The U.S.-Japan Relationship: A Mid-year Report

Ambassador Thomas S. Foley's Speech to the Yomiuri International Economic Society Tokyo, Japan

JUNE 30, 1998

(As Prepared for Delivery)

Thank you for that kind introduction. I'm grateful for the invitation to speak to the Yomiuri International Economic Society today. Japanese newspapers seem to do extraordinarily well not only reporting the news, but providing a forum for public discussion of the issues, and I am delighted to be able to participate in this respected symposium. I look forward to exchanging views with this distinguished audience following my remarks.

Today's symposium presents a particularly good opportunity to step back and take stock of U.S.-Japan relations - the last day of the first half of 1998, and the halfway point between the end of the Japanese and American fiscal years. But it is more than simply a coincidence of dates on the calendar. Recent and current events, in the region and in the world, have underscored the importance of a strong U.S.-Japan relationship, and the critical role it plays for both our countries. And at a time when so much of the world's attention is focused on President Clinton's ground-breaking trip to China this week, it is important to analyze what that means for the U.S.-Japan relationship.

Relations between the United States and Japan are so complex, and so varied, one has limited opportunity to step back and view them in their totality. But it is important to do so from time to time, for only then can we assess the overall health of the bilateral relationship, and detect the broad trends that are affecting it.

During my 30 years in Congress, and my years in the private sector, I firmly believed in the importance of a close U.S.-Japan partnership. Indeed, presumably that belief was one of the reasons the President sent me here as Ambassador. I was familiar with the broad outlines of the U.S.-Japan relationship, and the institutions we have established to pursue our shared goals. But while I understood the strength and stability of the ties between us, what I have had the opportunity to observe since arriving is how dynamic a relationship the U.S. and Japan have.

This is a partnership that is constantly evolving and expanding to respond to new regional situations, and address new issues, and involve new players. The dynamism of our bilateral partnership is what makes my job exciting, and encourages me about the future of relations between our two countries. So, in keeping with the title of this address, I would like to report to you, as one of the "managers" of the U.S. Japan relationship, that our results for the first half of 1998 show solid growth, and our return on equity has met, or maybe even exceeded, expectations.

Let me start by looking at the U.S.-Japan relationship in its regional context. The U.S. and Japan are the twin pillars of stability in the Asia-Pacific region, which in recent years has moved to the center of global security and economic developments. Between us, our two economies account for over 70 per cent of the output of the entire APEC region - and separately, each of us has an economy that is significantly larger than the rest of APEC combined (including such major economies as Canada, Korea, and China). We are the two largest donors to the United Nations system and multilateral financial institutions. The U.S. and Japan have the broadest range of cordial diplomatic relations with the nations of the region, and the most effective defensive capabilities and strongest alliance of any countries in the Pacific region.

Working together, the U.S. and Japan have created the environment in which impressive strides in Asian stability and prosperity have occurred over the past several decades. In the same vein, we are cooperating to assure that Asian countries quickly recover so they can resume that remarkable growth in the near future.

The foundation of our partnership has been the U.S.-Japan security alliance, which for over four decades has been the cornerstone of American engagement in East Asia and the key to stability and prosperity in the Pacific region. The U.S. currently has roughly 45,000 troops stationed in Japan, preserving peace in East Asia with indispensable support from their families, the Japanese communities in which our bases are located, and the Japanese Government's generous host nation support program. The U.S. and Japan have taken important steps to strengthen, update and reaffirm our alliance following the Cold War, including the Special Action Committee on Okinawa and the Defense Guidelines review, whose implementing legislation has been introduced in the Diet and is currently under consideration.

Our defense alliance has been supplemented by equally close coordination of our diplomatic efforts throughout the region. As we try to promote democracy and economic growth in Asia, the U.S. and Japan - the two largest industrialized democracies in the world - are natural partners, and it is hard to identify a region within Asia where we have not had extensive coordination of our policy.

