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JPRS-JAR-88-001 CONTENTS 10 MARCH 1988

ECONOMIC

Needed U.S., Japanese Macroeconomic Policies Explained

[Masaru Yoshitomi; ECONOMY, SOCIETY POLICY, Sep 87] 1

MITI Official Questions Trade Friction Remedies [Yuji Tanahashi; JIHYO, Jun 87] 3

Division of Labor Between Country, Asian NIC's Discussed

[Ippei Yamazawa; ECONOMY SOCIETY POLICY, Aug 87] 6

New Trade Insurance System Explained [KEIDANREN SHUHO, 13 Jul 87] 10

FOREIGN RELATIONS, TRADE

Business Leaders Discuss Solutions for Japanese-U.S. Trade Friction 12
JPRS-JAR-88-001

10 March 1988 ECONOMIC

Needed U.S., Japanese Macroeconomic Policies

Explained

41060009 Tokyo ECONOMY, SOCIETY POLICY in

Japanese Sep 87 pp 15-17

[Article by EPA Economic Research Institute Director

Masaru Yoshitomi]

[Text] Introduction

In this report, I am going to focus on the issues of the

foreign exchange rate and domestic demands which are

necessary to correct the large trade imbalance. When the

matter ofreducing the trade surplus is being considered,

it would be unproductive to attribute the cause of

Japanese trade surpluses to "Japanese problems" which

are deeply rooted in Japanese society and culture and to

have a discussion about "Who is at fault?" The current

trade surplus can be analyzed and dealt with from the

point of view of economics which should serve as the

fundamental basis for discussion.

Fundamental Relationship Between Foreign Exchange

Rate and Domestic Demands

The following has become common sense from the

standpoint ofinternational monetary policy as far as the

exchange rate and domestic demands are concerned. In

order for a country with strong currency to reduce its

trade surplus as well as to maintain a domestic employment level, the country must increase domestic

demands. In contrast, for a debtor nation with weaker

currency, the domestic demands must be curtailed. In

the case of Japan, a strong yen does hurt the price

advantage ofJapanese exports but reduces the prices of

imports, thus canceling the effect of a strong yen which

tends to reduce surpluses. Simultaneously, if a strong yen

is abating exports, the only way to compensate for the

loss is to stimulate domestic demands. Similarly, the

U.S. domestic prices should not be increased as the

prices of import goods increase in order for the weak

dollar to reduce the U.S. debt to other countries. The

price increases in domestic goods tend to upset the

symmetrical relationship of import prices and domestic

prices, thus allowing more foreign goods to be imported.

The domestic goods price increases can be curtailed by

reducing domestic needs. The U.S. has achieved nearly

100 percent employment (in June of 1987, the unemployment rate was 6.0 percent). It is believed that if the

unemployment rate falls below the natural employment

rate—5.5 to 6 percent— it will cause inflation. It should

reduce the internal demands but rather increase the

external demands by allocating capital as well as manpower to domestic production.

Evaluation of 1986 Macroeconomic Policies

Since the meeting of the September 1985 Plaza agreement, the U.S. dollar has been devaluated drastically.

Therefore, it can be seen that Japan needed to stimulate

internal demands while the United States needed to

curtail internal demands. However, the examination of

the structural government deficit of 1986 (normal government level) reveals that in Japan demand kept

decreasing while in the United States it stayed about the

same, thus not being able to reduce the government

deficit (OECD, Economic Outlook 41, June 1987).

Therefore, it can be concluded that both countries failed

to do whatever was expected as far as government

monetary policies were concerned. However, in the case

of Japan the official bank rate kept decreasing, thus

helping increase the internal demands. In fact the consumer purchases of houses increased at an annual rate of

15 percent (actual) from July 1986 to September 1986.

But in the United States, M2 went over the upper

limitation of 13.2 percent, thus resulting in stimulation

of the internal demands. Thus as far as the year 1986 is

concerned, the Japanese external demands (exports)

decreased by only 1.5 percent ofthe actual GNP, yet this

curtailed the trade surpluses. On the other hand, in the

United States imports increased by 10 percent and

internal demands exceeded the GNP in the same way as

in the period ofthe strong dollar (1982 through 1985). It

can be concluded that in 1986 the trade deficit of the

United States did not improve as far as the figures were

concerned but rather the actual deficits increased. This

delayed the adjustments of the U.S. trade imbalance,

thus causing impatience among people who complained

that the effects of exchange rate adjustments never had

been observed even after 1 year had passed since the

Plaza agreement. What made matters worse were the

1986 monetary policies of the Japanese Government,

which fundamentally caused weak dollars and strong yen

in 1987—yen being exchanged for less than 140. What

determines the exchange rates—strong yen and weak

dollar—after the Plaza agreement is the trade surplus

and deficit. The trade deficit has reached 4 percent of

GNP, and the total foreign debt to credit is going to be 20

percent of GNP within a few years. Therefore, it is not

right to blame the U.S. high-ranking officials who are

responsible for a "talk down" policy for the resulting

strong yen. Such talk could affect the exchange rates

momentarily; however, it does not essentially determine

the exchange rates. The fundamental determinant of

exchange rates is trade imbalance which is controllable

by the above-mentioned government spending and monetary policies, a fact which we should never forget.

Macroeconomic Problems of 1987-88

During April through June of 1987, the trade imbalance

began to decrease for the first time. The peak ofthe trade

imbalance was January through March. These improvements were aided by the fact that the U.S. Government

started reducing the government deficit in fiscal 1987

(October of 1986 through September of 1987) in the

amount of $35 billion (0.08 percent of GNP). At the

same time as far as the monetary policies are concerned,

the increase in M2 (annual increase) is less than 4

percent for the last 3 months, thus the market is being

tightened. Aided by the aforementioned policies, the

increase in the internal demands will be 1.5 percent and
JPRS-JAR-88-001

10 March 1988 ECONOMIC

2 percent in the years 1987 and 1988 respectively

(OECD, Economic Outlook 41). Increases in the total

exports will push up the GNP by approximately 1

percent in both 1987 and 1988, assisted both by the weak

dollar and the decrease in internal demands.

The process of the U.S. Government's reduction of the

government deficit has two important implications. The

first is that even though the reduction of government

deficits and gradual tightening of money are essential

aspects of rectifying trade imbalance and of halting

import inflation turning into domestic inflation, the

reduction of internal needs could cause worldwide inflation. In fact the increases of internal demands of OECD

countries in 1987-1988 will be 2.5 percent, compared

with 3.6 percent in 1986 (above-mentioned OECD).

However, this prediction is based on the assumption that

the U.S. government deficits will not further decrease in

1988. Therefore ifthe government deficits do decrease in

1988 as they did in 1987, the internal demands ofOECD

countries might further decrease—and this could lead to

the possibility of growth recession. Unless the trade

imbalance can be rectified despite the possibility of

growth recession, the world economy could cause financial depression because of the huge trade imbalance

contributing to a drastically weaker dollar which in turn

would cause rises in interest rates, expectation of inflation and distrust of the dollar. The financial depression

in the United States could cause worldwide financial

panic, aided by the rising interest rates ofthe dollar and

problems of loans made to the Third World countries.

Intermediate Continuity of Fiscal Policies

The second implication is the question of whether trade

surplus countries such as West Germany and Japan

should stimulate the internal demands in order to avoid

growth recession and fulfill "international responsibilities." Many economists do demand that the creditor

nations expand internal demands; however, they fail to

discuss the fundamental and most critical issue of conditions essential to sustain the intermediate internal

demands.

It will take approximately 5 to 6 years to reduce today's

enormous trade imbalance, thus making intermediate

policies very important. That being the case, the government policies must also support the intermediate policies in order to reach our objectives. Thus, ifthe government were to set policies for the first and second years as

rapid expandable fiscal policies as well as policies to

expand the structural deficits rapidly and change the

previous policies 180 degrees in the third and fourth

year, it would be self-defeating.

With the analysis of the estimates of balances of consumer savings and investments for the next several years,

it can be concluded that the ratio of excess savings over

GNP will be at least 4 percent. Prior to 1990 the

government will absorb approximately 2 percent and the

trade surpluses will absorb roughly 2 percent—estimated

from the selection of consumer portfolios. In 1985 the

general government deficit was 0.8 percent of GNP.

Therefore, even if the government were to increase the

deficit by over 1 percentage point, the government

should not exceed the deficits to GNP ratio of 2 percent,

thus limiting and stabilizing the total deficit to GNP

ratio to the comparatively low figure of 30 percent. The

government policies which allocated 3 trillion yen at the

end of May 1975 will raise the structural government

deficit to 1 percent of GNP (approximately 3 trillion

yen) after analyzing both the increases compared to the

previous year's government budget and sources of revenue. Indeed, it is essential that the nominal growth of

GNP and the balance of the government revenue and

spending grow proportionally from 1987 on in order to

meet the objectives of the intermediate government

fiscal policies. Of course, besides the above-mentioned

government policies it is required that money be loose

within a range that will not cause inflation and that the

policies structure change in order to increase internal

demands continuously. We must understand that we

need the structural change in order to shift the mode

from exporting to non-exporting with the least losses of

employment opportunities, capital and technologies,

considering the fact that the yen will be appreciated

more than its real value.

The Most Serious Problem

The problem we are facing now is whether the United

States and Japan can maintain the aforementioned relationship of internal demands and GNP.

As far as the United States is concerned, it must limit the

growth of internal demands to within 1.5 percent for the

next few years through reducing the government deficit.

Yet, imports will increase by 3 to 4 percent. Exports

must increase by at least two times that of the imports,

considering that the total amount of imports is one and

a half times larger than the total amount of exports and

that the accumulated interests are worsening the trade

imbalance. This implies that the U.S. exports must grow

twice as fast as the growth of the world market and that

the U.S. market share will increase gradually every year.

This has been taking place since the last half of 1986;

what is important is to maintain this.

Unless the United States increases the total exports and

reduces the government deficit, the dollar will further

devaluate, thus raising dollar interest rates, accelerating

inflation and possibly leading to worldwide financial

panic. It can be said that today's dollar to yen exchange

rate of 140 to 1 is the lowest that the dollar has moved

against the yen. The increase in dollar interest rates from

this past March through May and the rising expectation

ofinflation caused by the weak dollar are good examples.

The 140 yen exchange rate is probably 20 to 30 yen more

than an equilibrium exchange rate. However, in order to

reduce the huge export surpluses of Japan the market

share ofJapanese exports must decline—the opposite of
JPRS-JAR-88-001

10 March 1988 ECONOMIC

the United States. Even though the world market

expands at 4 percent, Japanese exports can increase only

at a far lower rate than 4 percent.

Unless the strong yen persists for the next few years, the

surpluses will never decrease. This means that the

decrease in the total exports will lower Japanese GNP by

0.5 to 1 percent every year. Unless the internal demands

increase by 3.5 to 4 percent, the growth of the GNP will

be less than 3 percent, thus possibly worsening the

employment opportunities.

How can we maintain the 4 percent growth rate in

intermediate terms? I believe that the real hardship to

the Japanese economy will come after the effects of

government spending of 6 trillion yen to stimulate the

economy start fading away. If the demands for houses

are satisfied and consumers are to spend a great deal, it

is obvious that the policies regarding the uses ofland will

be the most important government policies for structural

changes.

