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The United States and Japan Looking Forward: New Opportunities, New Synergies, New Challenges

Panelists: Hiroshi Mikitani, Chairman and CEO, Rakuten, Inc., Fumihiko Yoshida, Editorial Writer, The Asahi Shimbun and Lecturer, Princeton University, and Sebastian Mallaby, Director, Maurice R. Greenberg Center for Geoeconomic Studies, and Paul A. Volcker Senior Fellow for International Economics, Council on Foreign Relations
Presider: Sheila A. Smith, Senior Fellow for Japan Studies, Council on Foreign Relations
October 8, 2010
Council on Foreign Relations


This event was part of the workshop, The United States and Japan at 50: Resilience and Renewal, cosponsored by Council on Foreign Relations (CFR) and the Asahi-Shimbun. This event was also made possible by the generosity of the following corporate sponsors of CFR's Japan program: Canon USA, Mitsui & Company, Mitsubishi Heavy Industries America, Mitsubishi International Corporation, Sony Corporation of America, and Toyota Motor North America.

SHEILA A. SMITH: Welcome, everybody. We are running slightly behind schedule, which is really, really not allowed at the Council on Foreign Relations. So I apologize to all of you who have your stopwatches at the ready, but I'm going to blame it on Richard -- (laughs) -- who got us going this morning so well.

As you take your seats, let me begin by thanking all of you for coming. I am delighted to preside over the second panel, which is a panel that hopefully will focus on the renewal part of our task today, which is to look forward in the U.S.-Japan relationship, not only to find opportunities for enhancing our cooperation, and I hope opportunities for some optimism, given some of the pessimistic sentiments on the previous panel, but also to think of challenges we might face, ways we might avoid running into each other, and opportunities both in the region and on global fear.

So let me welcome you to session two. Again, I want to remind you to turn off your cell phones, BlackBerrys and all those things. And this meeting is on the record -- on the record. All right, so whatever you say can and will be used against you, as Richard said.

My first panelist to introduce is Mr. Hiroshi Mikitani. We are delighted that you took time out of your busy schedule. We know how busy you are.

Mikitani-san is the CEO of one of the world's fastest-growing Internet providers. His company not only sells things on the Internet but provides financial services, provides travel services, and it's an expanding and diversifying portfolio of operations. I think Rakuten is now in Thailand, in China, in the United States, and is soon to be in Indonesia, I believe. Have I missed anywhere? France as well.


SMITH: And France. So this is a CEO and a company that defies the definition of Japan as being insular. So we're delighted to have you with us.

Our second speaker is Fumihiko Yoshida, who is very familiar to most of us who have been working on Japanese security issues. He is a journalist and a scholar. He's currently on leave from Asahi. He's at Princeton University, but he has worked and is one of Japan's leading thinkers on nuclear disarmament and nonproliferation issues, and he'll be talking about those issues with us today.

And finally, last but certainly not least, we have Sebastian Mallaby, who is the director of the Maurice R. Greenberg Center for Geoeconomic Studies here at the Council and the Paul Volcker senior fellow for International Economics; very large title -- (laughs) -- and a deservedly large one. He is the author of the new book called "More Money Than God," which has been nominated for the Financial Times business book of the year award. And so we are delighted to welcome you, Sebastian, to the conversation.

So I think, without further ado, I'm going to allow Mr. Mikitani to start us off and talk about our future.

MIKITANI: Okay, thank you very much.

First of all, thank you very much for inviting me to this fabulous conference, and I'm very honored to speak in front of such a wonderful audience; a conversation on the 50th anniversary. We started in 1960. That was the year my father came to the United States as a Fulbright scholar student. So I feel some sort of relationship.

But as you know, I'm entrepreneur and I'm not specialist in foreign affairs. But I think my responsibility is to demonstrate there is still some entrepreneurship in Japan. (Laughter.) Many people think, you know, Japanese are all about Hitachi, Toshiba, Sony, big companies. But now I think we are trying to really grow the spirit of entrepreneurship in Japan.

Let me start by explaining about my background. After graduating from Japanese university, I joined the large Japanese bank called Industrial Bank of Japan. Some of you are very familiar with it, I think. And I went to Harvard Business School from '91 to '93.

Before going to Harvard, I never imagined myself becoming entrepreneur. I thought I'm going to just, you know, keep working for IBJ or maybe join other investment bank like Goldman Sachs or Morgan Stanley and make my money. But, you know, my experience at Harvard really changed my mind and I started thinking about starting my own business.

I went back to Japan and worked for investment banking department for two years. In 1995, we had a big earthquake in my hometown, Kobe, and I lost my friends and relatives, and many of my relatives' houses were completely destroyed. And I realized how short life is. And I went to the CEO's office of IBJ and told him that I'm going to leave.

They paid my tuition and everything when I was at Harvard. I thought that was a little bit -- (chuckles) -- bad. But despite that, I decided to leave the bank. And now Mizuho Corporate is making more than $50 million, I think, from my company, so now I feel really good. (Laughter.)

One of the reasons why I left the big company and started my own very small company -- at that time we only two people -- was I thought we need a new role model to create entrepreneur environment in Japan. So without having a very strong business model, I started very small consulting firm and bringing the U.S. business model to Japan, some of which went public, and we made a significant amount of return out of it.

In 1997, I got really tired of doing consulting work and, you know, started this small company with my younger partner, who was a graduate-school student at that time, called Rakuten. The concept was to create the Internet shopping mall. Unlike eBay or unlike Amazon, we wanted to create a marketplace to empower small to medium-size enterprise. And we didn't start big. We started very small with initial capital of 200,000 U.S. dollars; never raised money until we went public in the year 2000.

