Good Morning everyone. And can I say how delighted I am to be here in Japan and address such a distinguished gathering of people. In particular I would like to welcome Your Excellency, Madam Foreign Minister, Mrs Kawaguchi. It is very good to see you, and Mrs Toyama, the Minister of Education and Science, and distinguished members of the Diet and members of the Japan Federation of Economic organisations and other distinguished guests.
Standing before you today, I am struck by the similarities between Britain and Japan. We are both island nations, standing on either side of the Eurasian land mass, and we are rich in the one resource that matters in economics today - and that is people. It is by way of their inventiveness, entrepreneurship, organisation and sheer hard work, that we have come to enjoy a standard of living that past generations could only dream of. How has this come to pass? Scarcity and need still exist, but they have been tamed by small improvements in the rate of growth, sustained over long periods of time. And this growth has come from our willingness to allow commerce to grow, and so weave our futures into the fabric of our neighbours' lives. It comes from our willingness - Britain and Japan's - to engage ever more deeply with our trading partners across the world.
However, this structure of interlocking need can only grow, and be allowed to grow, where there is genuine confidence. Without confidence that contracts will be honoured, that the rule of law will be upheld, and that people will be treated fairly, commerce will falter. With trust and confidence that the peace of the world will endure, investment cannot be sustained. Therefore our nurturing of confidence expresses more than a moral preference, it is also an economic imperative.
There are those around the world who question this need for growth. They should note that it is economic growth that has enabled us to fill people's stomachs, provide healthcare at need, allow the creative impulse to flower, in soaring buildings, exquisite works of art, and not least to meet the obligations of charity, both at home and abroad. It is important to remember that our future needs and duties will only be met by future growth.
The lesson of the last century is that wealth comes by way of enterprise, harnessed to trade. One of the commonplace observations of the modern world is that there is only a passing relationship between natural resources and prosperity. An MIT study of the course of the United States over the last 150 years calculated that 80% of the increase in the country's prosperity came from the intellectual added value of innovation. Population and raw materials played the junior part in wealth creation. And what is true of the United States even more accurately describes the progress of the Japanese nation. Your success has come not from huge reserves of natural resources, but the sheer quality and scale of your human resources.
As you know, the United Kingdom has a long history of discovery. Indeed after the United States, we have produced more Nobel prizewinners in science than any other country in the world. Japan's success in innovation is equally striking. I understand that Japanese companies annually file the largest number of patents of any country, except the United States. And it is good that Britain and Japan already possess a long history of working together, as the scope for our future collaboration is clearly considerable. UK and Japanese scientists are currently working together in many important areas of inquiry, including fusion energy, stem cell research and climate change. And I believe this type of collaboration can be broadened and extended further. To this end, the Innovation UK Campaign, launched in May, showcases examples of British world class research, companies, products and ideas. In this context, I am also delighted to announce that the United Kingdom will take part in the Aichi International Exposition in 2005 - and my apologies for my Japanese pronunciation.
The purpose is one of communication. The more we understand about each other's comparative strengths, the more we can identify areas of cooperation. Trade is not just about the physical, it also encompasses the realm of ideas. The commonplace description of trade is that it concerns the exchange of products, investment and capital flows. However, embedded in each item are the ideas behind the products. Each investment represents a different perception of opportunity, and brings with it innovation of management, as well as production. As we buy from each other, as we invest in each other, we also engage in the process of learning from each other. No country has a monopoly on innovation and enterprise. It is through commerce that we gain from each other's knowledge and quicken our progress. Those people who are suggested as being losers, are not usually the victims of globalisation, the problem is usually that they are not participating in globalisation. Sometimes it is through their own choice. Sometimes, to our collective shame, it is through our own imposition. Free and fair trade, especially in the realm of agriculture, is capable of increasing the income of the poorest nations by many times the amount that we give in aid every year. Action in this area of trade is the most enlightened form of self-interest that there is, and the potential benefit is immense. According to the European Union, our post-war commitment to trade has been accompanied by a six-fold increase in world output over the past 50 years. With so much of the planet still mired in poverty, do we not have a duty to try and repeat this achievement over the next 50 years?