12545

MITI Official Questions Trade Friction Remedies

41060147 Tokyo JIHYO in Japanese Jun 87 pp 62-67

[Article by MITI Deputy Vice Minister for Administration Yuji Tanahashi]

[Excerpts] Prime Minister Nakasone promised to the

United States implementation of a comprehensive

domestic-demand expansion policy. There is an opinion,

within Japan, particularly in one quarter of the Finance

Ministry, that questions the effectiveness of such a

domestic-demand expansion to correct the Japan-U.S.

trade imbalance and that claims that MITI is substituting one problem with another.

For example, according to an informal tribal calculation

of the Finance Ministry, a Yl trillion domestic demand

expansion package will only have the effect of correcting

about $600 million ofimbalance. According to one set of

calculations made by MITI, it is seen to have the

corrective effect of $1.7 to $1.8 billion. Supposing that

"truth is in the middle," I do not think [the corrective

effect] is less than $ 1 billion. During the latest visit to the

United States, Prime Minister Nakasone stated that he

would put into effect a comprehensive economic measure of over Y5 trillion.

If the calculation of MITI were correct, it should have a

corrective effect of $8 to $9 billion per year, which will

be considerable. According to the calculation of the

Finance Ministry, it is $3 billion. Even if one takes the

middle figure of the two calculations, one can say that

the corrective effect of $5 to $6 billion is fairly certain.

Now, the problem is the content ofthis Y5 trillion. There

is a term called "real money." The question here is how

much "real money" is in the Y5 trillion. Measures with

little "real money" are not effective. For example, in the

supplementary budget of FY 1986, Y3.6 trillion was

added, but the "real money" in it was merely between

Y100 and Y200 billion. A bit over Y800 billion was

appropriated from the general account, but about Y550

billion of it was for a natural disaster relief fund, which

is appropriated each year for the past year's expenses and

which does not add to the net amount.

We are in trouble ifthe present domestic-demand expansion policy were like the supplementary budget of the

previous year. The Finance Ministry keeps insisting, "we

cannot lower the flag of financial reform." It is not that

MITI is insisting that the entire Y5 trillion be financed

by the national budget. We can include a certain amount

of fiscal investment and loan and also, to some degree,

public work expenses that are shared by the central and

local governments.

However, if we were to include in the Y5 trillion public

work expenses financed solely by local governments and

the capital investment by public utility companies such

as electric power companies and NTT, wouldn't we

repeat the same mistake as in the last year's supplementary budget? MITI is therefore insisting that the central

government finance with its own fund a half or, if

possible, about two-thirds of the entire amount, including a tax cut.

Corporate investment behavior is thought to be a problem. We cannot delay the implementation ofthe domestic-demand expansion measure. The prime minister has

already stated clearly to the United States his intention

to implement them in the month of August. Usually, the

supplementary budget is ready in October to November,

but this timing will be too late. We would like to finish

drawing up the outline of the supplementary budget in

July and to proceed with execution in August.

Given the situation of the sales tax, people are wondering about what kind offinancial sources are available. It

is true that enforcing the sales tax from January of next

year has become impossible, but there is another

means—to utilize the NTT stocks. With regard to the

proceeds from the sale of NTT stocks that the government has on hand, it is stipulated by law that the

proceeds will be put into the national debt consolidation

fund to be used for redeeming government bonds.

However, the market price of the NTT stocks has gone

up, largely surpassing the expected price, to around Y3

million. Assuming the price at the time ofsale to be Y2.7

million per share and after using the sales proceeds for

redemption of government bonds, there still remains

Y5.3 trillion at the beginning of next fiscal year. We are

talking about the idea of using this surplus for domesticdemand expansion.
JPRS-JAR-88-001

10 March 1988 ECONOMIC

Even if it goes down from Y2.7 million to Y2.4 million,

there remains Y4 trillion. This can be considered a gift

from heaven, and we should utilize it to the best advantage. The Finance Ministry keeps saying that they do not

like to use the windfall profit as a fund for a continuous

policy, but it seems their nuance has recently changed

somewhat. The administrative and fiscal reform is a very

important item, and I have a heart-felt respect for the

truly wonderful results achieved by the Finance Ministry

officials these past few years. I would like to ask these

smart officials to recognize fully this harsh international

environment.

Now, one important point of view is to realize that the

domestic-demand expansion measure does not only

serve to correct the trade imbalance.

If we carefully listen to the recent arguments of the

Americans, we realize that they are concerned about the

investment behavior of Japanese corporations. The

Americans came to attack this point also in the semiconductor negotiations, but we repelled this accusation by

saying that we, the Japanese government, cannot regulate capital investment by private companies, and that

this is a problem that touches the basic principle of a free

economy. However, the U.S. side is not necessarily

satisfied with this answer.

According to the argument of the Americans, Japanese

companies are export-oriented and make an enormous

investment in plants and equipment which does not

correspond to domestic need. For example, they invest

to boost production capacity by three to five times

domestic demand. And, when these facilities start operating, they start exporting and flood foreign markets with

their products. The best example of this is the semiconductor. The Americans consider this to be an overly

excessive investment.

By contrast, American firms make capital investment

based on domestic demand, and ifthere is a surplus, it is

directed to export. For example, American firm's thinking is to sell 10 units with a profit margin of 10 per unit

in order to realize the total profit of 100, whereas the

Japanese firm's approach is to sell 100 units with the

profit margin of 1 per unit in order to secure the total

profit of 100. This behavior is making a mess of the

production structure throughout the world. The Japanese build facilities with too much capacity, and when

they start to operate all at once, the operating rate is not

lowered in order to lower the capital cost, and the

products are sold at a huge bargain.

Now, a point is being whispered that argues the necessity

of applying a brake at the stage of capital investment by

setting up some kind of guidelines.

Think While Running

In other words, with regard to the Japanese domesticdemand expansion, it was expected to have primarily an

effect to pull the world economy up as seen in the

so-called "Japan locomotive theory," but today it is

expected to have first an effect to change corporate

behavior. This is an important change, and it requires a

change in the Japanese industrial policy.

We do not as yet have a clear prescription as to what we,

the Japanese, should do about this problem. Unfortunately, we have to think as we run. Our honest feeling is

that we have been pressed to take measures for the very

sudden rise of yen. At present, a "macroeconomic study

group" has been set up in the ministry with the participation of people learned in each field, and they are

earnestly looking into the question of how to advance a

domestic-demand-oriented industrial policy from various angles. By mid-June, an interim report is expected to

be finished for submission.

On one hand, for promoting adjustment of industrial

structure, an adjustment-fund system is set up by law,

and the policy is carried out using this fund as a lever.

There already exists a system called an industrial base

credit fund. The purpose ofthis fund is to discard or stop

facilities, taking as objects structurally depressed industries such as textile, aluminum, or chemicals and to

increase their competitiveness by slimming down their

facilities and manpower. The Japan Development

Bank's loan has been used for this purpose. But the new

adjustment fund is a system with a radically different

point of view.

First of all, the structural change is backed up by an

extremely low interest loan by adding further interest

subsidy to the Japan Development Bank's loan. Secondly, funds are provided for measures to be taken by local

governments. The objective is to help strengthen and

activate the management base by investing in the government and in private (academic) organizations centered in the third sector. For example, steel towns such as

Muroran and Kamaishi have been hit hard by the

elimination of blast furnaces from steel companies. At

present, of over 100,000 steel workers, 40,000 are scheduled to be laid offduring the period of 1988 to 1990. The

shipbuilding areas are also being affected severely.

Frankly speaking, in the third sector under the provincial

government, no one new enterprise is able to absorb

immediately the workers laid-off by the steel and shipbuilding industries. Nevertheless, in order to secure jobs

for only some of the workers, or to encourage industries

outside the industrial fields under the MITI administration, we [MITI] would like actively to help any new

enterprise that may have some possibility of generating

jobs. The governor of Hokkaido comes to us frequently

for advice. We, jointly with related ministries and offices, are going to support actively the establishment of

recreational facilities utilizing the region's natural assets

and educational facilities.

As a medium- to long-range view, according to a simulation analysis ofthe year 2000, 13 years from now, there

is a macrocalculation that says that the industries such as
JPRS-JAR-88-001

10 March 1988 ECONOMIC

electronics, bioengineering, and new materials (including superconductive materials) will rise to claim a market of over Y200 trillion at present value, and will

generate from 1.1 million to 1.2 million new jobs. We

need to have something to bridge over to that stage, and

as for us, we would like to minimize domestic friction by

taking realistic measures.

It Is Dangerous To Control Trade

I would like to mention a few problems coming in the

future with regard to individual points of friction vis-avis other countries.

The big headache is the automobile industry. In order to

ease the trade situation, we have been advising companies to produce cars in the United States. Each company

has already begun or is about to undertake on-the-spot

production by a 100 percent subsidiary company. From

the end of 1987 to 1988, the production capacity [of

on-the-spot production] is expected to reach about 1.5

million cars in the United States.

At present, the voluntary export restriction limits for the

United States is 2.3 million cars. If one adds to this the

1.5 million cars mentioned above, the total number

becomes a large one. It is a question whether nearly 4

million Japanese or cars of Japanese origin can be

absorbed in the U.S. market, since the scale of the

automobile market in the United States is 11 million

cars [per year] and the annual growth rate is 2 to 3

percent, at most. Even if one discounts the increased

export of Korean cars, it will be very difficult to have

room in the market for 4 million Japanese or cars of

Japanese origin.

The annual export value of the United States of bodies

and automobile parts is over $50 billion. As on-the-spot

production increases, so does the export of parts.

Because of this, Americans are demanding a large

increase in local parts-delivery. There are criticisms

saying that it is inexcusable to bring in 70 to 80 percent

ofthe parts for on-the-spot production, because then it is

no different from producing in Japan.

Also in the European Community, some opinions have it

that on-the-spot production of a VTR, for example, is

nothing but an excuse to avoid trade friction and that

investment for assembly alone is not desirable. More and

more on-the-spot production will be undertaken in various countries from now on, but as the above examples

show, there are possibilities for future misunderstandings in Europe and in the United States. More delicate

consideration, so to speak, is necessary. Overseas investment must be aimed not only to increase employment

but also to nurture local industries.

The recent deflation due to the high exchange rate ofthe

yen is not as serious as MITI says. Certainly the figure

between Y130 to Y140 [per dollar] is too low, but it is

doubtful that one cannot manage unless the rate goes

back to Y170 [per dollar]. There is an opinion which says

that one should accept the Y150 range if it is stabilizing.

However, it is true that medium- to small-sized companies and those related to export business are particularly

affected by the deflation due to the high exchange rate of

the yen. We are not exaggerating this fact. However, it is

also true that there is no decisive bright idea to counter

it. We can only try to survive the present predicament by

taking all conceivable countermeasures.

In one quarter the idea of trade control is being whispered. The present Japan-U.S. disagreement on trade

friction was caused by particular industries. In other

words, it was caused by $50 billion of export to the

United States of automobiles (including parts) and over

$20 billion of export of several electronics-related items

(electronics, office machines, VTR's, industrial

machines). One cannot have the ship "Nihon-maru"

["Japan"] sink because ofthese export-heavy industries.

In order to save the "Nihon-maru," is it not better to

throw these so-called "main culprits" overboard and

lighten the ship's load? Such an opinion, even if limited

to one-quarter, is voiced among influential people in the

financial world.