Now, in terms of e-commerce, we do about 10 billion U.S. dollars of transactions, still growing. Over 40,000 companies sell their products over Rakuten. And we have about 60 million membership, which is about 75 percent of Japanese Internet population.

I think we created very unique business model based on our own technology, which we have very strong pride on. In the year 2000 we went public and we started to buy many, many companies. We bought Internet travel agency, Internet portals. We bought a credit-card company, Internet bank, Internet brokerage. Now we have about 38 Internet-related businesses.

Unlike other Internet conglomerates we created, again, a very unique business model by combining those services under the same brand name and using same ID program. And we –call it Rakuten economic system, and I designed the business model so that we can compete against very powerful companies such as Google and Amazon.

And after several -- 10 years, we decided to globalize our business, because Japanese population is aging and the consumer market is shrinking. In the year 2050, many analysts is expecting that Japanese consumer market will be just 3 to 4 percent of global consumer market. So I still own 50 percent of Rakuten.

And if you wanted to build a long-term strategy, it is very important for us to grow the business outside of Japan. But most of the Japanese companies are not capable of -- I'm talking Japanese service-oriented companies -- are not capable of expanding their business outside of Japan. There are several very good Internet-related companies in Japan, but they are mainly domestic companies and they cannot grow outside of Japan. And we have been, you know, trying very hard to grow our business outside of Japan.

As you explained, we expanded our business into Thailand, Taiwan. We put a company in France, number one e-commerce company in France. We bought in the United States this year. And ironically, we are going to launch our China marketplace as of October 19th, partnering with the largest search-engine company called Baidu in China. And we are planning to do business in 27 countries minimum. And I think one of the reasons we are pushing this is obviously it's good for us and it is necessary for us. More than that, we once again would like to demonstrate Japanese, you know, ventures can grow beyond Japan.

And one of the very important things I found is that the language -- as of January, this January, we changed our internal communication language from Japanese to English. And we got so much attention from Japanese media, as well as from some business leaders, explicitly, you know, sort of accused us and told that this is kind of stupid action.

But I feel, as a service company, exchange expertise is critical issue, not only top-end level, but also the staff level. So we believe it is very important for us to be able to communicate across countries. And the only way we can do it is convert our language from Japanese to global language, which is English.

Because of that, this year we hired 500 students, out of which 100 is non-Japanese, coming from Beijing University, Xinhua, Yale, Stanford, Oxford, everywhere. And once again I would like to demonstrate to the Japanese people that, you know, younger Japanese company can become global company.

Thank you very much.

SMITH: Thank you very much. (Applause.)

I think -- I'm not Japanese, but speaking on behalf of all of us, I think we'd like to clone you -- (laughs) -- for the future of Japan.

Funabashi-san pointed out something in his earlier remarks and conversation with Richard that I wonder if I could ask you about, which is the regulatory environment in Japan for entrepreneurship and for the kinds of initiatives that you're doing. You're getting criticism, but you're also succeeding. And I wonder if you could give us a few thoughts about what you think needs to change for more of this kind of innovation.

MIKITANI: Well, yes. To be very, very honest, starting a company in Japan or creating a competitive business in Japan is probably easier in Japan than in the U.S. You know, if you think about U.S. business, you know, there are so many competitive businesses right now. But funding is not so easy. We don't have strong venture capital companies. So funding is difficult, but, you know competitive landscape is much easier. So it's plus and minus.

But I think, in general, the culture-wise, Japanese people are becoming more and more conservative, especially younger people. They don't want to go to foreign countries anymore. They want to be -- you know, have a nice and easy life in Japan. And I think they are losing, you know, the spirit of a challenger. So I think it is more sort of mental thing rather than the regulatory obstacles.

SMITH: You mentioned, in your new hires and your purchase of Baidu, right, that you're moving into China in a very big way. In this morning's panel, we talked a little bit about concerns about China and us working in China. Do you have those kinds of concerns? Or as a private entrepreneur, do you see this as an opportunity rather than a concern?

MIKITANI: Obviously if you think about the Chinese market, it is growing very fast. And I talk with many, many entrepreneurs, and they understand the shortcomings of their country very precisely. And they are very, you know, not -- how do you call it? -- sentimental about Japan, you know, China relations. They are very pure –business people, more business-oriented than maybe Americans and maybe Japanese.

So we do business with Baidu, and they -- we proposed maybe we should postpone our launch date. But, you know, they said we should do this. And I really think, regardless of the fact that we have the Senkaku islands issue, as a business, we need to keep investing into Chinese market. And if we can create a strong business relationship with China, maybe it's going to be a positive for China's and our relationship.

SMITH: Thank you very much. I've got lots more questions, but I want to move to the next speaker. And then we'll let the floor ask you more questions.

Yoshida-san, would you like to --

FUMIHIKO YOSHIDA: Thank you very much, Sheila, for having me here this morning.

I think my task for today is to inspire some arguments on global partnerships within U.S. and Japan, particularly in the context of global security. And I would focus on topics in our global community, especially on climate change and nuclear nonproliferation.

And I prepared my handout I have. Sometime let me refer to this handout. My memory is not so good. Sorry about that.

So, first of all, let me ask that my brief presentation -- I'm introducing some background with these issues. In last year, 2009, the two governments, U.S. and Japan, had very important agreements. One is Japan-U.S. joint statement toward a world without nuclear weapons. It says both government agreed concrete conditions to make -- to work up to it, to create the conditions for achieving a world without nuclear weapons. Of course, this kind of a world does not come soon. But they did decided to move ahead for this direction.

