JAPAN : The Global Problem of Tokyo’s Massive Trade Surplus
U.S.-Japan relations are in trouble. Talks aimed at opening the Japanese market to U.S. cars and car parts have stalled amid rancor on both sides. Wednesday, the Clinton Administration announced it intends to take Japan to the new World Trade Organization for a ruling on unfair Japanese trade practices. U.S. trade sanctions against Japan could have major effect. The U.S.-Japan trade impasse has, in turn, contributed to the nearly 20% decline in the value of the dollar against the yen since the beginning of the year.
Yet, both the trade and currency crises, serious as they are, are only symptoms of a deeper problem with vast ramifications not only for the U.S.-Japan relationship but also the global economy: Japan’s unwillingness to address the huge trade imbalances its export-oriented policies have generated.
Japan’s response to U.S. efforts to open the Japanese auto and auto-parts market is a case in point. The problem is not minor. In 1994, our overall merchandise trade deficit with Japan reached a record $66 billion. Of this, $37 billion, or more than 60%, represented our deficit in automotive trade. This is not new: U.S. automotive deficits with Japan have topped $30 billion annually for a decade.
During nearly two years of talks, the Administration has pressed Japan for steps designed to close this chronic structural deficit. These steps include removing non-tariff barriers resulting in broader U.S. access to the Japanese dealership system, more competitive Japanese purchases of auto-replacement parts and deregulation of Japan’s restrictive “certification” of garages for repair work.
Each step would lower prices and broaden choice for Japanese consumers. Most of Japan’s car owners would prefer to buy a $100 U.S. alternator rather than its $600 Japanese equivalent. Yet, Tokyo has refused to budge in the negotiations.
Japan’s stance on automotive trade reflects its mercantilist approach to economic development. For decades, it has promoted massive exports while protecting its domestic market. The result has been an imbalance not only in Japan’s foreign trade but, more fundamentally, in its own economy. Its domestic sector is marked by relatively low levels of consumer spending, excessive government regulation, an underdeveloped retail distribution system and an array of informal barriers to foreign goods and services.
Given these facts, the appreciation of the yen should come as no surprise, though the recent dramatic shift in the dollar-yen relationship has been exacerbated by Washington-Tokyo trade tensions. The stronger yen represents bad news for a Japanese economy just now emerging from its worst recession in decades. In the past, Japan has depended on export growth to lead it into recovery. Yet Japan’s export performance today is imperiled by the skyrocketing cost of Japanese goods and services. Japanese exporters are leading the cry for a stronger dollar. The mercantilist chickens have come home to roost.
Some Japanese officials have suggested that the United States increase interest rates to entice capital into the U.S. economy and thereby prop up the dollar. The United States has refused and should continue to do so. There are clear signs that the U.S. economy is slowing. This year, growth should average 3%, or even less. Another interest-rate hike by the Federal Reserve could lead to a recession in the United States, which could, in turn, imperil the recovery now under way in Western Europe and, ironically, Japan.
Nor can Tokyo any longer blame U.S. fiscal policy for Japan’s trade surplus with the United States. While the United States clearly needs to make more progress in taming the federal budget, our fiscal deficit, as a percentage of gross domestic product, is the lowest among the major industrialized economies--including Japan.
While the dollar has also declined against the German mark, the fall has been far less than it has against the yen. Moreover, the dollar has held its own or even appreciated against a number of other important currencies. In short, what Japan calls a dollar problem is essentially a yen problem--and only Japan can solve it by forceful measures to reduce its structural trade surplus.
Summoning the political courage to act won’t be easy. Prime Minister Tomiichi Murayama’s government, an uneasy coalition, is weak even by the standards of recent Japanese governments. Entrenched elements of Japan’s bureaucracy, unresponsive to elected officials at the best of times, remain committed to policies promoted for decades. And powerful domestic interests continue to oppose any change in the status quo.
Still, change is in the air. Last month, a group of senior Japanese politicians and businessmen called for a specific five- year program to slash the Japanese trade surplus. More and more Japanese, weary of high prices and limited consumer choice, share their point of view. They understand that Japan’s one-sided growth strategy has reached its limits, that policies appropriate for a developing country can be counterproductive for a global powerhouse like Japan and that it is time for Tokyo to come to grips with its problems. Resolution of the current impasse on cars and car parts is a crucial test of Japan’s willingness to face reality.
Unless resolved, today’s trade impasse will make it impossible to return to effective economic-policy coordination between the U.S. and Japan--sorely needed for exchange-rate stability. Even worse, it could undermine the U.S.-Japan strategic partnership and therefore stability in East Asia. The trade impasse similarly risks eroding confidence between Tokyo and Washington and encouraging protectionists in the United States and nationalists in Japan. Worst of all, it risks the futures of young Japanese and young Americans who today look on each other as friends.
Coming so close to the 50th anniversary of the end of World War II in the Pacific, the current trade crisis between Tokyo and Washington should cause officials in both capitals to resolve the problem without further rancor or delay.
