Japan Must Change, Assume a Grown-Up Role in World

The highly public arguments now flying between Washington and Tokyo could bring healthy change to Japan and the world economy. But the matter is very tricky, and misunderstandings between the Clinton Administration and the government of Prime Minister Morihiro Hosokawa could worsen relations between the world’s two largest economies, with consequences unpredictable and ominous.

The issue goes well beyond trade, which is a relatively simple problem. A deal could be made in automobiles and parts, or Congress could permit the export of Alaskan oil which Japan would buy. Either way, the roughly $59-billion Japan-U.S. merchandise trade deficit could be eliminated. Simply including the $19-billion U.S. surplus in services trade with Japan--transportation, tourism, banking and legal services--reduces the overall deficit sharply.

But numbers are not the issue. Rather, the concern is Japan’s role in a world of open economies. Japan benefits from open trade with other countries but doesn’t reciprocate by allowing access to its own considerable market. It has a trade surplus with every major country and trading bloc--the European Union, the rest of Asia, Latin America, the United States and Canada.

The imbalance is more than an annoyance. Japan’s economy is so large--$3 trillion a year in economic activity--that its policies distort the world economy. Denying access to the world’s second-largest market reduces opportunity for other countries; selling goods abroad at lower prices than in Japan, is a strategy designed to “export unemployment,” says economist Michael Borrus of the Berkeley Roundtable on the International Economy.

Overproducing some goods in an attempt to monopolize a business, as Japan did years ago when its companies took a $4-billion loss in semiconductors, threatens strategic industries of other countries. That’s why the United States hammered out a semiconductor agreement with Japan in 1986.

Now the U.S. government is seeking an even broader new deal, to open Japan’s home market which often operates like a stacked deck. Motorola, subject of Tuesday’s trade action by the U.S. government, has been in Japan for 40 years. The Schaumburg, Ill., firm is a pioneer in cellular telephones. But when it first brought cellular to Japan, it was told it could only do business in rural areas. Motorola protested and was allowed into the Osaka and Tokyo markets, and it is doing well in Osaka.

But in Tokyo it has done poorly because the Japanese government assigned it an affiliate of its chief competitor, Nippon Telegraph & Telephone, as a joint-venture partner. The U.S. market may be no picnic, but Fujitsu, Sony, Matsushita, Honda, Toyota, Nissan, NEC, Mitsubishi, Hitachi and other Japanese firms didn’t face that kind of runaround here.

That’s why the U.S. government and American trade and economic experts say Japan needs to change.

And many political and economic experts in Japan agree. Tokyo’s policy of protecting industry, a relic of the nation’s postwar rebuilding, has also hurt the Japanese people.

Consumers in Japan pay 40% more for food, furniture and most other goods. There are fewer public amenities, such as parks, and a lower standard of residential housing than in countries with a fraction of Japan’s wealth.

Real estate was severely distorted because capital from years of trade surpluses pushed up building prices astronomically. Now prices have fallen in Japan’s 3-year-old recession, and Japanese banks are left with an estimated $200 billion in bad loans.

Yet, there is more hope than gloom at the moment because Japan is changing. Hosokawa, who came to office last year, replacing 45 years of single-party rule, brought in voting reform to redress an imbalance that had given farmers and other rural residents three times the parliamentary representation of the highly populated urban districts.

The outlook is for more change--although it won’t come easy. Hosokawa wants to boost the economy with income-tax cuts, but he is being blocked by the Ministry of Finance, which wants to keep control at the center--almost like a commissariat of the old Soviet Union--in an era of decentralization.

And that’s a cue for the Clinton Administration. Just as U.S. policy has been to help Russia make the transition to a post-Cold War economy, so it wants to do the same with Japan.

A more democratic, open Japan would be in the U.S. interest. U.S. companies would benefit from access to the Japan’s market; the Japanese people would benefit from a reorganization of their economy and Japan’s companies would benefit in an open world economy.

But there’s a caveat. The Clinton policy must be principled and long-term, a determination to work with the best in Japan, and not a ploy of U.S. domestic politics.

“A poke in the eye with a sharp stick can be useful,” says Richard Drobnick, head of an International Business program at USC. “But do we have a policy for when Japan screams, or retaliates? Is our policy truly geared to making Japan a more cooperative member of the world economy?”

Borrus of the Berkeley Roundtable, the think tank that Laura Tyson belonged to before she became Clinton’s chief economic adviser, says it is: “There are some smart people in the Administration with very interesting ideas.”

As for Japan, Hosokawa said in Washington that the relationship with the United States is changing to one of “grown-ups.” A good term. For more than 48 years now, Japan has been defended by the U.S. military and its protectionist policies tolerated while the United States built a postwar world of open commerce. It’s about time Japan took its place in that world as a grown-up nation.