Trade increases our rate of growth, and hence our prosperity. But it also forces a greater degree of integration between countries and regions of the world. Our well-being today, more than ever before, is based on an increasing interdependence. However, that interdependence requires trust and confidence, that is the reality of globalisation, and it is also the reason some fear the process.
Four things destroyed the last great movement towards globalisation in the early 20th century: anti-liberal ideas; protectionist interests; global political friction; and economic instability. They still exist, potentially at any rate, today. Those who fear freedom are natural opponents of the flow of ideas and the exchange of culture that is necessary for a liberal trade regime. Of the fascist, and the communist, and religious extremists, two groups have fallen, and the third will fall, because while closed minds desire closed borders, their isolation leads straight to penury. It is of no surprise that the poorest nations in Asia are the ones that have turned their backs on the world.
In all societies there are those who defend their exploitation of others by making spurious claims to act in the national interest. We know that this is best served by allowing the whole nation to grow and prosper. In the modern world therefore, growth comes from having the courage to compete fairly, and it is the job of political leaders to ensure that sectional interests do not hijack the national interest. Reform, I know, and you know here, is often painful in the short term. But our experience, and I believe your's, is that it is clearly to our benefit in the long term.
Bilaterally and multilaterally, through organisations such as ASEAN, the WTO and the European Union, we must resist protectionist pressures in industry, agriculture and services. Our two countries - Japan and Britain - have been major beneficiaries of globalisation. We have a common interest in deepening the bonds of trust and mutual support. We have a common need to support the rule of law and the international institutions that underpin that trust. We must also be united in opposing those who would sow distrust between nations, those who threaten the political stability upon which our future prosperity depends.
Let me say at this point that I am very conscious of, and greatly welcome, Japan's contribution to political stability in this region - your government's role in the Sri Lankan peace process; the despatch of peacekeepers to East Timor; the logistical support that was provided for Operation Enduring Freedom; and of course the major contribution that your country has made to the process of reconstruction in Afghanistan, and is preparing to do in respect of Iraq. All of this is necessary to our common goal of ensuring stability. And the fact that Japan is now playing its full part in these matters is I think hugely in the interests of the whole of the world. Thank you for what you are doing.
The events of 11 September demonstrated to all that those rogue states cannot be ignored. We live in a profoundly interconnected world where the sickness of one place or one region can contaminate all. Globalisation makes us vulnerable, as well as richer. Withdrawing from the world therefore is not an option, as it is both ineffective and impoverishes us. We have no choice but to engage more deeply. As the history of our world shows, small increases in efficiency can over a period of time have a profound impact on the welfare of our peoples. You are seeking to re-ignite growth in your country by way of reform and a greater involvement in the affairs of the continent of which you are a part. I see in Britain the possibility of growing a little faster also by way of reforms and a closer engagement with the continent of which we are a part.
It is with this very thought in mind that the Chancellor of the Exchequer in Britain published a study on the subject of Britain's adoption of the euro, the single currency. 1,700 pages of analysis buttressed his statement on the subject to the House of Commons. I don't suggest you read it all. But his message was clear. Provided the economic conditions are right, then as a matter of principle it is firmly in the British national interest that Britain should join the European single currency. So the direction of policy is now clear. The economics must be right, but if they are we will recommend membership, and in the meantime we will work to ensure the economics are indeed right. And the reasons are plain. Our Treasury estimates that the combination of lower transaction costs, reduction in economic uncertainty, and the attendant increase in trade that monetary union can produce, raises the UK's growth rate by around one-quarter of a percent. That doesn't seem much, except when the magic of compound arithmetic means that after 30 years the nation garners an annual benefit of between 5 - 9% of GDP. To put that figure in context, the UK spends around 7% of GDP on healthcare, so we are talking about a very significant addition to the nation's wealth. Or alternatively the benefit may be seen as similar in magnitude to what we currently spend on state pensions and education combined. So the Treasury studies have established that over the long term monetary union is in the national interest.
