Transcript
M. Armacost: Ladies and gentlemen, I'm Mike Armacost. It's my pleasure to welcome you to this briefing on U.S.-Japan relations and the visit of Prime Minister Obuchi. I've had a little bout of bronchitis, I don't know whether you can hear me or not. I will struggle away.
We have two very knowledgeable, well-informed scholars to brief this morning. Ed Lincoln and Mike Mochizuki are both senior fellows in our Foreign Policy Studies program. I think you received a policy brief that Ed's just completed, as well as--if you haven't received it, there's a copy available of Ed's soon-to-be published book, Troubled Times. This is an advance press copy that I know you'll find interesting.
If you'll indulge me just for a moment, it seems that having participated in quite a few such meetings over the last few decades, I would just make a couple of observations.
First is as those of you in the press probably surmise, there are unlikely to be major surprises in a meeting of this kind. This is not only because Japanese political leaders hate surprises in summit meetings, but because bureaucrats on both sides have become accustomed to scripting such meetings very carefully.
In any event, in this case, there have been very high-level consultations recently about major issues, including macroeconomics yesterday in the context of the G-7 discussions. And Bill Perry's frequent visits to the Far East in recent months have permitted a greater degree of accord on Korea policy. Nor are we at the culminating phase of any major bilateral negotiation.
All that said, it seems to me a very timely moment to have an authoritative exchange between the Japanese prime minister and the American president, because looking back over the last year or two, a number of problems have developed in the relationship.
The Asian financial crisis did produce a measure of coordination around an IMF-centered strategy. But I think looking back it was never clear that Japanese and American officials fully shared an analysis of the problem. And therefore our consultations have not produced a full meeting of the minds. Political leaders on both sides have had reservations about the other's advice — the press in both countries has been marked by a certain amount of finger-pointing and scapegoating.
On the China issue, which is central to the balance of forces in Asia, the visits by Jiang Zemin to Washington, and by President Clinton to China, left in its wake a certain number of questions among Japanese as to whether or not America was contemplating a larger adjustment in its geopolitical strategy in the Far East, where Japan fit into that strategy and questions as to what a constructive strategic partnership between the U.S. and China might mean.
And on the American side, there were concerns about the eagerness with which certain leading politicians — not the government, but leading politicians--in Japan seemed inclined to assure the Chinese that the Defense Cooperation Guidelines we were negotiating, didn't extend to Taiwan, a clarification that Americans felt was neither necessary nor particularly helpful.
And when the North Koreans fired a satellite over Japan last August without prior notification, the reflex reactions of the Japanese Foreign Ministry and the State Department were a bit divergent, with Japan reacting immediately and firmly and with some emotion, while Americans continued negotiating with Pyongyang with an intent to limit damage on the 1994 nuclear framework accord.
Meanwhile, as Japan's economy has continued to slump, that has produced inevitable build-up in the size of our bilateral trade imbalance, proliferation of complaints, anti-dumping cases, and concerns in Japan that protectionism would grow in the American Congress.
And so for all these reasons, there are issues to be addressed, atmospherics and tone of the relationship to be tended to. And I think some of that accommodation has already occurred. The Miyazawa Plan produced a much more salutary response from Washington than the original Asian Fund idea. Bill Perry's trips to Asia recently I think have brought us to a closer alignment of views on Korean policy. The accumulation of difficulties in our relationship with Beijing in recent months has probably reduced Japan's fears of major adjustments in American policy.
So I think we approach this summit without any sense of crisis, but nonetheless with a need to talk.
Personally I'm optimistic about the future of U.S.-Japan relations for a couple of large reasons. I believe that while China policy can provoke differences between us, at the same time, the Chinese pose a challenge to us both. Neither of us knows how they'll use the power they're accumulating, and therefore we have very strong incentives to maintain an alliance which represents an insurance policy for both of us and which has a rather modest premium.
And moreover, the interest in Japan in administrative reform and economic deregulation is part of a wider global phenomenon that involves the adjustment in the balance between the power of government and the power of markets in managing economies. And I believe that while this is not going to produce an Americanization of the Japanese economy, it will reduce those trade and other frictions that arise out of the differences in our regulatory system. It won't eliminate them but it will attenuate them importantly.
So I look to the future with a considerable optimism that we'll manage this. And I believe it's a timely moment for us to talk. And at this point, let me turn the program over to first Ed Lincoln and then Mike Mochizuki to discuss the specific issues that will inevitably come up. Ed.
E. Lincoln: Thank you, Mike. I'm going to talk a bit about the economic side of this meeting. Let me start by saying that I think that economic issues are a very important part — should be a very important part of this meeting, but that this is not a time for picking fights and shouting. This is a time for quiet consultation, a time for putting stones down instead of picking them up, if you were.
If there's a danger here, it would be that in the effort to have quiet talks on the economic side, that in fact we would end up not talking or downplaying the importance of these issues. And that I think would be dangerous.
Let me start with the macroeconomic side of the picture. Lately as you know, the Japanese economy has not been doing well. For most of the 1990s, entered into a fairly serious recession starting in late 1997. Last year, the economic growth rate was minus 2.8.
Lately there has been a lot of talk about stabilization of the economy — that the worst is over, there is light at the end of the tunnel. I believe that this is largely a public relations message coming from the Japanese government that Prime Minister Obuchi is likely to try to sell to President Clinton. But I don't believe that the facts support that degree of optimism yet.
