I appreciate this opportunity to testify before your Subcommittee on issues concerning our relationship with Japan. During two recent trips to Tokyo I was delighted to see that other visitors from the United States—Vice President Gore, Secretary of State Albright, and Secretary of Defense Cohen from the Administration; and delegations led by Speaker Gingrich and Senator Ted Stevens from the Congress—have been devoting the attention to Japan and other Northeast Asian countries that their importance to the United States demands.
Japan, after all, is still our largest overseas trading partner, and accounts for roughly 60% of the East Asian economy. It remains our most important Pacific ally at a time of considerable uncertainty in Northeast Asia. Tokyo's diplomatic cooperation will be essential as we address changing circumstances in the Korean Peninsula, the Taiwan Straits and Hong Kong.
Happily, after a period of substantial tension in recent years, a certain tranquility has settled over our relationship with Tokyo. Trade frictions have been in abeyance. A variety of factors account for this. For several years, our bilateral trade deficit with Japan has steadily declined. We worked our way through a lengthy agenda of bilateral trade negotiations, and signed a host of agreements for which both the Clinton Administration and Hashimoto Government claimed "victory." With the World Trade Organization up and running, when trade disputes occur, they are now being referred in the first instance to Geneva. A renaissance in American manufacturing and Japan's lengthy economic slowdown, meanwhile, has changed the psychology of our political and economic relationship. Above all, the interdependence between our economies continues to grow. At the microeconomic level, strategic alliances between American and Japanese companies continue to proliferate; at the macroeconomic level, America continues to provide Japan its largest and most open foreign market; Japan, by recycling the proceeds of its trade surplus into investments in the U.S. continues to finance a significant portion of our debt.
Since the brutal and tragic rape incident in Okinawa in August, 1995, our security relations have likewise improved. Both of our governments displayed resourcefulness in dealing with the Okinawan problem; meanwhile, China's growing power and uncertainties about how it will choose to use it, remind Japanese and Americans alike that our alliance represents a valuable form of insurance for which the premiums remain modest.
The respite from acute tensions has been welcome. But a continuation of this period of calm is by no means foreordained. Rather than attempt a comprehensive review of U.S.-Japan issues, let me merely comment on a couple of matters that are once again in the news—the prospect of a larger trade deficit with Japan this year, and the possibility that Japan may take on a somewhat more ambitious security role in Northeast Asia.
Japan is destined to run a larger trade surplus with us this year. The reasons are obvious: our economy is more vibrant than theirs, and the yen continues to weaken against the dollar. I don't know what the exchange rate of the dollar against the yen should be. Only the market knows. But the yen certainly seems weaker than the fundamentals warrant; just as it appeared a bit too strong when it went to 79 to a dollar in 1995. I'm no monetary expert, but the fluctuations of the dollar and yen since 1993 appear excessive, imposing successively on each country's exporters undeserved bonanzas and unwarranted penalties. I wonder whether we shouldn't develop arrangements to control these fluctuations within a narrower band. But I haven't the expertise to propose a specific fix.
For the moment the yen is likely to remain weak. Certainly Japanese authorities welcome a weak yen for they see few other instruments for reflating their economy. Interest rates are low and will probably remain so to spur growth and protect a vulnerable banking sector. Fiscal stimulus has been tried, but succeeded mainly in running up the level of Japan's public debt. Consumer demand-led growth is unlikely; the Ministry of Finance has just raised taxes while compiling a tight budget. While corporate profits have been improving, they are not sufficiently robust to produce a strong investment-led recovery. This leaves basically two options: 1) export led growth, and 2) regulatory reform. Regulatory reform is tough and will take time; hence, a weak currency appears their best bet for achieving relatively modest growth objectives this year.
How should we respond? In a word, calmly. We should continue to remind our Japanese friends that a dramatic increase in our bilateral trade imbalance could provoke a repetition of the acute trade tensions of the past. We must continue to be vigilant against MOF or BOJ intervention in the currency markets to maintain the yen's current weakness, let along further diminish its strength. When specific bilateral trade problems surface, we should refer them promptly to the WTO, and we should insist that WTO panel decisions be expeditiously implemented. If GATT provisions are insufficiently precise or their remedies ineffective, we should seek to deal with bilateral problems through negotiations with the Japanese government.
Beyond this we should concentrate on fundamentals. I would emphasize three points in particular:
—First, while the dollar is strong, I hope American firms will take advantage of this by investing more heavily in Japan. The imbalance in our investment flows far exceeds the imbalance in our trade, and they are related. In a world in which a large percentage of international commerce involves intra-firm trade, the weak infrastructure of American multinationals in Japan is a real trade handicap.