We are in the forefront working to ensure a meaningful transition to democracy in Cambodia. We are the two countries most actively engaged in supporting President Habibie's efforts to open up the political process in Indonesia and return the economy to sound growth. We continue to consult very closely about the situation on the Korean Peninsula, and are working diligently with the South Koreans and others to keep the Korean Peninsula free of nuclear weapons.

Most recently, I am proud to say the U.S. and Japan led the international community in responding firmly to the reckless and self-defeating nuclear tests by India and Pakistan. We will be working closely with Japan in the months ahead to coordinate our responses to this dangerous development.

Close U.S.-Japan policy coordination on Asian issues has flowed from the fundamental fact that our interests are convergent. Nowhere is this more apparent than with China. China is a country of great resources and enormous potential. It can be an important force for stability in East Asia, and a major player in the world economy. The U.S. and Japan are both trying to encourage this transition. We want to see a China which accepts the benefits and responsibilities of full membership in the international system - which makes meaningful efforts to stop the proliferation of weapons of mass destruction, observes the trading rules and responsibilities of major trading economies, and protects the human rights of its citizens, including its religious and ethnic minorities.

Greater engagement and dialogue with China is the way to promote that evolution. President Jiang's trip to the United States last fall was a step in that direction, and President Clinton's trip to China this week is continuing that process. Japan has taken similar steps to upgrade its dialogue with China: then-Premier Li Peng travelled here last fall, and President Jiang will be coming in September.

This deepening of relations is something that is welcomed by all countries of the Asia-Pacific region. Improved relations between the U.S., Japan and China are a plus-sum game - we all benefit. But some commentators have not chosen to see it that way. They have suggested - I have to assume principally to stimulate debate - that warmer U.S.-China ties somehow undermine the U.S.-Japan relationship. (This is rather ironic, because a few years ago some commentators -- I don't know if it was the same ones - were suggesting that cooler U.S.-China ties would undermine the U.S.-Japan relationship.) This is hard for me to understand - as if closer U.S. ties to Russia imperil the United States' historic links to Britain.

I know of no serious analyst in the United States or Japan who thinks that the relations we are developing with China, however promising, could rival the ties we have with each other. Moreover, there is in Washington, and I believe here in Tokyo, an understanding that it is precisely the success of the U.S.-Japan alliance that has created the context in which we can try to engage China. To be more precise: the security and prosperity in East Asia made possible by the U.S.-Japan partnership provides the critical framework in which we can encourage China to pursue its national interests in a manner consistent with its obligations to the international community.

Historically the phrase "Asian regional situation" has referred principally to security relations within the Asia-Pacific region; but in recent years it has come to have an economic component as well, as countries of the region have seen greater economic integration stimulated by increasing flows of trade and investment, by a range of trade- and investment-related activities under the APEC umbrella, and more negatively, by the Asian financial crisis that began last summer. Here too, the U.S. and Japan are clearly the pillars around which this emerging economic framework is being constructed.

We are the two largest markets for most of the Asian economies. For many countries of the region like the Philippines and Indonesia, exports to the U.S. and Japan account for about half of all exports. Our companies are a key source of investment and technology: of the "Fortune Global 500" list of the world's largest companies, 294 - or almost 60 per cent - are based in the U.S. or Japan. But it has not just been the size of our private sectors: both governments have worked together to promote free trade in the region, to encourage responsible economic policies, and to keep our own markets open to the exports of these newly industrializing countries.

As everyone in this room knows, Asia faces serious economic challenges today. The catch-all phrase "Asian financial crisis" disguises a range of national variations: but as the crisis has accelerated, the symptoms have become increasing similar: a slowing of short term capital flows from overseas, and as a result, difficulty in meeting international loan obligations, securing access to necessary imports, and in many cases significant instability in the domestic financial sector.

While this has been a challenge I would imagine our financiers would rather have done without, the U.S. and Japan have taken a leadership position in helping the countries of East Asia deal with this situation. The U.S. Treasury and the Japanese Ministry of Finance played key roles in creating the Manila Framework group, through which affected countries in the region have been meeting to consult on responses to the crisis. Our bankers, along with their European counterparts, helped the affected countries reschedule their debt. Japan has pledged roughly $43 billion in balance-of-payments assistance, loans and insurance to Asian countries, far more than any other country in the world.

