A Comparative Analysis of the Economic Problems of the United States and Japan

 

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Introduction 

 

The current economic imbalance between the United States and Japan has produced one of the most serious crises to face the international trading system, and the world economy as a whole. The huge American deficit and Japanese surplus are having major effects on production, employment, and other key economic variables in both countries.

 

The magnitude of the imbalance has become enormous. In essence, the external position of the two countries is headed in opposite directions at an extremely rapid pace. Indeed, no country has ever experienced deficits of the magnitude now being experienced by the United States —– and, aside from Saudi Arabia for a year or two after the oil shock, no country has ever run surpluses like those of contemporary Japan.

 

The US-Japan economic relationship is critical to both countries. Their integration through trade considerably exceeds that between either country and its other trading partners. Where economic integration is proportionately so intense, and so large in absolute magnitudes, temporary imbalances may easily generate economic and political problems.

 

THE PROBLEMS  

 

The current trade problem has a number of dimensions. There are traditional problem of trade policy which involve questions of market access, fairness of  national practices, and standard protectionism. These issues now focus primarily on Japan and relate to US exports to Japan (for example, telecommunications equipment), Japanese penetration of the American market (for example, automobiles), and global competition between the two economic superpowers (for example, computers and semiconductors).

 

There are also major issues of a monetary and macroeconomic nature in both countries. The sharp growth in the US budget deficit is a central element in the US trade deficit, for example. By contrast, Japan has been substantially reducing its budget deficit. The opposite directions of these national policies have contributed importantly to the trade imbalance.

 

Finally, structural elements of each society contribute to their external imbalances. At the macroeconomic level, the United States has an extremely low rate of national savings by international standards, and Japan has an extremely high rate. At the microeconomic level, Japan’s keiretsu system of

industry conglomerates tends to discriminate against nongroup (including foreign) suppliers, and for their part, many American companies simply have not made the effort necessary to penetrate the Japanese market.

 

Conceptually, the problem thus can be divided into eight parts. In each country, there are both structural and policy elements. Both the structural and policy components include macroeconomic and microeconomic dimensions. Figures 1.1 and 1.2 depict these matrices; an illustration of the type of issue involved appears in each cell.

 

F I G U R E  1.1    Elements involved in trade surplus of Japan _____________________

 

                                                        Illustrative List       

                                             Structural                                                  Policy

Macroeconomic           High savings rate                          Sharp decline in budget deficits

 

Microeconomic            Keiretsu system                             Industry targeting   

 

F I G U R E  1.2      Elements involved in US trade deficit

 

                                                        Illustrative List

                                      Structural                                                  Policy

Macroeconomic              Low savings rate                          Sharp increase in budget deficits            

 

Microeconomic               Inadequate corporate efforts         Export controls (soybeans,  

                                       to penetrate Japanese markets      Alaskan oil)           

 

                   

   THE MACROECONOMIC DIMENSION           

 

The sharp increase in the overall macroeconomic imbalances, to previously unimagined levels, represents by far  the most significant issue in economic terms. Virtually the entire growth in the bilateral imbalance can be explained by the onset of exchange rate misalignment and differences in economic growth rates. Likewise, even a complete elimination of Japanese trade barriers, intangible as well as overt, would be likely to expand US exports in the future, but with only a modest impact on the overall imbalances.

 

A close study of the evolution of US-Japan economic relations over the past three decades also reveals that frictions rise and fall in response to major changes in the exchange rate relationship between the dollar and yen, which in turn produce sharp swings in the global trade balances of the countries. each rise of one percentage point in the real (inflation-adjusted) effective (trade-weighted) exchange rate of  the dollar produces a deterioration  of  $3 billion to $4 billion in the global US trade balance, and each rise of one percentage point in the dollar-yen rate produces a deterioration of about $850 million vis-à-vis Japan. Largely as a result of this historic currency misalignment, which relates importantly to the huge deficits in the US government budget, the United States has experienced an enormous deterioration in its trade balance, not just with Japan but with every part of the world.

