very hesitant aboutcommenting on other countries’ economies, but because ofit's size and importance in the international economy andfinancial system, Japan's success in dealing with thesechallenges is important to not only to Japan, but to workers,businesses, and governments around the world. And so, in thestrong economic partnership between our two countries, I wouldlike to highlight a few of the areas which we believe areimportant to the future growth of the Japanese economy.

First, is the challenge ofachieving strong economic growth driven by domestic consumption,and avoiding a significant increase in Japan’s externalsurplus. After our meeting in Tokyo, Prime Minister Hashimotoreleased a statement reiterating these objectives. His strategyis a restrictive fiscal policy and deregulation. If thatdoesn’t work, then Japan will face the challenge of how elseto meet the objective. Current account balances will naturallyrise and fall, but it is critical that Japan's current accountsurplus not rise again to a level that harms global growth, thatcauses trade frictions with Japan’s trading partners, andthat could fuel protectionist sentiments in other parts of theworld.

Second is the challenge ofcontinuing to open Japan’s markets. Large parts of theeconomy are still subject to formal or informal tradeimpediments. It is true that the United States and the rest ofthe world has a lot to gain from progress in reducing thoseimpediments. But the benefits for Japan are equally great interms of more choices and lower prices for the consumer and thecompetitiveness of its economy.

Third, an issue that is closelyrelated to opening Japan’s markets, is the challenge ofbuilding on Prime Minister Hashimoto’s ambitious commitmentto deregulation. Our view is that the faster these reforms areput in place, the better, because they are critical to a strongerJapanese economy over the long run. Ultimately, the measure oftheir success is the extent to which the Japanese economy becomesmore open, internally and externally.

Fourth, Japan faces the challengeof strengthening its financial system. In the United States, onecritical lesson that we have learned at great cost to ourselvesis that, when problems arise, they must be addressed quickly, asdemonstrated by our failure to do that in the savings and loancrisis of the 1980s. Japan has taken a number of steps in theright direct, but the job doesn’t seem to be over.

In a sense, Japan may be at acrossroads. Because of Japan’s inherent strengths, it hasthe potential for a robust economic future, but to realize thatpotential its challenges must be met. And, again, a healthy andstrong Japan is very much critical to the economic and nationalsecurity interest of the United States, the Asia-Pacific region,and the entire world.

The United States may be at acrossroads as well. We face a number of critical decisions overthe next few months which will help define our role in theinternational economy. Lately, when I’ve gone to G-7meetings of finance ministers and central bank governors, othercountries have started to express their concern about where wemay be heading, as evidenced by U.S. arrears to the UnitedNations and the World Bank, our inability to provide leadershipon trade liberalization, and the like.

And this takes me back to thebeginning of my remarks. We must work together, the government,and groups that are committed to U.S. international engagementsuch as the Japan Society, to build a shared understanding amongour citizens of one of the great lessons of the 20th century:withdrawal from international affairs cannot work. When wewithdraw, we suffer; when we engage, we prosper. Thank you verymuch.