I would go further. You are as aware in Japan as we are in Great Britain of the challenges facing us all as society ages. In the circumstances therefore, maximising future income is essential. Now while the strategic case in principle for the single currency is clear, entry at the wrong moment, without establishing sufficient convergence between the British and continental economies, could hinder, rather than enhance our medium term growth prospects. And this is the reason why the government has rightly established a challenging set of preconditions, before judging that the time has come to enter into monetary union. And as you are aware, we do not think that moment has yet arrived. The good news however is that we are working hard to ensure it can. And our decision to enter the euro bloc is dependent upon the UK meeting five economic tests relating to convergence, flexibility, employment and growth, investment and financial services.
There is no doubt about the benefits of financial services. The government appreciates and wishes to nurture this important part of the economy. This sector accounts for nearly 5.5% of GDP, making it the largest finance industry in Europe in both absolute and relative terms. We understand that anything that can be done to enhance liquidity and depth of its markets adds to both profitability and competitive advantage, and joining the single currency would help in both these regards. The key to meeting the employment, stability, growth and investment tests lies in achieving success in the areas of convergence, and flexibility. The greater the structural convergence, the smaller the economic shock, short and long term, attendant upon entry. The greater the flexibility, the better positioned are we and our trading partners to cope with any residual strains. It is for this reason that we have announced our commitment to examining and enacting a raft of reforms in areas such as housing, pay, the reporting of fiscal policy and the framework of monetary policy as well as other initiatives.
While it may be reasonably argued that some structural matters can only adjust over a period of years, that is to misunderstand the nature of the tests themselves. We are not looking for completion of the impact of reform in all areas before recommending entry, and neither are we keen to reduce the hurdle through one of a mere balance of probabilities. A clear and unambiguous decision requires sufficient material change to give us real confidence that we will benefit from entry. But it is the aggregate nature of the changes that matters.
And here observers should note that significant shifts are already happening. Take housing for example, where house price volatility has plagued the British economy over the last 50 years. With only a small proportion of all UK mortgages contracted at long term fixed rates, our sensitivity to interest rate movements is clearly greater than that of our European partners. The combination of house price inflation and volatility, and the impact both on consumption, has generally led to British short term interest rates being higher than what is found in other countries. And we are therefore in the process of examining how we can help the development of the long term fixed rate mortgage market in the UK. But it is worth noting that according to the very latest figures from the Council of Mortgage Lenders, over 50% of new mortgages in Britain are being issued of the fixed variety. So both the past predilection for floating rate mortgages, and the new found enthusiasm for longer dated instruments are the direct result of our economic history and the success of the government's macro-economic policies. A long period of interest rate volatility created an environment where lenders found it too dangerous to make long term rate commitments. After Bank of England independence, and the new framework for economic policy that we put in place in 1997, we have seen a steady fall in the cost of money that has made borrowers reluctant to lock in their commitment. A less volatile housing market will reduce the cost of capital to industry. It makes it easier to reduce short term rates when warranted. And this is the fruit of our earlier labours.
So those changes are happening, and both Japan and the United Kingdom have to adapt to the fact of pan-Asian industrialisation, globalisation and an ageing population. We both accept that the most successful economies are open, flexible, international and integrated into the global trading system. That is why we strongly support Prime Minister Koizumi's programme of reforms. Deregulation, a strengthened financial sector, and corporate restructuring, are key to returning Japan to robust growth, with consequent benefits for the world economy and international financial stability. Establishing the correct regulatory framework is also key to attracting foreign direct investment.
The changes in this area that you have already made have created welcome openings in Japan for foreign companies. It is this that has allowed British firms such as Vodaphone and Cable and Wireless to deepen their commitment to the Japanese market. And I am pleased to note that Vodaphone alone is responsible for making the largest single investment by a foreign company into Japan. I am confident that so long as regulation and reforms reinforce each other to create an investment friendly environment, then British companies will play a major role in helping Prime Minister Koizumi meet his goal of doubling the flow of foreign investment into your country.
The UK for its part has more Japanese foreign direct investment than any other market in Europe, and we want to keep it that way. The factors which first attracted Japanese companies to invest are as strong as ever. In both policy and practice, our decision-makers and workforce have a global outlook. We have a stable macro economy and provide an attractive tax environment for investment. The British labour market is already the most flexible in Europe. We think that we have the most employment-friendly regime in the world, a belief which is reflected in the fact that we now in Britain have the lowest unemployment rate of all the main industrialised countries.
