Economic growth has been the basis of stability in many quarters of the world in the last decade. Emerging economies have grown rapidly in recent years due mainly to their exports, and other developing countries have begun to follow their trail. Developed countries have maintained absorbing capacities in their markets for the products of developing countries and have periodically been able to enhance their development assistance. Now, however, these premises can no longer be taken for granted.

The financial crisis that started in the United States has negatively impacted Japan as well. This is unsurprising, of course, because the Japanese economy is closely coupled with the US economy. Globalization has made many markets interdependent, but Japan's case is unique: financial crisis is not unfamiliar to Japan. We experienced difficult years throughout the 1990s and early 2000s. Through these recent experiences, Japan has learned several lessons for coping with such financial situations, and our strategies can be implemented now by the United States as it deals with this unprecedented market failure. These can be summarized as the following "3 C's": confidence, control, and concerted action. It is important to restore confidence, stay in control, and take concerted action.

Restoring Confidence
Today, the credit crunch we witness is brought about not by lack of funds but rather by lack of credibility. Financial institutions no longer trust each other because they are not confident about other organizations' real financial situations. Japan has experienced this in the past: our financial institutions were heavily affected by non-performing loans after the bubble burst in the early 1990s. However, it took Japan years to identify the defaulted loans because of the lack of trust between the government, institutions, and the public.

Several problems confronted policymakers and regulators. First, there were no clear criteria to determine which loans were causing the problems. Second, financial institutions were weary of being labeled as problematic institutions possessing bad assets. Also, the general public was not willing to use taxpayers' money to save private financial institutions. This distrust of the establishments could be solved only through accurate asset assessments and the disclosure of all relevant information before the public could understand and accept the necessity of these drastic measures. We learned that transparency was the key to obtaining the public's understanding and recognition of monetary support as unavoidable and fair, and thus the key to restoring confidence.

In addition to accurately and quickly identifying non-performing loans, rigorously writing off and cutting off non-performing loans was necessary to avoid losses in the future. Furthermore, financial institutions had to raise capital to keep solvent. When they could not do this by themselves, institutions needed injections of public money in order to continue functioning. However, financial institutions resented being labeled as malfunctioning and insecure. In order to alleviate their concerns, better-performing banks were asked to accept the injection as well. In this way, it was like the Ali Baba story in Arabian Nights-mark all the pots and you will not know which one is the target. This approach of appearing to help all institutions, rather than singling out one particular organization, stabilized the financial system as a whole and reassured the market.

Altogether, Japan injected about US$500 billion of public money into private financial institutions. One hundred billion was used for buying non-performing loans, 120 billion for capital injection, and 190 billion for assuring deposits. After taking these steps, the situation began to change, and the watershed moment was the injection of public money to Bank Risona in 2003.
Financial institutions of Japan are now in a comparatively healthier situation. For instance, non-performing loans, which had comprised eight percent of the assets of major Japanese financial institutions, have dropped below two percent. However, it is true that this process took too much time: if we had been quicker, our scars would have been shallower. We learned that speed was indispensable.

Of course, the situation facing the United States is more complicated than that which Japan experienced in prior decades. First of all, the securitization of mortgages, whose values are hard to evaluate, did not exist in Japan. So-called leverage, or the ratio of asset to equity, was far smaller. Moreover, the economic slowdown was not a global problem, so export could play a positive role in its reversal. However, the very essence of the situation remains valid: securing transparency paves the way to introducing measures that the public accepts as fair. In this regard, it should be noted that the restoration of confidence is not only an objective but also a tool for the recovery process. It is a useful tool because the economy is based not only on mathematics but also psychology: if people think the economy will be weaker, they will refrain from investing or consuming, and this will result in an even weaker economy. I dare to say that, in spite of the gloomy prospect of the economy, the opposite is also true: If people believe that the economy will be stronger in the long run, they will be more vigorous in their economic activities, and the economy will strengthen as a result. In other words, the fortune of the economy can be considered a self-fulfilling prophecy.
Understanding the psychology of the economy, former Prime Minister Junichiro Koizumi said in the beginning of this decade that the Japanese were over-confident in the1980s but became exceedingly pessimistic ten years later. He stated that the ideal must be somewhere in between. This is true today in the United States as well. Overstating the pessimistic side may have a negative effect on the economy. Instead, the government should offer decisive demonstration of its resolve to cope concretely with the situation at hand. Doing so would provide reassurance to the market and will also present a plan for enhancing economic activities.