This opinion presents a very important problem. To put

it another way, first of all, the United States will not

evaluate such a measure by the Japanese as beneficial.

Isn't it likely that they will interpret it as a means to

evade the question of not being able to open the Japanese

market by suppressing exports? Such an interpretation

was given in the past, and it will happen again in future.

Secondly, there is the great danger of losing a brake.

What happens to the exchange rate of the yen if exports

are reduced to $20 billion? How about to $30 billion?

There is no assurance of a particular result or a clear

perspective. In addition, whether it be automobiles or

electronics, what kinds of influence will be felt in the

related industries when the export is cut by a certain

percentage? The great worry is that it will give rise to a

serious depression if deflation due to the high exchange

rate of the yen, which may not be necessarily corrected,

continues to exist.

If one haphazardly carries out trade control without

clearly understanding these points [raised above], one

can no longer call it a "policy" taken by a responsible

government.

As for us, we believe that the only possible way is to carry

out a basic domestic-demand expansion policy, while

smoothing present friction, by individual measures and

avoiding international isolation. Even if each measure

brings an improvement of only a few billion dollars it

becomes a fairly large flow ifone measures all the effects.

As a medium-range objective, we would like to build a
JPRS-JAR-88-001

10 March 1988 ECONOMIC

sound vision for bringing the Japanese industrial structure into an international mode. The "Nihon-maru" is a

tanker of 1-million ton capacity, so to speak. It can

overturn if its direction is changed all at once.

We pray to be able to steer the ship in a way that, when

looking back on the sea passage after 5 to 10 years, we

can say, "we turned it around correctly at that time."

13385/09599

Division of Labor Between Country, Asian NIC's

Discussed

41060164a Tokyo ECONOMY SOCIETY POLICY in

Japanese Aug 87 pp 15-19

[Article by Hitotsubashi Univ Professor Ippei Yamazawa]

[Excerpts]

1. Broader Perspective.

Tension in Japan's competitive relationship with South

Korea and the other Asian NIC's has surely increased in

fields such as textiles, shipbuilding, and steel. The NIC's

have only been exporting to Japan about 10 years, but

their textiles have been competing with Japanese goods

in the American and European markets for the past 20

years. So, Japan has been feeling extremely intense

pressure from the Asian NIC's. But it seems a little

short-sighted for us to perceive this only in terms of a

threat.

The Asian NIC's appear to be formidable competitors if

we restrict our consideration only to their bilateral

relationships with Japan, and focus only on specific

products traded, their total export and import volume,

and look at only the most recent 10 years or so. But if we

consider the Japan-Asian NIC's relationship within the

context of multilateral foreign trade, focusing on the

change in the structure of exports and imports and the

long-term development process on both sides, we discover an undeniable complementarity behind this

severely competitive relationship.

That is to say, up to now we have seen growth in both the

competitive and the complementary aspects of the relationship in the developmental processes of the Asian

NIC's and Japan, and I believe that both aspects will

continue to grow hereafter. The more we emphasize the

difference in size between Japan's economy and those of

the Asian NIC's, and differences in stages of development, the stronger the complementary aspects of the

relationship become. So this essay explores the international division of labor between Japan and the Asian

NIC's—the current situation and its likely evolution in

the future—rather than their race to overcome Japan.

The analysis below selects South Korea and Taiwan for

analysis from all of the Asian NIC's. The city-states of

Hong Kong and Singapore both are heavily involved in

transit trade, and their industrial structures depend

heavily on the financial and service sectors. While our

international division of labor with those two countries

also is important, it is qualitatively different from our

competitive and complementary relationship with South

Korea and Hong Kong.

Table One [not reproduced] illustrates the recent commodity trade relationship between Japan and the Asian

NIC's. Japan accounted for 12.3 percent oftotal exports

during FY85, and 14.0 percent during FY86. Japan's

share oftotal imports during the 2 years amounted to 7.0

percent and 10.0 percent respectively. Both showed

remarkable increases. Second, each of these four countries and the region as a whole have large trade deficits

with Japan. And that is in spite of the fact that Taiwan

has a large global trade surplus and the other three are in

global balance. The reader should maintain a sense ofthe

macro relationship between Japan and the Asian NIC's

as expressed in these aggregate statistics while reading

the remainder of this article.

ASEAN and China too are following the Asian NIC's in

their industrialization process, earning them the title of

"quasi-NIC's." This means that the competitive and

complementary relationship between Japan and the

Asian NIC's in the future will be intimately related to the

level of ASEAN and PRC industrialization.

2. Our Competitive Relationship With the Asian NIC's.

The Asian NIC's reached the take-off point in economic

growth and industrialization during the 1960's. They

provide a typical example of Gerschenkron's "spread of

industrialization." All of them followed the strategy of

industrializing in the labor intensive light industries and

exporting. The decade ofthe 1960's proved a propitious

time for their efforts with international trade rapidly

expanding at 6.5 percent driven by rapid economic

growth in the developed nations and trade liberalization.

Economic growth rates in the advanced nations dropped

to lower levels during the 1970's after the first oil shock,

but the Asian NIC's were able to maintain their high

rates of growth through promotion of exports to the oil

producing nations. In 1978 the OECD (Organization for

Economic Cooperation and Development) published a

report entitled "The Challenge ofthe NIC's." This report

referred to the developing nations that exported major

manufactured products as NIC's (newly industrialized

countries), and analyzed their export potential to the

OECD nations. In addition to the Asian NIC's, the group

included countries such as Brazil, Mexico, Spain, and

Yugoslavia. Demands for import restrictions increased

during the recession that followed the oil shock as

domestic manufactures in the OECD member countries

complained of adjustment problems resulting from competition with the NIC's' imports.
JPRS-JAR-88-001

10 March 1988 ECONOMIC

But the OECD report stressed the complementarity

between the two groups, arguing that the economic

growth rates ofthe OECD countries was being supported

by demand for their intermediate and capital goods

generated by continued high rates of economic among

the NIC's during the 1970's.

The advanced nations shifted to fiscal and monetary

retrenchment after the second oil shock in 1979, fearing

higher rates of inflation and creeping government deficits. This created a serious worldwide recession by 1982,

which this time dragged down the growth rates of even

the Asian NIC's.

However, economic prospects brightened for the less

developed countries with the sudden drop in the price of

oil and other primary products after 1983. The growth

rates of the oil producing countries and the exporters of

primary products dropped to zero and then into the

minus range with the sudden loss of export income.

South Korea and Taiwan, on the other hand, were able to

maintain moderate rates of growth, benefitting from the

decline in the price of imported raw materials. Further,

their exports to the United States increased dramatically

when the United States reintroduced positive fiscal

policies and with the return to high levels of economic

growth and imports in 1983.

The products of the Asian NIC's didn't really begin to

compete with Japanese products in the Japanese market

until the 1980's. But they had begun to replace Japanese

goods in the American and Western European markets

rapidly since the beginning of the 1970's, especially in

textiles, footwear, sundry goods and electrical equipment. So, commercial competition between Japan and

the Asian NIC's in the Japanese domestic market developed as an extension of their competition in our export

markets.

Yet another factor promoting this trend was the rapid

adjustment of the exchange rates of currencies such as

the Japanese yen and West German mark after the G-5

meeting in September 1985. The South Korean won

remained steady and the Taiwan dollar rose only slightly

against the U.S. dollar. This made both relatively cheap

versus currencies such as the Japanese yen and the West

German mark, and strengthened their export competitiveness. Further, with only small foreign exchange markets, exchange rates are determined by central bank

intervention in both South Korea and Taiwan. Since the

G-5 meeting the Taiwan dollar has crept up slightly,

increasing 10 percent against the U.S. dollar in one year.

The South Korean won remained fairly constant against

the U.S. dollar during the first year, but began to rise

after the end of 1986 (the cumulative rate of evaluation

during 1986 was 3.2 percent). Still, both remained fairly

cheap against the Japanese yen and the West German

mark, strengthening the price competitiveness of both

countries' products.

Recently, both countries have experienced considerable

increases in their exports to Japan. In the clothing

category, both countries' most important export to

Japan, South Korea's exports of knit outerwear were up

63.3 percent in 1986 over 1985, while those of Taiwan

rose 25.8 percent during the same period. During the

first 4 months of 1987 they were up 116.2 percent for

South Korea and 30.8 percent for Taiwan over the first 4

months of 1986. South Korean knitted underwear sales

to Japan in 1986 were up 56.1 percent over 1985 and

76.9 percent for the first 4 months of 1987, while

comparable sales figures for Taiwan were 83.9 percent

and 103.9 percent. (All figures are from the customs

statistics.) Steel plate and semiconductor imports too are

rising rapidly intensifying cries of warning from importimpacted domestic producers.

3. Complementarity Behind Competition.

Still, as we see in Table One, South Korea and Taiwan

both have large trade deficits with Japan. Although their

exports to Japan are increasing, their imports from

Japan are increasing at an even more rapid pace. Expansion of this trade deficit with Japan has become a point

of irritation for both countries, and they take every

opportunity to demand that Japan buy more from them.

On the other hand, both countries have large surpluses in

their global trade balances. Estimates for 1986 indicate

that South Korea's surplus has reached $5 billion and

Taiwan's $16 billion. Taiwan's foreign currency reserves

have now reached $50 billion, and South Korea is

rapidly reducing its foreign debt which amounted to

$24.6 billion at the end of 1984. The remarkable difference between the overall trade balance picture of both

countries and their trade balances with Japan reflects the

nature of the international division of labor between

them and Japan.

Analysis of the structure of their exports and imports to

and from Japan clarifies this situation. As indicated

above, South Korea's main export products for the

Japanese market are textiles (22.0 percent of the 1985

total), foodstuffs (19.2 percent), steel (10.4 percent), and

electrical machinery (8.8 percent). Taiwan's major

export items to China [as published] are foodstuffs (33.8

percent), sundry manufactures (15.2 percent), textiles

(10.8 percent), electrical machinery (9.4 percent), and

steel (4.1 percent). In contrast, South Korea's primary

imports from Japan are general machinery (25.0 percent), electrical machinery (21.2 percent), chemicals

(14.1 percent), steel (11.5 percent), and textiles (5.3

percent). Taiwan's primary imports from Japan are

electrical machinery (25.7 percent), general machinery

(18.0 percent), chemicals (12.8 percent), steel (10.1 percent) and textiles (4.7 percent).

Other than foodstuffs, we can see that the major export

and import items overlap. We recently hear a lot about

"Horizontal international specialization" which is often

said to be a desirable international division of labor for
JPRS-JAR-88-001

10 March 1988 ECONOMIC

the Asian NIC's. But it seems to mean different things to

different people, and is rarely used according to a strict

definition. Strictly speaking it refers to the mutual export

and import of products that are used for the same

purpose which have been manufactured by similar processes which are differentiated by brand name and

quality. It describes the pattern of trade among some

members of the European Community (excluding the

countries of Southern Europe that recently joined), for

example, which have similar levels of income and similar demand conditions, with no big differences in the

level of production technology and production factors.

We should not refer carelessly to the overlap of exports

and imports under discussion here as "horizontal international specialization." They belong to the same general category, but they do not belong to the same stage of

production—finished goods, for example. Rather, they

are differentiated by the various stages of production,

such as finished goods and intermediate goods or parts.

