U.S., Japan Can’t Afford to Be Enemies

Yasuhiro Nakasone, in his fifth year as an unusually energetic Japanese prime minister, is a lame duck politically. More so, probably, than the American President who is to be his host this month.

Nakasone’s troubles began before Washington announced spectacular penalties on a number of Japanese electronic exports. But this punitive action, from Nakasone’s friend Ronald Reagan, weakens a leader already wounded. Last year Nakasone led his party to its greatest electoral victory. No Iran scandal has marred that triumph. Yet, failing a miraculous turnaround, Nakasone seems destined to leave office by October as another discredited politician.

Things that matter in Japan’s politics today are tax reform, the yen exchange rate and relations with the United States. All are going badly for Nakasone.

The tax-reform issue is a problem created by the prime minister himself. Japan’s taxes need reforming. A top tax rate of 70% invites evasion. Japan’s corporate tax rates were well above U.S. rates even before our tax reform. Farmers and small businessmen have escape hatches. Wage and salary earners, subject to withholding, supply a disproportionate share of revenue.

Closing loopholes and reducing the income tax would have met political requirements. Instead, the choice was to add a national sales tax to make reform revenue neutral.

Since Nakasone had campaigned promising never to introduce a “major” sales tax, his opponents were delighted to charge bad faith. Then, when the Liberal Democrats overwhelmingly lost a safe Diet seat, the futures of the sales tax, tax reform and the prime minister were all at risk.

From abroad a revenue-neutral tax proposal looked like a fudge on the Nakasone commitment to stimulate Japan’s economy. Worse, a tax on consumption is dubious medicine for an underconsuming, over-saving country. Contrary to the myth that Japan’s restrictions on trade cause an over-sized trade surplus, the country’s excess of savings is at the heart of Japan’s foreign-trade dynamic. The further discouragement of consumption has to be questionable policy.

Since 1985 the yen has trended strongly upward against the dollar and less strongly against other currencies. Market forces swamped the recent big-power stabilization agreement in a matter of weeks. A yen ceiling is nowhere in sight.

The yen’s rise has been painful for Japan. During five years of escalating exports, a growing fraction of the economy has been hooked to foreign markets. As profits from these markets shrink, and as the markets themselves shrink, important sectors must undergo difficult adjustments. Major industries such as steel and shipbuilding are in recession. Export profits are down sharply. The growth of the gross national product has slowed. Unemployment is creeping upward.

However, Japan will have to cope with these discomforts along with the benefits of a strong currency. But if the Japanese economy slumps, there is small comfort for anyone. Treasury Secretary James A. Baker III has called for pro-growth policies in Japan and West Germany. Baker sees rightly that below-par performance in these bellwether economies puts all economies at risk.

Trade relations between Japan and the United States have rarely gone smoothly. To levy 100% duties on Japanese products is an embargo in all but name. We embargo imports from the likes of Cuba, Nicaragua and North Korea, but not from allies, and not even from the Soviet Union.

The assigned reason for these prohibitive tariffs is that Japan has violated an eight-month-old microchip agreement. Japanese officials reply that violations have not been willful, and that more time is needed to make the agreement work.

These are points for officials to argue. Nevertheless, it is a wondrous agreement that obliges Japanese firms to sell chips in third markets at prices decreed by the U.S. Department of Commerce, and to buy a specified percentage of chips used in Japan from American suppliers. To expect that these conditions--which, to be sure, Japan accepted--would be readily enforceable is to believe anything.

Japanese officials now are telling chip makers to reduce output. That will finally do what the agreement intends--raise prices. Yet, astonishingly, American industry is objecting to the reduction.

In trade terms the stakes are small. About $300 million worth of exports are involved. Exports to the United States are running at about $90 billion. This is not a trade-war scenario.

The terrible political symbolism of embargo tariffs does matter, however--to Japan. So does the example that we have given to that country’s trading partners--particularly the European Community, which has its own grievances with Japan.

So Nakasone’s preoccupation with the importance of the U.S.-Japan relationship may hasten his exit. But the near-panic that swept financial markets on March 30 says that his is the clear vision: Japan and the United States simply cannot afford to be enemies.