The Prime Minister Nakasone, increasingly desperate to find politically painless ways to correct the trade deficit pressured the Ministry of Finance and the Bank of Japan to start some kind of controls to stop this capital flow. In short, he wanted Japanese investors to cut back on their invest- ments in foreign securities in the hope that this would strengthen the yen against the dollar and ease American protectionist pressures. The Japanese government is authorized to take such activities by the Foreign Trade Control Law. The Bank of Japan and the Ministry of Finance have shown reluctance to take such measures on compulsory basis and indicated that if they did anything it would more along the lines of guidance to investors and securities firms. The Ministry apparently is announce a circular tsutatsu , instructing securities firms not to overly induce institutional investors or corporations to buy foreign bonds.
Options seem to be divided over the advisability of such actions.
Us government officials, led by Treasury Secretary Baker and Beryl Sprinkel, chairmen of the Council of Economic Advisors, felt that such measures would be contrary to the deregulation and internationalization of the Japanese capital markets. They asserted that those policies were mote important than the strengthening of the yen. As the reports of Japanese capital controls were announced shortly after the US government announced that it was taking unfair trade practice investigations against several Japanese industries, such as the tobacco and leather industry, many Americans were angered, claiming that the measures were really meant as retaliation against the Americans. That does not appear to have been the case, but the Americans do seem to have become keenly aware how much influence the Japanese have on their capital markets. It is certain that the Japanese also know this.