South Korea and Taiwan also export the above mentioned goods to countries other than Japan, and a high

percentage ofthe parts and intermediate goods required

for their production are imported from Japan rather

than supplied by local manufacturers. Thus, the more

that South Korea and Taiwan export to other countries,

the more they will import intermediate goods and parts

from Japan. True, some oftheir finished goods find their

way into the Japanese market, but not in quantities large

enough to make up the difference in the balance of

payments.

This year's White Paper on International Trade had the

following to say about Japan's trade with the Asian

NIC's: "Up to now the focus has been on process

specialization that takes advantage of the benefits of

profits based on comparative advantage and economies

of scale through mutually exporting the products of the

same production process at different stages of production. But a new product differentiation is developing

between high and low value-added traded goods with the

current appreciation ofthe yen," (pp 279-80). For example, if we categorize products such as synthetic resins

into low, medium, and high price ranges and then

compare the exports and imports of the Asian NIC's we

see that it is only in the low price range that Japan's

imports amount to 80 percent of exports. The medium

and high price ranges are still dominated by exports with

almost no imports at all. This new trend seems worthy of

notice. This is a division oflabor within the stages ofthe

production process (this "intra-industrial division of

labor" includes specialization based on product differentiation and stage of process differentiation).

As a result South Korea and Taiwan are both highly

import dependent (imports over domestic demand) on

Japan, and a new pattern is developing in which imports

from Japan inevitably increase when South Korean and

Taiwanese exports increase and they experience

increases in export- oriented production and economic

growth. Both South Korea and Taiwan have large trade

surpluses with the United States and are being asked by

the United States to increase their imports of American

goods. This contributes to South Korean and Taiwanese

demands for increased Japanese imports of their products.

This relationship has been changing gradually during the

last 2 years due to the appreciating yen. Appreciation of

the yen raises the price of imported parts and intermediate goods for South Korea and Taiwan, squeezing the

profit margins of their exports to the United States for

which prices have remained constant.

South Korea's and Taiwan's trade surpluses with the

United States in 1985 were $4.2 billion and $11 billion

respectively, while Japan's trade surplus with the United

States for the same year was $49.7 billion. Although

considerably smaller in actual value, their surpluses are

creating friction for both countries in their relationship

with the United States similar to U.S.-Japan trade friction. The United States is pressing South Korea and

Taiwan for up-valuations of their currencies against the

U.S. dollar as one means of reducing the tension. This

issue was mentioned in the economic statement at the

Venice Summit, and we can expect pressure on both

countries for up-valuations to continue.

Up-valuations of the won and the Taiwan dollar will

reduce the price of the above mentioned parts and

intermediate goods imported from Japan, but it is

unlikely that pressure on profits from exports will be

eased unless they can raise the dollar price of finished

goods exported to the United States. A longer-term

solution would be domestic production of the intermediate goods and parts they need for their exports, and

their has been steady movement in that direction since

the beginning of the 1980's resulting in a remarkable

decrease in import dependence in a number of specific

products. But the size of the South Korean and Taiwanese economies impose limitations on this trend. Unlike

Japan, it would be inefficient for them to produce most

oftheir intermediate goods and parts domestically. Modern manufacturing processes are extremely complex,

requiring many intermediate goods and parts. So they

are likely to continue to depend heavily upon imports for

most of them. That means their overall import dependence upon Japan cannot drop beyond a certain point,

and we must accept the fact that this limits their ability

to reduce their trade deficits with Japan. Instead, we

should consider shifting some of our production of

intermediate goods and parts to South Korea and Taiwan through joint ventures and technology exchange,

reversing the flow by importing those goods from them.

4. The Need for Cooperation in Industrial Structural

Adjustment.

The most serious international economic problem Japan

faces today is the continuation of trade surpluses with

her major trading partners, especially the industrialized
JPRS-JAR-88-001

10 March 1988 ECONOMIC

countries. These surpluses provide opportunities for

"Japan bashing" and emergence abroad of the "Japan

problem." Of course there is no need to achieve bilateral

trade balances within a multilateral world trading system. But Japan's global trade surplus exceeds $100

billion, which together with the U.S. global trade deficit

of $ 170 billion constitutes a situation ofmacro economic

global imbalance reflected in the bilateral imbalances of

our major trading partners.

A cooperative macro economic policy coordination

effort by the major countries is required to solve this

macro imbalance. It has become more difficult to implement monetary policies which are different from those of

other countries in the present world environment of

rapidly increasing flows of capital across national borders. Fewer and fewer people call for further adjustments

in exchange rates, and progress is being made on cooperation in fiscal policy.

But it is unlikely that the present U.S.-Japan trade

imbalance will be corrected with macro adjustment

policies alone. It may well require reform of the industrial structure itself, and support for that policy is

thought to be the only appropriate way to proceed.

Adjustment of the industrial and trade structure of one

country naturally will influence the industrial and trade

structure of that country's major trading partners. So

industrial structural adjustment in one country even

requires the cooperation of its major trading partners.

We must examine Japan's international division oflabor

with the Asian NIC's within this context. As was stated

in both the first and the second "Maekawa Report,"

Japan is now clarifying her plans for adjustment of

Japan's economic structure, and both South Korea and

Taiwan too are being forced into structural adjustment.

Trade friction with the United States is one source ofthe

pressure, since as mentioned above both countries are

faced with trade friction very much like that experienced

by Japan. Beginning with textiles, voluntary restraints

have been imposed on their major exports to the U. S.

market and they are being pressed to liberalize their

domestic markets. They have plans for trade liberalization which are supposed to be realized by 1988.

The third requirement for structural adjustment arises

from both countries' status as semi-developed countries.

They lead the ASEAN countries in industrialization and

export orientation, and their domestic production of

automobiles, electrical machinery, and steel has replaced

imports and even provided for exports in a short period

oftime. They are rapidly catching up with Japan. But the

ASEAN countries, on the other hand, are rapidly industrializing and becoming competitive in products such as

textiles and plywood. South Korean and Taiwanese

competitiveness in purely labor intensive exports is

being threatened by their rising standards of living and

wages, and by up- valuations of their exchange rates.

ASEAN-style industrialization is even possible in China.

Pressed between Japan on one side and ASEAN and

China on the other, the destiny of the semi-developed

countries depends upon adjustment of the structure of

trade. At present both sides are trying to improve their

levels of technology with introduction of ambitious

policies of direct aid that range from better education to

creating a foothold for the development of small and

medium-sized sub-contracting industries. But here too

are dependent upon Japan for advanced technology, a

problem they are trying to solve through diversification

measures, such as moving closer to the EC.

Thus, both the Asian NIC's and Japan face the need for

structural adjustment, with each country's adjustments

affecting that of the others. Here we must give some

thought to cooperative structural adjustment in production and trade of manufactured goods. The lines on the

graph in Figure One illustrate the mutual relationships

involved as Japan, the Asian NIC's, and ASEAN pursue

industrialization. In the normal course of events late

industrializing countries import new products, accumulate know-how adequate to substitute domestic production for those imports, and soon export the same product. Since the Meiji period (1868-1912) Japan has

introduced modern industries one after another, and

they all have followed the traditional pattern of development from importing to domestic production and then

to exporting. The vertical axis of Figure 1 [not reproduced] is defined as domestic demand over domestic

production, while the horizontal axis indicates the passage of time. The 1.0 line on the vertical axis indicates

the complete substitution of domestic production for

imports. So, when the line goes above 1.0 the product is

being produced for export, and when it drops back below

1.0 again the product is being imported.

The top half of the graph compares the stages of development of the textile industry in Japan, South Korea,

Taiwan, and ASEAN. Japan already has moved back

into import status, while ASEAN has just entered its

export stage. The bottom half ofthe graph compares the

same three stages of the development for the steel

industry. Japan has already entered the mature stage of

development, while South Korea and Taiwan are in the

early stages of exporting and ASEAN is still at the import

substitution stage. Hereafter South Korea and Taiwan

will pass industries such as textiles on to ASEAN and

focus on industries such as steel. Japan will pass its steel

industry on to Taiwan and South Korea (this has already

begun) in order to move into more technologically

advanced fields. This does not mean that Japan is being

over-run by the NIC's. Rather, we should consider

achievement of this "stratified division of labor" a

positive development.

Too large a gap in the structural adjustment processes of

various groups involved in this game of catch-up runs

the risk ofsurplus equipment and excessive competition.

Some people believe that international controls on

investment and allocation of production are required to

avoid this, but they would be difficult to achieve. Japan,

too, tried this sort of industrial policy during the 1950's

and the beginning of the 1960's but failed to allocate
JPRS-JAR-88-001

10 March 1988 10 ECONOMIC

investment in equipment among industries and to control production. If it is difficult to achieve within even a

single country, we can not expect much from efforts to

regulate sovereign nations.

We can discuss cooperative international structural

adjustment efforts, but in the end we will not realize

policy measures capable of overcoming national sovereignty. The best we can hope for is an exchange of

information about structural adjustment appropriate to

the level of development of the various countries

involved and the formation of a general consensus on the

direction in which we should be heading. Then at least

we can expect to cooperate to the extent that the countries involved will not implement policies that go against

the direction that everyone agrees to be desirable.

A new round of GATT trade negotiations began last

year. Abolition of various off-shore trade protection

measures and recovery of a new GATT trade and investment order will require the general agreement of the

countries involved over trends in trade and production

adjustment. Or put another way, without such agreement

there is no reason to expect any success in the end from

this new GATT round. With developing nation participation in this new round of negotiations impossible, it is

desirable for Japan to strive to reach agreement on the

international division oflabor with the Asian NIC's and

to work together to promote the success of the new

GATT round.

13194

New Trade Insurance System Explained

41060162 Tokyo KE1DANREN SHUHO in Japanese

13 Jul 87p 13-15

[Text]

Outline of the Explanation by Noboru Hatakeyama,

Director General of the International Trade

Administration Bureau of MITI

1. Background of the Enactment of the New Trade

Insurance Bill

Japan, which currently has a large trade surplus, needs to

recycle the trade surplus to LDC [less developed countries] debtor countries. As a measure to achieve this goal,

we have established two new insurance products—the

insurance for third country transactions and the insurance for prepaid imports—in addition to the existing

overseas investment insurance in order to promote product imports, third country trade and overseas investment. The Trade Insurance Law which provides the

three insurance products was enacted on 1 April 1987,

and those insurance products will become available from

1 October. By this law, the former Export Insurance with

the world's largest balance of 14 trillion yen will be

integrated in the new trade insurance system which was

designed to meet the needs of export insurance users. At

present we are working on the details of the operational

procedures and will try to meet their needs as much as

possible.

Together with the revision of the insurance system, the

insurance account funds will be increased by 1 billion

yen making the total 7 billion yen in order to strengthen

the financial basis of the account.

2. Insurance for Prepaid Imports

Because import payments are usually deferred until after

goods arrive, it has been believed that there was no risk

of transaction at the waters' edge. In recent years,

however, prepaid imports have increased. In FY 1985, of

the total import payments of $120-130 billion, approximately $ 11 billion was prepayment for imports that

required 50 percent or more of the bill be prepaid. This

method provides merit to both exporter and importer:

The exporter can obtain capital needed for production at

a low cost and the importer can expect a lower price for

products. As this method becomes more common, however, we cannot avoid such a risk as non-shipment of

goods in spite of prepayment. In order to cover such a

risk, the insurance for prepaid imports was established.

