"Fact and Fiction About U.S.-Japan Economic Relations"
by Ambassador Thomas S. Foley
Since I arrived in Japan just over one year ago, we have seen considerable progress in the Japanese government's policy response to the economic and financial crisis. In order to overcome the contractionary impact of its tight regular budgets and the April 1997 tax hike, the Japanese government has prepared two very large fiscal stimulus packages. The government has also passed legislation providing a total of V60 trillion in funds to close, nationalize, or recapitalize Japanese banks.
Throughout this difficult year for Japan and for Asia, the U.S. has tried to do its part. We have preserved our budget surplus, thus reducing pressure on global capital markets and on our own trade deficit. The Federal Reserve has twice cut interest rates. The Administration committed substantial bilateral assistance to help Korea and Indonesia, and later Russia and Brazil. And Congress (finally) passed $18 billion in new capital for the international Monetary Fund.
At the same time, we have encouraged Japan to act faster and do more. This is because Japan, which even today accounts for more than two-thirds of the Asian economy, as the leading trading partner and financier in Asia, can have the most impact in helping to turn around the economic and financial troubles in Asia. Immediate and effective measures to strengthen the financial system and restore sustained growth to the Japanese economy are urgently needed. Only with a strong domestically-driven recovery in Japan can we be sure that the instability in Asia can be put behind us.
Some Japanese people - quite naturally, perhaps - feel that the U.S. has been a little bit too free in our advice and too strident in our encouragement of Japan. In response, I must confess that I have some sympathy for complaints that the U.S. has sometimes allowed its frustration with the pace of Japan's policy process to show through, in ways that don't always help make that process smoother. But for the most part, I think that as a fellow G-7 economy that is very much impacted by Japan's economic performance, and as a close ally and partner of Japan, the United States justified in offering not only encouragement, but also advice. Also, it is important to remember that concerning questions of how to approach structural economic reform and how to handle financial sector problems, the United States has had some useful and, to be honest, some expensively obtained experiences during the past few decades.
In the midst of all the bilateral toeing and fro-ing on economic issues, however, it is easy for non-government observers in Japan or in Asia, relying on the media for information, to develop mistaken impressions concerning what is actually going on between the U.S. and Japan. For example, it is sometimes hard to distinguish between what the U.S. government is saying, and what other (sometimes self-appointed) experts claim we are saying. Also, the U.S. government clearly cannot control the reactions to Japanese policy of U.S.-based market participants, or private analysts. So with that in mind, I would like to debunk what I think are six of the more common myths about U.S. government views, and about the message which the U.S. government is trying to convey to Japan on economic matters.
Myth No. 1: The U.S. Doesn't Appreciate Japan's Assistance Efforts to Asia
First, I've frequently been told by Japanese that they are frustrated that the U.S. appears not to recognize the scale of the Japanese government's considerable efforts to directly assist its Asian neighbors during this crisis. While the U.S. itself has committed more than $10 billion to assist Indonesia, Korea, and other Asian nations during these difficult times, Japan's assistance commitments - for instance through the recently-announced Miyazawa Initiative -- have been much larger.
In fact, the U.S. government is very much aware of the large scale of Japan's assistance to countries in Asia attempting to recover from the current crisis, and very thankful for it. One of the objectives of the Miyazawa Plan is support for corporate and financial restructuring in Asia, and the United States has been actively working with Japan, the World Bank, and the Asian Development Bank in designing a broader Asian Growth and Recovery Program in an effort to accelerate the pace of restructuring in the region and hasten the restoration of growth. At the same time, however, we have often underlined our view-which we believe is shared by Asian leaders - that the most important thing Japan can do to help the troubled Asian economies return to growth is to restore growth to Japan's own economy. Of great importance is returning the Japanese financial sector to health so that Japan's considerable private sector financial resources can once again serve as an important source of patient capital for economic development in Asia.
Myth No. 2: The U.S. Doesn't Care About Japan's Long-Term Government Finances
Second, because the United States has been vocal in calling for expansionary Japanese fiscal policy in order to support growth in Japan, some critics complain that we care nothing about Japan's long-term financial problems, and are ignoring the economic difficulties that will result from the rapid aging of Japanese society. Given the size of Japan's public debt and its current budget deficit, how can the United States advocate more fiscal stimulus?
There is understandable anxiety in Japan about the future burden to be imposed on the nation's finances by the rapid aging of its population. The Clinton Administration is very cognizant of the problem of Japan's long-term finances, and shares those concerns. But we believe - as do many Japanese analysts - that economic growth is the critical element to managing long-term debt and aging problems in the coming decades.
In Japan's current economic situation, the debt problem cannot be addressed simply by raising taxes and cutting spending; this fact was made clear by the effort to cut Japan's fiscal deficit in 1997, which largely contributed to the recession that Japan is now in.
At the same time, we recognize that fiscal stimulus alone will not be sufficient to bring about sustained and robust economic growth. This is why we have stressed the importance of prompt and decisive measures to resolve the problems in Japan's banking sector. The absence of a well-functioning financial sector is a clear constraint on economic growth. And this is why we have consistently argued for thorough-going deregulation and market opening measures, in order to unshackle the sectors that can provide for Japan's growth in the future.