The rationale behind this PR message is that a large part of the current problem in Japanese economy is psychological — that there is a "pessimistic psychology" among households and businesses that is dampening consumer spending and plant and equipment investment. And therefore, the conclusion would be, if only people felt better about the future, the future would be better. People would spend, companies would invest.
Unfortunately, I believe that the current pessimism in society is underwritten by very solid economic statistics. If I were a Japanese consumer, I would be pessimistic too. Virtually all economic indicators are negative — they are not bottoming out yet.
Most careful private sector forecasts see a possible temporary plateau in the economy this spring and summer followed by renewed decline in the fall. That is not "light at the end of the tunnel," that is just a temporary stopping place.
And finally I would add that surveys of corporations suggest very strongly that most corporations feel they still have excess employees and excess facilities, which again suggests before the real recovery in the economy begins, there is another round of reducing employment and reducing investment before they reach bottom and turn back up. So the economic picture is not as rosy as you are likely to hear from the prime minister next week.
However, I am willing to say on macroeconomic policy, things have changed quite a bit in the last 12 months. A year ago was really low point in policy making for the Japanese government. They were careening into a serious recession with no vision of how to get out of it with macroeconomic policy, and no vision of what to do about the very large bad debt problem in the banking sector.
But in the last 12 months, there have been two new fiscal stimulus packages which have substantially altered the fiscal stance of the government, and in the fall new banking laws were passed to deal with insolvent banks and to recapitalize weak banks.
The net impact of these policies has probably been to cut off the possibility of a real economic depression — "depression" in the sense of maybe a 15 to 20 percent decline in GDP, and major collapse in the financial sector. I think that possibility has now been reduced back to near zero.
It's also true that the policy changes mean that it is now difficult for the United States to legitimately ask Japan to do much more in the sense of net additional stimulus to the economy. The government deficit is now rising rapidly as a share of GDP. Estimates are that for this year, 1999, the ratio of consolidated government deficit — the GDP — will be close to 8 percent.
Now, that's not a disastrous level, but it certainly means that Japan is approaching a level beyond which prudent governments are loathe to move. And therefore I think the Treasury will be loathe to push them much farther in that direction.
Meanwhile, on the side of monetary policy, interest rates in Japan are now quite low. They are not zero, but they're fairly close, short-term interest rates down around 0.2 to 0.3 percent and long-term government bond rates currently running around 1.8 percent. So again, there isn't a great deal more that can be done on the side of monetary policy, unless one subscribes to the flood-the-economy-with-money thesis, to which I do not subscribe.
So, what can President Clinton say at this meeting? Although he can't ask for additional net stimulus, he certainly can make the message about "don't move backwards, don't tighten monetary and fiscal policy."
This by the way I think is the essence of the perception of a difference between Mr. Rubin and Mr. Miyazawa at the IMF meetings yesterday, with Rubin saying we want Japan to do everything possible to stimulate the economy. That's a pretty vague term, and I think fits in my scenario, saying that he's not really looking for a lot more, but just wants Japan to keep doing what it's doing. And Miyazawa said "Well, we're not going to do anything more," which may end up meaning the same thing.
The other thing that the President can do is to try to fold the macroeconomic agenda — which is one in which the United States wants Japan to get through this problem, wants Japan to recover — and to fold this agenda into the trade agenda and argue that the road to a robust recovery — the long-term road at least — is one that would be improved with substantial deregulation and market opening in Japan.
Obviously that's not going to change the picture over the next 12 months in Japan. Deregulation is a long-term process. But among other things might also help to change the psychology. If businesses believed because that their opportunities to invest and profit in new areas because of deregulation was going to be improved, then they might begin feeling a little bit more optimistic and be in a position to begin expanding.
Now let me say a couple of words about the trade side of this meeting. I have a new book on this topic that will be off the presses in another week or two. I'm not going to summarize the whole book for you today.
In part, this book is an update of work that I did at Brookings 10 years ago on the question of foreign access to Japanese markets. We start by saying that certainly there have been some changes in a positive direction since I last did this work. Particularly in the mid-1990s, we find for example the ratio of manufactured imports to GDP, or manufactured imports to apparent domestic consumption of manufactured goods, has gone up.
Indices of intra-industry trade, the extent to which a country has both imports and exports within fairly narrow industry categories has gone up. This has been a very prevalent form of trade for most industrial nations — was not for Japan. But at least it's improving. And similarly in the mid-1990s begin to find foreign direct investment in Japan, another means of accessing markets, beginning to turn up.
However, on all statistical indicators of participation of foreign companies in the domestic market, Japan still lags considerably behind other nations, so that penetration has come up, the disparity between Japan and the United States or other countries has diminished somewhat. But those disparities remain fairly wide. That disparity cannot be explained satisfactorily only with standard economic variables. There's something else going on that one could argue is partial closure of markets to non-Japanese firms.
That suggests that there are still issues to talk about on the trade front. And there probably will be for many years to come.
At this meeting, the president and the prime minister will undoubtedly declare "success" and "progress" on these issues, but it will be decidedly modest. And that has been the picture at virtually every summit meeting for the last two decades. They always declare it a success. When you look at the details, you'll say "Yes, a little bit has changed, but not a great deal.
