U.S. Relies on Japan Funds, Martin Says

Preston Martin, vice chairman of the Federal Reserve Board, said Wednesday that an end to the flow of “tens of billions of dollars” in Japanese capital that finances American budget deficits would force higher interest rates in the United States.

“It would put pressure on the Congress to take action so there wouldn’t be so much of the budget to finance (with government bonds),” Martin told a group of reporters. “It would affect exchange rates and it would affect interest rates (in the United States). It might compel some action.”

Martin’s statement amounted to an acknowledgment of recent Japanese claims that capital from Japan has become essential to restraining interest rates in the United States--a situation that has developed within the past year.

No figures are available on what part of the U.S. budget deficit is being financed by Japanese capital, but some economists estimate that more than $60 billion in Japanese capital will flow into the United States in various forms of investment this year.

In Japan’s fiscal year 1984, more than $54.4 billion in long-term capital flowed out of Japan, most of it into U.S. Treasury bonds. In the previous fiscal year, only $20.8 billion in long-term capital was invested abroad.

Martin declined to forecast how much Japanese capital will move into the United States this year, although he said it will amount to “tens of billions of dollars.”

He expressed no alarm at the growing American reliance on Japanese capital, but he pointed out that American banks “are doing a great deal more financing offshore than in the United States,” and added, “That’s just part of living in the world. . . . We can’t retreat to a fortress America for our financing any more than we can for our goods and services.”

He said he did not want to contradict or support a call by Secretary of State George P. Shultz last month for Japan to use more of its savings at home. But he said that the use of “this marvelous Japanese resource of a high savings rate”--for more business investment, housing and infrastructure at home--”is one solution to the current (trade) problem.”

Still, he said that, if Japan followed Shultz’ advice, a decline in or an end to the flow of Japanese capital into the United States would drive up American interest rates.

Martin, who is attending an annual meeting of the Federation of Japan Banking Assns., also said that the Federal Reserve should not give priority to exchange rate considerations in its policy-making but rather should continue emphasizing the domestic American economy.

Any attempt by central banks of the United States and other countries to lower the value of the dollar would be futile in the face of present world capital flows, which he estimated at between $20 trillion and $30 trillion a year, a level beyond the power of central banks to influence, he said.

He said that capital flow exceeds by “10 to 15 times” the annual flow of international trade, which amounts to $2 trillion, and is now more important than trade in determining exchanges rates.

He supported recent increases in the American money supply beyond the Federal Reserve’s guidelines as a form of flexibility needed to promote healthy American growth.

“Fairly rapid money growth” may be needed temporarily, he said, to avoid slipping into a “growth recession”--slowly rising output combined with rising unemployment.