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JAPAN SOCIETY LECTURE 24 JANUARY 2006 - East India Club, London Lecture by Sir Graham Fry 1. Thank you very much for inviting me to speak to the Society again. I think I should begin by reviewing the last year. Economy 2. The Nikkei rose by over 40%. Most of the buying was by foreigners. (Once aspect of the UK-Japan link which we may under-rate is portfolio investment: I have heard that about 10% of the money invested in the Japanese stock market may be managed in the UK.) But not only the foreigners were optimistic this time. Growth in the first nine months was 2.2% at an annual rate - higher than the UK. Business surveys such as the Tankan show confidence particularly among the larger companies. The banks are no longer in danger and are starting to expand again. Companies have paid down debt and seem to have cash to invest. 3. The big issue now is deflation. The benchmark indicator in November recorded plus 0.1%. Mr Fukui seems reasonably confident that it will continue to rise and at some point enable him to have a more normal monetary policy. But there is also pressure from the Ministry of Finance and others to reduce the fiscal deficit, and the draft budget for next year goes in that direction, mainly by pruning expenditure. Yet others are worried that premature monetary and/or fiscal tightening could damage the economic recovery. So macroeconomic policy is entering an interesting phase. Politics 4. For once, though, in Japan last year the politics was more interesting than the economy. Most of us thought that postal privatisation would get through the Diet, one way or another. I bet very few indeed predicted how it would happen. Mr Koizumi now says that your enemy is your friend - if his enemies had not voted down the postal bills in the Upper House, he would not have called the election for the Lower House and he would not have won his landslide victory. His most obstinate opponents have been kicked out of the LDP, and fresh blood brought in. I spoke at the LPD's 50th anniversary conference when they paraded their 89 MPs elected for the first time. 5. Mr Koizumi also says that he will retire in September as LDP President and Prime Minister. The LDP is already preparing for the election of a new leader. They want to involve the public more in the process. That would probably favour the Chief Cabinet Secretary, Shinzo Abe. 6. All this makes a big change in Japanese politics. In my view, it is for the better, because it has reduced (but no eliminated) the influence of special interests. The change is partly the results of the electoral reform 10 years ago, partly the result of Mr Koizumi himself, but fundamentally responds to the frustration of the electorate with the political process as it worked before. Wise heads worry that politics is now decided by theatre and sound-bytes. But that must be better than cash in smoke-filled rooms. As a result, the progress of reform will continue beyond Koizumi. Foreign Policy 7. The relationship with the US is very strong. Both sides make an effort to solve mutual problems. The import of American beef has resumed. An outline deal on re-locating US bases was agreed. The Japanese extended their SDF contributions to Iraq and Afghanistan with little debate, even though the deployment in Iraq remains unpopular. President Bush paid a very successful visit. 8. Almost the opposite is true of the political relationship with China. In economic terms, the two countries have what Dr Mahathir used to call a win-win situation. But the Chinese have decided that the political relationship at the highest level depends on whether or not the Japanese Prime Minister visits Yasukuni Shrine. Mr Koizumi responds that there is no good reason for the relations between the two great powers of East Asia to depend on this issue. Underneath of course are other matters - the continuing modernisation of China's armed forces, disagreement about the shape of East Asian institutions, different values, competition for energy resources, and so on. Clearly it would be better for the security of the region for relations to improve. 9. One issue where things did not go well in 2005 was Japan's bid for permanent membership of the Security Council. China lobbied against. The US said they were in favour but in practice did not help. The Japanese are now trying to find a new way forward with the US. I see some contradictions here with their campaign also to reduce their UN contributions. Relations with the UK 10. I devoted most of my talk last year to an audit of bilateral relations. So I will not repeat it all, but just give a few headlines:- a) We continue to agree about almost everything. The UK supported Japan's Security Council bid throughout. Japan has consistently supported our efforts with Iran. The EU and Japan co-sponsored resolutions in the UN on the DPRK's human rights record, and the Japanese were pleased that we mentioned abductions. We work closely together on Afghanistan, the Middle East Peace Process, Sri Lanka, and of course Iraq. We (the EU) have initiated a strategic dialogue on East Asian security, and I hope that in due course we will reach an acceptable outcome on the China arms embargo. b) Japan is much more active now in the WTO and playing a constructive role. c) The deployments in Iraq have brought us together on defence as never before. Cooperation on the ground works well. We are now beginning to discuss when and how to withdraw our ground forces from Al Muthanna province and hand over to the Iraqis. We are also beginning to discuss longer-term cooperation on peace support operations. d) A big issue last year in the G8 and the UN was how to help Africa. Mr Koizumi promised to increase Japan's ODA by $2 billion a year for 5 years and to double ODA to Africa in 3 years. We are continuing our bilateral cooperation between DfID and the Foreign Ministry. e) The other big G8 issue was climate change. On this, the Japanese Ministry of the Environment paid for full-page advertisements showing Messrs Koizumi and Blair - a clear sign of our special partnership. f) The only issue where we have a fundamental disagreement is whaling. 11. As for the economic relationship, it continues to run smoothly. Many in this room play their part in that. An area deserving particular comment is Japanese investment in the UK. As we all know, a number of electronics companies have closed their UK factories in recent years. The closure of Sony's factory in Bridgend was the latest to hit the headlines. But it would be a big mistake to think that manufacturing in the UK was doomed. Eisai, the pharmaceutical company, which already has an R&D centre in University College, London, announced today its decision to set up a manufacturing plant in Hatfield - the first ever such plant to be established in the UK by a Japanese pharmaceutical firm. They are not alone. Last year, through acquisition, through expansion and through new plants, 20 different Japanese companies made manufacturing investments in the UK. The total invested by these companies was over £750 million. Don't forget also that Nissan, Toyota and Honda last year made 750,000 cars in the UK, accounting for around half of all UK automotive vehicle production. 12. UK exports to Japan also continue to expand steadily. The big numbers are in pharmaceuticals, chemicals, cars and components, general machinery and of course the service sector. We are seeing increasing interest in high tech areas including software applications and nanotechnology, and in consultancy for eg design services. Foreign investment in Japan has doubled to the (still tiny) figure of 3% of GDP equivalent. The UK is active: eg Vodafone, Tesco, GKN, and property investors. 13. We have 40 staff working in the Embassy's Commercial Section to support UK companies of all sizes. It's worth finding out how they can support your business in Japan. 14. Last but not least, let me speak about the cultural and education links. Last year in Tokyo we issued 8408 visas to Japanese students. The number studying at UK universities rose slightly to 6,800. 15. On the cultural front, we were able to watch the Royal Shakespeare Company and the Royal Ballet. The V and A lent exhibitions of Art Deco and Islamic Art. The Royal Horticultural Society put on an exhibition of botanic art. The Mori Art Museum had an exhibition of Vivienne Westwood's fashion. Bunkamura showed art from the Scottish museums. 50 British designers took part in our Design UK promotion. Sting signed books in the Ambassador's Residence. And much more besides. And all this in the official Year of Germany. So we are now planning to make 2008 a Year of Modern Britain, with a focus on creativity - art, design and science. This will not be a simple repeat of 1989 or 1998. The world has moved on. Our aim will not be just to raise the British profile, but to try to increase awareness of modern Britain and encourage people to work together.

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