And another important agreement they made in last year is the Japan-U.S. joint message on climate-change negotiations. But in this message, the two leaders reaffirmed that shifting to low-carbon growth is inevitable, and also they agreed to reduce their own emissions by 80 percent by 2050.

So this, I think -- these agreements reflect some new, big footprint on the global security issues by U.S. and Japan. And this is very important new step for both countries, I believe.

And taking this new agreement into consideration, let me briefly talk about some details about nuclear issues and the climate-change issues.

First, about the nuclear nonproliferation, to strengthen the non-nuclear regimes which we have right now, I believe that the NPT, the Nuclear Nonproliferation Treaty, is critically important. The NPT is based on so-called grand bargain -- it's a big deal -- in 1968. This grand bargain between nuclear-weapon systems and the non-nuclear-weapon states says that nuclear-weapon states negotiate in good faith on the effective measures for nuclear disarmament in exchange for non-nuclear weapon states not trying to obtain nuclear weapons. So this is the deal.

So to make this deal working, it is very important that both these commitments are fulfilled -- not only one; both. For global nuclear security -- that is, to avoid or prevent nuclear terrorism -- is a very highly important security issue in the United States. So global nuclear security, of course, cannot be sustainable without progress on both nuclear disarmament and nonproliferation. So that is a very important point about the nuclear issue.

So in this context, there are two big steps ahead in this year. In spring, the U.S. government concluded a new treaty, arms-control treaty, with Russia, but still awaits ratification in the Senate, but it's one big step ahead.

Another new change of the U.S. policies included in the Nuclear Posture Review -- this is also made this year -- and this Nuclear Posture review includes new language as far as reducing the role of the nuclear weapons in national-security strategy. And another thing is – strengthening regional deterrence to assure U.S. allies and partners. So this is quite new in the U.S. nuclear strategy.

But both these elements, I believe, will contribute to strengthen the NPT and relating regime and the treaties. That is the positive side of the story. But having said that, there are several very important unanswered questions. For example, if we really reduce the role of nuclear weapons in our strategy, what kind of conventional forces will be required to replace the nuclear deterrence? Maybe missile defense or global threat capability by putting the conventional warheads on the ICBMs or something else?

And how about the management of U.S.-Japan alliance? Is new strategy will influence on the U.S.-Japan alliance management? That is not clear yet. And also, the increased reliance on conventional weapons will affect the strategic balance in East Asia or not, were questioned or not where -- or are nowhere answered. That is a very important point. So we need to -- those are tough questions, but we need to ask ourselves very seriously.

Let me turn briefly to climate-change issues. In the joint message, it was beautifully written that we need to cooperate together in this context. But unfortunately, other reality, that both the U.S. and Japan have not been so successful in achieving concrete outcomes.

In case of Obama administration, on the diplomacy, Mr. Obama has succeeded in concluding so called Copenhagen Accord in last December, when we had the U.N. climate-change-treaty conference in Denmark. But this Copenhagen Accord is not legally binding. So in that context, it is still weak agreement. So it depends on the people how to evaluate this achievement. But from my perspective, this is still weak and need to -- we have a lot to do from now on.

And if you look at the domestic side of Obama's, President Obama's so-called climate-change bill will not be passed in the Senate so far; and the same in Japan. Japanese government has tried to pass the legislature. The Japanese legislation is called the Basic Act on Global Warming Countermeasures. So this was not passed in the Diet so far.

In saying those elements, maybe narrative elements, may be due to those narrative elements, some prospect on the next session of global conference on climate change to be held in Mexico at the end of this year seems to be quite pessimistic. So maybe there won't be any official document could be agreed, or maybe no specific prospect for the following conference, which will be held maybe in Seoul in 2012. Already we have now in negative atmosphere, unfortunately.

And in addition to these challenges which I have described, we have a kind of a negative nexus within nuclear nonproliferation issues and climate-change issues. Many call it as a dilemma with the climate-change policies and the nuclear-nonproliferation policies.

If I say something somewhat detailed about dilemma, due to increased global demand right now for electricity and concerns over greenhouse gas emissions, now, in many countries heading for or focusing more on nuclear energy as a means of providing electricity with less emission of carbon dioxide. But another side of the story is expansion of reliance on nuclear energy, especially one that involves the spread to uranium enrichment and plutonium separation. Those will put into increased pressure on already troubled nonproliferation regimes. That's one of the new problems on the NPT regime. So there is a big question.

So considering these negative nexus, I think U.S. and Japan need to find out some new international framework to go ahead about nuclear energy. However, we still have a big question in this context. For example, U.S. and Japan need to specify new international framework which could balance the conflict of interest of climate change and nonproliferation policy. But so far there is no agreement.

We have some broad agreement to go through some international arrangement, some new international framework which makes the use of nuclear energy and climate policy compatible. But the specifics are not clear.

And as my conclusion, let me report some of my own proposal. My impression is that with any alliance, the need for the aspect of alliance is very important. It's critical, no doubt about it. When we think about the global security challenges in this century, we had better look at -- more seriously at the problems, which are first in the field of global security more than -- not only the global, broader issues, and also the need for nonproliferation; we also have emerging diseases and also the terrorists.

So considering these new emerging threats, we had better pay more attention to the global security issues, the security as the necessity of this new century, in the 21st century.

Thank you very much.