 

Japan’s recent policies also have played a major role in generating the sharp rise in that country’s external surpluses and the weakness of its currency against the dollar. The Japanese savings rate is now substantially in excess of domestic investment in Japan, largely because the government budget deficit has declined sharply and no longer absorbs the excess savings of the private sector, creating net capital outflows and a current account surplus. In addition, the geographical distribution of Japanese investments is undergoing a policy-induced policy adjustment:  the liberalization of exchange controls. As a result of these factors, along with the general “pull” into the dollar, caused primarily by high interest rates and “safe-haven” considerations, long-term capital outflow from Japan has become massive, depressing the yen against the dollar and improving Japan’s international competitive position against the United States.

 

The US-Japan disequilibrium has thus been magnified in recent years by the opposite directions of policy in the two countries. The United States has sharply increased its budget deficits which, along with a return of private investment to normal levels without any substantial increase in domestic savings, has raised interest rates and the international value of the dollar. Japan has been reducing its budget deficits, which until a decade ago, had soaked up most of the excess savings of the private sector, creating a sizable surplus of savings and pushing capital abroad.

 

Moreover, recent policies adopted by the two countries which aim directly at international capital flows have made the yen-dollar problem worse. Japan’s speeding of the liberalization of its capital markets has increased capital outflow from Japan and thus has weakened the yen further. American elimination of its withholding tax on interest payments to foreign investors in US Treasury securities, and Treasury’s subsequent “tailoring” of its securities to the needs of such investors, further increased financial movements into the dollar and intensified the trade problem.

 

  SECTOR-SPECIFIC ISSUES                                        

 

At the same time that macroeconomic factors seem to be dominant in increasing the overall imbalances being experienced by the United States and Japan, a perception of extensive “unfair” trade practices on the part of Japan looms exceedingly large in the political dimensions of the problem. There clearly exists a widespread view, in Europe and elsewhere in Asia as well as the United States, that Japan is “different” : not only in the diligence of its people and underlying competitiveness of its economy, which are widely acknowledged and admired, but in the basic manner in which it relates to the rest of the world. Indeed, there was a “Japan problem”, albeit to a much lesser degree, even when the aggregate imbalances were much smaller and exchange rates and other macroeconomic factors were much closer to the equilibrium.

 

Part of the “specialness” of the Japan problem undoubtedly stems from the simple fact that it is a large country, the second most sizable economic power in the world. Part of the problem probably derive from its ability to challenge industry in America across the board, especially at the frontiers of high technology, which no other country can do. Part relates, no doubt, to the huge trade surpluses already discussed.

 

But this concern ranges far beyond the “normal” trade distortions such as tariffs, import quotas, and other visible nontariff barriers and export aids. It alleges that “Japan, Inc.” encompasses a  unique brand of cooperation among government, industry, and labour which produces a formidable competitor unlike any other country. One specific manifestation of this alliance is said to be widespread “industry targeting”, through  which future “winners” are promoted and “losers” eased out in much more rapid and efficient manner than can be accomplished by the more traditional industrial policies employed in other countries —- let alone the largely laissez-faire approach of the United States. In turn, such targeting is said to produce impenetrable import barriers and powerful, if subtle, support for exports.

 

Other fundamental elements of Japanese society are also widely viewed as having the effect, if not the primary intent, of unfairly blocking access to the country’s markets. The keiretsu system of social organisation, under which some firms buy only from other firms in their “family group” and discriminate against all outsiders (Japanese as well as foreign), is one such practice. Another is the desire of powerful government bureaucrats, especially in the Ministry of International Trade and Industry (MITI), to maintain power and a plethora of lucrative postretirement positions in industry. Myriad lists of licensing, standards, testing, and certification requirements are widely thought to interrelate with these apparently deep-seated elements in Japanese society to render access exceedingly difficult, if not impossible in many cases, for foreigners.

 

Needless to say, objective analysis of such issues is also exceedingly difficult.  Most discussion of them tends to focus on specific cases, which makes it extremely difficult to employ the usual techniques of quantification and aggregation.