In view of Japan's importance to the Asian economies, since last year we have also been having close consultations on the best way for Japan to speed its economic recovery, and how the U.S. might support that process. The U.S.-Japan joint intervention in the currency markets of two weeks ago - which was carried out in the context of new Japanese plans to strengthen Japan's economy and financial system - opened a new window of opportunity for Japan to undertake bold new actions, some of which are already starting to emerge.

Both the U.S. and Japan agree that the restructuring and revitalizing of Japan's economy and financial system is urgently needed. As the Manila Framework Deputies concluded at their meeting here in Tokyo ten days ago, it is of vital importance to Japan, to the recovery of Asia - particularly those countries affected by financial market turbulence - and to the entire world economy that Japan restore its banking system to health, achieve domestic demand-led growth, and open and deregulate its markets. This means implementing concrete plans to restructure Japan's financial system, including the prompt disposition of bad assets, and to pursue growth-supporting fiscal policies. We are encouraged by the proposals we are now seeing emerge to accomplish this challenging task, but markets are obviously looking for more details. As Deputy Treasury Secretary Summers emphasized when he was in Tokyo, there currently exists a window of opportunity to convince markets of the seriousness of Japan's efforts, but this will not last forever. Asia's financial problems make trade liberalization even more important to the region. Last week in Kuching, Malaysia, APEC Trade Ministers met to review the status of the "Early Voluntary Sectoral Liberalization" initiative, whereby APEC members will accelerate tariff reduction in nine important sectors, including toys, forest products, fish products and energy. Virtually all of the APEC members, including those most affected by the financial crisis, were prepared to move forward with an ambitious schedule for accelerated tariff reduction. Unfortunately, Japan was unable to join that consensus.

This is a particularly important year for APEC and the Pacific Rim trading system; other countries will be looking to Japan - which has gained so much from the global free trading system, and whose trade surpluses with APEC economies continue to increase each month - for a strong commitment to trade liberalization. The U.S. sincerely hopes that between now and September, when the program will be finalized, Japan will take a leadership role with us on this sectoral liberalization initiative - just as our two nations have taken a leadership role on so many other regional issues.

This impressive list of our joint efforts clearly demonstrates that the U.S.-Japan partnership in Asia is not just a slogan; it continues to provide a tremendously effective strategy for dealing with issues and crises in the region as they emerge. Needless to say, both of our countries have interests elsewhere in the world, and coordinate our policy there as well, but it is particularly in Asia that the structures of our U.S.-Japan partnership - both the institutions and the informal consultations - continue to be for both of our countries one of our principal means of dealing with the changing situation in Asia.

I'd like now to shift my focus to some of our newer cooperative efforts. One of the things that has struck me since taking up this position last fall is how our partnership is continually being expanded to encompass new issues. I would like to review some of the new efforts we've embarked upon over the past year, which I think show that increasingly, the U.S. and Japan are seeing each other as natural partners in dealing with new issues on the international agenda.

One of the most significant accomplishments of the past year was the creation of the Enhanced Initiative on Deregulation and Competition Policy, which was announced by the President and Prime Minister twelve months ago at the Denver Summit and which wrapped up a first year of very fruitful work at last month's Birmingham Summit. This initiative represented an innovative, sector-specific approach to link the Japanese Government's efforts to deregulate the Japanese economy with our efforts to create more competitive opportunities for American firms in important sectors of the Japanese economy. The resulting agreements will lead to great benefits for Japanese consumers and for the companies - Japanese, American, and from elsewhere - that are prepared to serve them.