However, a fast changing world is bringing new opportunities, and also new competition. China is joining the WTO. India is now producing 220,000 science and information technology graduates annually. While in Europe ten more countries are set to join the single market of the European Union. So we know that we cannot take for granted the inward investment flows that we have seen in the past. The Japanese business community represents the second largest economy on the planet and has a proven track record of supporting UK investment. So I take your views very seriously. And it is clear from my discussions that you welcome greater flexibility in Britain as much as we welcome reform in Japan.
Following the joint declaration of all European Union Finance Ministers, placing for the first time labour market flexibility and structural economic reform at the heart of the new economic guidelines for Europe, there is much progress that we can make.
So I believe that in all these areas we are going to be able to provide not just a dynamic UK economy, but also make significant structural reforms to the European economy too. And it is worth just pointing out that if of course we are able to meet the economic conditions, provided there is sufficient convergence and flexibility between the UK and the eurozone, we could enjoy a period of superior growth because of our superior flexibility in the UK, and that clearly is not the greatest disaster that can befall a nation. In any event, we are rigorously pursuing the agenda of economic reform within Europe with our European partners. And it is important that everyone understands that trade is not a zero sum game, that both sides can and do win.
With the European Union's impending expansion coming to 25 countries from next year, we are therefore very conscious that we are part of a potential market of 450 million consumers. But we know we are subject to currency risk. And I know that investors are keen to address this vast market, but that especially in manufacturing, the danger that an enterprise will swing from profit to loss for reasons that have nothing to do with the competence of the managers, and everything to do with the vagaries of the international capital markets, I know that that inhibits investment. So that is why it is important to see our reforms combined with those of our European partners, working in a self-reinforcing manner to enhance our ability to cope with the strains of euro membership.
So we in Britain intend to maintain our position in labour market flexibility, we intend to maintain our position in macro economic stability that have given Britain the lowest interest rates, the lowest inflation, the lowest unemployment for decades, and we intend as a country to play our full part in the European Union. That is why I believe we will continue to be the number one place to invest. And I know for many of your companies, you want the certainty that the direction of British economic policy is one that allows us to play our full part in Europe, and it is. But what is more, we want to make sure that the Europe we are playing our full part in is a Europe that itself is geared to greater flexibility, greater growth, greater innovation in the future.
Finally let me say this to you. I have no doubt at all that in this more interdependent world, we need to work more closely together politically and economically. That is one reason, quite apart from the economics, why it is important for Britain to be at the centre of Europe. It also justifies the increasingly strong bilateral ties with Japan. And the one thing that we have learned as a world in these past couple of years is that if we are to have the confidence that allows the world economy to grow, we must also have political stability. That is why the actions against terrorists, against rogue states with weapons of mass destruction, is important. They are important because anything that puts at risk our stability, puts at risk our way of life, our way of life not just politically, but economically.
Globalisation we have seen as essentially an economic phenomenon, and it is. But the whole point about a world moving closer together, in communication, in technology, in trade, the whole point about globalisation economically is that it has its political dimension too, and that political dimension is that we need to reinforce the global integration with a clear sense of shared political values and perspectives. That is what we are trying to do.
And I would like to pay a special tribute to your Prime Minister in the work that he has done in the past few months to have Japan play its full role politically as well as economically. Because often for a British Prime Minister we address first and foremost the economic relationship, and it is of course important, and I have addressed it with you today; but I am delighted that finally our cooperation, Britain and Japan, on political issues now matches our economic cooperation. And I believe that that is important and I think we have to work on it. Because in the end, as you know from some of these difficult issues here in this region, to do for example with North Korea, but also to do with other political questions within this region, the voice of Japan, a modern Japan, that is outward looking and able to play its full role in the world, is of fundamental importance to resolving these issues in a sensible and proper way. So I believe that we are at a time in our world of unprecedented opportunity, but also enormous challenge. And I have no doubt at all that our two countries, that share so many of the same perspectives, that want for example a strong relationship with the United States, but want that set within a series of global relationships that bring the world closer together, that recognise the value of the economics and the politics going together, I am sure that our two countries can play an enormous part in helping our world to greater prosperity and greater stability. In particular I hope that my visit here to Japan allows the bilateral ties, politically as well as economically, between Britain and Japan to be strengthened still further. It is a good relationship that we have. I want to make it a great one. And I believe that if we do that it will be to the benefit not just of Japan or Britain, but the wider world.