 

It is clear whatever the economic conclusions reached here or elsewhere, that the political impact of alleged Japanese malpractices is enormous. Important  elements in both industry and Congress in the United States, and their counterparts in many other parts of the world —- including japan’s nearest neighbours, some of which (such as Korea and Taiwan) are also among the world’s most competitive countries —- believe deeply that Japan is “different” and that the difference constitutes a massive trade barrier. In the United States, this view of pervasive “unfairness” has motivated many of the initiatives to retaliate against Japan. Each time a new problem is discovered for an additional product, suspicions are confirmed and the complaints grow.

 

However, the extent of the problem has fluctuated quite closely with the levels of the two countries’ external imbalances —- both globally and bilaterally, which tend to move closely together. This brings us back to the macroeconomic and exchange rates issues, both structural and policy-related. But the intensity of concerns over the sector-specific issues, and proposals for microeconomic responses to them, also rises with the aggregate imbalances.

 

There is a certain logic in this correlation of sector-specific and macroeconomic concerns. When the aggregate positions of the countries are in rough equilibrium, fewer industries are likely to experience competitive problems —– due to Japanese practices or other causes —- which deny them market share. Hence, fewer will seek political redress, and the level of tension will be considerably lower.

 

Conversely, a rise in the macroeconomic imbalance —- as manifest most directly in dollar overvaluation and yen undervaluation —- adds to the problems of all industries, including the more competitive. a growing number will inevitably look for government help, with some justification as their problems derive from forces outside their own control. the nature of the help sought will almost always be sector-specific, as individual firms quite naturally focus on their own problems and remedies apparent to them. In any event, they tend to feel virtually powerless to offset broad economic forces such as exchange rates and government budgets, let alone national savings proclivities and other structural phenomena.

 

To the extent that evidence of   “unfair” treatment of the petitioner’s effort to compete against Japanese firms can be confirmed, his case for microeconomic responses will be buttressed. Hence the growth of the macroeconomic imbalances will inevitably produce increased allegations of microeconomic distortions, adding to the escalation of tensions on both fronts. There is probably a ratchet effect of overall imbalances on sector-specific concerns: each round of sizable macroeconomic difficulties produces additions to the list of sectoral complaints, which in turn must be dealt with to return the overall relationship to anything approaching stability.

STRIKING   A  BALANCE   

It therefore seems clear that both the macroeconomic and sector-specific issues must be addressed to deal effectively with the US-Japan economic problem that has emerged. On one hand, even an immediate elimination of all of Japan’s trade barriers and distortions —- both overt and intangible —- would, under current macroeconomic circumstances, almost certainly leave an enormous imbalance in the external positions (local and bilateral) of the two countries. On the other hand, even a return to macroeconomic balance in the policies (especially, fiscal policies) of both would leave a long list of sector-specific complaints.

 

The case for attacking simultaneously the macro and micro dimensions of the problem, with all possible effort, is reinforced by three other considerations:

 

First, Japan can be expected to run substantial current account surpluses, albeit at levels much lower than at present, both globally and with the United States even under equilibrium conditions. Unlike the period just after the dollar devaluations of the early 1970s, when Japan’s global surplus and bilateral surplus with the United States disappeared or dropped to very low levels, there is unlikely to be a respite from at least some substantial and continuing imbalance between the two countries.

 

Second, both the macro and micro dimensions of the problem reflect important structural elements in both countries. By definition, structural change cannot occur within brief periods of time. A substantial part of “the problem” will thus inherently take years , or even decades, to resolve even with the best of wills in both countries. The corollary is that it is essential to do everything that can possibly be done in the short run, not only to avoid the enormous economic and political costs of a systemic breakdown but also to avoid derailing the needed structural changes and thus delaying further a lasting solution to the US-Japan problem itself.

 

Moreover, it is important to recognize at the outset that major structural influences may be largely beyond the control of the governments, at least in the near term. Indeed, the distinction between “structure’ and “policy” implies the presence of structural problems beyond the normal reach of government action. There is a dangerous potential for clash between the demands of the United States for change in the Japanese economy, on one hand, and a limited ability of the Japanese government to act in some societal areas, on the other.

 

Third, different constituencies are affected differently by changes in macroeconomic and sector-specific circumstances —- and perceive the differences as even greater than they actually are. For example, exporting firms in the United States may benefit primarily from Japanese measures to liberalize specific markets, whereas import-competing firms may gain from currency changes.

