Japan Targeted by 6 Summit Nations on Trade Deficits

In 1975, the problems created by the Organization of Petroleum Exporting Countries’ oil embargo spurred leaders of the world’s seven major industrial democracies to gather for the first of their annual summit meetings.

Now, as they convene their 12th summit Sunday, six of them share a problem of even bigger dimensions--monstrous trade deficits with Japan, which has grown so rich, so dominant economically, that it has become the OPEC of the 1980s.

This year, Japan will haul in an $80-billion current-account surplus, or twice the earnings from trade and non-trade transactions such as insurance, shipping and tourism that Saudi Arabia enjoyed at the peak of its oil boom, according to the Organization for Economic Cooperation and Development (OECD).

‘Misdemeanors’ Cited

“Keeping Japanese misdemeanors in international trade off the agenda (at the summits) is a problem the Japanese have every year,” said one Western source in Tokyo, who insisted on anonymity. “But this year, it is the worst. (The Americans) are very upset, and the European Economic Community is upset.”

A senior Administration official in Washington called the trade imbalance with Japan “politically intolerable” but stopped short of predicting a table-banging summit.

“Japan,” the official said, “could take steps to stimulate domestic demand. It could open up its markets. It could move on tax reform or at least tax reduction” to give its citizens more disposable income.

In a speech April 23, Treasury Secretary James A. Baker III criticized what he called Japan’s “structural barriers to more rapid growth, especially growth of domestic demand, which is crucial to the adjustment of Japan’s large external imbalance.”

He indicated the United States will urge Japan to adopt “specific policies to strengthen domestic investment and consumption.”

The Europeans have joined the United States in demanding that Japan put its house in order so as to make its economy more capable of absorbing imports of manufactured goods--but they also have gone one step further than the Americans. They insist that Japan set specific goals for purchases of European manufactured goods, with the target amounts rising every year.

After its March 10 meeting in Brussels, the European Economic Community issued a stern statement urging Japan to take immediate steps to expand imports “to relieve the increasing strain which Japan’s overall current-account surplus is placing on the multilateral trade and payments system.”

Even Japan has acknowledged that its current-accounts surplus last year--$49.3 billion--has reached crisis proportions.

But Prime Minister Yasuhiro Nakasone has gone to unusual lengths to forestall attacks on Japan’s trade policies--including trips to Europe last year, Canada in January, and the United States in April.

The 67-year-old prime minister told American reporters last month that he intends to play the role of “umpire” in the summit discussions, letting each of the visitors take a turn at “pitching.” Asked if he feared there might be calls to “kill the umpire,” Nakasone laughed and said:

“I hope not, but I will wear a sturdy chest protector.”

Criticism Weakens

To Nakasone’s relief, Foreign Minister Shintaro Abe reported that criticism of Japan at an April OECD ministerial meeting had weakened, compared to a year ago.

The whopping appreciation of the yen’s value--which makes Japan’s exports less competitive--since Japan, the United States, West Germany, France and Britain agreed last Sept. 22 to suppress the dollar’s value has helped defuse what otherwise might have been an explosion against Japan at the Tokyo summit.

In Japan, however, the rising yen has created a new problem for Nakasone.

Under political attack for letting the yen rise too far, too quickly, Nakasone said last Friday that he would ask the summit visitors to join in intervening in foreign exchange markets to stabilize the yen’s value. Earlier, Nakasone and other Japanese leaders made it clear they want an exchange rate of around 180 yen to the dollar--an appreciation of about 34% compared with last September.

Their plea, however, is expected to fall on deaf ears.

Baker said publicly that he was satisfied with the way foreign exchange markets were working to lower the dollar’s value, even as the yen shot beyond a 42% appreciation rate and the Japanese criticism of Nakasone began. (Since then, the yen has strengthened by a further two percentage points.) Reagan himself twice declared that the strengthening of the yen was a “legitimate” development.

At almost the same time, British Finance Minister Nigel Lawson called for even more appreciation of the yen against European currencies.

“He is saying to Japan ‘We accept you are not going to do much (to cut the surplus) through fiscal or domestic demand measures, so you have no alternative but through exchange rates’,” one Common Market official said.

