A decade of transformation

by Glen S. Fukushima

The 37th annual U.S.-Japan Business Conference that met in Tokyo last month reflected the vast changes that have taken place in the U.S.-Japan economic relationship over the past 10 years.

When I attended my first Business Conference a decade ago, I had just joined AT&T after nearly five years at the Office of the United States Trade Representative. That 27th conference, held in Osaka in July 1990, came immediately after the Bush administration and the Kaifu Cabinet had reached a settlement on the Structural Impediments Initiative, in which Japan agreed to undertake reform in six areas: distribution system; land-use policy; infrastructure investment; keiretsu; exclusionary business practices; and the differential in pricing of products sold domestically and abroad. The Bush administration had pursued SII in 1989 and 1990 largely in response to pressures from the U.S. Congress expressed in the form of the Trade Act of 1988 and its Super 301 provision.

Despite the numerous trade agreements concluded between the two countries in the late 1980s and early 1990s, problems of market access and trade imbalances persisted. This was reflected in the many complaints voiced by American executives at the Business Conference over such issues as automobiles, automobile parts, semiconductors, supercomputers, flat glass, photographic film, insurance and financial services. These issues became even more prominent as a result of the U.S.-Japan Framework Talks agreed to between U.S. President Bill Clinton and then Prime Minister Kiichi Miyazawa after the G7 summit in Tokyo in July 1993.

But a significant shift occurred in 1995. On June 28 of that year, the U.S. and Japan reached a settlement in Geneva on the contentious issues of autos and auto parts. And the Clinton administration began to turn its attention away from U.S.-Japan economic matters to bilateral security cooperation. There were several reasons for this, including concerns about North Korea’s nuclear development that surfaced in the spring of 1994, the rape of a 12-year-old Okinawa girl by three U.S. servicemen in September of 1995, and the tensions between China and Taiwan in the spring of 1996.

In the meantime, the Japanese economy was stagnating in the aftermath of the bursting of the bubble. By the mid-1990s, Japan was no longer seen by Americans as the feared rival symbolized in Ezra Vogel’s 1979 book, “Japan As Number One.” Second, the slow-growth Japanese market was seen as less attractive than in the past. Third, in contrast, the “big emerging markets” of East Asia – China, India, Indonesia and South Korea – were seen as having major growth potential for U.S. exports and investment. Fourth, partly due to the yen’s appreciation, Japan’s trade surplus with the U.S. had declined. Finally, the more than 30 trade agreements concluded with Japan during the first Clinton administration were seen as proof that bilateral trade problems had been addressed.

At the same time, by 1995 the U.S. economy was in full recovery. U.S. prosperity over the next five years was unprecedented – strong economic growth (8.3 percent in the fourth quarter of 1999), low inflation, high stock-market prices and the lowest unemployment in over 30 years (3.9 percent in certain months). Furthermore, the U.S. economic expansion – already the longest on record – promises to continue, spurred by productivity increases thanks to the Internet and information technology.

These changes in the economies of the two countries have brought about a shift in the attitudes of the two business communities unimaginable 10 years ago. At the Business Conference last month, a Japanese speaker reporting on his country’s political and economic climate was struggling to persuade his somewhat skeptical American counterparts that Japan is now truly on a course toward economic recovery. On the other hand, the American reporting on his country’s political and economic climate ended his presentation by proclaiming, “It’s a wonderful time to be alive . . . so much wealth and so much opportunity. . . . Let’s enjoy it!”

With this backdrop, the Business Conference in recent years has become less of a forum for debates and complaints and more of an opportunity to share ideas, learn from each other’s experiences and find common areas for potential cooperation. This year’s joint statement, for example, lists 16 areas where the two business communities can work together – for instance, promoting structural reform and deregulation, renegotiating the U.S.-Japan Tax Treaty, enhancing competition in telecommunications, encouraging reform in pensions and financial services, advancing e-commerce and cybersecurity and preventing credit-card fraud.

What are the implications of this transformation over the past decade? First, the nationality of capital continues to decline in importance, at least for American executives. With increased foreign direct investment and merger and acquisition activity in Japan, it is increasingly difficult to draw clear lines between purely “American” and purely “Japanese” companies. Second, the government’s role in the economy is receding, and the private sector is increasingly taking the lead even in establishing regulatory regimes, as in e-commerce.

Third, the growth of the U.S. services economy is reflected in Japan. There is greater representation than in the past by U.S. firms engaged in professional services – banking, insurance, securities, consulting, information and telecommunications and so on – as opposed to traditional manufacturing. Fourth, globalization is posing challenges that must be dealt with by Japanese as well as by American companies, including those related to structural, regulatory, tax, workforce, education, telecommunications, financial and environmental issues. This opens the way for greater trans-Pacific collaboration and sharing.

The interesting question is whether what we are witnessing now is a process of convergence, where Japanese and American companies will increasingly face similar issues and start to look like each other, or a blip in the process of cycles, where Japanese companies will eventually regain their competitiveness and begin to assert their distinctiveness as in the 1980s, when they took pride in the “Japanese form of capitalism.” What happens over the next year or two should provide the answer to this all-important question about Japan’s economy in the 21st century.