U.S. and Japan: Giants in Need of Each Other
Why is Washington changing signals faster than a frightened quarterback?
The secretary of the Treasury now says that the dollar has fallen far enough, when for months he was saying that the more it fell, the better for U.S. trade. The Federal Reserve Board, and Chairman Paul A. Volcker, are indicating that interest rates shouldn’t go down--which undoubtedly means they’ll turn up.
More than the usual confusion is involved. Both policy shifts are mindful of the interests of foreign investors who put their money into Treasury bills. The United States now is barreling so fast into debt that by the end of the decade it could owe more than $700 billion to foreigners, and borrowers must be careful. Although Japanese insurance companies recently demonstrated confidence in the dollar by purchasing $4 billion of a $9.5-billion issue of 30-year Treasury bonds, the fear is that at some point the Japanese will tire of watching their investment returns eroded by declining dollars.
Spread Deep Gloom
And such fears have spread a deep gloom among officials in Washington, where dinner parties these winter evenings seriously discuss the prospect of power passing from the United States across the Pacific to Japan. Four of the world’s largest banks now are Japanese, as is the largest brokerage house. Japanese capital is buying buildings in New York and Los Angeles and selling them in real estate syndications to Japanese housewives. Japanese industries are building factories in Ohio and Kentucky, Michigan and Tennessee.
The pattern suggests a page from “The Perspective of the World,” by Fernand Braudel, in which the late French historian described how, in centuries past, economic power passed from Venice to Amsterdam and then to London, whence it came to New York. There are a lot of people today who complete that sequence with the name Tokyo.
But hold on. Such gloom is excessive. Not that there isn’t cause for serious concern in the U.S. economy. But the power-passing scenario is a one-eyed view of the world; it lacks perspective.
Even leaving aside Japan’s dependence on U.S. defense, it ignores the fragility of Japan’s economy. Japan is a nation in which almost three out of four jobs rely on export trade, but which counts on a single customer--the United States--for almost 40% of those exports. If we stop buying, they stop working.
Japan invests the dollars it earns from exports as well as the savings of its people--which are extraordinarily high because Social Security is low--in U.S. bonds and real estate because it lacks investment opportunities at home. Japan’s domestic economy has been stagnant for almost two years, but household savings have bid share prices so high on the Tokyo stock exchange that Wall Street looks like a bargain.
Sometimes one should look behind the mask. The looming giant Japanese banks? James Grant, editor of the Interest Rate Observer newsletter, notes that inflated Japanese stock values make up part of those banks’ capital bases. If the stock market fell, so might the banks.
More Vulnerable
In fact, if there is any economy in the world more vulnerable to recession than the American it is the Japanese. Japan’s export trade necessarily will suffer, as Stephen Marris of the Washington-based Institute for International Economics points out, when the U.S. trade balance improves. Either U.S. imports from Japan will be lower, or U.S. exports will displace Japanese goods in other markets. On the other hand, if U.S. exports don’t improve, the dollar may go into free fall, taking the American economy into recession and the Japanese economy tumbling after it.
Clearly, the correct perspective is that the U.S. and Japanese economies are extraordinarily interdependent. And with an equal interest in avoiding recession.
How? Through growth and cooperation. Japan must revive domestically while the U.S. economy expands internationally. To export enough to pay its awesome foreign debts, reckons Peter Jones of the UC Berkeley business school, U.S. industrial output must expand 30% in the next five years. Even to come close to such a goal, Americans must save more and invest more--which means fewer consumer goods purchased on credit, less Wall Street speculation on borrowed money. Nothing to fear, in short, but hard work.
And no cause for gloom. Washington dinner parties would do better to see Japan as it is, a historically insular nation brought into the wider world through interdependence with the United States. An economic challenger, sure, but one that U.S. industry is fully capable of facing. Rudyard Kipling put the proper view in verse, but not in the first line of “The Ballad of East and West”--the one about the “twain” never meeting. It’s in the less-quoted lines that finish that stanza:
But there is neither East nor West, Border nor Breed nor Birth,
When two strong men stand face to face, though they come from the ends of the earth.
