Staff writer While Japan and the United States exited the 20th century as the world’s two largest economic powers, Tokyo and Washington had little to celebrate when they crossed the threshold into the new century.
In February in Palermo, Sicily, finance ministers and central bank governors from the Group of Seven major economic powers acknowledged that a U.S. economic slowdown was crystallizing and urged Japan to speed up banks’ disposal of bad loans and revamp its financial sector.
The state of the world economy, however, continued to deteriorate in subsequent months and Group of Eight leaders pledged in their meeting in July in Genoa, Italy, to use all means available to avert a global recession.
As downside risks mount on major economic powers, policy coordination between Japan and the U.S. is becoming more significant.
For the sake of Asia-Pacific prosperity, experts say, the two nations must enhance their often-frictional economic partnership to better cope with a range of problems arising from globalization.
“In the last half century, Japan and the U.S. have nurtured economic ties, sometimes with friction and sometimes benefiting from each other,” said Masaru Yoshitomi, dean of the Asian Development Bank Institute — ADB’s think tank. He was involved for a long time in Japan’s macroeconomic policymaking at the former Economic Planning Agency.
Under the Bretton Woods system, which was enacted shortly after the war and continued for about a quarter century, the U.S. demonstrated its strength and placed the dollar at the center of the international currency framework. With the yen fixed at 360 against the dollar, Japan was able to gain from exports, hasten its postwar reconstruction and achieve high economic growth.
The U.S. economy, however, began to lose its shine in the late 1960s. In August 1971, President Richard M. Nixon suspended the gold standard and plunged the world into a currency regime of floating exchange rates.
Then came the oil crises of 1973 and 1978, which triggered worldwide inflation and dampened the U.S. economy.
These two incidents had definite ramifications for Japan. In striking contrast to the U.S. economy, however, Japan overcame the difficulties and re-emerged as a leaner economy.
The changing balance of economic power become conspicuous in the 1980s, and Japan’s surging trade surplus with the U.S. caused bilateral friction.
In 1985, the Group of Five major economic powers — the U.S., Japan, Britain, France and Germany — agreed to mount concerted efforts to reduce the value of the dollar in the Plaza Accord. This boosted the competitiveness of U.S. exporters.
The stronger yen hit Japanese exports and plunged the economy into recession. But the subsequent easy monetary policy more than lifted the sagging economy and boosted asset prices, bringing double-digit economic growth in the late ’80s.
But the 1990s brought another change as the U.S. economy staged a remarkable comeback and Japan plunged into prolonged stagnation.
Looking back on the past five decades, Yoshitomi said Japan’s economic policies have been swayed from time to time by changes in policies and circumstances in the U.S.
“The U.S. has always been extremely sensitive about what it sees as a threat to its hegemony,” he reckoned. “In its relations with Japan, the U.S. tends to press Japan whenever Japan outgrows the U.S. in economic strength.”
In the ’80s, the threat was Japan’s trade surplus with the U.S., which was then saddled with deficits in both state finances and foreign trade, Yoshitomi said. The U.S., which had long been tolerant of Japan’s protection of key domestic industries, adopted an increasingly fierce stance and imposed retaliatory protectionist policies against Japanese imports.
And some within Japanese business and academic circles believe the U.S. was partly to blame for Japan’s economic bubble and the prolonged slump after it burst. They contend that Tokyo failed to take timely action to calm asset inflation due to strong urging from Washington to continue an easy monetary policy to boost domestic demand.
Takeshi Matsuda, professor at Osaka University of Foreign Studies and an expert on U.S.-Japan relations, said one needs to analyze U.S. policy toward East Asia and the Pacific in the postwar era to understand the rationale behind its Japan policy.
“In its strategy toward the Asia-Pacific region, the U.S. has consistently tried to establish and maintain an economic system that is free from trade or investment barriers and ensures Washington’s full access to it,” he said.
“It is because the U.S. will gain most from such free-market competition.”
Working under this assumption, it appears unfair that Japan did not provide the U.S. with equal business opportunities in Japan and instead continued to protect various domestic industries, he said.
As Japan remains mired in an economic morass, its once-daunting trade surplus is beginning to shrink.
In the first half of 2001, Japan’s trade surplus with the rest of the world shrank 44 percent from a year earlier to 3.19 trillion yen, marking the fifth straight fall on a half-year basis, according to the Finance Ministry. The surplus with the U.S. dropped 6.1 percent, marking the first drop since the January-June period in 1996, the ministry said.
But the drastic changes in global trade over the years may have robbed bilateral trade figures of some of their significance. With more and more Japanese and U.S. companies operating on a global scale, the bilateral flow of goods represents just a fraction of the economic relations between the two countries.
Also of relevance have been international developments such as the emergence of the integrated European market and the rising new economies in Asia.
This, however, does not necessarily mean a weakening of Japan-U.S. economic ties. Indeed many experts point to the deepening interdependence between the two economies, which can no longer be simply illustrated as a Japan-U.S. trade war, as was the case in the ’80s.
