Bush and Kaifu Best Serve Relationship by Putting Own House in Order

When they meet for the first time today, President Bush and Prime Minister Toshiki Kaifu of Japan need to begin to articulate a vision of shared goals and responsibilities for the relationship. It should be one that transcends today’s frictions to set out new areas of cooperation for the 1990s.

To extend interdependence to peaceful pursuits on a global scale is worthy of two great democracies and provides a stronger framework to work out bilateral conflicts. Prominent people in both countries have urged such efforts for the past two years.

To do so effectively requires moving beyond the familiar litany of complaints. Americans blame the persistance of the trade gap on “predatory” Japanese trading practices and an inherent reluctance to buy anything but Japanese products. In turn, the Japanese blame our massive budget deficit and our “greedy” propensity to consume today and pay tomorrow.

Looking at the positive side, the Japanese are changing in ways that bring them closer to the other great democracies. For the first time in 40 years, there is real political competition, even the possibility, though not the certainty, that someone other than the Liberal Democratic Party will run the government. Women are a potent force in Japanese politics, no matter who wins the next election. The Japanese have accepted the fact that they are awash in capital and must recycle it through increased economic assistance (now larger than our own) and by backing international debt relief for Third World countries.

The rise to prominence of a revisionist American wisdom about Japan focusing on economic and political behavior, particularly its insularity and inherent protectionism underscores the problem of the perspective of each country for the other. There is irony in the pain that the Japanese feel at these writings, for they are testimony to the success of Japan’s self-portrayal as a singular culture.

Similarly, a revisionist thinking about our country is rising in Japan. The most recent example, by no means unique, is a published dialogue between Shintaro Ishihara, a popular novelist and longtime Liberal Democratic member of the Parliament, and Sony Chairman Aiko Morita. Morita is one of Japan’s first truly international-minded public figures. He is fed up with much of American criticism of Japan and says so, frequently, but doesn’t shrink from bashing his countrymen for their contributions to the friction. Ishihara is also fed up but writes from an often ultra-nationalist perspective. His major criticism of Japan seems to be that the government and its diplomats are too soft on the United States, and his prescription is to threaten to cut off computer chips for the U.S. military if we don’t behave.

There is irony here, too, but no coincidence in the fact that Ishihara’s views mirror America’s most ardent Japan bashers, who want to cut off imports to this country to leverage changes in Japanese behavior. Whether you like “managed trade” or not (this phrase and “results-oriented trade,” however intended, have become synonymous with protectionism) the tit-for-tat use of such leverage is a recipe for an unmanageable trade war and a worldwide economic downturn. A more rational focus hinges on the disparity in the savings ratios of the two countries, which underlie our trade and budget deficits and Japan’s larger trade and capital surplus.

Japan’s saving ratio is considerably higher than that of the United States, even if the gap is narrowing. So the Japanese point out the need for Americans to save more, and Americans stress the need for Japan to consume more, particularly imports. Common sense suggests that the way to sustain recent improvements in the trade balance is to make progress on both sides of the equation.

It would be good to see a summit in which national roles are reversed, so that each leader focuses on his own responsibilities: Prime Minister Kaifu setting targets and measures for increasing Japanese consumption and imports, and President Bush responding with targets and measures for increasing savings and investment and for a decline in the budget deficit.

I am not talking pie in the sky. Recent improvements in the trade balance can be traced mostly to a major devaluation of the dollar and to partial macro-economic successes, the all-to-modest restraints on our budget deficit symbolized by Gramm-Rudman and a one-shot Japanese budgetary stimulus of two years ago to domestic demand.

The string of successful negotiations on Japanese import sectors--beef and citrus and telecommunications are the most recent--largely eliminated Japan’s formal barriers to imports. But these market openings, vital to important American exporters, count for less than the barriers that remain, which are mostly “structural,” touch both societies and require a major effort in each country.

Further devaluation of the dollar and appreciation of the yen are inevitable--if trade balances do not improve, 100 yen to the dollar is not unlikely. This will stimulate U.S. exports to Japan, no matter how much the Japanese system resists foreign products. Eventually the Japanese consumer will demand that lower import costs get passed along in lower prices. Another major devaluation of the dollar, however, poses a risk of inflation and opens the doors to Japanese acquisition of U.S. assets at low yen prices, a recipe for rolling the investment climate.

There is another way to narrow the trade gap, better than reliance on a blunt instrument, the exchange rate mechanism. The arguments are compelling for Prime Minister Kaifu to use fiscal and monetary policy to stimulate economic expansion and with it, demand for imports. The Japanese budget, if social-security receipts and local government accounts are included, is in a surplus. Japan, with its high saving ratings, can afford such a stimulus and it is needed if Tokyo is not to further alienate its trading partners, including the newly industrialized economies of Asia.

The arguments are equally compelling for President Bush to turn the screws on the budget deficit, on both the tax revenue and the expenditure side. It is time for this country to stop overspending, to increase its savings and to channel domestic investment into industrial expansion.

It is time for both countries to move to get trade problems behind us, pooling talent and sharing responsibilities, not just in traditional terms, but for the agenda of the 1990s and beyond--Third World development, science, health and the global environment.