SMITH: Thank you very much. You've given us a lot to think about.

Let me ask you a two-part question, if you let me do that. I think, in terms of the U.S.-Japan potential for addressing the broad array of common global security challenges that we face, clearly we all believe that there's a lot of potential there for us to do it.

I wanted to ask you, specifically on the nuclear piece, one of the things that we've all been watching over the last year is Japan have a fairly open debate about whether or not it needs the American nuclear deterrent, whether it's comfortable with a conventional deterrent for the U.S.-Japan alliance. And I think the answer is yes.

And I just want to make sure that I understand that you think -- do you believe firmly that the Japanese people are comfortable with that answer, that the United States does not need to provide nuclear capability specific to Japan's deterrence? That's the first part of the two-part. (Laughs.)

The second part is really to get to your proposal about nuclear energy. And I understand we don't have the framework yet to think about this, but clearly there's a demand around the globe for access to technology, civilian nuclear capability. And the demand is growing, and I don't think we can avoid it. How comfortable are you with allowing everyone to have civilian nuclear technology and capability?

YOSHIDA: The first question. I don't think Japanese government or the expert on security issues do not accept a fully depend on the conventional deterrence. We will accept less global nuclear in extended deterrence, but we still need a nuclear deterrence as an extended deterrence. So that's my impression.

So as I said in my presentation, we need -- we accept a less role of nuclear weapons, but we may need a backup system which is maybe missile defense or the global threat capability. But it's going to maybe inspire the argument about it is -- it will contribute to stability in the region. It will not bring a new arms race with China. So those kind of things to be answered from now on in thinking about the future of the extended deterrence.

The second question. We need to separate to two parts. One is just a nuclear power plant. But I agree -- I'm quite supportive of more use of nuclear energy in the world. But about a U.N.-managed plant and plutonium reprocessing plant -- sorry, spent fuel reprocessing plant -- where we can, you know, take out the plutonium. So these two specific plants, we had better think about some system that limits the countries which can use those facilities and make it more internationalized. And the other countries which have not -- do not have a –these facilities can use -- enjoy the surge from the use of it. So as I said, the new -- NPT is a kind of bargain. We need a balance of interest. So when we create a new framework about the nuclear energy, we need to take care of both nonproliferation side and also the energy demand side.

Thank you.

SMITH: Thank you so much.

Sebastian, help us understand this whole conversation about currency wars. Are we having one?

SEBASTIAN MALLABY: Yeah. Well, the thing I'd like to talk about diplomacy today. It's almost lunch time and people are feeling tired, so I'm prepared to be undiplomatic and to state categorically that I think Japan, last month, including in the currency markets, made a significant and unforced error, which said something very negative about the U.S.- Japan partnership now. Richard suggested earlier that perhaps the alliance, the partnership would, in the future, wither. I'm here to suggest that maybe it's already withered and I think that the currency diplomacy is a sign of that.

Now, what do I mean by all of this? Well, it seems to me that we can stipulate that the Chinese exchange rate pegging is both, fixing that is not the key to fixing the problem of the world economy. People can overstate how much it matters. But it is part of the puzzle. We have a situation globally, in the G-7 especially, of inadequate demand. Right I mean the U.S. consumer which has driven global growth for much of the decades before the financial crisis, is overloaded with debt and the best economic research suggests that it takes about seven years after this kind of balance sheet recession for balance sheets to recover and for consumption to come back from where it used to be driven.

So we need a new source of demand. The initial response to the crisis was resuscitate consumer demand with government demand. And that's why you have fiscal deficits all over the G-7 exploding upwards. But the European sovereign debt crisis shows us there's a limit to this strategy, and the tea party movement suggests here that there's a political limit to this strategy. So we cannot go on substituting inadequate consumer demands and just putting in lots of government demands.

So where do we get demand from? The answer has got to be that certain countries which are in a position to consume more because they've got so much savings, and these guys start consuming more. And the most obvious player in the world economy that can do this is China, because in China, the lack of consumption is not just a further consequence of private household decisions, as I think it is in Japan and Germany. In China, the lack of consumption is the direct result of government distortions in the economy.

It's to do with the exchange rate peg. It's to do with the treatment of state owned enterprises, and the fact that they don't pay dividends to the government, so they can sit on all their savings. And there's a variety of distortions in the Chinese economy which lead it to save on an unprecedented scale, thereby depriving the rest of the world of demand that could be pumped into the world economy, and thereby needing the Chinese to run a counter class effort, which means that they are relying on our demand, not on Chinese demand, for part of their growth, when it ought to be the other way around, because they're the guys with the savings and we're the guys with a hangover from the financial crisis.

So there is a legitimate reason to be pushing China on its currency policies and on more rebalancing more generally. Now, how should we push? Well, earlier on, Richard and others made some comments about this, and I kind of agree with it, that you can push too hard and too aggressively, and that can be counterproductive. We will see when you push the Chinese it doesn't necessarily work. Right? So the best response to this problem of the Chinese distortion is partnership by the U.S., Japan and Europeans and other partners, talking together, having a common strategy, using the G-20 framework leading up to the South Korea summit later this year, to push the Chinese into a position where they find it embarrassing not to do something.

It sort of worked before the last G-20 summit. It shows that it can be done because the run-up to the last G-20 did drive the Chinese to announce that they would move their currency. The only problem is that then they didn't move their currency, except by one percent. If you take a kind of six to seven year view, you can say, well, quite diplomacy has where, and Richard said that. I think that's true for the pre-crisis world. They did move then. In the crisis, they've' stopped. Maybe that was understandable. After the crisis, they continued to stop. This is not acceptable. Right? So we need G-20 coordination with U.S.-Japan coordination being at the center of that, to push the Chinese.