Outline of the Insurance for Prepaid Imports

1) In the case when the importer had prepaid all or a part

of the import bill prior to shipment; 2) —the exporter

had not fulfilled all or a part of the contract obligations;

3) —therefore, the importer had requested a refund of

the prepayment within a certain date; 4) —but, the

refund has not been made by either of the following

reasons: (a) war, restriction on foreign currency transfer

(unanticipated reasons); (b) bankruptcy of the exporter,

no refund has been made over 6 months (credit reasons);

5) —the insurance system will reimburse 90 percent of

the unrefunded portion of the prepayment (the law

permits reimbursement up to 97.5 percent at the maximum); 6) Insurance premium rates are currently under

study with reference to various foreign examples.

Qualifications for the Insurance: 1) Exporters who are

registered with the trade insurance authority after having

undergone the required credit investigation; 2) Limitations on the period of insurance liability are currently

under study. (At present, the MITI is considering 5

years.)

3. Insurance for Third Country Transactions

While Japanese marketing and product supply have

developed globally, and production and sales bases are

growing overseas, three-way trade where Japanese industry is the intermediary is also growing, and in 1984

reached roughly $4.5 billion. Even under the current
JPRS-JAR-88-001

10 March 1988 11 ECONOMIC

export insurance system, in plant export, etc., transactions are covered where supply to a third country is less

than 50 percent of the total. With the new intermediary

trade insurance, cases where amounts surpass 50 percent

are now covered.

Outline of the Intermediary Trade Insurance System

1) In the case where a Japanese firm has conducted

intermediary trade accompanying the movement of

goods between three nations, (note: a necessary condition is that the Japanese firm is the intermediary and this

will not apply if there are direct imports between the

nations); 2) the third country buyer for reasons specified—the same reasons listed under the section on insurance for prepaid imports above—does not make payment; 3) as a general rule, compensation will be made for

90 percent of the amount of payment not received 4)

Insurance rates are currently under review and various

foreign examples are being studied. (As a basic rate, from

0.8-0.9 percent per year is estimated. The policy is also

to set premium rates to differ according to region or time

frame.)

Furthermore, as to those covered by this insurance: 1) As

a general principle it will be limited to third country

buyers who have registered with the trade insurance

authorities and who have undergone the required credit

investigation. 2) With the exception of plant export and

related items, the time period for insurance liability is

planned to extend up to 2 years.

4. Overseas Investment Insurance

The recent increase in overseas investment by Japanese

firms has been striking, but much ofthis investment has

been directed toward advanced nations, and investment

in developing countries is not necessarily sufficient. To

deal with this insufficiency a necessary reform which is

calculated to reduce investment risk has been enacted

with the inclusion of credit insurance protecting against

bankruptcy at the location where investments are made

in addition to already existing coverage for extraordinary crises such as expropriation and war. We are proud

ofthe fact that there is no example for this elsewhere in

the world.

Furthermore, we revised the method of calculating the

amount of loss from the method of "valuation immediately before bankruptcy-valuation immediately following bankruptcy" used heretofore, to the "investment

amount-returned amount" method, since in cases of

bankruptcy and the like, the worth of the assets just

before bankruptcy were greatly reduced.

Outline of the Overseas Investment Insurance System

1) In cases where Japanese firms have invested abroad

(this includes financing, acquisition of debentures, guarantees, and not just investment of funds); 2) bankruptcy

at the location of investment; 3) as a general principle,

compensation for 40 percent of the amount of loss

accompanying such investment (the government's portion of the compensation will be lower than that of the

firm's).

Furthermore, the scheme for this insurance is expected

to be as follows: 1) As a general rule it will be for the

manufacturing industry. However, in cases where special

conditions are met it may apply to other industries

besides manufacturing. 2) We will conduct a study ofthe

credit of the investor and an examination of the subject

ofthe proposed investment. 3) The insurance premiums

will, as a general rule, be paid annually, but depending

on the business results of the investment target, we are

studying an adjustment ofthe period within fixed limits.

(Insurance premiums are presently under study but are

estimated to be on the order of 1 percent.) 4) We will set

a guarantee limit amount per one transaction (on the

scale of Y10 billion). 5) A fixed period immediately

following the commencement of operations (2 years) is

exempt from coverage. 6) The amount of loss which will

be compensated for will be the amount collected subtracted from the amount invested.

12964
JPRS-JAR-88-001

10 March 1988 FOREIGN RELATIONS, TRADE 12

Business Leaders Discuss Solutions for

Japanese-U.S. Trade Friction

41060033 Tokyo KEIDANREN GEPPO in Japanese

Nov87pp2-15

[Panel discussion in search of solutions for JapaneseU.S. trade friction among Eiji Toyoda, chairman of

Toyota Motors, a vice chairman of the Keidanren [Federation of Economic Organizations]. Takuji Matsuzawa,

adviser to the Fuji Bank, a vice chairman ofthe Keidanren; Toshikuni Yahiro, chairman of Mitsui & Co., Ltd, a

vice chairman of the Keidanren; Isao Nakouchi, chairman of Daiei Co., Ltd.; Tadahior Sekimoto, president of

Nippon Electric Company, Limited; moderated by

Masanari Miyoshi, managing director of the Keidanren]

[Text] Miyoshi: The enormous trade imbalance amounting to $58 billion (last year) is being cited as the principal

cause ofJapanese-U.S. economic frictions. But since the

beginning of this the J-curve effects have rapidly dissipated; as a result, the dollar-based global trade surpluses

of our country are expected, according to a trial computation by the MITI, to decline by some $15-19 billion a

year. In yen-based and volume-based term, this trend

becomes even more pronounced.

Meanwhile, there are no signs of improvement in the

U.S. trade balance. This is why discontent has risen in

and around the U.S. Congress, and a heated debate is in

progress over a protectionist omnibus trade bill. Moreover, with the COCOM violation case as a turning point,

the activity of Japan's economic sector is now being

made an issue in the context of security.

Against this backdrop, my question is, how do you view

the current state ofJapanese-U.S. relations? I would like

to hear your view first, Mr Yahiro.

Omnibus Trade Bill Could Lead to Global Stagnation

Yahiro: I believe that Japanese-U.S. frictions have

indeed reached a point more critical than ever before.

Despite a 70-percent appreciation [as published; obviously meant depreciation] of the dollar since the Plaza

Agreement, the extreme trade imbalance has not

improved at all, which has exasperated those ofthe U.S.

administration, Congress, and industrial sector; furthermore, partly as a result ofthe Democratic Party's having

taken up the trade question as one of the issues for the

upcoming presidential election, the trade issue has

become intertwined with political and security questions, resulting in an amplification of the friction—this,

I believe, is the situation that exists today. What makes

the situation all the more worrisome is the omnibus

trade bill, which is about to be taken up by the House

and Senate Conference Committee ofthe U.S. Congress.

The contents of this bill are by and large strongly

protectionist in tone: particularly such provisions as

Article 301 and the Toshiba clause ofthe Senate bill and

the Gephardt clause of the House bill, if passed as they

are written—the possibility of presidential veto notwithstanding—will be a direct blow to Japan for sure; moreover, passage ofsuch a bill not only poses a fundamental

threat to the GATT system envisioned in the new round

of negotiations, but also could conceivably lead to stagnation of the global economy in the end—an alarming

prospect, indeed.

Contrasting Economic Structures

Matsuzawa: I, too, share the view that Japanese-U.S.

relations are in a state of crisis. One of the causes of the

Japanese-U.S. trade imbalance, I believe, is in the economic structures of the two countries that are so drastically contrasting to each other.

During the period of mid-1940's through mid-1960's,

Japan was plagued by recurring shortages of foreign

currencies. Being a country lacking in natural resources,

Japan had to earn foreign currencies by means of

increasing its exports. For this reason it resorted repeatedly to an economic policy designed to impose monetary

restraints, to suppress domestic demands, and to stimulate exports. Consequently, its economic structure has

become increasingly export-oriented, and its currentaccount balance has consistently been in the black since

1975. In the works ofscholars, Japan is a country where

the imbalance between excessive savings and inadequate

investment is being manifested in the form of exports. In

other words, Japan is so completely steeped in this

tendency that it is almost like its constitutional disposition.

The United States, on the other hand, started off as a

country almost completely self-sufficient in the first

place. Never in its history has the United States even

attempted to promote exports by means ofimplementing

a domestic belt-tightening policy. On the contrary, the

propensity to import more when the domestic business

conditions are good has turned into the nation's second

nature.

Faced with the kind of chronic trade deficit it is experiencing now, logically the United States should curb

domestic demand and stimulate exports. I believe Japan

would have done exactly that, but the United States,

never.

In my view, as long as the debate is kept on the

superficial level without going into these structural problems, the root causes ofthe friction will not be resolved.

Three Partners of the Free World

Sekimoto: I agree with what Mr Matsuzawa has said.

Being blessed domestically with a favorable economic

environment in terms of energy, economic environment

in terms of energy, food, and other essentials, the United
JPRS-JAR-88-001

10 March 1988 13 FOREIGN RELATIONS, TRADE

States has been lacking the drive to export. Furthermore,

when it comes to industrial products, which constitute

the core ofthe friction, U.S production bases have been

moved to overseas.

Consequently, of the industrial products the United

States is buying from Japan, one-third are items indispensable in the lives of American people. If you look at

American electronics businesses, quite a few of them

have moved their production bases to Asian NICs; their

products, made abroad, are being imported into the

United States.

In other words, the United States has thoroughly become

an "information society." It is importing hardware but

its software items are excellent—it is these software

items the United States should try harder to sell. I also

think that Japan, for its part, should make the effort to

buy these fine software items from the United States.

Another point is that Japan and the United States,

together with the EC [European Community], are partners of the free world. If one goes bankrupt, other will

suffer as well. This idea should be the basic premise from

which the two countries must figure out how to cope with

each other as partners—I believe this is important.

Miyoshi: As the top leader of the manufacturing sector,

what is your view, Mr Toyoda?

Conglomerates and Vietnam War Are Culprits

Toyoda: I believe that conglomerates and the efforts of

the Vietnam war are partly responsible for the trade

imbalance.

Lately you do not hear the term "conglomerate" used

very often, but what may be an offshoot of the same

concept is very much alive even today, the M&A [mergers and acquisitions] activity, for example, is tantamount

to an act of snatching a once successful business using

the power of money: Who would want to foster a

business or an industry with tender care under such

circumstances? If a business has had a good performance

record, it usually has accumulated reserves, making it

possible for the new management to siphon off profits

from it for a period of time. But as soon as the business

starts going downhill, the management will sell it offwith

no second thoughts. In such a situation, there is no way

for industries to grow.

As for the other fact the Vietnam war, I believe it served

to demoralize the spirit of the working population. In

order to put an end to this spell and to have the country

regain its characteristic energy and soundness, the Reagan administration has been striving in many ways

including some policy measures, but I am afraid the

United States still has not sufficiently regained the kind

ofsincere, hard working attitude which its workers used

to demonstrate in the 1960's.

Miyoshi: Well, we heard Mr Yahiro say that much ofthe

Japanese-U.S. friction is political in nature. You being a

frequent visitor to the United States, what is your feeling

on this, Mr Nakauchi?