Standing before you today, I am struck by the similarities between Britain and Japan. We are both island nations, standing on either side of the Eurasian land mass, and we are rich in the one resource that matters in economics today - and that is people. It is by way of their inventiveness, entrepreneurship, organisation and sheer hard work, that we have come to enjoy a standard of living that past generations could only dream of. How has this come to pass? Scarcity and need still exist, but they have been tamed by small improvements in the rate of growth, sustained over long periods of time. And this growth has come from our willingness to allow commerce to grow, and so weave our futures into the fabric of our neighbours' lives. It comes from our willingness - Britain and Japan's - to engage ever more deeply with our trading partners across the world.
However, this structure of interlocking need can only grow, and be allowed to grow, where there is genuine confidence. Without confidence that contracts will be honoured, that the rule of law will be upheld, and that people will be treated fairly, commerce will falter. With trust and confidence that the peace of the world will endure, investment cannot be sustained. Therefore our nurturing of confidence expresses more than a moral preference, it is also an economic imperative.
There are those around the world who question this need for growth. They should note that it is economic growth that has enabled us to fill people's stomachs, provide healthcare at need, allow the creative impulse to flower, in soaring buildings, exquisite works of art, and not least to meet the obligations of charity, both at home and abroad. It is important to remember that our future needs and duties will only be met by future growth.
The lesson of the last century is that wealth comes by way of enterprise, harnessed to trade. One of the commonplace observations of the modern world is that there is only a passing relationship between natural resources and prosperity. An MIT study of the course of the United States over the last 150 years calculated that 80% of the increase in the country's prosperity came from the intellectual added value of innovation. Population and raw materials played the junior part in wealth creation. And what is true of the United States even more accurately describes the progress of the Japanese nation. Your success has come not from huge reserves of natural resources, but the sheer quality and scale of your human resources.
As you know, the United Kingdom has a long history of discovery. Indeed after the United States, we have produced more Nobel prizewinners in science than any other country in the world. Japan's success in innovation is equally striking. I understand that Japanese companies annually file the largest number of patents of any country, except the United States. And it is good that Britain and Japan already possess a long history of working together, as the scope for our future collaboration is clearly considerable. UK and Japanese scientists are currently working together in many important areas of inquiry, including fusion energy, stem cell research and climate change. And I believe this type of collaboration can be broadened and extended further. To this end, the Innovation UK Campaign, launched in May, showcases examples of British world class research, companies, products and ideas. In this context, I am also delighted to announce that the United Kingdom will take part in the Aichi International Exposition in 2005 - and my apologies for my Japanese pronunciation.
The purpose is one of communication. The more we understand about each other's comparative strengths, the more we can identify areas of cooperation. Trade is not just about the physical, it also encompasses the realm of ideas. The commonplace description of trade is that it concerns the exchange of products, investment and capital flows. However, embedded in each item are the ideas behind the products. Each investment represents a different perception of opportunity, and brings with it innovation of management, as well as production. As we buy from each other, as we invest in each other, we also engage in the process of learning from each other. No country has a monopoly on innovation and enterprise. It is through commerce that we gain from each other's knowledge and quicken our progress. Those people who are suggested as being losers, are not usually the victims of globalisation, the problem is usually that they are not participating in globalisation. Sometimes it is through their own choice. Sometimes, to our collective shame, it is through our own imposition. Free and fair trade, especially in the realm of agriculture, is capable of increasing the income of the poorest nations by many times the amount that we give in aid every year. Action in this area of trade is the most enlightened form of self-interest that there is, and the potential benefit is immense. According to the European Union, our post-war commitment to trade has been accompanied by a six-fold increase in world output over the past 50 years. With so much of the planet still mired in poverty, do we not have a duty to try and repeat this achievement over the next 50 years?
Trade increases our rate of growth, and hence our prosperity. But it also forces a greater degree of integration between countries and regions of the world. Our well-being today, more than ever before, is based on an increasing interdependence. However, that interdependence requires trust and confidence, that is the reality of globalisation, and it is also the reason some fear the process.