But instead of pursuing this diplomacy, what has Japan done? It said, well, we're bored of trying to do the diplomacy. We can't be bothered to push China in these patient channels. We'll just do it unilaterally. We'll intervene by ourselves in the currency market, and do this for the first time in several years. We will try to move the value of the yen unilaterally. Now what kind of reaction does that produce? Well, the Europeans are furious. They start to criticizing the Japanese for doing this by themselves and not coordinating. It encourages, you know, the U.S. Congress to pose its own aggressive, or to, the House at lease, to practice aggressive, or the sanction on China for its behavior.

It triggered discussion. The Brazilian finance minister says we're in a currency war. The head of the IMS is talking about, how do we manage this currency war? I mean, they're globally, suddenly, since the Japanese intervention, you've had a massive escalation of the rhetoric around impending conflicts over this currency. See, there's talk now that if the Chinese don't let us buy their sovereign bonds, why the heck should we let them buy our sovereign bonds? Maybe we should have capital account of reciprocity. Which is by the way a crazy idea, because there's no way you can prevent the Chinese from buying U.S. bonds because they do it through intermediaries.

But the fact that the rhetoric has reached the point of advancing in pretty serious spaces some crazy ideas is not a good sign for global government. Why we got there, I think that the Japanese decision to do a unilateral intervention was part of the defense into the wrong direction. So, I would make an appeal. I would say, look. You know, in these debates about a U.S.-Japan alliance, now I spent three years as the economist correspondent in Tokyo. I've had plenty of involvement in those debates over the years. And the classic line is, yeah, we understand and on the security side and on the political side for historical reasons, Japan may be punching below its weight. We understand that.

But on the economic side, on the monetary side, we remember the Plaza Accord and we remember a different kind of tradition in Japanese external policy, which is being far more collaborative, far more positive, and I think there's no excuse for being a dwarf on the economic side. In fact, the old poem used to be it's an economic giant and political dwarf. And now the danger is that the economic diplomacy is becoming dwarflike as well.

So I would say that, you know, this is, by the way, a policy that, from the Japanese perspective, if anything works, doing it by yourself. I think also that you can have quantitative easing and that would be triggering the same kind of aggressive response from Europe and it will achieve much of what you want in terms of pumping up domestic demand. You don't need to do these unilateral currency moves. So I'll leave it at that. But I think it is a worrying vignette about the nature of the partnership.

SMITH: Well, I was about to ask you for your prescription for the partnership, but it sounds to me like we're, I want to move it a little bit more to the multilateral, the Plaza Accord. Is there, in a different form and fashion, what would be your suggestion as to how to go about this effectively, to get the right results, but multilaterally?

MALLABY: Well, I mean, Plaza was a meeting in a hotel with five governments. You know, the world has moved beyond that and the right format now is the G-20. And I think that it's possible to use that format if people are really coordinated about doing it. And I think the fact that the Chinese announced that they were going to do the right thing before the last G-20 shows that diplomatically, there is a lever there. They didn't follow through on what they promised, so now it's time to use the lever again and make them try to follow through. It's not a silver bullet, but it is something worth doing. And if we just diplomatically say, oh, we can't be bothered and we'll go unilateral, I think that's counterproductive.

SMITH: Is focusing on China alone the right way to go about this, or are the other Asian economies part of the package?

MALLABY: Well, you know, people correctly point out that China is not the only septic economy in Asia, and therefore, it's wrong to single out the Chinese. I think that's wrong, because I think that the other currency management that goes on in the region is derivative from China. If China is running a currency policy that undervalues its currency and makes it artificially competitive, which it is.

If you look at any PPP chart, -- purchasing, power, parity -- and you look at where the Chinese exchange rate is, there's a big gap. The currency is too cheap. And when you're in that situation, anybody who's competing with the Chinese in the rest of the region is going to also want to hold their currency down, is also going to engage in intervention in the markets, is going to accumulate reserves and is going to amplify the problem. But the force of the problem, I think, is China.

SMITH: Well thank you very much to all three of our panelists. A fabulous conversation. I'm now going to open the discussion to everyone. Please wait for the microphone. I'll call on you if you raise your hand.

QUESTIONER: Thank you.

My question to Mikitani is, I think that diplomacy is going to be necessary for to revitalize Japanese economy and the Rakuten is doing pretty well. But always, there's opposition or vested interest or they get a challenge. And particularly, in Japan's case, in the distribution network or the pop and mom shops, smaller enterprises, I guess, in case of Rakuten, I think you have a challenge of drug store, Internet drug store, and there's kind of a, against that is the existing domestic pop and mom small type drug store.

So my question is there's always a challenge of those smaller shops and, are particularly I think Japanese people tends to get emotional, let's protect those smaller stores, smaller pop and mom shops, and often politicians is behind that. So my question is to whether how you pass weight, or how you get the support of Japanese public who tends to be always emotional?

MIKITANI: Well, talking about the, you know, how to impart small and medium size stores, we are unlike Amazon. We're aggregation of small stores. We have about 40,000 stores. And the concept of Rakuten is not to really go against those stores, but help them to sell their products online. So we have the alliance with almost all prefectures right now, and many of these, you know, stores in the countryside, they are still alive because of Rakuten. You know, most of the sales they are making is through Rakuten or other Internet shopping malls, and they cannot live on the, you know, the face-to-face physical shopping anymore.

