"The World and Japan" Database (Project Leader: TANAKA Akihiko)
Database of Japanese Politics and International Relations
National Graduate Institute for Policy Studies (GRIPS); Institute for Advanced Studies on Asia (IASA), The University of Tokyo

[Title] Keynote Address by Minister for Foreign Affairs Taro Aso, "Global Management and the Mission for Japanese Diplomacy" (The 17th Asia Corporate Conference, "Coming Together, Moving Ahead: Asian Economies Leading through Integration and Innovation" (Asia Society))

[Date] May 18, 2007
[Source] Ministry of Foreign Affairs of Japan
[Full text]

When you are engaged in corporate management, the "medium term" suggests a timeframe of about three years. Likewise, I believe that even when discussing things over the "long term," only rarely would you be thinking ten years into the future. It is quite possibly a result of enhanced corporate governance systems, but we are seeing more and more cases of company presidents who step down after serving a mere two terms.

As a result, there is a tendency to pay lip service to the need for management that prepares for long-term changes in the environment, yet when putting it into practice, in the case of private corporations, it becomes quite difficult in light of how management is actually structured.

I hope that today all of you, as participants from both domestic and international corporations, will gain a clearer understanding of the fact that an important part of diplomatic efforts for a country like Japan involves dealing with issues related to the structural limits of predictive ability, which is a problem that private corporations often grapple with.

Reading the future is never an easy task. Predicting things that will happen ten or twenty years hence is something that no one can successfully do. This is one of the lessons taught to us by human history in the 20th century.

When the Soviet Union invaded Afghanistan in 1979, no one could have predicted that ten years later the Berlin wall would fall, and that not even twenty years after that invasion the Soviet Union itself would disappear from the face of the earth.

If we look for a minute at the world "globalization," we will find that 25 years ago, it was never mentioned in newspapers or magazines at all. That is because it only entered the popular vocabulary after Ted Levitt, who passed away last year, published an article entitled, "The Globalization of Markets" in the Harvard Business Review in 1983.

Similarly, the question of what might result from a combination of globalization and the Internet is one that no one could have foreseen the answer to fifteen years ago -- because the Internet itself still didn't exist then.

What has happened is that China has become a big manufacturer, with India the back office of the planet, and its research laboratory, too. The notion that such a future would come would have been beyond the predictive capabilities of even the great Herman Kahn (of the Rand Corporation), who foresaw the rise of Japan and India.

And so, after all is said and done, the future is entirely murky. But if one were to ask whether corporate management is only an endeavor akin to stumbling around in total darkness, I would respond that the diplomatic efforts of responsible countries includes putting forth their fullest efforts so that this does not occur.

In my opinion, one of the critical tasks of diplomacy is global risk management. Now, within the concept of "risk," there are two different types, "capital-R 'risk'" and "small-R 'risk.'" Another key task in the diplomacy of a country like Japan is making global network effects as substantial as possible.

Recall for a moment, if you will, the concept of force majeure, which is something that is relevant to seaborne shipping and will be very familiar to people involved with insurance.

This is the idea that one cannot be held accountable for breaches of contract in cases of so-called "acts of God," which are situations beyond the capacity of risk management of private corporations -- wars, the requisitioning of assets as a result of civil wars, and so on. The approach here is that even if a contractual provision cannot be faithfully carried out, it is not a case of breach of contract, as the circumstances could not be helped.

But even in situations in which a private company would throw in the towel, citing force majeure, the diplomatic efforts of a responsible country, in my view, never shirk preparations against such possibilities.

This is something you already realize, I am sure. What succeeded in steadily eliminating the "capital-R" risk factors and factors for force majeure from the post-World War II environment for commerce in Asia was first of all the presence of the United States armed forces in this region. I would argue that it was also the Japan-US Alliance, which supported their presence. In recent years, we can further include alignments with Australia and other friendly democratic nations.

What I hope you can appreciate through this is the fact that by providing infrastructure for security in the broadest sense -- infrastructure which supports the stability and development of the Asian economy -- with the Japan-US Alliance as its primary axis, Japan's diplomacy increases the ability to predict the future business environment while also decreasing risk.

As for "small-R" risk, there is the issue of how to reduce the risk associated with investments, which vexes businesses on a day to day basis. But the fact is that here too, we find a role for diplomacy to play.

Foreign direct investment, or FDI, as it is commonly called, is an engine for growth that has brought about the "takeoff" of the Asian economy. Unlike trade and portfolio investments, FDI results in invested capital becoming part of the long-term landscape of the recipient nation.

For that reason, it is necessary for the receiving side to have reliable systems, including those for civil law, accounting, and auditing, as well as policies and measures addressing the protection of intellectual property rights and competition in the marketplace. If in these countries it is possible to establish structures and mechanisms that are fair, transparent, and useful for anticipating the future, then that is clearly a win-win situation satisfying both FDI investors and recipients.