In telecommunications, Japan has committed to lower interconnection rates - the fees charged to connect calls to Japanese customers - and has liberalized international services. This will allow more competitors, including American firms, into Japan's telecommunications market, and will lead to lower domestic and international telephone bills here in Japan that are more in line with charges in other developed countries. For housing construction, Japan will bring its testing requirements in line with international practices and eliminate discriminatory standards and regulations in housing codes. This will allow American lumber and housing greater access to the Japanese market, and will give the Japanese consumer access to a broader range of safe and innovative housing options. Japan will streamline the approval process for new pharmaceuticals from 18 to 12 months, which will give Japan's aging population quicker access to innovative, cost-effective medicines. Japan has also agreed to allow the introduction of a broad range of new products in the financial services and satellite broadcasting areas; and has undertaken to ease restrictions on the opening of new stores here in Japan by repealing the Large Scale Retail Store Law.

While these agreements sometimes focus on rather technical issues, they will have a dramatic impact in allowing more competition, and more competitors, into the Japanese market. Based on the success of this first year's efforts, the President and Prime Minister announced in Birmingham that in the coming year the Enhanced Deregulation Initiative will be expanded to cover the energy and power sectors - an area where there is considerable discussion of deregulation already occurring in Japan, and one in which U.S. companies are keenly interested.

Deregulation is an issue that is attracting increasing support in Japan. There is an increasing understanding that deregulation not only benefits consumers, it benefits the overall economy by exposing inefficient firms to competition and forcing resources to shift from weak, non-competitive sectors - which have previously been shielded by hidden subsidies or protection - into more efficient sectors which generate more growth and employment. The process will not be painless, but as study after study points out - from MITI, the Economic Planning Agency, the OECD, the think tanks here in Tokyo - the result will be a Japan that is better able to serve its citizens' needs, provide jobs, and respond to the demands of an aging society and increasing global competition.

Another area where we have begun to work together since last year is electronic commerce - business conducted over the Internet. Electronic commerce has taken off in the last few years, and the projected growth rates are phenomenal - estimates indicate that electronic commerce is expected to grow to over $300 billion annually within the next five years. Electronic commerce will make businesses more efficient; it will also enhance citizens' lives. Any citizen with an Internet hook-up will have access to the range of choices previously available only in the major cities - not just for consumer products, but for political information, medical consulting, or education services. But for electronic commerce to reach its full global potential, the international community will have to find ways to address such important issues as the protection of confidential consumer data, the transmission of content that might not be suitable for children, how to handle tariffs and taxes on the Internet, and how to revise international commercial code to accommodate "digital signatures" and other forms of electronic contracts.

Last July, President Clinton issued a paper calling for the private sector to take the lead addressing these issues, noting that industry self-regulation would ultimately be much more effective than traditional top-down government regulation, and would be more conducive to the growth of electronic commerce. Finding that Japanese authorities share this philosophy, we reached an agreement to cooperate to promote this approach. The President and Prime Minister announced that agreement - our Joint Statement on Electronic Commerce - at last month's Birmingham Summit.

Viewed together, I think these two trends I have outlined - our continued close cooperation on all Asia-Pacific issues, like South Asia nuclear proliferation and the Asian financial crisis, and our new cooperation on emerging issues like deregulation and electronic commerce - provide evidence that the partnership between our two governments is in good health and continues to flourish. But it takes more than strong relations between governments to sustain a partnership between two democracies - it also takes exchange and cooperation on a private sector level.

This is, as always, most evident at the pop cultural level. Titanic has been the most popular movie in Japanese history; and in the opposite direction, Japanese movies like Shall We Dance and Hanabi are receiving more popular and critical acclaim in the U.S. Some of our best architects like I.M. Pei and Rafael Vinoly are designing important buildings here in Japan, like the Tokyo International Forum, and Japanese architects like Arata Isozaki and Yoshio Taniguchi are winning important new commissions in the United States, like the project to expand the Museum of Modern Art in New York. Issey Miyake's fashions are sweeping the U.S., while some of the Gap's highest grossing stores in the world are located here in Japan.

This kind of interaction helps build a greater grassroots understanding between our peoples; and makes us realize that we have more in common than we've realized - maybe we're not as unique as we have been led to believe. And while Japan has historically been very open to U.S. cultural influences, I am particularly pleased to see that Americans are showing a greater receptivity to Japanese culture and customs.