So the OTC drug issue which we challenged the Japanese government very fiercely last year was exception. But besides that, I think, you know, compared with other countries, we are not facing so strong regulatory obstacles. But government OTC -- for example, France, you cannot sell the drugs. That is identical situation as we face in Japan. There are departments just going against the idea.

But I think now the consumers are demanding so strongly, and the benchmark, French government is going to open up. And after all, the voice of the consumers will win eventually. And we need to be more strategic in terms of lobbying, and that is the one reason we form that association called Japan E-Business Association with 2,000 other companies.

SMITH: The lady at the back of the table. Yes.

QUESTIONER: Hi. I just want to congratulate the panel and the conveners for this initiative. I think we need a lot more U.S.-Japan, U.S.-Germany-Japan trilateral sorts of discussion and programming. I just want to make an observation and open it to the panel. From my perspective, and most of my work is transatlantic, transatlantic/U.N. multilateral policy cooperation.

I feel, to a certain extent, that it was a mistake to continue to beat Japan because it was "underperforming" or so on and so forth. I don't like that kind of terminology. I think we have to look at what Japan did and has done and is doing, not just for the transatlantic relationship but for globalization. A lot of what we have now in terms of multilateral standards, policy standards, regulatory standards, global industry standards, came from silent and effective policy cooperation with the Japanese, the Germans and U.N./U.S.

How can we get back on the framework of normative cooperation and agreement and collective action so that the Japanese position is once again in the forefront, and that they are appreciated for all that they have done? Because I sometimes feel that there is this element of dropping Japan because we think we can get more money out of China. And historically, I think this is always dangerous. You know? Because even before the creation of the United States, it was, in a way connected to the collapse of the East Indian Trading Company and the assumptions that were put on that by the British that led to, in a way, the creation of the United States. You know?

So I think you have to rely on yourself and not just look at how many people are living in what country or whatever. We have to look at a bigger element of normative agreement and what that brings for collective action, not just on global security but also on globalization, rules for engaging in the global market system, policy cooperation, because you have to have socioeconomic framework for policy cooperation. Thank you.

SMITH: Thank you. A very important point. I think, all three of our panelists, do you sense that we have the foundation, still, for that normative consensus on how our collective action should work?

MALLABY: Well, I'll take a crack at it. I mean, I think a normative consensus is, does matter for collaboration across borders. I think that's why the G-2 talk was as much of a blend because there was not a normative consensus between the U.S. and China. But at the same time, it may be a help, but it's not a sufficient condition. And you know, I frankly, you know, I've been with the consulate group to Brazil a year ago, to China about six months ago. We're going to India in a couple of weeks. And the point is to go see these emerging powers and ask them, now that you're emerging, what do you want me to do with your power?

How do you fit into the system? How do you see it working? And as Richard said, the basic answer is we don't know. And you know, I think that, in a sense, the sort of oddity has been that there was a high degree of global architecture building and collaboration between 1945 and circa 2000, first of all because of the Cold War creating the glue, and secondly, because the sort of unusual amendment of American preponderance enabled the U.S. to lead the system and enabled it to conceive of itself as sort of a unipolar power, which, however, you know, overblown it was, caused policy makers to view kind of the global commons as sort of almost mapping onto U.S. interest.

And that's just an unusual historical circumstance. And we may be going back into a world more like the 19th century, where countries behave for a short term like guardless? France, right? I mean, France is a country, after the war, which had the same sort of democratic values, the same Western orientation as the United States and yet its foreign policy was frequently to undermine the U.S. opportunistically and for commercial reasons whenever it could.

There was not a huge amount of terrific collaboration between the French and the U.S. on, you know, NATO or whatever. So I think that, you know -- or trade, for that matter. So I think that, you know, you can have quite a high degree of cultural and sort of political values overlapping, and yet countries pursue their own interests. They don't particularly feel like collaborating. There's no collective action mechanism that forces them to collaborate, and they don't.

And so I think that, you know, what we're seeing now on this currency question, for example, is, you know, different countries have different interests. Japan says, gee, we're not on the level of the yen; we'll just intervene by ourselves. And one can understand why it happens, and you have to make a kind of deliberate case for why this is bad and I think, perhaps, use a bit of sharp tactics, not just kind of we're all in this together and, you know, we all have to share values to be fine.

I think that's not true. We could have shared values and it won't be fine.

SMITH: Yoshida-san.

YOSHIDA: Yes. I think for the global security, the norm and rule is very important. So in many cases, also difficult to harbor concrete agreement what is norm- what is the necessary rule for the global governance and global issues.

So I believe what is necessary right now is we need to share the sort of the what is the common threat why, kind of a threat perception. If we can share about what is the emerging threat for our common interests, we may find the way to go and find some norm on which we can create some international rule.

So fundamentally, I agree with your perception that we need a normative agreement. So how we can get there is the question.

SMITH: Mr. Mikitani you open businesses in new countries.


SMITH: Do you worry about these issues? Does this matter to you?

MR. MIKITANI: Well, obviously, as the Japanese say, it is so sad to see so many companies are moving their Asian headquarters from Tokyo to Singapore or Shanghai or Hong Kong. But I'm in IT industry, and I have, you know, conversation with many top IT CEOs in the United States. And they are so worried about China, if you see what has happened to Google, and also many IT companies don't want to go into China because they're going to steal the source code.

