Sentiments are noble. “Nothing is more basic to the post-Cold War system than a harmonious and productive U.S.-Japan relationship,” said Secretary of State James A. Baker III as he visited Japan this week.
But nobody should have any illusions. Harmony is going to take a lot of work and understanding on both sides of the Pacific. Ultimately, the relationship can enter a new and healthy period, benefiting from expanding Asian markets. But first, U.S.-Japan tensions may rise sharply because the two economies are out of sync.
Right now, Japan is accumulating a capital surplus of about $90 billion, thanks to renewed success in trade with many countries. Unlike the 1980s, however, not much of that surplus will be invested in the United States--and that will have a direct bearing on how fast America recovers from the current recession and on U.S. living standards in the next few years.
Japanese investors are now sellers--not buyers--of U.S. Treasury securities. Their investments in U.S. stock markets are a fraction of their 1980s peaks, and their investments in U.S. real estate and businesses--once decried as an attempt to “buy up America"--are now a diminishing percentage of growing Japanese business investment elsewhere in the world.
One reason for the cutbacks is that Japanese investors have lost money across the board, either through declines in the dollar or in prices of what they bought. Americans protested when Mitsubishi bought Rockefeller Center in 1989, but with New York real estate prices now in the tank, the deal looks like a shrewd one for the Rockefellers.
Americans will feel the pinch from those losses. Japan accounted for about $160 billion of the roughly $1 trillion in foreign loans and investments that the United States took in during the 1980s. It was a time when the United States “served as engine for the world economy, taking in imports and preventing global recession,” explains economist David Hale of Kemper Securities.
The money helped a lot of people. It allowed Americans to live better than they otherwise might have in a time of expanded defense spending. It allowed Japan and other nations to benefit from exports.
And the easy money led to foolishness--a takeover wave in the United States, an expansion spree in Japan, where big companies now must redeem $100 billion in stock warrants and Tokyo real estate prices remain worrisomely inflated.
Still, the U.S. economy comes into the new decade with less muscle than the Japanese economy. Savings are a problem. The latest figures show the average Japanese saving 10 times as much as the average American. Japanese companies invest for the future at double the rate of U.S. companies.
Those weaknesses must now be corrected by increasing U.S. savings and reducing the government deficit. That means pulling in belts all around. Consumer spending will probably continue to be weak and the recession may linger.
It’s a ticklish time. If there are false moves and misunderstandings, foreign investors could dump U.S. Treasury bonds--Japan holds about $60 billion worth--and precipitate a crisis in the dollar, says Robert Brusca, chief economist of Nikko Securities.
Most important, the U.S. economy needs increased savings so that its businesses may compete in the new economies opening up in Asia, Eastern Europe, the Soviet Union and elsewhere.
Especially in Asia. Economies are growing 10% to 20% a year in Pacific Asia, a region of 500 million people in more than a dozen countries. U.S. trade with Pacific Asia is already one-third larger than its trade across the Atlantic, notes Secretary Baker in the latest issue of “Foreign Affairs.”
“America’s destiny lies no less across the Pacific than the Atlantic,” Baker writes.
Yet that destiny is threatened because U.S. investment is lagging. Last year, Japanese business invested $3.5 billion in Thailand, Malaysia, Indonesia and the Philippines, compared to only $326 million for U.S. companies.
Money and know-how are winning respect for Japan’s culture, says Prof. Mark Fruin, a Japan scholar at UCLA. Asian companies such as Korea’s Samsung send their young engineers and managers to study in Japan. Asian nations look to Japan as a model.
That is no bad thing for a new international order in which America is encouraging Japan to play a larger role.
But the risk is that U.S. business will be eclipsed in Asia, not only dealing a serious economic blow to the United States but complicating questions of defense and political leadership. An economically tattered America would present a poor model and find little sympathy or support among nations.
In short, a lot is riding on the ability of U.S. business to hold its own in a changing world.
It’s going to be quite a decade. Even if we look past the immediate tensions to where Japan is going--and we should be going--there is more challenge than reassurance. The only consolation is that challenge is bracing.