Pressures for Change Mount in U.S., Japan

Japan has a new prime minister, Toshiki Kaifu, whose first statement about the United States Tuesday was the kind of thing you’d say about a barely endured brother-in-law. “Whether Japan likes it or not, the U.S.-Japan relationship is precious,” said Kaifu, perhaps revealing more than he meant to of current Japanese attitudes about America.

The feeling is mutual on this side of the Pacific. Respondents to recent polls by both Gallup and Harris said Japan’s economic power poses a more serious threat to the United States than the military power of the Soviet Union.

Both sides are suffering delusions. Americans told Gallup that they thought Japan is already the world’s leading economic power--which it isn’t now and may never be--and that they feared its capital buying up U.S. companies, dictating the American future.

Meanwhile some Japanese, seemingly drunk on the strong yen, have been sounding off. “You know what Japanese leaders really think of Americans,” a Japanese government official confided recently. “They think the upper classes want to become doctors and lawyers and make lots of money and the rest want to go on vacation.”

Clearly a little factual analysis is in order to see what the situation really is.

The truth is Japan’s economic power, and the value of its yen, may be closer to a peak and a long-term leveling out than a continued up-trend. Predictions of Japanese billions buying up the world are misplaced and overblown.

At the same time, America has to get its economic house in order--and Japanese pressure, verbal and otherwise, may actually be helpful.

Japan’s economy--which totals close to $3 trillion in gross national product, compared to more than $5 trillion for the United States--is impressive these days because it’s like a man with money in the bank. Last year, Japan ran a $79-billion current account surplus--the broadest measure of its trade in goods and services. Its economy has abundant capital available because the Japanese people save 16% to 17% of their income--down from 20% in former years but still more than treble the United States’ 5.3% savings rate.

By contrast, the U.S. economy, with low savings and big deficits in trade and its government budget, is overdrawn at the bank.

But if the United States has been overspending, Japan has been underspending. Japan’s determined 40-year industrial drive hasn’t merely held back luxuries from its people, it has held back basic amenities; 40% of Japanese housing is not connected to sewage.

Voting Socialist

But now the people are demanding a payoff for their sacrifices and things are changing. That’s the reason for the political turmoil that has brought in the third prime minister in three months.

Great numbers of Japanese are voting Socialist, not because they believe in Karl Marx, but because they want to change their society. They’d like better housing, and a government that will pay attention to the needs of growing numbers of elderly in Japan’s population.

What it all means is that Japanese domestic spending will increase, reducing the savings surplus and drawing in imports--which will reduce the current account surplus. Indeed, that is already happening, as Japan’s imports from other countries in Asia are increasing--and its surplus so far this year is running roughly one-third below last year’s level.

The outlook is that over time Japan’s economy will more closely resemble America’s. It will rely more on consumer spending, and spend more on defense. Its companies will invest more outside Japan--as they are already doing. Last year, Japanese firms invested $18 billion in South Korea, Taiwan, Singapore, Thailand and other Asian countries--almost double the $10 billion it invested in plant and equipment in the United States. (Such permanent investment is different from the $50 billion and more that Japan has been investing in U.S. Treasury bonds, helping to fund the government’s deficit).

The Japanese economy, in short, is changing. And most of its changes, the increased consumer spending and defense outlays, the imports from and investments in other Asian countries result in whole or in part from U.S. pressure.

But now it’s America’s turn to change, and Japan is applying the pressure--frequently threatening to cease funding the U.S. deficit, bluntly telling America to spend less and save more. Those who fear Japan’s industrial investment are missing the mark, says Peter Rona, an American banker who is president of IBJ Schroder, the New York-based investment arm of the Industrial Bank of Japan. “Japanese investment in U.S. industry and real estate will phase out after a few more years,” as changing interest and currency exchange rates make it less economic, he says.

The real pressure for change will come as Japan’s diminishing capital surplus will no longer be available to fund U.S. deficits. Then either U.S. savings will have to increase, or U.S. taxes will.

If Americans still have pride, savings will be the better bet. Sure, today’s haughty Japanese criticism is annoying. But many Americans recognize also that it hits home, that a lot of things in the U.S. economy have gone astray lately, and putting them right shapes up as the challenge of the 1990s. Some times your harshest critics are your best friends.