Kaifu Agrees to Boost Japan’s Public Spending : Pacific Rim: The decision removes a major roadblock from U.S.-Japan trade talks. But there are still several unresolved issues.

Japanese Prime Minister Toshiki Kaifu late Wednesday approved a compromise on a key issue blocking agreement in U.S.-Japan trade negotiations and telephoned President Bush to seek his acceptance of the new proposal.

But, as negotiators recessed at 5:50 a.m. today after a marathon 21 hours of talks, a Foreign Ministry official said, “Not all of the big issues have been resolved.”

The talks are scheduled to resume late this morning, but it was not clear whether enough time was left to reach final agreement during this round of negotiations.

Commitments to other diplomatic business, including preparations for the July 9-11 economic summit of seven advanced industrialized democracies in Houston, will force both American and Japanese officials to break off the talks around noon today, a U.S. official said.

If an agreement eludes negotiators today, officials will hold another round of talks before the Houston summit at a time and place in the United States that will be determined later, he added.

After a meeting with Finance Minister Ryutaro Hashimoto late Wednesday, Kaifu agreed to raise Japan’s initial offer for public works spending over the next 10 years by an extra 15 trillion yen ($98.8 billion) to 430 trillion yen ($2.77 trillion).

Hashimoto, saying it would be Japan’s “final offer,” told reporters he had telephoned Treasury Secretary Nicholas F. Brady in Washington to inform him of the decision.

Japan also promised to ensure that investments by former government corporations such as Nippon Telegraph & Telephone Corp. would amount to an extra 25 trillion yen ($161.3 billion) during the 10-year period.

Kaifu asked Bush to accept the new proposal and said it represents “the full limit” of the prime minister’s efforts, the Foreign Ministry announced. According to Japanese diplomats, Bush replied that he was awaiting a report from U.S. officials here.

Kaifu and Bush, who received the call in Washington, were said to have talked for 10 minutes.

The new offer came as American and Japanese officials negotiated throughout the night in an attempt to reach agreement in the year-long Structural Impediments Initiative talks, which are designed to remove trade barriers.

Bush Administration officials insist that a higher level of public investment in roads, harbors, airports, housing and other public amenities would increase domestic demand in Japan. That, in turn, they say, would pull in more imports, ultimately cutting the U.S. trade deficit with Japan, which amounted to $49 billion last year.

Pointing to Bush’s declaration in Washington on Tuesday that he would support tax revenue increases to reduce the U.S. budget deficit, one U.S. official said: “We suggested (to Japanese negotiators) it took somewhat more political courage to be willing to raise revenues than to increase public works spending.”

Bush’s tax announcement, the U.S. official said, was timed to coincide with the SII talks here to prod a bigger commitment from Kaifu on Japan’s public works spending. John Taylor, a member of the President’s Council of Economic Advisers, also told Nihon Keizai, Japan’s leading economic newspaper, that the announcement was “calculated to influence” the SII talks.

Both the U.S. budget deficit and Washington’s demand for increased spending on public works by Japan are being discussed as part of a mutually perceived need to reduce the gap between savings and investment in both nations. In Japan, savings exceeds investment, while in the United States, consumption and investment exceed savings.

Late Wednesday, the U.S. official, who left the negotiations to brief reporters, listed 18 points on which he said agreement had been reached or was near in the SII talks, which Bush has made the centerpiece of his economic policy toward Japan.

But the official, who asked not to be identified, said that at that point in the talks Japan had made no new offer to increase its public works spending during the next 10 years--the key U.S. demand.

Later, Assistant Treasury Secretary Charles Dallara and U.S. Ambassador Michael Armacost met with Hashimoto to urge him to approve an increase in the amount Japan would spend in the 1991-2000 period from its initial offer of 415 trillion yen ($2.67 trillion). On Sunday, U.S. Deputy Trade Representative S. Linn Williams had urged Japan to increase the 10-year commitment to around 500 trillion yen ($3.2 trillion), a figure Hashimoto rejected as inflationary.

However, after hearing the appeal from the two American officials, Hashimoto conferred with Kaifu, apparently to work out the new compromise offer.

However, the two sides remained far apart early today on what kind of mechanism should be established to monitor progress in the implementation of the reforms both sides are expected to pledge in a final SII report. Disagreement continues on “frequency, format, timing and substance” of the follow-up mechanism, the U.S. official said.

The talks, which lasted 10 hours Monday and 13 hours Tuesday, were recessed early this morning because, as one Japanese diplomat put it, “Our minds were becoming clouded and efficiency was suffering.”

Bush’s Structural Impediments Initiative has emerged as the Administration’s main weapon against protectionist moves in Congress. Failure to reach an accord could trigger a congressional explosion against Japan that might also threaten the successful conclusion of a round of multinational trade negotiations scheduled to end in December.

The U.S. official said agreement had been reached by Wednesday night on clarification of reforms in a Japanese law regulating the establishment of large retail sales outlets, as well as on strengthening measures to ensure that all imports clear customs within 24 hours.

He added that progress had been made on U.S. demands for additional penalties for violations of Japan’s anti-monopoly law and the right of private citizens to bring actions against corporations. The two sides had moved closer to agreement on shortening the period for approval of patents in Japan, land-use and foreign investment policies and other issues, he said.

For their part, U.S. negotiators, the official said, had moved closer to meeting Japan’s demands for reforms involving the U.S. budget deficit; improvement in U.S. education at the high school and university levels; better labor training; a change in American business attitudes; adoption of the metric system, and removal of controls on exports to Communist countries and on the export of oil from the United States.