Providing assistance so that Asian countries are themselves able to create these types of institutional infrastructure is a type of effort that Japan and the United States pursue jointly as part of the strengthening of the Japan-US partnership.

The question of how to enhance economic stability and predictability is something that is always emphasized during Japan's provision of official development assistance (ODA) as well as in its work to create economic partnership agreements, or "EPAs," with an EPA being essentially a more advanced type of free trade agreement.

Cambodia provides an example of this. Japan has been helping to draft civil code provisions and establish a legal framework as one part of its ODA to Cambodia.

Once the laws are codified, the next important step is to train specialists and provide advice about practical implementation, and Japan has been sending experts for exactly those purposes. By coincidence all have been young female legal specialists.

Currently, Japan is working to further share information and insights with the United States regarding our FTA and EPA policies. If Japan's accomplishments in this area that I mentioned just now are successful in bringing about synergy with the US' own efforts, then this will give new significance to the Japan-US Alliance.

Allow me, if you will, to change the topic now to the economic effects of networks. I want to explore with you what the significance is for diplomacy in maximizing networks.

If you have a three-person network, you need three lines to directly connect every participant to every other participant. But by adding just one other person, you suddenly get six lines in total. Each user receives added value without investing any extra effort into the equation. This is known as an "externality." Looking at it from a different angle, if you remove one person from a network, you are in fact significantly diminishing the effects compared to what could otherwise have been generated.

Now I want you to think about the fact that North Korea continues to close itself off from international society.

In other words, North Korea is not a member of the global network. At first glance, it would seem that this would not impose any negative impacts on us, but what I hope you understand is that in reality, all of us suffer a disadvantage through this situation.

That is to say, we are not able to enjoy all the benefits of the network's "externality" due to the loss of a considerable number of network lines that would have existed if North Korea were connected to the network. To put this into economics lingo, it is the same as if negative expenses were imposed on us.

I would like to take this opportunity to urge North Korea once more to adhere faithfully to the commitments it made during the Six-Party Talks to bring about a resolution to the abduction and missile issues in addition to the nuclear issue, and I once again call on it to engage in an honest and sincere relationship with Japan.

If we take a look at the nominal size of the economies of the countries that are members of the Six-Party Talks, we see that even China, whose economy has of course expanded dramatically, has an economic scale that is still only about half the size of Japan's, while the economies of the Republic of Korea and Russia each stand at less than 20 percent of that of Japan. Therefore even the combined economies of China, the ROK, and Russia still do not measure up to the size of the Japanese economy.

What that means, of course, is that the economy of North Korea simply cannot develop without maintaining a relationship with Japan. Even becoming a member of the "Asian network" would, frankly, be impossible.

Incidentally, when you get to talking about the number of lines in a network as I was a minute ago, the more, the better. If something happens to hinder that, then the system as a whole suffers losses.

What I want to discuss with you now is Japanese policy towards Central America, on the other side of the Pacific.

As you know, the width of the Panama Canal has determined the size of the space available for freight on a ship, which in turn means that there is a human-induced limit on physical distribution. Fortunately, it has been decided to expand the Panama Canal and in the future it looks like this problem will be eased in the future.

One Japanese bank has shown substantial interest for many years in a vision for a second Panama Canal. That bank, the former Industrial Bank of Japan, is now Mizuho Corporate Bank. Recently, the bank was selected to be the fund procurement advisor for upcoming canal expansion operations, with total project costs projected to exceed five billion US dollars. I understand that the bank was selected from a pool of 15 institutional applicants, and its success there might be the product of their great determination. So you can see that efforts towards the Panama Canal are what we might call "all Japan" efforts.

In addition, as support for the integration of infrastructure in Central America through the use of ODA, Japan is backing the so-called "dry canal" proposal. This would involve a modal shift -- that is, the use of more than one form of shipping -- in which goods would travel first by sea, then by land, then again by sea, and we can expect that a major transport artery will open up to connect the Atlantic and the Pacific.

In this way, by channeling ODA and other diplomatic resources as a concentrated investment into an area that appears likely to become a bottleneck for the world economy in the area of physical distribution, we can maximize the network effects, resulting in what I would argue is one of the largest missions for Japan's diplomacy to accomplish.

This is something that the private sector simply cannot do. In other words, as one role of Japanese diplomacy, we should readily undertake investments that would precede private-sector investments and bring about a so-called "cowbell effect."

If the world economy is able to fully reap the benefits of the network, there will be benefits for all. Insofar as Japan's economy makes up over one-tenth of the global economy, we too will certainly benefit enormously.

Today I have shared with you my thoughts on the importance of Japanese diplomacy taken from a perspective relevant to corporate management. I hope that through these remarks you have gained a clearer picture of the fact that while our work impacts your success only indirectly, our contributions are of tremendous importance. Thank you for listening this afternoon.