Governments around the world are already attempting to implement this strategy: the Obama administration has proposed a massive economic stimulus package of US$825 billion. This quick and decisive policy reaction is expected to enhance and support the recovery of the US economy. China has announced an economic package of US$540 billion to be spent in two years to stimulate its economy. In August 2008, the Japanese government announced an emergency economic package of US$120 billion, and it enacted a supplementary budget required under this package in October. In addition to this, Prime Minister Taro Aso's Cabinet created two additional stimulus packages, one in October and the other in December 2008. These amount to US$270 billion and US$230 billion respectively, although the two packages overlap by approximatelyUS$60 billion. These stimulus plans are mainly designed to help the negatively-impacted domestic industries and to have the effect of providing assurances and stability to financial institutions and investors. It is hoped that these sets of policies will restore the people's confidence in the market and thus lead to economic recovery.

Staying in Control
The second lesson is to stay in control. To illustrate this point, a metaphor of the relationship between a boat and a stream may be useful: when one is conducting a boat in a fast stream, there are four logical ways to sail. One is to simply let the boat ride the stream, or in other words, to drift. It is easy but risky, as only the stream or current knows where you are headed. The second option is to resist the current and steer the boat against it. In this scenario, the boat will be left behind or could even capsize. The third option is to accelerate the boat faster than the stream to get ahead of it. This way, one will have the satisfaction of moving past the current, but the passengers may be arriving at an unknown place at an undesirable time. Finally, one could accept the current as unavoidable but maintain firm control of the boat. At times, the boat may be slower than the stream, and, at times, the current may be useful or even beneficial. This will require much maneuvering and energy, but eventually one will arrive at the destined place at the correct time.

Today, the speed of the current is very rapid. In such times, knowing how to stay in control of the situation is important. The most difficult task is to resist the temptation of moving ahead of the stream. There are people suggesting that fundamental changes in global financial institutions, such as the IMF and the World Bank, are needed. There are also assertions that the US dollar can no longer be the key currency of the world. There are also proposals stating that we need to expand the present G7 or G8 before they become obsolete. These ideas are analogous to the third option above: trying to be ahead of the stream.

Considering that we are in the midst of a fire, it is evident that this is not the time to indulge in discussions on the selection of firemen for the task or on the improvement of the design of fire extinguishers. It is time to use them. There are adjustments underway within the international community in response to this crisis. For example, in order to not repeat the experiences of the Asian financial crises in 1997 and 1998, we are now limiting the scope of the conditionality of IMF emergency lending. With the aim of aiding developing economies, Japan has appealed for the need to strengthen the IMF emergency lending capacity and has expressed its intention to extend emergency loans up to US$100 billion to the IMF in the Summit of 20 countries that took place on November 15, 2008 in Washington DC. During this summit meeting, Japan proposed a coordinated international framework for supervisory systems and a review of accounting standards, as well as the development of credit rating agencies for Asian and locally issued bonds. These adjustments promise to improve our response capacity.

During the Summit, Prime Minister Aso clearly stated that we should be making efforts to support the US dollar-based currency system on which the current international economic and financial systems rely. International institutions could also be supported by fortifying regional frameworks. The Chiang Mai initiative in East Asia is a significant tool in this regard. The development of regional credit rating agencies is in line with this as well. These are fortifications of our financial institutions. It is not an opportune time to question the fundamentals of our system.

Turning to the issue of the G7 or G8, those who criticize this body make the following arguments: we can no longer discuss economic issues without involving China, which is the largest holder of foreign reserves, and developing countries, which will be hardest hit by the crisis. Additionally, the G8 is repeating similar discussions every year without making progress on them. It is true that we may need a larger group than the G7 or G8. Regarding the G8, we have dealt with this issue through outreach efforts: it started with the Okinawa G8 Summit in 2000 and has continued since then. At the Toyako Summit in 2008, several different G8 configurations were introduced. In total, 22 countries and representatives from six international or regional organizations, including the G8, MEM (Major Economies Meeting), and Dialogue with African Countries, participated. This outreach formula has worked quite well. It particularly helps advance discussions on climate change. Regarding discussions on financial issues, the United States invited the leaders of the G20 on November 15, 2008 to discuss these issues. This is certainly not the time to spend our energy on altering the configuration or composition of participants.