At this meeting, there are a number of issues that will be on the agenda and that have been under negotiation recently, including for example telecommunications deregulation, where the concern is basically the continued Japanese government protection of the de facto government monopoly, quasi-monopoly on telecommunication and DT; competition policy, which will involve developing improved contacts and sharing of information between the Justice Department and the Japanese Fair Trade Commission, and the insurance sector, where we've had continuing concerns about the implementation of plans or a lack of vigorous implementation of plans to deregulate the insurance sector.
And on all three of these, there will be small steps forward, but not a great deal. I believe that at this time, it is important, not in this round, to be threatening the unwanted American unilateral action, although from time to time, as you'll see in my book, I think that may be actually be necessary.
At this particular meeting, I think it's at least important that the president raise these issues himself. Now one might say, why do we have a president having to talk about things like the insurance market or flat glass. Flat glass is not a particularly sexy product.
And yet, the reality is that at least mentioning these issues, bringing them up, telling the prime minister that we need to have progress on these, is important to achieve progress on these issues. And so I hope that he will do that — as trivial as some of these things may seem.
Most of that can happen in private, but in public as well, there should be at least mention of some of these topics.
Well, let me just stop there, and I'll turn things over to Mike Mochizuki.
M. Mochizuki: Thank you, Ed. I'm going to focus more of my remarks on the background or the broader context of the summit and U.S.-Japan relations. I personally do not feel that much of substance is going to take place in this summit meeting. From the U.S. point of view, I think this summit is primarily a time for the working level officials who focus on Japan and East Asian issues to capture the attention of the president at a time when the president is distracted by so many other issues, such as Kosovo.
And I think for the Japanese prime minister, this summit is primarily — that are trying to get the president to at least give some positive acknowledgement for some of the efforts that he's made to revive the Japanese economy and to strengthen the U.S.-Japan security relationship.
But beyond that I just don't expect that there will be much of substance. So I think it's much more importance to use the summit to focus on kind of the broader context of the bilateral relationship. And what I'd like to do is to first talk about some of the recent developments in Japanese politics; secondly, to discuss the passage in the Lower House of the legislation to implement the U.S.-Japan Defense Cooperation Guidelines, and finally to touch on the Korea issue and to some extent the relationship with China and what that means for U.S.-Japan relations.
First, in terms of recent developments in Japanese politics, the conventional wisdom I think among many Japan watchers in the United States as well as Japanese analysts of Japanese politics, is that for the last several years, Japanese politics has been primarily in a state of instability, the LDP has been weak, there's been the end of the so-called 1955 system of LDP dominance.
But in my opinion, nothing could be further from the truth. Despite the seeming instability in Japanese politics, what is remarkable since about 1994, is the great stability. The basic framework of Japanese politics has changed very little.
To the extent that you see some fluidity in Japanese politics, it's basically musical chairs among the elites in the Liberal Democratic Party and some breaking-away of some of the opposition parties and people leaving to rejoin the Liberal Democratic Party.
And rather than the LDP being weak, I think over the last five years that the LDP has shown a remarkable degree of resilience and demonstrated that it is probably the party for all seasons. And rather than the end of the '55 system, which many people see as the end of LDP dominance, the most significant thing that has happened since 1993, is really the decimation of the political left — the Japan Socialist Party. It is not the end of LDP dominance, but the end of the Japan Socialist Party as a prominent force in Japanese politics.
And so I think what you see today in Japan, is that the LDP is jointly pursuing a strategy of divide-and-rule, and adopting some of the measures that were taken in the 1970s to basically prevent the opposition parties from coalescing by pursuing a strategy of partial coalitions. And I think that's the most important thing that is happening in Japanese politics today.
The other thing is that over the last couple of months, Prime Minister Obuchi's popularity has revived, and I think the Japanese are pretty comfortable with the pace of change that he has been promoting. Or to put it another way, there really is no major challenger to Mr. Obuchi at this time.
Some commentators, especially American journalists, have referred to the victory of Mr. Ishihata [ph] in the Tokyo gubernatorial election as indicative of the weakness of the Liberal Democratic Party. I see it in exactly the opposite way. The conservatives have had such a field day in terms of defanging the opposition that the conservative camp could afford to field three different candidates and still defeat any kind of progressive opposition.
And so I don't see the election of Ishihata [ph] as necessarily a defeat for the Liberal Democratic Party.
Secondly, to turn to the Defense Guideline issue. What is remarkable if you read the Japanese newspapers and the American newspapers over the last week, you would think that people are looking at very different aspects of the U.S.-Japan relationship. I mean, it's just totally different agendas.
Over the weekend, just about every newspaper in Japan, the front-page story, the top headline story is the passage, the debates about passing the legislation to implement the U.S.-Japan Defense Guidelines. I don't think I've seen hardly an article about this in the major American newspapers, except maybe on page 16. And in today's newspaper, I don't think there's any mention about the Defense Guidelines legislation, although that is the headline story in the Japanese newspapers.
And so, from the point of view of Japan and the summit, the preparation for the summit, the key issue was getting the Defense Guideline legislation passed in the Lower House at least. And I'm not going to go into the details of this legislation, but I think of the many controversial issues that were debated in the Diet regarding the Defense Cooperation Guidelines, two I think stood out.
One is the role of the Diet in implementing any kind of joint operational plan or for Japan to participate in rear area support and a contingency surrounding Japan. The opposition party, the Democratic Party, had insisted that the Diet have prior approval for any kind of operation of this sort, but the LDP worked with the Komato [ph] and a coalition partner, the (Liberal ?) Party, to revoke the Democratic Party demand. And so now Diet approval is only required for Self-Defense Force activities and rear area support and search-and-rescue missions.