In merchandise trade alone, the United States suffered a $49.7-billion deficit with Japan last year. The nations of the Common Market were somewhat better off--recording a $12.9-billion deficit, according to their preliminary figures.

How much larger the deficits would be without American and European protectionism against Japan is hard to guess.

Restraints have been imposed on Japanese exports of cars, steel, textiles, and motorcycles to the United States. Until last Dec. 31, the Common Market imposed so-called voluntary curbs on imports of Japanese videocassette recorders, color television tubes and sets, certain machine tools, cars, light commercial vehicles, fork lift trucks and quartz watches. Now, all categories except quartz watches are just being “monitored” to see if new curbs should be imposed.

Britain, France, and Italy still maintain separate, overt restrictions on imports of Japanese cars--a miserly 2,200 a year in the case of Italy.

Despite the summit guests’ frustrations, Japan has changed its practices since the first economic summit. More change is expected. The problem, however, is how fast it will come and how far-reaching it will be.

The outright protectionism that remains in Japan today is a pale shadow of 1975. With Japan’s biggest corporations now raising most of their own funds, rather than relying on banks whose credit allocations the government controlled, government-guided targeting of industries for preferential development has all but vanished.

In 1975, Japan was just getting around to lifting a limit on the number of retail shops any foreign firm could set up--which had been pegged at 11 nationwide. Its tariffs on both manufactured imports and raw materials, then among the highest imposed by the industrialized nations, are now lower than those of the United States, Canada or the Common Market.

No tariff at all is now imposed on imports of cars, though until the early 1970s, Japan maintained tariffs of up to 40% on imported cars. It didn’t abolish them until its domestic market was saturated, precluding major imports.

Japanese standards for product safety and quality, the most complicated of any advanced country, are now being revised to match international standards.

Protectionism Evaluated

Even as staunch a critic of Japan as Philip Caldwell, the former chairman of Ford Motor Co., who is now senior managing director of Shearson Lehman Brothers Inc., admitted in Tokyo last month that barriers to the Japanese market were keeping out only $10-billion to $15-billion worth of U.S. products--or as little as the equivalent of one-fifth of the 1985 American trade imbalance.

C. Fred Bergsten and William Cline of the Washington-based Institute for International Economics estimated that the impact of Japanese protectionism at even a smaller amount--barely $5 billion or $6 billion.

Although overt protectionism is gone (except in limited areas, such as agricultural products), what remains is a Japanese mind-set against imports established during the drive to expand exports, as well as an old-boy network of interlocking business relationships and an economy whose very structure is geared to growth through exports.

Department stores, for example, still find their customers returning electronics goods--without testing them--when they discover the products weren’t made in Japan, according to Jiro Ushio, chairman of Ushio Inc. and one of Nakasone’s economic advisers.

The old zaibatsu system--under which companies buy only from “sister” firms in the same conglomerate--also “does a fine job of restricting imports,” said one Tokyo representative of the Common Market.

While the United States imports about 60% of all manufactured goods produced by developing countries, Japan takes only about 7%. Europeans complain that Switzerland, with an economy one-tenth the size of Japan’s, imports about the same value of manufactured goods that Japan buys from overseas.

Japan’s resistance to buying from the rest of the world led Caldwell to express the gut-level emotion that lies at the core of the frustrations many summit guests feel against Japan.

“You cannot have one country winning at the expense of all the others,” the former Ford executive complained.

Cites Recommendations

Hoping to defuse trade criticism at the summit, Nakasone will cite as evidence that Japan is trying to change its ways in line with the recommendations made by a commission headed by Haruo Maekawa, the former governor of the Bank of Japan, and a new “vision” for the 21st Century produced by the Ministry of International Trade and Industry (MITI).

Although he later qualified his pledge, Nakasone promised President Reagan last month in Washington that Japan will carry out Maekawa’s recommendations to transform Japan’s export-oriented economy into one dependent upon domestic demand for growth, to reduce surpluses and to slash tax exemptions that encourage Japanese to save rather than spend.