Why have American companies not invested more heavily in Japan? To be sure, the Japanese have not made things easy; on the contrary. But when I was serving in Tokyo, the American Chamber of Commerce in Japan usually cited the following factors as the largest disincentives to direct investment: the high cost of doing business in Japan, in particular, the virtually prohibitive price of land; the difficult of recruiting top notch local staff; and the harsh regulatory environment.
Things are changing. Since the yen has depreciated nearly 50% against the dollar since August, 1995, the cost of doing business in Japan has come down rapidly. The price of land in Japan's major metropolitan centers has declined even more sharply. Doubts about the future of Japan's lifetime employment system have made it easier for our companies to recruit top graduates from the leading universities. And regulatory reform is on the agenda, and on the way. It is an excellent time for American companies to position themselves—particularly in the service sectors—for the opportunities that reform will bring.
—Second, we obviously need to encourage prompt regulatory reform in Japan. I believe it is coming. Japan's leading politicians have invested more of their prestige on achieving it; the business establishment is more strongly committed to it; and the bureaucracy's resistance has been weakened by its involvement in recent scandals. More importantly, the reasons for proceeding with reforms are far more compelling than the arguments advanced in the past. Today regulatory reform is promoted not to mollify foreign critics, but to preserve the future growth prospects of Japan's own economy. The devil, of course, is in the details. And the content, the shape, and the pace of reform is not entirely clear.
These considerations notwithstanding, the resistance to reform will be formidable. The principles adduced to guide reform—e.g. reliance in the invisible hand of market forces rather than the visible hands of Kasumigaseki to regulate supply and demand, transparency of the rules, international comparability, etc.—make eminently good sense, but they also represent a frontal assault on long accepted bureaucratic prerogatives. We should not expect self-abnegation from Tokyo's "best and brightest." But I believe key elements of the bureaucracy are concluding—either because they regard some reform as desirable or inevitable—that their interests will best be served by controlling the process in order to preserve to the extent possible their own perquisites and some scope for the continued pursuit of industrial policy.
It is only natural that reform in Japan will take a different guise than in the U.S. It would be inappropriate and feckless to insist that Japanese regulatory arrangements mirror our own. But we have substantial interests at stake. Many of Japan's most difficult trade barriers remain embedded in their regulatory system, and we have a right to expect genuine national treatment for our firms. Thus we should encourage the reform process, and press the Japanese government, in concert with other European and Asian countries, to take fully into account the legitimate interests of foreign companies, as their regulatory reform process proceeds.
—Third, we must acknowledge our own responsibilities for our trade deficit. We all learned in Economics 101 that when a nation consumes more than it saves, it must make up the difference through imports and foreign borrowing. We have done that in spades. The corollary is clear: Unless we do something about this imbalance between consumption and savings at home, an assertive trade policy can merely rearrange the composition of our external deficit; it cannot reverse it. Fortunately, there has been real progress in reducing government "dissaving" by reducing the Federal fiscal deficit. Both the President and Congress deserve credit for getting the deficit down from nearly $300 billion in FY93 to $107 billion in FY96. Yet we are in jeopardy of losing momentum on deficit reduction this year. The Administration's budget is heavily "backloaded," raising questions about its seriousness. Nor has the Congressional leadership identified its own priorities with clarity and precision. Meanwhile, recommendations for adjusting the CPI inflators are stalled; fundamental tax reform is off the table; and the future of entitlement reform is unclear. I hope the Administration will provide a lead in these important matters. If it does not, I trust that Congress will hold its feet to the fire in the months to come. For the foreseeable future our efforts to achieve fiscal stability will continue to have a major influence on the contours of our relationship with Japan.
I am confident that if we stay on track with efforts to reach a balanced budget and augment incentives for household savings; if the Japanese make steady progress in their effort to achieve regulatory reform, and if our companies capitalize on the benefits of a strong currency to invest in the world's second largest economy, we can transform the current respite in our trading relationship into a more durable era of good feelings.
In the security field, the question is how we place our alliance on a more sustainable basis in the post cold war environment. No major constituency in either country is calling for amendment of the Treaty of Mutual Cooperation and Security, let along its termination. But public support for the alliance in both countries while broad, is somewhat shallow. And questions persist about the supporting arrangements.
It is important that we recall the benefits the alliance brings. It remains a means of deterring threats to the sea lanes in the Pacific, of averting the proliferation of weapons of mass destruction, and of contributing to the stability in Asia that is essential for trade to flourish. The alliance is also a source of reassurance—that we have a reliable friend in Asia that can help us maintain a stable equilibrium in the area, and that Tokyo can achieve security without radical changes in its military forces or its regional role. The alliance also provides a framework for promoting preventive diplomacy in Asian trouble spots. In short, we and the Japanese have a substantial stake in maintaining our cooperation in the field of defense.