The other controversial issue was the matter of Japan participating in ship inspections. The government legislation required that this would take place only under a United Nations resolution. Its coalition partner, the Liberal Party, insisted that a U.N. resolution was unnecessary. The Komato [ph], however, wanted the U.N. resolution.
Well, the compromise was not to reach an agreement at this point and to split the ship inspection issue from the rest of the legislation, deliberate on this issue later and pass it at some later time. But there are a variety of other issues, and if people are interested, I'll be happy to discuss them.
Now, some people interpret this legislation as really Japan's normalization as a security actor. There have been some sensational articles being written that this is the first step to Japan kind of remilitarizing. Of course the Chinese definitely emphasize that. But it's not just the Chinese. I think there are a lot of Western commentators who see it in that way.
Nothing could be further from the truth. This is a very, very limited package. If you look at the contents of what Japan will be able to do with the defense guidelines legislation, first of all, in terms of the type of rear area support or the type of search-and-rescue — support for search-and-rescue missions, what Japan would do is to help with transportation, communication, medical aid. They will not be able to provide ammunition. They will not even be able to provide fuel in the context of a U.S. combat operation.
Secondly, in terms of the geographic scope of Japan's rear area support, it is primarily limited to Japan's homeland. And to the extent that it extends beyond Japanese territory, it is limited to areas which are not combat areas. And so in a time of crisis the combat zone could shift. If an area which is not seen as a combat area at the time that Japan makes a decision to provide rear area support and it becomes a combat area later on, according to this legislation Japan would have to pull back.
With this legislation, the Japanese self-defense forces does not have to come into harm's way. And still with this legislation it's very difficult for Japan to move to some kind of much more coherent formalized command structure with the United States. And I would say that this legislation does not in any way mandate a closer defense relationship with the Republic of Korea.
Now, you have to remember when Prime Minister Hashimoto first started this process of reviewing Japan's defense cooperation guidelines with the United States he argued that what Japan should do at first is to see what Japan can do within the constraints of the current interpretation of the Constitution, and then do those things first, and then leave other issues for discussion later. And that is exactly what has happened. All of these measures are taken within the constraints of the current interpretation of the Constitution. But this is far from Japan being normalized as a security actor. This is far from transforming the U.S.-Japan security relationship into a true alliance.
So I would say that the defense guideline legislation, when it will be eventually passed in May, is just a work in progress. It is not the culmination of a process for restructuring the U.S.-Japan security alliance.
Finally, to turn to some of the regional issues, regarding Korea, over the last three months I think the most significant thing that has happened is that Japan has moved towards a closer security relationship with the Republic of Korea — of course, all short of any kind of collective defense arrangement. First of all, Seoul and Tokyo have agreed to naval cooperation for disaster relief and search-and-rescue missions. They've also agreed to greater military exchanges and consultations. They've agreed to cooperation on defense technology. And they have also agreed to establish a hot line and develop an emergency contact system for emergencies.
I think all of these things are very good, and it helps to strengthen the degree of global warming between the United States, the Republic of Korea and Japan during a regional contingency — still inadequate, but I think it goes a big step.
But I think one of the pressing issues — I don't know to what extent President Clinton will focus on it, but I think working level officials need to focus on it — especially once former Secretary of Defense Perry's report gets released about the Korean issue — is really how to involve Japan into a policy of constructive engagement with North Korea, if that is the strategy that we are going to pursue. At this point the Japanese feel excluded from any kind of process to deal with North Korea after the missile launch and the recent intrusion of North Korean spy boats into Japanese territorial waters. The Japanese support for constructive engagement with North Korea is at an all-time low. So if we want constructive engagement with North Korea, it is very important that consultations be furthered with Tokyo, but also that Japan be brought into the process somehow.
In terms of the relationship with China — and I'll stop with this — last November the Sino-Japanese summit, the summit between Mr. Obuchi and President Jiang, was seen as very much a modest success, if not an outright failure, primarily because of the history issue.
But given the fragile state of Sino-American relations, what I see happening since January is that China has begun to warm up to Japan. And I believe that the Sino-Japanese relationship may be on a modest upswing. But the most important thing I believe is not to let China kind of play off the United States and Japan, but that the United States and Japan need to work together to have a coordinated strategy to deal with the variety of issues that pertain to China--not just things like WTO accession, but the nature of China's involvement in some kind of security architecture in Northeast Asia.
Thank you very much.
M. Armacost: Thank you, Mike. We can turn now to your questions. There are mikes that will be available to you. You might identify yourselves before asking your question. Maybe I could ask the first question just because it deals with one issue that hasn't come up in the briefing, and that's Kosovo, which is of course a principal preoccupation of our government. I'd be surprised if there weren't some gesture offered by Japan to provide help on the humanitarian side — perhaps a large gesture in view of the fact that that's something that's easy to be done, it's important to be done, and Mrs. Ogata of course has played a leading role in the UNHCR. But, Mike, would you comment briefly on how you see that issue perhaps being discussed.
M. Mochizuki: Yes. Well, I think the Japanese would really like to play some kind of role in this, and I think it will primarily be one of financial support for humanitarian relief for refugees. There's even some discussion of the Japanese welcoming some refugees. But I think the most important thing will be that of humanitarian assistance.