Use of Customs Statistics as Sole Basis for Judging

Trade Imbalance Is Antiquated

Nakauchi: The issue is an emotional one but only at the

federal level; at the state level people are very friendly. I

believe that lurking in the background of Japanese-U.S.

frictions is a problem of "perception gap"—äs in other

situations. In these days, called an era of "no national

boundaries," to talk about trade imbalance solely on the

basis of customs clearance status is in itself antiquated, is

it not?

According to "The Movement of Companies with Foreign Capital," a MITI report issued in September 1987,

434 American companies based in Japan recorded total

sales amounting to Y8.475.9 billion during the fiscal

year 1984. This figure, which I believe was not less for

fiscal 1986, if computed at the exchange rate of $1:Y150,

is equivalent to $56.5 billion. By comparison in the same

year Japanese companies based in the United States

produced goods worth $31.1.

Assuming these figures remained pretty much the same

for fiscal 1986, Japan sold to the United States goods

altogether worth $98.6 billion: $85.5 billion of which

representing exports from Japan and $13.1 billion representing goods produced by Japanese companies in the

United States. The United States, meanwhile sold to

Japan $84.4 billion worth of goods, of which exports

accounted for $26.9 billion and the sales by U.S. companies in Japan for $56.5 billion. The margin is a mere

$15.2 billion surplus in favor of Japan. If the invisible

trade balance favoring the United States is taken into

account, Japan's net trade surplus is only about $8

billion, an amount hardly worth quarrelling about.

Sekimoto: Those are the kind offacts which the Japanese

Government itselfshould have an accurate grip on. This

year 6 million Japanese are expected to travel abroad as

compared with 2 million foreigners expected to visit

Japan, which means Japanese travelers will outnumber

foreign visitors by 4 million. The money these Japanese

spend on their foreign travels for such things as lodgings,

food and drinks and souvenirs adds up to a considerable

sum. There are other items which should be clearly

reflected in statistics: for example, the copyright fees

Japanese are paying for American best-seller books [Japanese translations] being sold in Japan. Arguing about

trade balance solely on the basis of primary and secondary products will never lead to a solution. What one must

not forget is that the trade imbalance between Japan and

the United States exists because the economies of the

two countries are mutually complementary.
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10 March 1988 14 FOREIGN RELATIONS, TRADE

The United States Should Change Import-Oriented

Disposition

Yahiro: Taking the amounts of invisible trade into

account will, as Misters Nakauchi and Sekimoto are

saying, reduce the size of actual trade imbalance; nevertheless, a large imbalance still remains. This is due to the

structural differences in the economies of the two countries.

Over a long period of strong dollars the United States

turned completely into a nation of import-dependence

and rendered itself into a relationship of inseparable

interdependence with Japan, a nation inherently exportoriented. By force of natural consequences an extreme

imbalance has developed between the two nations—this

is the situation we have today. In order to correct this

imbalance, Japan is now trying, by implementing the

Maekawa Report, to stimulate domestic demand, to

reduce its traditional reliance on the United States

simultaneously undertakes a structural reform in the

direction opposite to what Japan is pursuing, the problem will not be resolved. This is precisely the point I am

making to those Americans concerned with this problem

when I appeal to them on my visits to the United States

to please implement "a reverse Maekawa Report."

Miyoshi: In addition to the ongoing trade imbalance

question, lately the security issue has been brought to the

fore. Regarding this situation, some people are apparently saying that the United States is venting all of its

frustrations in the direction of Japan.

Toyoda: Europeans, too, are saying that Japan has simply concentrated on economic growth without worrying

about military preparedness. In other words, they are

saying that while they are running clad in armor, we

Japanese are running wearing only athletic shirts, which

makes it only natural that we Japanese can run faster.

How about snowing some restraint?—This, in essence, is

what they are saying to us.

U.S. General Consumers and Industrial Circles Are Not

As Upset As Members of the Congress

Yahiro: for a number of reasons, one of which is that

Japan's defense budget is 1 percent of its GNP while in

the United States the ratio has reached 6.5 percent, there

has always been a complaint about Japan's having a free

security ride. Now, to make things worse, there is the

huge trade imbalance coupled by the recent case of a

COCOM [Coordinating Committee for East-West Trade

Policy] violation by a Japanese firm. AH these things

seem to have led to gradual exacerbation of U.S. frustrations.

Nevertheless, criticism against Japan among these election-conscious members of the Congress aside, most of

the general consumers and business circles in the United

States do not seem nearly as upset as we may think they

are about the imbalance issue. In and around Washington every word spoken seems to have something to do

with Japan bashing, but I tend to doubt whether Japan

bashing has reached such a point if you look at the

United States as a whole. For instance, an amazing

number of 590 Americans, mostly couples, led by 7

governors of such states as Georgia, Virginia, North

Carolina, and South Carolina, is expected to come to

Japan for the 12th Conference of Japanese-U.S. Southeastern Regions to be held in Tokyo on 4-6 October—

this fact alone makes me wonder what happened to

Japan bashing!

Japan Should Promote International Cooperation

Matsuzawa: I believe that the following two factors can

be cited as major causes of the Japanese-U.S. trade

imbalance:

First, since the end of World War II the global economic

might has become decentralized from the monolithic

control by the United States into a tripolar force comprised of Japan, the United States, and Europe. This

means that the economic strength of the United States

has declined in relative terms. Despite this, the United

States as the leader ofthe Western alliance has continued

to bear the enormous security costs in the post war years.

It may even be said that this imbalance between the

burden and the declining strength of its relative economic position has led to the colossal budget deficit of

the United States. It is this budget deficit which the

United States is filling with financing from abroad.

The other factor is the structural difference of the

economies. The United States is based on the principle

of free enterprise: the only constraint on business activities is the Antitrust Act—just about. As such, there is no

national industrial policy; the matter of moving production bases to overseas is decided solely at the discretion

of individual enterprises. As a result, there has been

progressive "hollowing out" of its industries.

In Japan, on the other hand, the situation is reverse—so

much so Japan is even called a nation of regulations:

Activities of all enterprises have always been subjected

to various ordinances and administrative guidelines; of

course there have been coherent industrial policies as

well.

Although these two factors are largely responsible for the

trade imbalance, what cannot be ignored is the reality

that the United States is currently suffering from twin

deficits. Should this situation remain unchanged, the

dollar is likely to decline even more in the medium to

long terms. There are some, such as Martin Feldstein,

former chairman of the CEA (Council of Economic

Advisers), who even anticipate the dollar's decline ifleft

unchecked. There may be a repeat of the great panic of

1929. To wit, there is the danger that loss of confidence
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10 March 1988 15 FOREIGN RELATIONS, TRADE

in the pivotal currency could drive trade into a state of

regressive balance. I believe that this kind of situation

must be avoided at any cost.

For Japan, therefore, it is necessary to promote international cooperation in line with its economic strength and

to take the attitude of willingness to do everything

possible toward that goal.

Nakauchi: The colossal budget deficit of the United

States, which is causing the dollar's decline, is due to its

bulging defense expenditure. Hopefully the recent trend

toward easing oftensions between the United States and

the Soviet Union will facilitate reduction of arms. At the

same time, Japan, too, should do its part toward easing

the tensions worldwide by taking over some of the

foreign aid burdens from the United States; once such an

effort is underway, it should be made the theme of an

aggressive, sustained PR campaign. I fully agree with Mr

Matsuzawa's view.

Miyoshi: Will there be an industrial policy in the United

States? What do you think, Mr Sekimoto?

The United States in Transition From an Industrial

Society to an Information Society

Sekimoto: It will be difficult for the United States to

revert to the industrial structure by bucking the tide of

history running from an agrarian society to an industrial

society and then to an information society. For its part,

Japan should figure out how it can become a good

partner to the United States, a nation senior to Japan

like an elder brother, which is in transition to becoming

an information society.,

Nakauchi: I wonder whether the term "partner" might

not be controversial from the U.S. standpoint. In my way

of thinking, the United States is a "daimyo" [a feudal

lord] and Japan a "chonin" [a tradesman]. It would seem

more to the point for Japan to say to the United States,

"We will accommodate you with necessary funds."

Yahiro: Also, the United States seems to loathe the

thought of Japan becoming a "bushi" [warrior].

Toyoda: It has not been that long since the United States

emerged as the number one. But most of today's Americans have been raised and educated since their country

became number one; therefore, subconsciously, they

seem to take this label for granted, and the thought of

being anything less is instinctively disagreeable to them.

Sekimoto: Although the nuances vary depending on what

words are used to describe Japanese-U.S. relations, that

the two countries are in a mutually complementary

relationship is an unshakable truth. Essentially, I believe

that the United States must reorient its thinking on the

premise that it is a country in transition to an information society and can no longer revert to an industrial

society. Still being in a transition period, on occasion it

may be necessary for the United States to be alert to the

need for emergency-escape measures such as MOSS

[market oriented sector selective].

Miyoshi: It appears that the United States itself is

beginning to recognize the seriousness of the falling

value of the dollar, which is the pivotal currency, in

terms of the impact on the global economy; largely it

seems to have begun to exert itself for the restoration of

international competitiveness among its industries.

Industrial Policy Has No Place in the U.S.-Style

System

Sekimoto: Although such an effort would be much welcome, I wonder whether any attempt to introduce an

industrial policy into the American-style system oftoday

might not create a situation basically alien to that

environment.

Toyoda: I beg your indulgence for blowing my own horn,

but when we at Toyota Motors decided to establish a

joint venture (NUMMI) [New United Motor Manufacturing Inc.] in California, we thought the outlook would

be bleak to say the least if we had to accept a traditional

American labor union. But the circumstances were such

that we could not very well shut out the UAW; so, we

made a proposition that only on condition that they go

along with our way of doing things would we hire UAW

union members, to which the UAW made some concessions. In the end, the matter was resolved with the

understanding that the Toyota Formula would be adopted. Any problem having to do with the American labor

union should properly be taken care of by Americans; in

this case, however, it was we from Japan who rendered a

helping hand in solving the issue. I believe it is necessary

for Japan to help U.S. industries revive themselves—

here and there, in various ways, within the limit of

Japan's capability.

Reforms Making Headway in Japan

Yahiro: In the midst of a continuing decline ofthe dollar,

as one approach to their structural reform Japanese

corporations are moving their production bases to the

United States. As a result, before long, not only will

Japanese exports to the United States begin to shrink,

Japanese products manufactured in the United States

will be exported to Japan. When these things happen the

trade imbalance as it exists today is bound to improve

gradually.

As a matter of fact, Japan's industrial structure has

changed. The ratio of manufactured goods in percentage

of total imports has risen from abut 30 percent 2 years

ago to 45 percent this year. The volume of our total

imports, too, has been increasing steadily on a monthto-month basis as compared with a year ago: the figure

for August this year, for example, showed an increase of

33 percent over the same month last year. All this seems

to indicate that the reform effort within our industrial
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10 March 1988 16 FOREIGN RELATIONS, TRADE

sector is finally bearing fruit, albeit slowly. Even those at

the MITI are now beginning to say, "At long last the

uptrend in Japan's imports looks like something real."

By the way, I have heard recently that there is a move

afoot among some American businesses to transfer their

overseas production bases back to the United States. Do

you think there is something to this story, Mr Sekimoto?