As for the topics discussed by the G8, it should be understood that they serve as an annual health check up for our system as a whole. Our international system of democracy and market economy faces many challenges: the proliferation of WMD, terrorism, global warming, HIV/AIDS, and development issues, to name just a few. Analysis should be done regularly to see what progress has been made and what more should be done. Because of this, similar prescriptions may be made every year, but that does not diminish the importance of comprehensive and regular check ups for our system. Furthermore, it is always important to consult and coordinate amongst like-minded countries before discussing issues with general colleagues. This is an important time for global politics. All world leaders should resist the temptation to get ahead of the stream or to overreact and endanger what we have been fostering for years. This lesson also stems from the experiences of Japan, which started the outreach formula in the G8.

In Concert
Today, there is no need for detailed arguments over policy coordination in order to cope with financial issues. No one is naive enough to believe that one country alone can cope with a financial issue of this magnitude. Consultation is carried out daily through communication between central bankers and the government officials in charge. I would like to emphasize that the United States and Japan have special responsibilities in managing the world economy: Japan has the second-largest GDP in the world. As for its contribution to the world, Japan is number two in UN contributions. Our Official Development Assistance (ODA) figure has recently begun declining, but if we take the aggregated sum of ten years, we are still second in the world. In regards to the reconstruction of Iraq and Afghanistan, Japan is number two and number three, respectively. Finally, for an example to show the importance attached to innovation, international patent application and research and development budget figures show that Japan again is number two in the world. In all these areas, the United States, needless to say, is the number one country. However, Japan is number one amongst major countries in one area: energy efficiency.

Today, when the world economy is negatively affected, the interest of private industries in cooperating with long-term issues, such as global warming, may diminish. There may be some concern that we should be more mindful about tomorrow's bread than the situation 40 years from now. However, we cannot slide down such a slippery slope. Now is exactly the time to step up and show political will. It is the obligation of leading countries to set a good example on this for the others to follow. The Japanese experience may be helpful here: in the 1950s and 1960s, when Japan was trying to recover from World War II, environmental issues were not our priority. As a result, Japan became one of the most polluted countries in the world: big cities were covered with smog, health hazards proliferated, and people were belatedly convinced of the need to introduce a new set of regulations. There was a parallel movement in the United States to introduce such regulations.
Japanese pollution standards went through a sea of change. In 1978, Japan introduced, ahead of others, the regulation that automobiles must decrease emissions by 90 percent from the level of actual emission in the early1970s. In other words, the Muskie Act, which was not enacted in the United States until the 1990s, was introduced in Japan more than ten years earlier. Automakers, of course, resisted in the beginning, but they later realized that the early regulation gave them golden opportunities to compete with rivals around the world.

As a country with almost no natural energy resources, Japan was hard hit by oil price hikes in the1970s. However, that crisis also gave us the chance to change our economy to that of an energy-saving one. In addition to new technology and the use of nuclear energy, the philosophy of the 3Rs-"Reduce, Reuse, and Recycle"-has contributed to our excellent energy statistics. Today, according to IEA statistics, in order to produce one unit of GDP, the United States and European Union need respectively two times as much energy, Russia 17 times, China nine times, and India seven times as much as Japan. As a result, Japan's share of GDP in the world is eight percent, but our CO2 emissions constitute 4.3 percent. The United States' share in GDP is 25 percent and CO2 emissions 20.3 percent. For China, GDP is 6 percent and CO2 emissions 20.2 percent.

Japan hopes to save developing countries from following in our footsteps of crisis. We would like to see nations develop without experiencing pollution-related health hazards. This is why Japan is distributing more than 30 percent of its ODA to environmental areas. Japan also announced in 2008 that it will contribute US$ ten billion to assist the mitigation and adaptation efforts of developing countries to introduce restriction on carbon dioxide emissions.
This year is crucial. We will have to agree on the post-Kyoto framework by the end of 2009. There is this expectation from people around the world. Japan is confident about working with the Obama administration in this regard. The United States and Japan, as I mentioned above, are number one and number two in many areas involving international cooperation, innovation, and the environment. The leaders always have special responsibilities. We may call this "noblesse oblige."

Author: Ichiro Fujisak

(Author is the Ambassador Extraordinary and Plenipotentiary of Japan to the United States. He was the Ambassador of Japan to the International Organizations in Geneva and the Japanese Deputy Minister for Foreign Affairs.)