Crowbar Is Wrong Way to Prod Tokyo : Japan’s Economy Is Changing, but American Complaints Don’t

Recent reports about the statistical weaknesses in America’s collection of economic data are well demonstrated when it comes to Japan.

Last February, the Advisory Committee for Trade Policy and Negotiations submitted its analysis of the U.S.-Japan trade problem to President Bush’s trade representative, Carla M. Hills. Among other things, the report stated that Japanese imports of manufactured goods were about 40% less than would be expected, a conclusion that is attributed to an analysis by Robert Z. Lawrence of the Brookings Institution.

While Japan’s 1987 imports of manufactured goods were $59.6 billion, Lawrence’s analysis indicated that they should have been $99.3 billion. That was 1987. With the increase in Japanese imports of manufactured goods over the last two years, it is forecast that the figure will top $100 billion for 1989. The Japanese economy has developed dramatically, and I fear that the current debate in the United States has failed to keep up with events. It is imperative that the United States and Japan use the latest data available.

The Japanese economy is moving faster than Americans realize. In 1984, the 5.1% growth in real gross national product was attributed to a 3.8% increase in domestic demand and a 1.3% gain in the demand for Japanese exports. Four years later, in 1988, the real GNP growth rate of 5.7% was the result of a 7.6% increase in the demand for domestic products, while the external demand contribution was minus 1.9%. The shift to a pattern of growth fueled by a demand for domestic goods is clear.

Perceptions are also out of phase. There has been conspicuous change in the ratio of the trade surplus to GNP; the 4.4% rate of 1986 was sharply reduced to 2.8% by 1988. This is vivid testimony to the fact that exchange-rate adjustment has not been wholly ineffective. Nevertheless, some people have pointed out that even if the trade surplus is reduced as a percentage of GNP, the Japanese trade surplus has stayed basically unchanged in dollar terms. To be sure, Japanese GNP doubled in dollar terms from 1984 until 1988. Yet there was only a 16% increase in yen terms. While the yen has been somewhat weaker on exchange markets recently, its astonishing appreciation in past years has meant that Japan’s dollar-denominated GNP looks like a very inflated figure from the domestic Japanese perspective. Thus there is inevitably a yawning gap between the way the Japanese themselves see the economy and the way it looks to observers overseas.

Japanese exports will remain competitive, largely because of production expertise. Last year, partly because of the yen’s appreciation, Japanese private-sector capital investment in dollar terms was $498 billion, which topped even America’s $488.4 billion. With this heavy investment, Japanese companies may become more quality- and price-competitive than American companies. Recent developments on exchange markets are also creating a situation conducive to Japanese exports.

While there is some concern that Japan does not shoulder responsibilities commensurate with its economic capability, or that it lacks the philosophy or principles needed to guide it in the years ahead, much of this criticism arises from the gap that has suddenly opened up between the way Japanese see Japan and the way foreign observers evaluate Japan.

Things are changing radically. It is important to recognize that Japan is in a transitional phase. Should not some consideration be given to how long a country has been a rich industrial country? Much of the criticism of Japan points to special features that are said to characterize Japan, but I wonder if the current problems are truly rooted in Japanese peculiarities or whether they are rooted in the fact that our two countries are at different stages of development and that Japan’s situation is changing very rapidly.

Japan has been a latecomer to the club of industrial nations, and this has created conditions different from those at the time the United States and Western European countries achieved industrial status. This historical perspective is also important in understanding the problems that may arise between the industrial countries and the newly industrializing countries or other developing countries that have, or soon will achieve, rapid growth. In fact, I doubt there is much real difference between Japan today and the United States and Western Europe of a generation ago when it comes to working hours, productivity, living standards and all the rest. The features that seem so peculiar to Japan today are, in fact, transitional phenomena.

Americans should also weigh the political costs of its demands on Japan. These costs, incurred in responding to repeated American demands for more and more market openings, have begun to mount. We are very near the political limits to what Japan can do to accommodate these demands.

Liberalizing agricultural imports, for example, benefits urban dwellers but creates serious problems for farm families. As a result, the ruling Liberal Democratic Party’s receptiveness to these demands has cost it votes in old rural strongholds. While it might conceivably be possible to offset these defections by picking up new votes in the urban areas that benefit from lower food prices, urban voters have been turned off by the new consumption tax and the Recruit corruption scandal.

Similarly, American demands to revise the Japanese law restricting the giant retail chains and restructure the distribution sector impose additional political costs on the Liberal Democrats. Large corporations benefit at the expense of smaller retailers.

While Washington is loudly and busily calling on everyone else to reduce trade surpluses, there is much that the United States could do to reduce its own trade deficit.

In testimony to the Senate Finance Committee in May, Trade Representative Hills admitted that less than 20% of the United States’ trade deficit is attributable to other countries’ barriers; the remaining 80%-plus is due to the savings shortfall and other macroeconomic factors within the United States.

Little wonder so many Japanese suggest that the United States should get its own act together first--including better macroeconomic policies and greater corporate competitiveness--before it starts crying about how unfair others are.

Many in the United States who view Japan as a threat and contend that Japan engages in “adversarial trade” to deliberately destroy American industry sector-by-sector have also called for the two governments to reach agreements on Japanese industry’s share of the U.S. market in each specific sector, or for Japan to enter into “voluntary export restraints” to limit the damage to American industry.

The behavior that looks so damaging to industry in the importing countries is a carry-over from the fiercely competitive climate that exists in the domestic Japanese market. However, it should be recognized that some Japanese companies are now moving to rein in their competition for market shares overseas. While this may be attractive in light of the political considerations involved, its implementation will require a deliberate shift to managed trade.

What does America really want? Japanese companies are damned for competing for market share and damned for anything that smacks of cartelization.

Brandishing the Super-301 crowbar, the United States has called Japan “unfair” and demanded that Japan increase its imports or else Washington will impose punitive measures. Such an approach simply inflames passions on both sides of the Pacific, imposing new costs on the crucial bilateral relationship.

Recognizing the two countries’ different historical, social and institutional backgrounds, it is important that Japan and the United States attempt to find a constructive way out of their present impasse. In that sense, it should be noted that the U.S. effort to brand Japan as “unfair” is needlesly antagonistic--both for its connotations of immorality and for its blatantly arbitrary nature.