Sekimoto: I am aware of some cases in which domestic

production facilities of certain American companies

have been strengthened with the help ofJapanese firms;

as for the question you raised, there may have been some

special cases, but I do not believe that the move has

developed into a general trend yet.

Matsuzawa: But if the dollar's decline continues and

reaches, say, the level of $1:Y100, is it not likely that

those America businesses will eventually come to the

conclusion that it would be better to move the production back to the United States.

Sekimoto: I think it will take a rather forceful policy to

make them "gather the spilt water back to the bowl."

U.S. Problem Is Not Deindustrialization But Structural

Shift

Nakouchi: There is, I believe, the need to clearly define

the meaning of "deindustrialization" or "hollowing out"

of the industry. In the United States, what the members

of Congress and the administration want is to reduce

unemployment. They do not care whether the jobs are

provided by the secondary or tertiary industries; all they

want is to provide people with employment opportunities. So it seems to me that the question of how to create

jobs has become the number one issue.

Matsuzawa: As I said at the beginning, when in the past

trade deficit occurred, Japan adopted a general policy of

suppressing demand and thereby tightened up the

domestic economy so much that the employment picture

worsened and there were even some companies going

bankrupt while in the black. By contrast, the United

States will have nothing to do with such a policy;

furthermore, what is ironic is that, despite the critical

state ofits trade deficit, itsjobless rate has been improving more and more—in August, the rate dropped to 6

percent.

Yahiro: It is because the service industry is absorbing

workers seeking jobs.

Sekimoto: From 1980 through 1986, under the Reagan

administration, the U.S. manufacturing sector cut its

work force by some 1.3 million while the service sector

increased its work force by some 11 million, which

means that nearly 10 million more workers found jobs

during the period.

Nakauchi: What is happening in the United States is not

a case of deindustrialization; rather, it is a shift in the

industrial structure. I think the United States, too,

should be more careful with the use of terminology.

Miyoshi: The point made by Messrs Nakauchi and

Sekimoto, as I understand it, is that the current situation

in the United States is more a switchover phase in the

industrial structure than deindustrialization—a point

which the Japanese Government ought to make with the

U.S. Government, insisting that the trade imbalance

issue should not be debated on the basis of customs

statistics alone.

Be that as it may, right now we are faced with, shall I say,

an emergency situation: The House and Senate Conference Committee of the U.S. Congress is deliberating on

the omnibus trade bill. Some are saying that, if we hope

to make a meaningful input into that deliberation, Japan

must either make some concessions or otherwise demonstrate by action its willingness to take a policy measure

of one kind of another toward resolution of the trade

issue. This, too, I believe, is a point well taken. I also

believe that Japan, after it has taken some policy measure first, can still put forth certain demands to the U.S.

side. It is on these points that I would like each of you to

comment.

Stimulate Domestic Demand by Relaxing Regulatory

Controls

Toyoda: In any event, as a practical matter, I think Japan

will have to do something about its trade surplus. When

the other side is deliberating on a trade bill, for us to say

that such a trade bill is in violation of the GATT is not

only ineffectual for the most part but will simply further

complicate the issue.

As a matter of basic stance, first of all Japan must

somehow find ways—even at the expense of logic to a

degree—to prevent a head-on collision between the two

parties. To do this, Japan will have to undertake without

failure what it must, including, making some compromise— even if doing so is somewhat disagreeable. In fact

Japan is compromising quite a bit already. There are of

course many things we want the United States to do, but

it would be a folly for us to think that the issue will get

resolved if we kept on finding fault with the United

States.

The first thing Japan should do probably is to stimulate

its domestic demand. To be able to do that, whatever

else might be said, Japan simply will have to speed up the

easing of regulation controls. Once unnecessary regulations are removed, the rest will be taken care of by the

private sector. Relaxing regulatory controls also has a

bearing on the matter of opening up the market.

Having said that, there is another thing I would like to

add. Lately I have been hearing time and time again the

argument that Japanese businesses ought to change their
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10 March 1988 17 FOREIGN RELATIONS, TRADE

behavior—from fighting over market shares to putting

more emphasis on profits. But in the United States, too,

during its heyday of the past, there was a competitive

struggle being waged over the market shares. The result

was that an oligopolistic situation developed, the fight

over market shares subsided, and the country's economy

began sliding on a path devoid ofvitality. More recently,

managers of American enterprises have been under so

much pressure to produce profits above anything else

that they can ill afford to sacrifice profits even temporarily for the sake of expanding their market shares.

Likewise, in Japan, too, undue pressure to suppress

excessive exports may produce grudging compliances

initially, but soon a sense of futility—what is the use of

even trying!?—is bound to drive the managers of the

export businesses to settle for a reasonable retirement

allowance rather than staying on their jobs. Should this

happen, the industry will wither, and Japan will end up

on the same path which the United States has already

taken.

Policy for Sustained Growth of Domestic Demand Is

Preferable Than Sporadic Increases in Public

Investment

Matsuzawa: The Maekawa Report is out, and there is a

national consensus supporting it as a government-level

policy. So, it seems fair to say that the things Japan must

do have at least gotten on track. As for the matter of

stimulating domestic demand, which is the most important of all issues, it is already known that a Y6 trillion

"domestic-demand expansion budget" is to be prepared

for fiscal years 1987-88. This means that the fiscal and

monetary policies designed to stimulate domestic

demand are all in place.

Although money supply is still being controlled, the basic

tone of the current monetary policy is in favor or credit

relaxation in order to help stimulate domestic demand.

Our interest rate is extremely low in comparison with the

prevailing rates elsewhere in the world; it is providing a

foundation conducive to domestic-demand growth. Our

government is moving aggressively on the fiscal front as

well; a sizable portion of the budget is being allotted to

the purpose of beefing up infrastructural investments.

Such being the case, it is fair to say that Japan is doing

the things it should be doing.

In the final analysis, Japan's current drive to stimulate

domestic demand signals a shift from complete devotion

of production capacity to exports, to an all-out effort to

improve infrastructural investments within the country,

for which all technological, funding, and economic

resources of the country are to be fully mobilized.

Although it is often being said that the stimulation of

domestic demand has been compelled by external pressures, I would like to think that it is an effort for Japan's

own interest—an effort motivated by the desire to take

greater interest in putting domestic affairs in good order

while we have affordable economic strength to do it.

At the same time, stimulating domestic demand will lead

to lessening ofthe pressure to export and to an upturn in

imports; it also has a bearing on the foreign exchange

issue. So, for the medium and long terms, I believe this

effort will produce a reduction ofthe trade imbalance to

a certain level; for this reason, I think it is necessary for

Japan to maintain this policy of stimulating domestic

demand for sometime to come.

I have a word of caution, however: I am cautioning

people about entertaining the notion that Japan's fiscal

operations have turned into an aggressive mode as a

result of implementing the measures to stimulate domestic demand—this, I believe, is a very dangerous view.

Sporadic increases in public investment is not that

significant; what is far more important is a policy that

will ensure sustained growth of domestic demand. For

example, Japan's income tax system is very hard on the

working classes; this is one of the reasons why I believe

that the tax reduction measure should be extended to

fiscal 1988, instead of being terminated at the end of

fiscal 1987, so that the living standard of individual

citizens may be improved.

Likewise, reducing the corporate tax, too, will have a

salutary effect on the expansion of domestic demand, for

it will increase retained profits and thereby will facilitate

corporations' efforts to improve the welfare and workenvironment oftheir employees. At the same time, as an

integral part ofthe tax reduction policy, we need to keep

our mode of thinking trained toward reforming the

government's spending structure, in keeping the growthprone administrative machinery in check and bringing

about a small government. Otherwise today's fiscal burden will turn into a monstrous burden for the generations to follow.

Needed Are Relaxation of Regulatory Control, Easing of

Licensing Procedures, and Simplification of Import

Process

Yahiro: To somehow improve the trade imbalance with

the United States is the biggest and the most urgent

problem for Japan. Nevertheless, as I stated at the

beginning, for Japanese exports to become subjected to

involuntary suppression as a result ofthe emergence of a

strongly protectionist move by the United States is not a

desirable state of affairs for Japan. I think that Japan

should, if possible, devise its own approach to solving

this problem by such means as voluntary dispersion of

exports in terms of the countries of destination and a

switch to the OEM made in the United States.

Meanwhile, what is more important than anything else is

for Japan to make constant efforts to increase imports.

As the Keidanren has been saying for some time, we need

to open up our market to say the least, citing the

unsatisfactory state of Japan's move to open up its

market as the reason, some are even talking about the

inevitability offurther devaluation ofthe dollar down to

the #1:Y100 level. Compared to the kind of impact such
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10 March 1988 18 FOREIGN RELATIONS, TRADE

as eventuality would have on us, whatever adverse

impact—there will be some, for sure—from voluntary

opening-up ofthe market would be much more bearable.

For this reason, I believe it behooves the government to

act boldly in order to remove those factors that are

impeding the process of opening up the market; specifically, the government should relax regulatory controls,

ease the licensing procedures, and simplify the import

formalities—the measures which have been requested by

the Keidanren repeatedly in the past and which are likely

to be resisted by bureaucratic elements within the vertical administrative structure.

There are two things I expect most from the newlyformed cabinet: one is tax reform; the other is to open up

the market. For those items currently under import

controls, the government should announce a definite

schedule for removing such controls and try to meet the

schedule in opening up the market for them.

Miyoshi: I would also like you to spell out the kind of

things you want the U.S. side to do in order to promote

its exports. How about you start off, Mr Nakauchi?

Japan Should Make An Explicit Promise on the

Timetable for Its Market Opening

Nakauchi: Although for the medium and long terms I

think it is important forJapan to put forth its views more

plainly to the U.S. side in order to deepen their understanding of Japan's position, what is essential for the

short term is to faithfully implement the Maekawa

Report as we already said we would. In this connection,

our market must be opened up based on a set schedule

exactly as suggested by Mr Yahiro. In doing so, it is

imperative to open up the market for everything, for

leaving even one or two exceptions would lead to further

misunderstandings.

There are obstacles abounding for American businessmen trying to get something going in Japan. For

instance, if an American wants to set up a store, he is

blocked by the restrictions ofthe Big Store Act; even if he

succeeded in setting up a store, if he wants to extend his

store hours he is told that he cannot keep the store open

during evening hours because local merchants would

oppose it. If another American wants to develop waterfront property as a venture into a resort business, he runs

into the question of compensation for the local fisheries,

forestry, and agriculture; moreover, due to the peculiarities of the vertical administration, he is required to

report to a number of different ministries, such as

Ministry of Transportation, Ministry of Construction,

MITI, and even Ministry of Education, if he wants to set

up and operate just one yacht harbor—otherwise, he

cannot. An attempt by Americans to sell rice to Japan is

choked off by the Foodstuff Control Law; if it is liquor

they want to sell, there is the problem ofliquor tax which

makes the license very difficult to obtain. All these

problems are utterly hopeless unless regulatory controls

are eased—I tend to think this may very well be the most

serious issue.