But what adjustments in the supporting arrangements for the alliance are called for in the light of changing circumstances? The first principle of the physician is, "Do no harm." That is a good place to start. There are a few things which in my judgment we should not do.
—This is not the time to undertake major reductions in U.S. military deployments in Asia. While there is nothing magic about our current force levels, we recently reaffirmed our intention to maintain them for a lengthy period. Our word will not be taken seriously if we are constantly changing our position on matters this central.
—We should not press for early decisions to produce or deploy Theater Ballistic Missile defense systems. The technology is developing rapidly; the cost of alternative systems remains high; no short-term threats compel urgent choices; and the implications of such decisions for our respective relationships with China and Russia deserve further reflection.
—We should resist any attempt to reorient the alliance explicitly toward the containment of China. China presents no immediate military threat to either of us; nor will it for some time. Preservation of the U.S.-Japan alliance naturally affords us a "fallback" in the event China's future conduct should make containment necessary. For the moment we should accord priority to an attempt to draw China into multilateral regimes for managing regional and global problems on terms consistent with the purposes of those regimes.
What adjustments in the terms of defense cooperation would be timely and relevant? Here are a couple of suggestions that I think might move us in the right direction.
- We should reestablish a more formal process for periodically reviewing U.S. force levels in Japan. The East Asia Strategy Initiative (of the late 1980s) provided a useful process, which was regrettably aborted. At regular intervals, our force posture should be reviewed in the light of changing circumstances in the region. U.S. government conclusions regarding appropriate adjustments can provide the basis for consultations with allied governments. Timely consultations would offer allies an early warning of possible changes, and an opportunity to influence them. We now have regular "2-plus-2" meetings between our respective Defense and Foreign ministers, and this subject is an entirely appropriate one for that forum. So are related issues, such as Japanese roles and missions. So long as we bear the principle responsibility for responding to regional contingencies, Washington is likely to want to exert a controlling influence over decisions on U.S. forward deployed force levels. In the end, of course, Japan has the decisive voice over deployments in Japan, since it is the host nation. If we are to achieve a more balanced alliance we should move in the direction of joint decisions through genuine consultations.
- Japan needs to clarify its right to exercise collective self-defense and collective security responsibilities. These issues are currently being debated in Japan. It is a good time to harmonize interpretations of such rights as are embodied in the Japanese Constitution, the U.S.-Japan Treaty and the U.N. Charter. An assertion of the right of collective self-defense—presumably through a reinterpretation of the Constitution—would 1) permit Japan to tackle wider responsibilities in U.N. peacekeeping operations, thereby enhancing its claim to a Security Council seat, and 2) strengthen the alliance by permitting wider cooperation in the defense of common interests in a crisis. To be sure, the affirmation of such rights would not compel Japan to cooperate with the U.S.; it would merely enable such decisions to be made on policy rather than constitutional grounds. These, of course, are major decisions which touch sensitive nerves in Japan and abroad. We need to consult closely and confidentially on these matters with the Japanese. They, of course, will need to develop a policy consensus on them through a more open public debate.
- We should, above all, augment collaborative efforts at preventive diplomacy—with special attention to Korea and China. The most immediate Asian security issues we confront are in the Korean Peninsula and the Taiwan Straits. Implementation of the U.S.-North Korean Framework Accords required U.S.-Japanese collaboration. The maintenance of our alliance remains an important feature of our residual deterrent role in the Korean Peninsula. If a humanitarian crises were to become acute in North Korea, joint efforts would be needed. U.S.-Japanese cooperation will likewise be necessary to deal with the political and economic challenges the unification of Korea would inevitably bring. By the same token, peaceful resolution of the Taiwan issues is more likely if Tokyo and Washington pursue parallel efforts to encourage flexibility and patience in Beijing and Taipei. Most importantly, we jointly face the task of dealing with a rising China. Successful integration of Beijing into multilateral security, economic and political arrangements can spare us the burdens of confrontation with a powerful self-assertive China down the road. It will require that we jointly encourage Beijing's compliance with accepted norms of conduct while creating a regional equilibrium of power that encourages its restraint and moderation. Wise diplomacy today can spare us both heavier security burdens tomorrow.
Eight years into the post-cold war era, we have already explored various adjustments in our relationship. Thoughtful people on both sides of the Pacific recognize that if each of us attends to structural changes needed in our own economies, relations between us will benefit. They also know that we need to strive for a more balanced security relationship. Interdependence between us is so extensive that it is inescapable. Why either of should want to escape it is mystifying to me. But for those who find its terms discomfiting, we can make it more comfortable by working to assure that its benefits continue to grow and striving to see that they are equitably shared. Ultimately, these are the guidelines we need to keep in mind as we reshape the contours of our trade and security ties.