And obviously, for us, that is one of the -- you know, we need to be very careful about that. And you know, banking system as well and business practice is totally different. And I think, you know, for -- obviously, there is so much small, you know, obstacles in Japan, but I think if you're talking about business environment, legal environment -- you know, the copyrights, intellectual property treatment -- I think it's very similar to the United States. And we are almost -- very similar.

So I think we need to -- Japanese government does need to proactively take action to convince not the U.S. government, but U.S. private sectors to stay in Japan. But unfortunately, unlike other, you know, embassies and other governments, you know, they are just sitting there and, you know, letting them go and, you know, saying goodbye.

So I think we need to proactively move and, you know, market ourselves.

SMITH: I see a number of hands coming up. I'm going ask, also -- just to alert you, I'm going ask a couple of questions to the panel. We'll get some questions on the table, and then we'll go back to the panel because I think everybody's getting hungry, so we don't want to continue too long.

But I think if we could get two or three questions. I'd also really like to encourage some of our Japanese participants to respond to Sebastian's provocative comments on the intervention on the yen. Otherwise, I may have to call on Funabashi-san to do it for you collectively. But I would encourage our Japanese participants to join the conversation on that particular issue.

Anybody else want to get in line?

QUESTIONER: I have a question about Iran sanction issues. I see the U.S. and Japan cooperating on this issue and, actually, many American and Japanese companies are stepping down from the investment in Iran business.

On the other hand, Chinese companies, energy companies, are investing -- increasing their investment in Iran. And Brazil and Turkey has a different position from the U.S.-Japan position.

So how do we solve this issue on this Iran sanction issue? Is there any idea on this?

SMITH: Thank you.

I think you're next.

QUESTIONER: Thanks. Can I ask a question of each panelist, Sheila?

SMITH: Yes, you can.


Mikitani-san, serious question. How much is your stock selling for? What is your five-year prospectus, and how can I buy it? Absolutely serious. (Laughter.) Please!

Yoshida-san, I really liked the way you laid out the difficulties for potential contradictions of the nuclear, you know, the non-nuclear world especially when the ironic problems of you end up empowering conventional arms races for the rest of our lives. And obviously, that's a problem when you've got the economies of scale problem with China versus everybody else.

But my question in that area is, if we are ever to have a non-nuclear Korean Peninsula, a unified one, what would it take to get the South Koreans to give up nukes? Are we looking at a North Asia security arrangement? But can that be done if there is still go real rapprochement between South Korea and Japan on many issues, on history issues especially?

And for Mallaby-san, I think a lot of my Japanese clients still see the Plaza Accord as a dirty trick that Jim Baker played that brought down the Japanese economy. So I think I'd be -- I try not to talk about the plaza with them, but you outlined a broader, more forward-looking united effort.

Isn't that what we're hearing, especially this week, from Geithner that that does seem to be the U.S. effort to try to gather a massive international coalition for the G-20? And what's your sense of this time regardless of what Japan did or didn't do? Is there a chance of success this time, or are we just kidding ourselves?

Thank you.

SMITH: Our colleagues in the Japanese press are very, very uncharacteristically quiet. So I encourage you to put your hands up, please.

Funabashi-san, can I ask you to comment a bit on the yen intervention? Give us some perspective on the decision making? You don't have to commit yourself to a position -- (laughs) -- but help us understand, perhaps, the context maybe.

The microphone, please?

YOICHI FUNABASHI: Thank you very much. I really appreciate your critical assessment of Japanese government's recent intervention in the currency market.

First of all, did the Plaza Accord matter? Did it help reduce the U.S.-Japan and global imbalance? It's a moot point. Martin Feldstein first argued that it did not matter, but 10 years later, he started to argue it mattered. It's a very, very complicated issue. So I think we should be cautious in making Plaza as a sort of case and try to apply Plaza formula into renminbi.

Secondly, I do not think that the G-20 will ever be able to function as a mechanism to rebalance the global imbalance. Chinese government, so far, as adamantly refused to even allow the world global imbalance to be documented in the G-20 documentation. They have been extremely hostile to that.

And G-20, as such, I doubt will have -- will be a viable institution to address that global imbalance. I think that the United States and China still are in the best position to address this issue. And then, perhaps, a G-7 should be resurrected as a sort of a backup mechanism to correct that imbalance, particularly that Chinese renminbi caused imbalance.

SMITH: Thank you. Any other questions? Otherwise, I'll turn back to the panel.

Iran sanctions. Yoshida-san, would you like to talk about the sanction on Iran?

YOSHIDA: Okay. About Iran, I think the model of how the U.N. Security Council can be effective on this issue -- on proliferation of nuclear arms capability to Iran -- every time we have a new Security Council resolution, it is a result of compromise within the so-called P-5 plus one countries and Russia and China.

So now a new player is Brazil and Turkey. So the situation is more complicated. Even if we -- I mean, they decide -- UNSC decide about the resolution, so the implementation of the resolution depends on each state.

So in the case of China and Russia, they are very, very slow to move and they do very little. So but what is the most important we must ask. The resolution itself? Or what to do?

So the best question we need to ask is how much we can rely upon the U.N. Security Council to deal with the Iranian case. That is an unanswered question, I think.

So specifically about sanctions, I don't think this sanction, based upon the last resolution, will affect alone on the political movement -- I mean, the Iranian auction on the nuclear enrichment effectively.

SMITH: Thank you very much.

Mikitani-san, I think you were asked about your company's -- (laughs) --

MIKITANI: Oh, that's a very easy question. Thank you very much. (Laughter.)

SMITH: I think we have an investor in waiting, I think. (Laughs, laughter.)