I have more ambitious kind of ideas about what Japan can do. If at some point an international force is necessary to keep the peace, to have NATO forces there will not be the kind of neutral force that might be acceptable to Yugoslavia, and this would be a great opportunity for Japan to step up to the plate and provide that kind of peacekeeping force.
M. Armacost: Who wishes to ask the first question?
Participant: I would like to ask the panelists about how you see the basic approach of the White House towards these summit talks. It seems to me there could be two approaches. One is to bash Japan and look tough, and especially in economic sectoral issues, and try to be a — successful, tough stand, to show it as it is towards especially Congress. The other approach could be try to picture an alliance — a very successful alliance, especially in the light of the difficulty the president had with China, and also NATO, for the Kosovo issue. And it seems to me the approach the White House would take for this time is the latter one. I was wondering how you the panelists look at it.
E. Lincoln: Maybe I'll start. I suppose it depends a great deal what you mean by bashing Japan. And I do think that economic issues will be on the agenda. I do think the president is likely to express concern about the state of the Japanese economy, and perhaps reiterate what the IMF communique was saying yesterday about the need to continue all possible means to stimulate the economy and get out of the current slump.
I personally would not consider that "bashing" Japan. And so I think it's possible to have a summit that may do from your perspective or from a Japanese perspective — may do both things, that it does involve statements or expressions that are not entirely smiling and laudatory of what is happening in Japan on the economic side along with something that's more like that, in emphasizing the importance of the security relationship.
M. Mochizuki: Like if you were to look at the various summits that President Clinton had with Japanese leaders you will probably think of the summits with Mr. Miyazawa and Mr. Hosokawa as being on one side where the United States was very harsh and cool towards Japan, versus the April '96 summit between Prime Minister Hashimoto and President Clinton where the primary focus was on security and things were probably at one of the high points of the bilateral security relationship. This will probably be somewhere in the middle. Positive encouragement, not satisfied with what Japan has been doing on the economic front, but not bashing Japan, but nudging Japan to go further — and also I think on the security front as well.
M. Armacost: Others? Yes?
Participant: [Off mic] — I was fascinated by your suggestion that perhaps this is — Kosovo is an opportunity for Japan to offer, are you suggesting troops as part of a NATO force, or are you talking about medical units? And how realistic is this? Has there been any discussion between the Japanese government and NATO headquarters or between Washington and Tokyo?
M. Mochizuki: Well, definitely this would not be part of a NATO force. One does not know what kind of settlement is ultimately going to emerge, but if a settlement is ultimately going to emerge. But if a settlement requires the placement of neutral forces, non-NATO forces, that that's the only kind of force that might be acceptable to Yugoslavia, then there aren't that many countries out there that have the capability of stepping up. And of course there are a number of constraints, political and legal constraints, in Japan. But this is the kind of contribution which I think would really highlight Japan's emergence as a contributor to collective security.
But as I said, as a purpose that's very ambitious, and I don't believe at this point that there is any discussion about this. But I would say that this is an opportunity for the Japanese people to play such a role.
M. Armacost: Another way of saying it, it would require a permissive environment I think as our people say. But there is precedent for it, as in Cambodia earlier in this decade.
Participant: Good morning, panelists. On the guideline issues I'd like to ask Dr. Mochizuki and Ambassador Armacost--it took almost three years to accomplish these guideline-related measures and completely pass with both houses of the Diet. And so Dr. Mochizuki sounded quite diplomatic in assessing the modest progress. From the American point of view, is this progress satisfactory enough, and also to cope with the looming challenges or threats are in the Korean Peninsula. So what kind of steps should Japan and the U.S. take after the so-called post-guidelines period on the U.S.-Japan security side? Thanks.
M. Mochizuki: Okay. Well, first of all in terms of the time I think it would be unfair to say it took three years. I mean, if we are talking about from the beginning of the process of study it might be three years, but it's really only one year and eight months after the final report on the defense — the new defense guidelines came out.
Now, it really depends who you talk to. I think if you are talking to the officials who worked on the bilateral security relationship I am sure they would have preferred much sooner action. And the one thing that we can be grateful for is that there wasn't a severe military crisis during this period. If there had been such a crisis, then it would have been a fateful moment for the bilateral security relationship. But one never knows, and the North Korean situation is always fraught with tension and volatility. So the sooner Japan acts, the better.
And I think if you're looking at it from the economic vantage point, the priority, in the wake of the East Asian economic crisis, was for Japan to revitalize its economy. And I think Prime Minister Obuchi focused on the economy first after he became prime minister. So the people who focus on the economic relationship probably saw that as good.
Looking at it from Washington, although I understand all the intricacies of Japanese parliamentary politics, I don't see why the Japanese parliament cannot be structured in such a way that they can be pursuing deliberations on the economic front and the security front at the same time and why it has to be sequential. But it was that sequence that caused the delay.
In the post-guideline environment, I think there's a lot to be done. Now you finally have the enabling legislation. Now comes the hard part of operational planning, development of an infrastructure, an organizational infrastructure between Japan and the United States, so that these plans can be implemented during a crisis. And as I said, that although the defense guidelines are a big step forward, it is still insufficient to transform the security relationship into a true alliance. And therefore, when the political situation is right, I think the next step should be taken so that Japan can not only recognize its right to collective self-defense, but exercise that right as well.
M. Armacost: I would simply add that in some respects the process has been longer. It's quite correct, as Mike has said, that the period in which they've really been talking about enabling legislation has been shorter than three years. In some ways this is the culmination of a discussion that commenced during the Gulf War when I think Japanese politicians had to cope with the issue of whether or not to go beyond simply financially contributing when issues arose over the horizon. And this represents a response to that in legislative form.