In February, MITI’s Industrial Structure Council, in what was called a “vision” for the 21st Century, called for an annual increase of 12% in overseas manufacturing every year from now until 2000 to “weave imported manufactured products into Japan’s production and consumption structures.” Cumulative investment by the year 2000 would reach $184.7 billion, about $60 billion of it in the United States alone, the ministry’s council predicted.

At present, offshore manufacturing accounts for a mere 5.2% of parts used in Japanese production, while the portion of manufactured imports in retail sales stands at only 3.7%. The ministry’s Industrial Structure Council proposes to double both percentages in the next 14 years--but estimates it will cost 1,060,000 factory jobs in Japan.

The trouble with both the Maekawa report and the ministry’s vision is that neither has yet won substantial support in Japan.

Widespread criticism of his promise to carry out Maekawa’s recommendations, in fact, forced Nakasone to confess just last Monday that his call for a fundamental reshaping of Japan’s economy represented his personal determination and not a government commitment.

In addition, neither the Maekawa recommendations nor the ministry’s plan can be carried out quickly. Both represent reforms of revolutionary dimensions in a country where change, at best, occurs only evolutionarily.

Western critics say, however, that Japan needs revolutionary change.

“The Maekawa report,” said the Common Market official in Tokyo, “does not satisfy our requests. It sets no time limits, and its results will not be quantifiable.”

Maekawa himself warned that appreciation of the yen, by itself, won’t bring Japan’s surpluses under control.

Currents May Be Shifting

Although fundamental reform is unlikely, a consensus is forming among American economists who believe that Japan’s huge surpluses have been caused by major economic currents that may now be changing.

In Washington, Bergsten and Cline said that the vast bulk of the U.S. trade deficit with Japan has accumulated because of huge U.S. budget deficits, the strong dollar, the weak yen and the high price of oil.

Most of those trends now seem to be reversing themselves.

“What we have now is the VCR running in reverse,” said economist Paul Krugman of the Massachusetts Institute of Technology. Within five years, he said, the impact of lower U.S. budget deficits, a weaker dollar, a chronically strong yen and a much lower oil import bill for Japan will combine to push Japan’s current account surpluses drastically lower.

There is general agreement that a yen strengthening to about 160 to the dollar--up more than 50% from the 242 that prevailed before last September--should be enough to drain anywhere from $15 billion to $30 billion from Japan’s surplus.

(In late February, U.S. Trade Representative Clayton K. Yeutter suggested that an exchange rate of 150 yen to the dollar, a more than 60% appreciation, would be needed.)

The rest of the work would be done by cheaper oil.

Krugman pointed out that the impact of a fourfold rise in oil prices forced an enormous increase in the bill for raw materials that Japan must import to survive, giving Japan no choice but to export even more ferociously.

Between 1973 and 1985, Japan’s economy grew at an average of 3.7% a year, but exports grew much faster, at 8.5% a year, while imports expanded at only 1.6% a year.

Sam Jameson reported from Tokyo and Oswald Johnston from Washington.

TRADING WITH JAPAN: A LOSING PROPOSITION

Trade balances with Japan, expressed in billions of dollars and as a percentage of gross domestic product.

1982 1983 1984 1985 United States Balance -$18.9 -$21.7 -$36.8 -$49.7 % GDP -0.6% -0.7% -1.0% -1.3% Canada Balance +$1.0 +$0.3 -$0.1 -$0.4 % GDP +0.3% +0.1% -0.02% -0.1% France Balance -$1.7 -$1.3 -$1.3 -$1.8 % GDP -0.3% -0.2% -0.2% -0.3% Italy Balance -$0.3 -$0.3 -$0.5 -$0.8 % GDP -0.1% -0.1% -0.2% -0.2% Britain Balance -$3.7 -$4.0 -$4.2 -$4.0 % GDP -0.8% -0.9% -1.0% -0.9 Germany Balance -$2.9 -$3.3 -$3.8 -$4.7 % GDP -0.4% -0.5% -0.6% -0.8% European Economic Community (10 nations) Balance -$11.4 -$11.8 -$12.9 -$12.9 % GDP -0.5% -0.5% -0.6% -0.6%

Sources: U.S. Commerce Department, European Economic Community, Canadian Embassy, Organization of Economic Cooperation and Development.