Four things destroyed the last great movement towards globalisation in the early 20th century: anti-liberal ideas; protectionist interests; global political friction; and economic instability. They still exist, potentially at any rate, today. Those who fear freedom are natural opponents of the flow of ideas and the exchange of culture that is necessary for a liberal trade regime. Of the fascist, and the communist, and religious extremists, two groups have fallen, and the third will fall, because while closed minds desire closed borders, their isolation leads straight to penury. It is of no surprise that the poorest nations in Asia are the ones that have turned their backs on the world.
In all societies there are those who defend their exploitation of others by making spurious claims to act in the national interest. We know that this is best served by allowing the whole nation to grow and prosper. In the modern world therefore, growth comes from having the courage to compete fairly, and it is the job of political leaders to ensure that sectional interests do not hijack the national interest. Reform, I know, and you know here, is often painful in the short term. But our experience, and I believe your's, is that it is clearly to our benefit in the long term.
Bilaterally and multilaterally, through organisations such as ASEAN, the WTO and the European Union, we must resist protectionist pressures in industry, agriculture and services. Our two countries - Japan and Britain - have been major beneficiaries of globalisation. We have a common interest in deepening the bonds of trust and mutual support. We have a common need to support the rule of law and the international institutions that underpin that trust. We must also be united in opposing those who would sow distrust between nations, those who threaten the political stability upon which our future prosperity depends.
Let me say at this point that I am very conscious of, and greatly welcome, Japan's contribution to political stability in this region - your government's role in the Sri Lankan peace process; the despatch of peacekeepers to East Timor; the logistical support that was provided for Operation Enduring Freedom; and of course the major contribution that your country has made to the process of reconstruction in Afghanistan, and is preparing to do in respect of Iraq. All of this is necessary to our common goal of ensuring stability. And the fact that Japan is now playing its full part in these matters is I think hugely in the interests of the whole of the world. Thank you for what you are doing.
The events of 11 September demonstrated to all that those rogue states cannot be ignored. We live in a profoundly interconnected world where the sickness of one place or one region can contaminate all. Globalisation makes us vulnerable, as well as richer. Withdrawing from the world therefore is not an option, as it is both ineffective and impoverishes us. We have no choice but to engage more deeply. As the history of our world shows, small increases in efficiency can over a period of time have a profound impact on the welfare of our peoples. You are seeking to re-ignite growth in your country by way of reform and a greater involvement in the affairs of the continent of which you are a part. I see in Britain the possibility of growing a little faster also by way of reforms and a closer engagement with the continent of which we are a part.
It is with this very thought in mind that the Chancellor of the Exchequer in Britain published a study on the subject of Britain's adoption of the euro, the single currency. 1,700 pages of analysis buttressed his statement on the subject to the House of Commons. I don't suggest you read it all. But his message was clear. Provided the economic conditions are right, then as a matter of principle it is firmly in the British national interest that Britain should join the European single currency. So the direction of policy is now clear. The economics must be right, but if they are we will recommend membership, and in the meantime we will work to ensure the economics are indeed right. And the reasons are plain. Our Treasury estimates that the combination of lower transaction costs, reduction in economic uncertainty, and the attendant increase in trade that monetary union can produce, raises the UK's growth rate by around one-quarter of a percent. That doesn't seem much, except when the magic of compound arithmetic means that after 30 years the nation garners an annual benefit of between 5 - 9% of GDP. To put that figure in context, the UK spends around 7% of GDP on healthcare, so we are talking about a very significant addition to the nation's wealth. Or alternatively the benefit may be seen as similar in magnitude to what we currently spend on state pensions and education combined. So the Treasury studies have established that over the long term monetary union is in the national interest.
I would go further. You are as aware in Japan as we are in Great Britain of the challenges facing us all as society ages. In the circumstances therefore, maximising future income is essential. Now while the strategic case in principle for the single currency is clear, entry at the wrong moment, without establishing sufficient convergence between the British and continental economies, could hinder, rather than enhance our medium term growth prospects. And this is the reason why the government has rightly established a challenging set of preconditions, before judging that the time has come to enter into monetary union. And as you are aware, we do not think that moment has yet arrived. The good news however is that we are working hard to ensure it can. And our decision to enter the euro bloc is dependent upon the UK meeting five economic tests relating to convergence, flexibility, employment and growth, investment and financial services.