Americans, meanwhile, instead of continuing to say they

cannot sell to Japan, should make the effort to sell—they

should study the Japanese market so that they can adapt

themselves to it. Also, we ought to tell the U.S. side in no

uncertain terms that it is ludicrous to let the kind oflogic

go unchecked—logic that Japan is not buying American

goods, therefore Japan is at fault. There are some positive signs, however: right now, in the United States, a

kind of one-village-one-product movement is spreading

in many states, and competitive spirit is on the rise—our

company.for example is witnessing this surging competitiveness on the part of Americans in their drive to sell

beef. Obviously Americans are learning, albeit slowly,

about the Japanese market: these days they are doing

things like packing the meat in boxes to please the fancy

ofJapanese consumers.

Meanwhile, as Mr Yahiro has pointed out, I believe the

time has come for Japan to make a clear-cut commitment as to when it will fundamentally liberalize its

market. It will only invite further misunderstandings if

Japan should continue to stall using this and that as

excuses, giving in an inch at a time as if to say why

should we voluntarily go naked when it is going to hurt

us. It would be better, I believe, for Japan to declare its

intention to strip itself bare by a certain time, for this

will leave the United States without any excuse to

criticize Japan. Am I wrong to think that it behooves

Japan to stop practicing its traditional negotiating tactics

of giving in just a little only when so demanded by the

other side?

Miyoshi: By the way, do you suppose that problems are

likely to occur in the days ahead in the high-tech sector as

well?

Japanese Enterprises Should Study Ways To Contribute

To, Harmonize With The International Community

Sekimoto: I think it is inevitable that the high-tech sector

will become the center of controversy. It seems fair to say

that this is an area in which we are making some

contributions but, at the same time, we have generated

jealousy and envy as well.

I would like to make the following three points. First,

there exists a culture gap, which may also be called a

perception gap, between Japan and the United States.

Take the power relationship between the legislature and

the government, for example: this interbranch relationship is ever so delicately different in Japan as opposed to

the United States, depending on the issue at hand. Thus,

the notion that everything will be fine as long as our

government, legislature, and private sector maintain a

line of communication with their respective counterparts in the United States is simply unrealistic. Some
JPRS-JAR-88-001

10 March 1988 19 FOREIGN RELATIONS, TRADE

issues are well understood by the government but not by

the legislature; on each issue we must know to whom we

should address ourselves. For this reason, I think it is

important for each segment of our society to make it a

habitual practice at all times to cultivate personal connections within the United States through various

means. Otherwise needless misunderstanding might very

well be brought on over such issues as one involving the

high-tech sector.

My second point has to do with the conduct of business.

Japanese business are said to be concentrating on market-share competition without regard to the profit factor,

but my point is that even for American businesses a

higher market share means a greater profit, and that

therefore the share question and the profit question are

not mutually unrelated. But looking back at the historical development of Japanese industry, it is true that

considerably more emphasis has been placed on the

promotion of exports than on the promotion ofdomestic

demand—this is something we probably need to reflect

on. It is also true, however, that Japanese goods have

been exported because they have been sought after; they

have never been forced on anyone. But viewed in terms

of the end result, the criticism that Japanese exports

have, in some sense, inflicted damages on the industries

ofthe recipient countries is partially correct, I believe. I

should think, therefore, that all of our business firms and

industries ought to weigh domestic and foreign issues

from a strategic standpoint, adopt more of the line of

thinking which moves away from total preoccupation

with exporting, and to figure out specific ways to contribute to and harmonize with the international community.

My third point is that to date Japan, while saying it will

do this and that, actually has not shown much movement. Take, for instance, Japan's plan for the recycling

ofits surpluses, it is being said that the "net value" ofthe

plan amounts to only $5 billion or so. The point is, this

sum being inclusive ofwhat has already been recycled, it

is nowhere near the $30 billion being envisaged in the

international expectations. On the question of opening

up the market, too, once a promise is made, it is essential

to keep that promise. The United States has already

secured the application of the waiver provisions of the

GATT to 13 of its agricultural products. This is a matter

about which the Japanese Government should have

something to say; on the other hand, Japan cannot

maintain that the status quo is all right—it must, within

the limit ofJapan's realities, put forth a proposal spelling

out its intentions.

On the question oftariffs, I think the tariffs on industrial

products should be be abolished. Already semiconductors and computers are exempt from tariffs. For certain

special items a time limit may be imposed, but the

important thing is to eliminate tariffs on all industrial

products in order to facilitate the inflow of foreign

products of this category.

Meanwhile, there are two things which I would like to

call on the United States to do. First, I want the United

States to reduce its budget deficit. The United States has

already demonstrated its will to do so by enacting the

Graham-Rudman Law on its own initiative; I hope it

will vigorously pursue this course. Second, keeping in

mind that marketing is something Japan learned from

the United States, a pioneer in marketing, the United

States should go back to the drawing board and once

again start producing the kind of hardware and software

based on the needs of the customers in the marketplace.

What is essential is for U.S. private businesses to make

aggressive efforts to gain access to the Japanese market.

Right now they are tackling this problem with the help of

the government—this may do for now, but it simply

cannot go on forever. Looking at the rate of growth in

exports to Japan during 1986, in the case of the United

States it was 12.6 percent in dollar terms, whereas in the

case ofEurope, even though the foreign-exchange adjustment to its currencies was less than that to the U.S.

dollar, the growth was 46.6 percent. In comparison with

2-3 years ago, not only has Japan opened up its market to

a significant degree, the exchange value of its currency

has been adjusted. It is under these circumstances that

Europe and the NICs have increased their exports to

Japan but, regrettably,that has not been the case with the

United States.

Miyoshi: Before closing, I would like each of you to

comment on one more subject. Japan and the United

States are supposed to be important partners sharing the

responsibility ofsupporting the global economy. But the

question is: Will this point ever become a widely

accepted perception not just among the government

leaders but among the leading opinion makers ofthe two

countries as well? Your outlook on this question and

thoughts on the future ofJapanese-U.S. relations, please.

Japan Must Do More Recycling of Capital

Matsuzawa: I think enough has been said already, but if

I may venture to say a few more words, the first thing is

that both Japan and the United States must realize the

fact that their relationship, in a nutshell, is one ofmutual

dependence which has been so shaped and forged over

the 40 postwar years. Ifthe United States catches cold, so

does Japan; if something goes wrong with Japan, so it

goes with the United States. Getting back to the trade

issue we discussed earlier, if Japan should seriously

restrain its exports, conceivably this could hurt the

United States as well.

My second point is that, although Japan will, for the

medium and long terms, try to restructure its economy

into the domestic-demand-oriented mode, we must constantly insist on the need for a stable exchange market as

a sine quo non for that effort by Japan.

My third point is a question: In connection with Japan's

intention to resolve the trade imbalance problem over

the medium and long terms, what should Japan be doing
JPRS-JAR-88-001

10 March 1988 20 FOREIGN RELATIONS, TRADE

right now? I believe the answer should be the recycling of capital. This is what the prime minister

promised at the Venezia summit; we cannot let it be

just a PR balloon and do nothing about it. The

recycling of capital, if it is to be substantive and

systematic, will have to be mainly in the form ofODA

[official development assistance]. The private-sector

funds will probably have to augment the ODA program. Due to budgetary constraints, Japan's ODA

program is still lagging behind those of the Western

advanced nations. Unless we move now to beef up

our ODA program, we, Japan will be accused of

paying only lip service to the structural reform, while

Japan will be demanding Americans to shake themselves free from the import dependency. The problem

is, neither the structural reform of our economy nor

their shedding the import dependency is something

that can be done over night.

Japan Must Share With the United States the

Responsibility To Lead International Society

Yahiro: The relationship between Japan and the

United States, in essence, is that between brothers. As

long as there is the Security Pact, Japan will be under

its umbrella, enjoying the status as the world's number two economic power accounting for 15 percent

and 10 percent of the world's trade and GNP, respectively. As such, I believe Japan must share with the

United States the responsibility to lead in the international community.

As I said earlier, the problem oftrade imbalance with

the United States is the biggest issue facing us, but

this is not the kind of problem which can be remedied

either quickly or distinctly—this is a point of which

we need to seek the U.S. side's understanding. In the

meantime, as to the question ofwhat, Japan should be

doing for the good of the world community, the

recycling of capital as suggested by Mr Matsuzawa

seems to be the answer after all. In dealing with this

question, Japan should carefully weigh the modality

of the recycling in order to ensure that whatever

action taken by Japan will not only lessen the load of

the United States but also prove beneficial—even

indirectly—to the United States. This is a point which

we raised with Finance Minister Miyazawa when we

had him over at a meeting ofthe Japan Foreign Trade

Council: essentially, what I am saying is that we

should avoid any form of recycling in which the

money we contribute produces no palpable results.

Whether our money is channeled through the World

Bank of some other entities, shouldn't there be some

arrangements made whereby we can observe and

confirm how the money is being used to the end—just

like in the case of a tied loan? For instance, ifit can be

so arranged that our money is used to foster purchasing power of the Central and South American countries to enable them to buy that much more goods

from the United States, the end result would be

tantamount to Japan's helping out the United States

as much this way as it is unable to help with the

bilateral imbalance question. Wouldn't there be a

room for such an approach?

Reform of International Monetary System Needed

Toyoda: For Japan and the United States, problems

of common interest and areas requiring mutual cooperation are increasing more and more; it therefore

behooves Japan to come to a firm realization that

there are now more problems than ever before, the

solutions to which cannot be found from Japan's

egotistic standpoint alone.

I believe a more fundamental solution to the world

economic problem lies in a reform of the international monetary system. I think what is needed is to

devise a dollar standard that will check the dollar's

incontinence. There is the ECU [European currency

unit] based on the EMS [European monetary system],

but the question is whether the concept can be

expanded somewhat to cover the entire Free World. It

seems to me that the ECU is unquestionably one

possible option, but this whole question will never be

resolved unless the United States becomes so

inclined. Seeing the light only at the end ofthe tunnel

is no way to find a solution to any problem; it is a case

of letting nature take its own course.

Pluralistic Mutual Understanding Needed

Nakauchi: First, we need to gain a better U.S. understanding of Japan's realities; for that purpose, it is

important that we hire American PR experts so that,

with their help, we can explain things in the way more

convincing to the American people. Second, we must

implement the Maekawa Report in good faith: in this

regard, I think it is important for us to make it clear

that we will ease regulatory controls, open up our

market, and do away with tariff and nontariff barriers. Third, I hope to see the U.S. side do more to

improve its productivity which, in a way, is the root

cause of the trade imbalance. I also hope to see

Americans rid themselves ofthe notion that anything

sold on their domestic market must be sellable to

Japan; for one thing, Japanese do have their own

taste; this is why I especially would like to see Americans do research on the Japanese market. Fourth as

Japan and the United States have been woven into the

same economic fabric, it is essential for them to have

mutual understanding, not a perception based solely

on customs clearance statistics but an understanding

covering a wide variety of angles. Lastly, I think it is

important for us to forge a national consensus on the

question of how best Japan should recycle the wealth

it has earned.

Sekimoto: Americans are a people who tend to talk a

lot; I think we Japanese, too, as their friends, should

speak up. In order to gain their better understanding,
JPRS-JAR-88-001

10 March 1988 21 FOREIGN RELATIONS, TRADE

we need to discard, among the other things, conven- In short, I believe we ought to maintain ample opportutional statistical data and replace them with a set of nities for dialogue at each phase and state our case in a

updated data gathered through a new statistical truly straight forward manner.

approach befitting the changing times. When we

present our case clearly while showing such new data,

I am sure Americans will understand our position. 9977/12232
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