Hold Japan’s Feet to the Fire

With problems in the U.S./China trade relationship taking the forefront of late, few people are aware that a time bomb was set to explode in Tokyo next month that could have resulted in U.S. sanctions against Japan. Although a last-minute agreement between President Clinton and Prime Minister Hashimoto at the G-7 meeting in Lyons to postpone the deadline until July 31 temporarily averted a showdown, the two sides remain far apart.

In October 1994, U.S. and Japanese negotiators agreed on a series of measures that would eventually liberalize Japan’s insurance industry. Now, Japan’s Ministry of Finance is balking at executing the deal as agreed. In early June, the head of the Life Insurance Assn. of Japan told the Japanese press that it doesn’t matter what the agreement says, the Japanese industry is not prepared to live by it.

Since the failure of talks to meet the initial June 1 target date for resolving the problem, the Japanese insurance industry has been preparing measures that will nullify the deal, and will likely do more of the same at corporate board meetings. If this movement is not reversed quickly, President Clinton will have no choice but to impose harsh sanctions on Japan shortly after July 31.

The significance of this potentiality goes far beyond insurance or even U.S.-Japan economic relations. In April, President Clinton and Prime Minister Hashimoto breathed new life into the troubled U.S.-Japan relationship by revitalizing the security agreements between the two countries. An important element of this was Japan’s pledge to supply U.S. forces in peacetime and to consider the possibility of a broader Japanese role in helping the United States maintain security in the Pacific. Their promises were presented to Americans as a major new commitment by Japan. But how really meaningful can such pledges be if formal, signed trade deals are simply ignored or circumvented.

The problem arises out of an attempt by the elite bureaucrats of Japan’s Ministry of Finance, (the same guys who gave Japan the bubble economy and $1 trillion of bad bank loans), to maintain their grip on power by continuing to control and manipulate financial markets.

Since the end of World War II, the Japanese insurance industry has been strictly regulated by the ministry with only a few Japanese companies licensed to sell traditional forms of life insurance and traditional nonlife products such as automobile insurance.

Foreign insurance companies (along with some smaller Japanese firms) were allowed by the ministry to offer only nontraditional products in niche markets such as personal accident, cancer and sickness insurance. This aggregation of nontraditional products now accounts for 4.7% of the Japanese insurance business, with foreign firms accounting for about one-third of the sector’s premiums.

As pressure built in the 1980s and early ‘90s for liberalization of financial markets, the Ministry of Finance announced plans for deregulation of the insurance business. But the plan was designed to enable the major Japanese insurance firms to move into the niche markets while their own traditional market was still protected. This was obviously a recipe to wipe out the foreign and smaller Japanese providers in the name of liberalization.

Consultations between U.S. and Japanese trade negotiators ensued and led to the signing of the October 1994 agreement under which the ministry agreed not to open the niche markets until the traditional segments of the market were deregulated.

Despite these agreements and numerous bilateral consultations since, the Ministry of Finance is now moving ahead in such a way as to target the niche sectors for initial liberalization while continuing to protect the majors in the primary sectors.

In what has become the classic mode of U.S.-Japan agreements, the ministry negotiators never gave written explanation of the agreement to their industry. Rather, vague oral briefings led to a Japanese view of the deal that is completely at odds with the U.S. view. Thus, for the past several months the U.S. and Japanese negotiators have been locked in an argument over the meaning of the deal they signed 19 months ago. Meanwhile, the Japanese majors are rapidly establishing subsidiaries to enter the niche markets as soon as possible.

It is imperative that Prime Minister Hashimoto bring his ministry bureaucrats under control and direct them to fulfill the agreement as signed. If he does not, the trust so essential to a healthy U.S.-Japan relationship and so recently rekindled will be severely undermined with potentially dangerous consequences.