A second comment would be that impetus was provided to this process precisely by a regional contingency; namely, the Chinese exercises off Taiwan's cost, which I think reminded people in both our countries that there were circumstances in which a more operational alliance would be very important. I agree also that in the post-legislative period, there'll be a need to operationalize this.
But I would go back to an earlier comment that Mike made. Since the primary contingency we have to worry about is in Korea, the gradual movement toward more impressive levels of cooperation between Japan and South Korea, I think, are very important, because undoubtedly if a provocation arose from Pyongyang, the test would be whether or not the United States, South Korea and Japan could work in a coordinated fashion. Hopefully that will include a parallel approach by China, but at least the core of any response would have to be between the three of us.
Participant: My apologies; I got here a little late, so hopefully this hasn't been covered. But I've heard talk that there may be an early election in Japan. You mentioned Obuchi's popularity has been on the rise. What do you think the chances are of that?
And number two, on the supplementary budget, there seems to be a whole sort of minuet going on in Japan about whether or not there will be or not be some supplementary budget, whether it will be a different type of supplementary budget, you know, instead of the old sort of pave-over-the-roads budget, but that it would be more, you know, spending on new sectors, new — I would be interested to get your opinion on that as well.
M. Armacost: Mike, why don't you go first.
M. Mochizuki: Well, in terms of an election, one can speculate about it. My feeling is that there is not going to be an election before the LDP presidential election, which will be in the fall, because from the point of view of Mr. Obuchi, it is somewhat dicy to then have this election, and if the performance isn't as well, then he would be ousted from power. And at this point, I don't think that there is any particular contender that is serious.
You know, something could happen over the next several months. That could change things. But I think what is most likely to happen is that Mr. Obuchi will get re-elected as president of the LDP and then he will look for an opportune time to call an election, either sometime later this year or the year 2000.
E. Lincoln: On the supplementary budget, for those of you in the audience who are not familiar with the Japanese budgeting process, the fiscal year runs from April 1st to March 31st. The regular budget is usually passed late March, early April. There is always a supplementary budget passed at some point in the fall.
So the simple answer to the question would be, of course, there will be a supplementary budget. There always is. The question is going to be, what kind of supplementary budget are we talking about here? And again, I think it will have to be fairly substantial if for no other reason than the government has chosen to front-load much of the public works spending in the first six months of the year. So the money that is currently authorized to be spent, a large part of it, perhaps as much as 80 to 90 percent of it, will be spent by early fall. If there is no substantial continuation or additional allowance for public works under the supplemental budget, then there will be a major dropoff in government spending on public works.
Now, I thoroughly agree that in many ways the Japanese government has done itself and the economy no good with massive public works spending filling imaginary potholes and putting concrete (in ?) rivers and things like that. But at this point, the way they have chosen to do this, they would have a negative impact on the economy in the fall if they don't pass something to keep the spending levels up.
I suppose an alternative is to put the money into spending on, say, promoting the future economy. I'm not sure I'd like that either. You know, for example, one of the things that is being done under the government budget is subsidizing the laying of fiber-optic cable to the homes in Japan. Well, Japan is not a developing country. In the United States, telecommunications companies make the decisions on how far toward the home they want to extend fiber-optic cable on the basis of a profit-and-loss consideration.
It doesn't seem to me that Japan needs or should be subsidizing this process. This is a continuation of old-fashioned industrial policy. I'd rather have the government deregulate and get out of the way and tell the private sector, "Go at it. Do whatever you think is necessary in a more permissive business environment." If anything, I guess I'd rather see them put more money on teacher salaries, things like that.
M. Armacost: You will perceive a connection between these two answers in the sense that if an election is coming, whatever the effect of public works spending as a multiplier in the economy, at least it is appreciated by candidates in outlying prefectoral districts — [Laughter] — who think there's probably a strong incentive to contemplate that sometime in the fall.
Yes.
Participant: I just wanted to ask Professor Lincoln, since you mentioned that you saw maybe some plateau in the late spring and summer and then further decline in the fall, where do you see this ending? Where do you see some final light at the end of the tunnel?
E. Lincoln: That's a good question. And everyone should keep in mind that all economies recover, even in cases of economic disaster, as occurred for the United States in the 1930s. There is a turning point. My guess for Japan is that it may be as much as 18 to 24 months away. It could be as near as 12 months from now. Partly what's going to drive it is a natural business cycle. Firms will cut back on employment. They will cut back on investment to a point where they no longer feel they have excess employment, excess plant and equipment.
Meanwhile, in the household sector, the sharpest drops in spending have been on housing investment and automobiles. And again, you know, there does come a point when the family car starts to wear out. And so people who had been postponing that purchase finally say, "Well, gee, you know, I can't postpone it any longer," and they start to buy again; similarly with housing. You know, the roof starts to leak or you have an extra child, although there aren't as many of those in Japan, and you say, "I need more space" or "I've got to remodel," and the housing investment starts to go back up again.
I don't think they've reached that point yet. But again, my guess is that on the household side that within 12, 18 months, we'll probably reach that turning point. When those start to happen, then the economy will begin to recover.