Of course, it is possible to make too much of this. Fashions are, by definition, evanescent. I am told that Japanese sake is the drink of the moment in certain circles in New York, but I will not view it as a major setback to U.S.-Japan relations when the trendy set moves on to, say, Polish vodka or Argentine wine in the fall. More lasting than these pop cultural trends will be the mutual understanding that will be developed by exchange programs operating between our two countries.

The breadth of these exchange programs continues to surprise me. At one end, we have highly specialized programs like the Mansfield Fellowship program, named after our illustrious former Ambassador here in Tokyo, which brings U.S. government workers over to Japan to work for a year in a Japanese government office. The binational Fulbright program has for 51 years enabled thousands of U.S. and Japanese scholars to deepen their knowledge about the other country. At the other end of the spectrum we have much less formal programs: last week the organizer of the "World Junior Golf Championship" in Hyogo came to meet me - and while the event is indeed open to participants from other countries as well, the fact that the U.S. and Japan had won in each of the six years since the tournament began lent a decidedly bilateral cast to the event. In between are dozens of other useful exchange programs, including Youth for Understanding, American Field Service, the JET program, sister city programs, and the thousands of individual students and even tourists who set out to learn more about our fascinating countries.

Another factor in understanding why our societies are viewing each other more positively in recent years - and the polls bear that out - is the changing attitude of the business community. Although market access barriers, particularly those related to excessive government regulation, investment barriers, and exclusionary business practices in Japan continue to be of concern to the American business community, there appears to be a growing consensus that Japan is changing. Foreign products are a much more accepted part of the Japanese landscape now. Japanese manufacturers are facing increased competitive pressures, and are increasingly prepared to outsource important components or functions to competitive foreign suppliers. For example, SONY has zoomed to the top of the computer game market with Playstations built around a semiconductor supplied by a U.S. firm, LSI Logic.

With pressure to increase return on equity, we are even seeing some Japanese firms consolidate their business operations, and get out of those sectors where they are at best marginal players. Japanese firms understand this will make them stronger and more profitable in the long run. It has also opened up more opportunities for foreign firms in this market.

Perhaps the most visible sign of this change has been the handful of foreign acquisitions and other tie-ups that have occurred in the past year. It is important to place this in perspective: acquisition of existing companies represents only a small part of foreign investment in Japan; and even with the recession, Japan's investment in the United States continues to be vastly greater than U.S. investment in Japan. Still, it is always a bit of a surprise when a familiar element of the business landscape changes hands, and maybe even changes its name.

I've been pleased to see that the Japanese response to these business deals has been generally very positive. The companies involved have explained that these deals will introduce new technologies or management methods to Japan. The Prime Minister himself has endorsed these types of deals as a way to preserve jobs. And an even more powerful voice - the stock market - has given its blessing, bidding up the Nikkei index in the expectation that similar deals may follow.

Much as global competition drove U.S. companies to adopt Japanese-style manufacturing practices in the 1980s, this same global competition is driving the best Japanese companies to adopt American-style management practices in the 1990's. Of course, this is just the most recent example of a long history of bilateral exchange between our societies. But it is a development of fundamental importance.

I'm sure there will continue to be some frictions - those are inevitable with two economies as intricately linked as ours are. For example, we continue to have serious concerns about Japan's implementation of our bilateral insurance agreement. But increasing agreement over time on the basic "rules of the game" will lead to greater cooperation, and healthy competition, among our two business communities, and will make it easier to resolve the issues that continue to arise. And the end result will be to strengthen both the U.S. and Japanese economies, and to create a broader basis of support for our bilateral partnership.

So goes my half-year report on the U.S.-Japan relationship. Our partnership continues to be an important and effective means to address on-going and emerging issues in the Asia region. We are each other's natural partner in working on new issues like electronic commerce and deregulation. And more so than in years past, the close government-level partnership is mirrored by greater friendship, respect and trust at the private sector level. It might not be a dramatic story, but it is a story of solid accomplishment, of a dynamic relationship which continues to evolve and expand. And it gives me every confidence that the U.S.-Japan partnership will continue to grow in the coming century.

Thank you very much.