 

From this cursory review of the problem, we conclude that it is essential to move as quickly as possible in both the United States and Japan to address its several sets of causes: structural and policy, macro and micro. However, it is the macroeconomic area that both holds the major potential for rapid improvement in the situation and has been least subject o intergovernmental negotiation to date.

 

It is also essential to understand the limitations of the several sets of policy tools for redressing the several parts of the problem. Changes in trade policies are most unlikely to have a significant impact on overall trade balances. Improvement in the trade balances will not resolve many concerns of trade policy. Hence, there must be a much clearer matching of policy instruments to policy targets than has characterized much of the debate to date. No single device, be it a change in the dollar-yen exchange rate  or a US import surcharge or a “get tough” approach  to Japanese import barriers, will simultaneously redress the different aspects of the US-Japan problem.

 

Both the history of the US-Japan economic problem and its latest manifestation highlight  the enormous importance to both countries of an effectively functioning international economic system. At least to some extent, the existence of a more disciplined international monetary regime might have prevented the emergence of the recurrent dollar-yen misalignment. Better GATT mechanisms could have channeled at least some US-Japan conflict into orderly dispute settlement procedures. In addition to making every effort to resolve the several dimensions of their current problem, the United States thus would be well advised to make joint efforts to lead the world toward adopting more effective economic systems         as well.

               CONCLUSIONS  &  RECOMMENDATIONS               

 

Japan will tend to run a sizable bilateral current account surplus with the United States, even when both countries are in global  equilibrium. the sharp escalation of the US-Japan economic problem derives from the magnitude of, and huge increase in, the global current account imbalances of the two countries and the resulting bilateral imbalance between them.

 

Fortunately, policy changes are available which offer promise of achieving structural and economic reforms. Both the United States and Japan need to adopt a series of policy measures to try to diffuse the current crisis. Here are some specific recommendations, acceptance of which might enable the achievement of the desired outcome:

 

First, it is essential that the United States launch a comprehensive program to assure correction of the exchange rate of the dollar.  The primary requirement for fundamental adjustment remains a sizable, credible, and a sustained drive to eliminate most or all of the structural component of the budget deficit. Only by thus reducing the government’s ongoing demands on the economy, leading to an excess of spending over production, and an excess of investment over saving can America’s external accounts be moved toward fundamental equilibrium. the United States has repeatedly pledged in international forums to take such steps as its major contribution to the restoration of equilibrium; its failure to do so represents at least as great a violation of international compacts as any failure by Japan to open its markets more completely.

 

Second, Japan should reinforce the effort to correct the dollar, and move simultaneously to reduce its own current account surplus, by taking new steps to promote expanded private and public investment through tax cuts and other supply-side measures. More rapid Japanese economic growth would reduce its external surpluses both directly, by generating increased imports and lower exports, and indirectly, by attracting greater capital inflows and thereby strengthening the yen.

 

Third, once the currencies are moving in the right direction, due to other policy efforts or simply as a result of changes in market sentiment, the United States and Japan can promote the needed correction by intervening jointly in the foreign exchange markets. such “leaning with the wind”, in the direction of both current market sentiment and underlying equilibrium, can help convince private markets of the commitment of the authorities to correct the existing misalignment and might not require the actual infusion of very large resources.

 

                                        BIBLIOGRAPHY                                        

 

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Staiger, Robert W., Alan V. Deardorff, and Robert M. Stern. 1985. United States-Japan   

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Ohmae, Kenichi. 1986. Triad Power: The Coming Shape of Global Competition. New      

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Hyde, Herbert F. 1985. “ US-Japan Trade Tensions: The View of American Business in

           Japan”. Washington.

 

Petri, Peter A.  1984.  Modeling Japanese-American Trade: A Study of Asymmetric

           Interdependence. Cambridge, Mass.: Harvard University Press.

 

Scott, Bruce R.  1985. “US Competitiveness: Concepts, Performance, and Implications”.

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             School Press.

 

            

 

                                                                                                                                                                                    

 

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