M. Armacost: Yes.
Participant: You just mentioned about the cyclical aspects of the economy. But I'd like to get your comment on the Japanese economic strength in the longer-term perspective. Japan has been — some argued that, you know, underestimated its fundamental strength in the manufacturing technology. It is still far better than any other industrialized country. And they are in the kind of depression in short-term area, — 2.8 percent last year. It is expected to register minus this year. It is coming out of it next year. That's what IMF predicts. What is your longer-term perspective on the Japanese economic strength?
E. Lincoln: Well, in the long term, even a Japanese economy that recovers from the current economic problems is not going to be growing quickly. The primary explanation for that is demographics. Total Japanese population begins falling less than a decade from now. The total so-called working-age population, people between the ages of 15 and 64, is already starting to fall.
That acts as a break on potential domestic economic growth. At best, I would say over the next decade we're talking maybe 2 percent growth, probably less than that, as a potential. Actual growth may be lower than that. And if you look more than a decade out, we're probably talking something closer to 1 to one and a half percent potential growth. And maybe, again, if at that point the demographics haven't changed, it's probably drifting down closer to zero. That doesn't mean people are worse off. A slow-growing economy with a falling population would still be well off.
The interesting thing is going to be, by the way, from a theoretical economic standpoint, we have not had an economy experience like this in 200 years. The notion of a fairly affluent nation experiencing a falling population and zero economic growth, this is not an environment that we have dealt with. We don't know what kinds of things will occur to be problems in this situation. But it certainly seems to be possible.
So I think we're looking at a slow-growth environment. But I would also draw a distinction between the Japanese economy as a geographical entity and the success of Japanese corporations, particularly in the manufacturing sector, where I think that it is dangerous, as you point out, in underestimating Japan; that in this current period of malaise, everybody's talking about the failures of Japan.
I happen to think that Toyota is still probably one of the best-run automobile manufacturing firms in the world, and the same could be said for at least a handful of other major Japanese manufacturing firms. But these are now multinational firms, at least in terms of the distribution of their production. And so their fortunes are not tied as much to what happens domestically within Japan. And my guess is that they will continue to do quite well.
M. Mochizuki: If I might just piggy-back on what Ed said. If you're looking at growth, Japan may not be performing as well as in the past. And for a mature economy, it probably makes sense that growth would be longer. But in terms of competitiveness in the manufacturing sector, I think Japan is going to be quite strong.
Now, one way that Japan can become a much more dynamic country would be to really loosen things up, deregulate the economy and provide opportunities for new industries to emerge. But I don't think Japan is going to be taking radical steps in that direction. But I think a lot of Japan's recovery is going to be linked to the recovery of East Asia. And East Asia, despite the decades of growth, has much more growth potential and has (probably ?) much greater demand.
And what is quite striking in the wake of the East Asian economic crisis is how much the Japanese companies have continued to maintain the production network in East Asia. I would characterize this as the strategy of aggressive defense. And a lot of the financial packages are designed to sustain these investments. And once the East Asian economies begin to recover — and I think that that's almost inevitable — Japan, I believe, will be better poised than any other advanced industrial country to reap the benefits of the revival of East Asia.
M. Armacost: I would simply add also that in terms of working through this cycle, the biggest problem Japan confronts are this mountain of non-performing loans — and the banks are belatedly addressing that — and the huge excess capacity in the manufacturing sector. And you can't open a newspaper without seeing some company restructuring to address that. That'll take time. So in addition to the natural cycle, there's the aggressiveness with which the government addresses these two fundamental problems.
In other respects, Japan is one of the most competitive economies in the world, besides — [Audio break] — habits of savings, habits of thrift, habits of hard work, generally a lean government that could be assisted by some deregulation. So the fundamentals are there to return to, but these two issues of excess capacity and non-performing loans have to work their way through, and it's going to take some time.
Any further questions? Yes.
Participant: I just had a question about Super 301. That was renewed earlier this year, and the announcement is due out on Friday. I'm wondering if you think that the United States might use that as a means to raise some of these economic issues with Japan, or will they continue their quiet consultations that you were suggesting earlier?
E. Lincoln: As I suggested earlier, I would be very surprised if they used Super 301. In my view, Super 301 has been useful, if at all, as a rhetorical tool. And I don't perceive, at least relative to Japan, I don't perceive much interest in the administration on actually wielding it, particularly at this point in time.
M. Armacost: One issue hasn't come up, and that's another round of WTO talks. And it seems to me that's likely to be one of the subjects for conversation. I surely hope it will be. For one thing, if we're serious about securing fast-track legislation, you've got to have a vehicle that looks toward multilateral trade negotiations which can promise large, incalculable gains for us if it stands a chance in the Congress. But we can't expect to have a fruitful round unless the two biggest economies in the world are on board. So this is one of those occasions prior to November to get our ducks a little bit in a row.
Any other questions? Yes.
Participant: I had a question on the practical applications of the defense guidelines. From the U.S. military point of view, I assume the argument was if the U.S. went into a Korean conflict, there would be some major gaps in what Japan could do to assist us in that. I'm wondering, from the U.S. military point of view, how many of these gaps were plugged, and what would be the major gaps that would remain? For instance, field supplies, something like that.
M. Mochizuki: Well, in many ways, one could raise some questions in terms of how much there were real gaps in terms of what the United States needed Japan to do. I remember at a time when North Korea was much stronger relative to South Korea militarily that many military officers would say, in terms of a Korean contingency, basically they wanted Japan to get out of the way and they would be able to use the bases and the like to move ahead.