There is no doubt about the benefits of financial services. The government appreciates and wishes to nurture this important part of the economy. This sector accounts for nearly 5.5% of GDP, making it the largest finance industry in Europe in both absolute and relative terms. We understand that anything that can be done to enhance liquidity and depth of its markets adds to both profitability and competitive advantage, and joining the single currency would help in both these regards. The key to meeting the employment, stability, growth and investment tests lies in achieving success in the areas of convergence, and flexibility. The greater the structural convergence, the smaller the economic shock, short and long term, attendant upon entry. The greater the flexibility, the better positioned are we and our trading partners to cope with any residual strains. It is for this reason that we have announced our commitment to examining and enacting a raft of reforms in areas such as housing, pay, the reporting of fiscal policy and the framework of monetary policy as well as other initiatives.
While it may be reasonably argued that some structural matters can only adjust over a period of years, that is to misunderstand the nature of the tests themselves. We are not looking for completion of the impact of reform in all areas before recommending entry, and neither are we keen to reduce the hurdle through one of a mere balance of probabilities. A clear and unambiguous decision requires sufficient material change to give us real confidence that we will benefit from entry. But it is the aggregate nature of the changes that matters.
And here observers should note that significant shifts are already happening. Take housing for example, where house price volatility has plagued the British economy over the last 50 years. With only a small proportion of all UK mortgages contracted at long term fixed rates, our sensitivity to interest rate movements is clearly greater than that of our European partners. The combination of house price inflation and volatility, and the impact both on consumption, has generally led to British short term interest rates being higher than what is found in other countries. And we are therefore in the process of examining how we can help the development of the long term fixed rate mortgage market in the UK. But it is worth noting that according to the very latest figures from the Council of Mortgage Lenders, over 50% of new mortgages in Britain are being issued of the fixed variety. So both the past predilection for floating rate mortgages, and the new found enthusiasm for longer dated instruments are the direct result of our economic history and the success of the government's macro-economic policies. A long period of interest rate volatility created an environment where lenders found it too dangerous to make long term rate commitments. After Bank of England independence, and the new framework for economic policy that we put in place in 1997, we have seen a steady fall in the cost of money that has made borrowers reluctant to lock in their commitment. A less volatile housing market will reduce the cost of capital to industry. It makes it easier to reduce short term rates when warranted. And this is the fruit of our earlier labours.
So those changes are happening, and both Japan and the United Kingdom have to adapt to the fact of pan-Asian industrialisation, globalisation and an ageing population. We both accept that the most successful economies are open, flexible, international and integrated into the global trading system. That is why we strongly support Prime Minister Koizumi's programme of reforms. Deregulation, a strengthened financial sector, and corporate restructuring, are key to returning Japan to robust growth, with consequent benefits for the world economy and international financial stability. Establishing the correct regulatory framework is also key to attracting foreign direct investment.
The changes in this area that you have already made have created welcome openings in Japan for foreign companies. It is this that has allowed British firms such as Vodaphone and Cable and Wireless to deepen their commitment to the Japanese market. And I am pleased to note that Vodaphone alone is responsible for making the largest single investment by a foreign company into Japan. I am confident that so long as regulation and reforms reinforce each other to create an investment friendly environment, then British companies will play a major role in helping Prime Minister Koizumi meet his goal of doubling the flow of foreign investment into your country.
The UK for its part has more Japanese foreign direct investment than any other market in Europe, and we want to keep it that way. The factors which first attracted Japanese companies to invest are as strong as ever. In both policy and practice, our decision-makers and workforce have a global outlook. We have a stable macro economy and provide an attractive tax environment for investment. The British labour market is already the most flexible in Europe. We think that we have the most employment-friendly regime in the world, a belief which is reflected in the fact that we now in Britain have the lowest unemployment rate of all the main industrialised countries.