MIKITANI: Well, you know, investment in your own judgment, so I don't want to mislead you. I think market share price is around north of 60,000 yen. Market cap is about 840 to 850 billion (yen). Our profit -- the income is about 360 billion yen, and our profit is north of 70 billion yen.

It's growing, but to buy or sell is your judgment. (Laughter.)

SMITH: Do you care about intervention into the yen markets? Does that affect your global operations at all, or?

MIKITANI: Well, I think it's kind of, you know -- staying in Japan, you know, first of all, my father is an economist and his student -- one of his ex-student is on the -- sitting on the committee of BOJ, and I'm also in the sort of same adviser group to Shirakawa-san, so I don't want to comment too much. (Laughs.)

Well, for me, I don't know about intervention, but if you're talking about exchange rate, it's pretty, you know, positive for us because we are aggressively trying to go into other countries. And you know, it used to be -- you know, it looks much cheaper for us than before.

And if you're talking about other companies, like many manufacturing companies, they have already moved significant portion of their production facilities to outside of Japan. But the reason why they cannot aggressively take this opportunity to buy many foreign companies are the lack of their ability to manage the foreign organization.

I think, you know, it's obviously -- for labor, maybe it's not good. But for capital wise, strong accounts is great. So I think the longer term, Japan -- corporate Japan -- does need to, you know, really advance the capability of managing the business outside of Japan.

SMITH: Thank you.

Sebastian, the Plaza Accord, was it good or bad or sneaky?

MALLABY: Well, I mean, the thing about the Plaza Accord is that the monetary policy response to it created a bubble in Japan. And I mean, the idea of a current realignment is that the economy has to realign as well and that you're going to be less dependent on exports and, overtime, you're going to build up a more domestically focused growth engine.

But if you don't have the patience to wait for that adjustment structurally and you just throw on ton of monetary evening at the problem, you're going to get a bubble. And that's exactly what happened. So in my view, it's less the Plaza Accord than the mistake after the Plaza Accord that causes that example to be viewed as a bad one. One can debate that, I'm sure, but that's my view for what it's worth.

I think there -- I mean, I agree with Funabashi-san on the point that -- and I think I said this originally -- we shouldn't pretend that this is a silver bullet, certainly not. I mean, when I was in China last time, one of the things I did is spend about four days at Tsinghua University in one of the engineering departments.

And, you know, I met engineers there who had been called by shoe factories and other manufacturers from the sort of southern and coastal rim who were suddenly facing a short-falling demand in the global slowdown. And they called up the Tsinghua engineers and said, well, what can we do about this. And the engineers came down. And just by implementing completely basic industrial engineering stuff -- you know, just-in-time inventory management, you know, Kaizen-type, you know, quality circle stuff, signs in the factory, you know, telling workers what they're meant to do, what the goal is for the day -- I mean, things that, you know, were done in Japan or in the U.S., you know, decades ago, these guys just haven't gotten around to doing because they've been growing at 10 or 15 percent a year. And so they've been focused on the making things, not making things better.

And when the Tsinghua engineers came down, they produced a 40 percent productivity improvement in one Chinese big shoe company over the space of a year and revising them. A 40 percent productivity gain shows you that the currency can move by 39 percent, and they can actually become more competitive and export even more.

So I'm not pretending this is a silver bullet, but I do think that, you know, it's impossible to argue -- we can debate the magnitude of the effect of a currency move in China in terms of rebalancing their economy, but we know the science. We know it's positive that if your currency gets more expensive, your exports become a bit less competitive, you know, other things equal, and vice versa with imports. You're just going to drive more -- your economy is going to reorient more towards domestic consumption.

So we don't know how big the effect is. We can debate the size, but we know the sign, we know the direction.

So I think it's clear that this is something -- although it's not a silver bullet, it's a worthwhile bullet. And then there comes the question, how do you -- how do you -- how do you address it? And Funabashi-san said something very interesting. He said, you know, the G-20 won't deliver. And I agree that it might not.

But I'm actually more skeptical than you are about using the U.S.-China direct bilateral pressure, and I'm more skeptical about the G-7. And the reason is it strikes me that a kind of common thread of the Chinese self-image is we're a poor developing country, you guys are rich, so don't push us around and ask us special favors because you owe it to us because we're poor. And this comes up with the climate change diplomacy very much. This comes up in the extraordinary story of how the Chinese basically prevented surveys of their prices from being done so that the purchasing power parity calculation was skewed for a long time to make the Chinese economy look a good deal smaller than it really was. It's all about China trying to maintain the idea that we're a poor developing country, so cut us some slack.

And I think it's very powerful when other emerging economies like Brazil or India join a global coalition and say to China, look, it's not the rich guys in the U.S. who are complaining about this; it's not just the Japanese and the Europeans; you know, we, the Indians, are being messed up by your policy, we, the Brazilians. I mean, Brazil has had to impose two rounds of capital inflow tax because hot money generated in mainly by China and also by QE (ph) elsewhere is just flooding into Brazil creating asset bubbles. The Brazilians have a big interest in being critical of China on its policies.

So I do think -- it's a question of judgment. You may be right. I just offer my views that the Chinese psychology is such that when a coalition including developing countries asks it to do something, it's more likely to listen.

SMITH: We have time for a couple more questions. Anybody? My invitation to the Japanese press has gone unheeded. (Laughs.) The table back there is very quiet. Anybody else?

If not, I think I'd like you to join me in thanking our panelists for a fabulous conversation, very stimulating discussion. Thank you all very much. (Applause.)







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