While fiscal stimulus is not by itself sufficient, in the depths of the current recession it is clearly necessary to support economic activity and incomes, and to support and assist the banking sector and deregulation policies that will allow growth over the longer term. Fortunately for Japan, this country has a high national saving rate, and a very large pool of private household savings. The growth rate that Japan is, able to achieve and sustain will largely determine Japan's debt burden and the difficulty of meeting its commitments to future retirees two or three decades from now.
Myth No. 3 The U.S. Wants to Make Japan's Economy Identical to the United States'
Third, some Japanese people say that they don't think the United States will ever be satisfied until Japan's economy and society perfectly imitate America's - and there are some aspects of the American system that Japanese clearly don't want. This should be an obvious point, but I think it bears repeating that the U.S. does not really want to make Japan's economy identical to that of the United States. Some aspects of every economy are cultural, or have particular causes based in history or geography, and we respect that.
On the other hand, there are a number of economic practices we recommend that Japan adopt, because they are what are broadly recognized as being logical and necessary common features of all advanced economies at the end of the 20th century. For example, a regulatory framework which maximizes the information available to market participants; tax structures which do not provide perverse incentives, or deter investment; transparent rules and rules-making for financial market and 40 the private sector in providing public services, are all common sense in any advanced capitalist economy.
In October, the U.S. government made a series of structural reform proposals to Japan aimed at improving Japan's environment for direct foreign investment. These suggestions included adopting consolidated taxation, increasing the participation of shareholders in corporate governance, improving financial information disclosure, reducing land acquisition taxes in favor of land: holding taxes in order to increase real estate market liquidity, and improving pension portability in order to improve labor mobility. These practices are common to many major economies, and are certainly not uniquely American.
Myth No. 4: The U.S. Prefers a "Soft Landing" and a Delay in Japanese Economic Restructuring
Fourth, I think it's important to debunk the myth one hears that the U.S. somehow suddenly switched this fall from a shard landing" approach to a "soft landing" approach to Japan's economic problems and financial sector restructuring. One usually hears this theory in connection with the U.S. government's support for the idea of recapitalizing "weak but viable" banks - support which became quite noticeable this autumn when methods of bank recapitalization became a fierce point of contention between Japan's ruling and opposition parties. In fact, the U.S. has consistently favored the use of public funds for bank recapitalization throughout this crisis - while also stressing the importance of tight conditions on the use of public funds, and the importance of quickly resolving financial institutions which do not meet the "viability" test.
I want to make a broader point here, however, than just the question of bank policy and the proper conditions for use of public funds in helping the banks. Everyone knows that Japan is going through some significant economic restructuring, with considerable streamlining and re-investment called for in many sectors of the economy. There is also the difficult problem of working out from under a massive burden of post,"bubble" corporate and household debt, much of it unsustainable for the borrower and dangerous for the lender. These problems are going to take time to resolve, and are naturally going to make it harder for the Japanese economy to grow in the interim. At the same time, however, we want the Japanese economy to improve its performance as quickly as possible.
With that in mind, I think it's understandable if the message of Japan's foreign partners gets a little confusing, because, essentially, what we are asking Japan to do is skillfully walk a fine line. Perhaps the best way to think of this is that in reality the "soft landing" versus Hard landing"' dichotomy is a false choice -- Japan in fact needs to do both. Japan's foreign partners hope and expect that its leaders will act to prevent any continued contraction of the Japanese economy in the short term. But we also hope and expect them to do it in a way that does not stall the restructuring of the financial sector and economy and the clearing out of the bad debt problem, which together hold the key to sustainable Japanese growth in the medium and long-term. That means going ahead with financial sector restructuring, deregulation, and economic structural reforms such as tax reform, while at the same time using macroeconomic policy to keep the Japanese economy above water. This is a tall order, but the stakes are high, and we think Japan can pull it off.
Myth No. 5: The U.S. Prefers a Weak Japanese Economy
According to some unofficial surveys we have seen, it appears that some Japanese citizens believe that the U.S. prefers a weak Japanese economy. Clearly, that is in no one's interest, but apparently this myth continues. I hope that President Clinton's recent visit to Tokyo - and in particular the televised free-form discussion he had with Japanese citizens - will help combat this misunderstanding. To quote the President last November in Tokyo:
"I want to be clear about something that I'm surprised there could be any doubt about: The United States wants a strong Japan, with a strong and growing economy. Japan's prosperity is vital to our own future."
I think that's pretty clear.
Myth No. 6: The U.S. Doesn't Think Japan Can Succeed
Finally, one last point needs to be made: that the United States is confident that Japan can succeed in the complex tasks it faces. We don't underestimate the difficulty of the challenges facing Japan, but we know that Japan - with its astute and thoughtful people, high savings, very strong technology, and powerful work ethic - has what it takes to succeed. Again, let me quote President Clinton from his visit to Tokyo in November:
"We have every confidence that Japan is fully capable of restoring growth to this country and all of Asia, [and] fully capable of mastering this challenge just as it has the challenges of the last 50 years."
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