However, a fast changing world is bringing new opportunities, and also new competition. China is joining the WTO. India is now producing 220,000 science and information technology graduates annually. While in Europe ten more countries are set to join the single market of the European Union. So we know that we cannot take for granted the inward investment flows that we have seen in the past. The Japanese business community represents the second largest economy on the planet and has a proven track record of supporting UK investment. So I take your views very seriously. And it is clear from my discussions that you welcome greater flexibility in Britain as much as we welcome reform in Japan.
Following the joint declaration of all European Union Finance Ministers, placing for the first time labour market flexibility and structural economic reform at the heart of the new economic guidelines for Europe, there is much progress that we can make.
So I believe that in all these areas we are going to be able to provide not just a dynamic UK economy, but also make significant structural reforms to the European economy too. And it is worth just pointing out that if of course we are able to meet the economic conditions, provided there is sufficient convergence and flexibility between the UK and the eurozone, we could enjoy a period of superior growth because of our superior flexibility in the UK, and that clearly is not the greatest disaster that can befall a nation. In any event, we are rigorously pursuing the agenda of economic reform within Europe with our European partners. And it is important that everyone understands that trade is not a zero sum game, that both sides can and do win.
With the European Union's impending expansion coming to 25 countries from next year, we are therefore very conscious that we are part of a potential market of 450 million consumers. But we know we are subject to currency risk. And I know that investors are keen to address this vast market, but that especially in manufacturing, the danger that an enterprise will swing from profit to loss for reasons that have nothing to do with the competence of the managers, and everything to do with the vagaries of the international capital markets, I know that that inhibits investment. So that is why it is important to see our reforms combined with those of our European partners, working in a self-reinforcing manner to enhance our ability to cope with the strains of euro membership.
So we in Britain intend to maintain our position in labour market flexibility, we intend to maintain our position in macro economic stability that have given Britain the lowest interest rates, the lowest inflation, the lowest unemployment for decades, and we intend as a country to play our full part in the European Union. That is why I believe we will continue to be the number one place to invest. And I know for many of your companies, you want the certainty that the direction of British economic policy is one that allows us to play our full part in Europe, and it is. But what is more, we want to make sure that the Europe we are playing our full part in is a Europe that itself is geared to greater flexibility, greater growth, greater innovation in the future.
Finally let me say this to you. I have no doubt at all that in this more interdependent world, we need to work more closely together politically and economically. That is one reason, quite apart from the economics, why it is important for Britain to be at the centre of Europe. It also justifies the increasingly strong bilateral ties with Japan. And the one thing that we have learned as a world in these past couple of years is that if we are to have the confidence that allows the world economy to grow, we must also have political stability. That is why the actions against terrorists, against rogue states with weapons of mass destruction, is important. They are important because anything that puts at risk our stability, puts at risk our way of life, our way of life not just politically, but economically.
Globalisation we have seen as essentially an economic phenomenon, and it is. But the whole point about a world moving closer together, in communication, in technology, in trade, the whole point about globalisation economically is that it has its political dimension too, and that political dimension is that we need to reinforce the global integration with a clear sense of shared political values and perspectives. That is what we are trying to do.
And I would like to pay a special tribute to your Prime Minister in the work that he has done in the past few months to have Japan play its full role politically as well as economically. Because often for a British Prime Minister we address first and foremost the economic relationship, and it is of course important, and I have addressed it with you today; but I am delighted that finally our cooperation, Britain and Japan, on political issues now matches our economic cooperation. And I believe that that is important and I think we have to work on it. Because in the end, as you know from some of these difficult issues here in this region, to do for example with North Korea, but also to do with other political questions within this region, the voice of Japan, a modern Japan, that is outward looking and able to play its full role in the world, is of fundamental importance to resolving these issues in a sensible and proper way. So I believe that we are at a time in our world of unprecedented opportunity, but also enormous challenge. And I have no doubt at all that our two countries, that share so many of the same perspectives, that want for example a strong relationship with the United States, but want that set within a series of global relationships that bring the world closer together, that recognise the value of the economics and the politics going together, I am sure that our two countries can play an enormous part in helping our world to greater prosperity and greater stability. In particular I hope that my visit here to Japan allows the bilateral ties, politically as well as economically, between Britain and Japan to be strengthened still further. It is a good relationship that we have. I want to make it a great one. And I believe that if we do that it will be to the benefit not just of Japan or Britain, but the wider world.