And so it's curious that at a time when North Korea has become weaker militarily, except in the case of a suspected nuclear program and missile development, that the United States is now so insistent that Japan step up to the plate for rear-area support. And I think a lot of this has to do with the political implications of this; that if it looked like Japan was standing in the way in the use of civilian facilities, those communication facilities, for a variety of reasons, some of them having to do with local politics, at a time when U.S. forces are being sent into harm's way, dying on the battlefield for what Americans would perceive as the defense of one of Japan's vital interests, and if Japanese self-defense forces could not help in the search and rescue of American soldiers or provide medical aid — and these were all issues that came up during the Persian Gulf crisis — then even if the United States could prosecute the war without Japanese support in the post-bellum period, the U.S.-Japan security relationship would have been hollowed out. And I think that is the primary motivation.
So, you know, rather than pointing to the technical details about what fuel shortages there might be, what specific force might be necessary, I think those are much more very nitty-gritty technical issues. But I think the major question is that Japan be seen as facilitating and, at the very least, not obstructing the U.S. military operations.
M. Armacost: I would say the existing plans of the American military were framed without expectations of Japan's involvement. So those plans exist, and it's against those plans that we make our own preparations.
Secondly, it seems to me if a conflict occurred in which there were the prospect of major American casualties, then we expect our expectations of Japan would go up. That's simply politics. And it's a region in which Japan's interests would be as engaged or more engaged than ours. Korea is, after all, a lot closer to Japan than it is to the U.S.
Thirdly, however, the contingencies that seem likely, as Mike suggests, are not the calculated, premeditated assault from the North, because it's far too weak to contemplate that, but it's rather contingencies short of all-out war that arise from instability in North Korea. And that might evolve to maybe humanitarian challenges, immigration, things of that sort. Happily, our governments have consulted about those things and they haven't experienced them, but there's an inevitable bit of ad hoc improvisation in dealing with them. But the fact that we've talked, I think, is encouraging.
Any other questions? Yes.
Participant: As Dr. Mochizuki put a good analysis on what has happened in the Japanese political arena since 1993. And also, I think that the LDP has become even stronger than ever before through 1993. But the basis on which the LDP has stood, it's a little bit fragile and they're losing some seats in the local elections. And also, there is some argument that in Japan that, given the weakening of LDP power, would — [Inaudible] — some more positive aspects not only in political landscape but also in economic situation. So how do you respond to this kind of an argument?
M. Mochizuki: Well, you're right that the LDP is resilient and it's strong now relative to other political parties. And I think this is really a relative issue. But that political foundation may be fragile, and one of the reasons for this is that you not only have floating voters, but a lot of voters who don't vote, who are not aligned with any political party. And depending upon the time and the issues of the moment, these voters may go out and vote and really skew the election results.
The LDP is very good in mobilizing its organized base. And it's been relatively good so far, relative to other parties, in mobilizing these floating voters. But kind of the non-aligned, non-voting population has always been a wild card. And so if an opposition force emerged with the right strategy that can build not only on its organizational base but reach out and excite the voters who tend not to vote — and many of these are urban voters — then it's quite possible that, under the new election system, that they could just overturn it and even win a plurality. And that's theoretically possible.
But the reason why I say that the LDP is relatively strong is that at this point, none of the opposition forces have, I believe, come up with the match of the organizational strength, the right image, and kind of the excitement. I think the Democratic Party has had an opportunity to do this, and Mr. — [Inaudible] — is quite popular, but it fizzled out. And the Democratic Party is fraught with as much contradictions and differences as the Liberal Democratic Party. So until an opposition party emerges like that, it will be difficult.
And the other thing is that, you know, it's strange that if you look in the past, the LDP has done relatively poorly when the economy seemed to be doing very well. I mean, it's a time when Japanese voters felt that, well, you can begin to experiment with other possibilities and other types of issues like corruption emerge. But I think that in the final analysis, they see, well, maybe the LDP is a safe bet in terms of dealing with the economy.
So the irony is that once Japan's economic performance goes up, that may be the time when the LDP may be much more vulnerable. But at this point, I just don't see that. And if you look at a lot of the local election results, a lot of the independent candidates that did not have the endorsement of the Liberal Democratic Party had linked ties to conservative politicians.
And so one should not interpret the victory of independent candidates as a defeat necessarily for the LDP. A lot of these deal with kind of factional rivalries; one candidate getting the LDP endorsement but another more conservative-leaning candidate affiliated with a particular politician. And so it's hard to read the results of the unified local elections as being a setback for the LDP.
E. Lincoln: If I might just add to that, for the Americans in this audience, I'm endlessly fascinated with the differences in the way our politics seems to play, or political opinion and voting patterns in the United States and Japan. In the United States, the tendency seems to be that if something has gone seriously wrong with the economy, the mood is "Throw the bums out and get somebody else in here who can fix it."
But I think Mike is absolutely right that often in Japan, particularly in the lower house as opposed to the upper house, that people hesitate. It's kind of like, "Well, maybe this isn't the right time to experiment with a bunch of people who don't know how to run the government. We'll stick with what we know."
And so although people did vote against the LDP in the upper house, I think particularly for economic reasons, the waffling back and forth on "Yes, there will be a tax cut," "No, there won't be a tax cut," "Maybe there'll be a tax cut," just before that election, I think really hurt the LDP. But that may not be the same in the lower house.
M. Armacost: I think we'll leave that as the last question since there's another program in this room. We thank you for your attendance, and I hope the trip will go well.