With both long- and short-term capital invested in each other’s country, economic health in one country promptly spreads to the other.
It has long been said that Japan will catch a cold if the U.S., the largest market for Japanese products, sneezes. The opposite holds true, albeit to a lesser extent.
The Japanese government and institutional investors such as banks and life insurers hold some $350 billion worth of U.S. government bonds, nearly a quarter of those held by foreign investors. What if a crisis hit the Japanese economy, forcing the government and other investors to sell their U.S. government bonds to secure their dollar reserves?
The answer lies in the events of June 1997, when then Prime Minister Ryutaro Hashimoto indicated the government may sell some of its holdings of U.S. government bonds in a bid to maintain foreign exchange stability. His remarks sparked a massive selloff on Wall Street, with the Dow Jones industrial average suffering its worst point drop since the “Black Monday” crash of 1987.
As to the prospects of Japan-U.S. economic ties, Yoshitomi said that friction will likely arise as the two countries intensify competition in information technology and other newly emerging fields.
“I believe that the two countries’ economic friction in this century will be technology-oriented,” Yoshitomi said. “Friction might occur if Japan achieves a technological breakthrough that threatens the U.S.”
He cites human genome and nanotechnology as other possible battlegrounds for the two countries.
Matsuda meanwhile said that Japan and the U.S. should nurture an “equal partnership” if they want to successfully manage the rough road ahead. He called for a system that allows frank discussion on any problems without resorting to political or economic leverage, while adding that he wonders whether the U.S. really wants such equal relations.
“As the history of Japan-U.S. relations illustrates, the U.S. feels comfortable when it retains enormous power over Japan,” he said.
In dealing with the U.S., he said, Japan should better clarify its policy options by re-evaluating its diplomatic resources, including political and economic power.
Yoshitomi also said Japan and the U.S. must elevate their partnership beyond a bilateral framework to cooperate in tackling globalization problems.
“While trying to combat their domestic woes now, Japan and the U.S. should work together, for example, to strengthen the international financial architecture to prevent a recurrence of economic crises in Asia,” Yoshitomi said, adding that areas of cooperation should also cover development assistance and the environment.
Yoshitomi, however, said he is concerned that the current U.S. administration is more concerned with domestic matters, citing Washington’s recent rejection of the Kyoto Protocol for the sake of its national interests.
If it takes effect, the 1997 global warming pact would oblige industrialized nations to achieve numerical reduction targets for their greenhouse gas emissions, which would certainly weigh on their economic activities.
“We must note that only three regional powers — Japan, the U.S. and the European Union — can tackle issues of global implications,” Yoshitomi said. “To deal with 21st century problems, the spirit of accommodation will become more necessary than ever.”
Chronology of economic events
The following are events that have affected the economies of Japan and the U.S. and their trade relations in the past half-century.
July 1944: A fixed exchange rate system for currencies is adopted at an international monetary conference in Bretton Woods, N.H., putting the dollar at the center of the international currency framework.
April 1949: The yen is fixed at 360 against the dollar under the U.S. Occupation.
1955: High postwar economic growth begins in Japan.
1965: Japan’s exports exceed imports for the first time.
August 1971: The U.S. suspends the dollar’s convertibility with gold, putting an end to the Bretton Woods system, and the yen begins to rise in value against the dollar.
December 1971: A fixed exchange rate system is re-established, with 1 ounce of gold convertible to $38 under the Smithsonian Agreement and the yen is fixed at 308 against the dollar.
February 1973: The Smithsonian system collapses and major currencies shift to floating exchange rates.
October 1973: War breaks out in the Middle East, prompting the first oil crisis.
1974: Japan’s economy posts the first postwar negative growth in the aftermath of the oil crisis.
1978: The second oil shock hits.
1981: Japan’s trade surplus with the U.S. exceeds $10 billion, accounting for some 40 percent of the U.S. trade deficit. Japan imposes voluntary restrictions on its auto exports to the U.S.
September 1985: The Group of Five major economic powers agrees at New York’s Plaza Hotel to mount concerted efforts to reduce the strength of the dollar.
December 1985: The U.S. posts $110.7 billion in accumulated external debt, becoming a net debtor for the first time since the end of the war, while Japan becomes the largest creditor.
December 1986: Japan’s bubble economy — economic expansion for 58 consecutive months — begins.
1989: Sony Corp. buys Columbia Pictures Entertainment and Mitsubishi Estate Co. acquires majority stakes in the Rockefeller Group, the owner of the Rockefeller Center in New York.
1990: Matsushita Electric Industrial Co. takes over MCA Inc.
1991: The burst of the bubble becomes apparent in Japan while the U.S. economy bottoms out.
June 1994: The yen strengthens, with its exchange rate hitting 100 against the dollar for the first time.
1996: Ford Motor Co. effectively takes over the management of Mazda Motor Corp., raising its stake in the Japanese automaker from 25 percent to 33.4 percent.
1998: The U.S. achieves its first budget surplus in 29 years.
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