No. 8 — March 1, 1996


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Chronology of U.S.-Japan Relations and Japanese Economic Developments in 1995



MOF officials reveal that the ministry will have to compile a third supplementary budget for FY 1995 in light of a sizable shortfall in tax receipts. According to these sources, government administrative costs and revenue-sharing programs with localities will be cut at the same time that additional borrowing is added.

Participants in the 18th Trade Conference, a forum for cabinet members and business leaders, adopt a plan backing deregulation to improve access to Japan's markets.


In a public statement the head of the Electronic Industries Association of Japan, which represents the semiconductor industry, states that the chip pact should be allowed to expire on schedule in July 1996. No government-to-government replacement is needed, he adds, in large part because foreign manufacturers now are an integral part of the supplier network in Japan. EIAJ's chairman also says that the cooperative relationships that have sprung up between American chip manufacturers and Japanese customers can be expected to continue.

The yen, which spent all of October until the month's final days at slightly below ¥100=$1.00, closes in Tokyo trading at ¥103.56. That drop fuels a 3.2 percent gain in the Nikkei average to 18,028.80, restoring the stock market indicator to what had become its typical level in late September and most of October until a sell-off occurred in the five previous trading days.


U.S. banking authorities order Daiwa Bank to cease all U.S. operations within 90 days. They also ban it from returning to the American market for three years. The joint action of the Fed, the Federal Deposit Insurance Corp. and state banking regulators is unprecedented; never before in the postwar period has a Japanese bank been kicked out of the United States. Moreover, with $13 billion in U.S. operations, Daiwa Bank appears to be the biggest foreign banking business ever shut down by American regulators. The U.S. government simultaneously announces a 24-count criminal indictment against Daiwa Bank. Authorities additionally say that they will seek a $1.3 billion fine against the bank. The U.S. response to the disclosure that Daiwa Bank had concealed $1.1 billion in trading losses over 11 years at its New York City branch is stronger than most observers on either side of the Pacific expected. As such, analysts say, it is designed to send several messages, including one to foreign banks operating in the United States that American authorities intend to extend their supervisory reach and another to the Finance Ministry that it needs to beef up its supervision of banks in Japan.

MOF announces an unprecedented series of measures against Daiwa Bank intended to restrict its foreign and domestic banking activities. Among these is an order to reduce the level of outstanding loans related to international operations.

Senate Majority Leader and presidential candidate Robert Dole (D, Kan.) says that "it would be a mistake to extend new fast-track authority [to President Clinton] at this time." Analysts interpret his announcement as the final nail in the coffin for fast-track renewal in 1995, given that congressional Republicans and the White House already are locked in a standoff over the scope of a renewed fast-track authority.

The American Forest & Paper Association calls on the Clinton administration to urge Japan to make further changes in standards, testing and certification procedures for building materials as well as construction methods. AF&PA's comments are one of just two received by USTR in response to a public notice asking for input on what steps Washington should ask Japan to take when it submits a new regulatory reform plan to Tokyo later in the month.


Kodak files additional documentation with USTR to support its charge of barriers in Japan's consumer photographic market. The company says that it hopes the additional information will enable U.S. trade officials to accelerate their efforts to negotiate with the Japanese government. In the filing Kodak rejects MITI's argument that the company should take its allegations of anticompetitive practices by Fuji Photo Film to the JFTC. The antitrust agency is a big part of the problem, Kodak says, because of its failure to enforce Japan's competition law.


With agreement still eluding APEC members on the contents of the action agenda that is be adopted at the fast-approaching leaders' summit in Osaka, Mr. Kantor expresses optimism that the forum's 18 members will be able to reach a consensus on how to free regional trade that is comprehensive yet flexible on the timing for liberalization of sensitive sectors.


Daiwa Bank pleads not guilty to each of the 24 criminal charges filed against it in the New York Federal District Court.


EPA comes to the same conclusion in its economic report for November that it did the month before. It says that the economy remains weak and at a standstill. EPA economists do find some bright spots in business investment and residential construction, however.


The White House announces that President Clinton will have to cut short his trip to Japan for the November 19 APEC summit and meeting the next day with Prime Minister Murayama because of the deadlock with the Republican-controlled Congress over the FY 1996 budget. Emergency spending authority expires at midnight, and new short-term spending legislation sent down from Capitol Hill is unacceptable to Mr. Clinton. The president's foreign policy advisers forcefully argue that Mr. Clinton must go forward with his trip, even if it has to be abbreviated. The State Department's top Asian policymaker reportedly warns, for example, that cancellation of the trip could be a "body blow to our partnership with Japan and a body blow to APEC."


Japanese financial institutions held almost ¥37.4 trillion ($373.9 billion) in nonperforming or underperforming loans at the end of September, the Finance Ministry reports. By its calculations almost half of this total — ¥18.3 trillion ($182.9 billion) — is uncollectible. MOF officials defend their number, which is down slightly from the March 31 figure, saying that it provides a very accurate picture of the bad-loan situation in Japan. To bolster this claim the ministry splits the total between loans on which no interest payments had been made for at least six months (¥24.4 trillion or $244.3 billion) and loans on which the interest charge had been renegotiated to a level below the discount rate (¥13 trillion or $129.6 billion). It also reports that agricultural cooperative-related financial institutions held ¥4.9 trillion ($490 billion) in restructured loans to troubled housing loan companies, down from ¥5.5 trillion ($550 billion) six months earlier.


The budget impasse with Congress forces Mr. Clinton to cancel his long-scheduled trip to Japan. The decision, by all accounts, is not easily made. Top Clinton administration officials regarded the chief executive's attendance at the APEC meeting as an important demonstration of the U.S. commitment to Asia. Equally if not more important, Washington as well as Tokyo had looked forward to a Clinton-Murayama summit to reaffirm the importance of bilateral defense relations and to ease tensions in Japan over the large U.S. military presence there, especially on Okinawa, where three American servicemen stand accused of the early September abduction and rape of a schoolgirl. In the end, though, the president decides that he has no choice but to stay in Washington to work out the budget stalemate, which already has caused a partial government shutdown. The extraordinary logistics of negotiating with congressional leaders from half a world away made the trip highly impractical, White House officials say.


With commercial banks and agricultural cooperatives still at loggerheads over how to split the losses rung up by the seven failing jusen, Finance Minister Takemura suggests at a news conference that the government might have to step in to force a resolution. He reiterates that the Murayama administration expects to finalize by yearend a plan to deal with the problems of the mortgage providers. Sources close to the Finance Ministry already have leaked the outlines of MOF's first cut at a plan to close down the jusen. According to these reports, banks, whether or not they own equity in the housing loan companies, would forgive most of the money owed them, while agricultural cooperative-related financial institutions would write off about one-tenth of what they lent the jusen. The seven firms then would transfer their recoverable loans to a new public-private organization.

Trade and foreign ministers of APEC's 18 member countries endorse at the end of a two-day session in Osaka a Japan-shepherded action agenda that describes the principles and the guidelines to be followed in moving toward the group's goal of regional free trade and investment within the next 25 years. Despite this broad support, a number of the road map's elements, particularly in the section on principles, remain controversial.

In an apparent attempt at damage control following the cancellation of his Japan trip Mr. Clinton takes his case directly to the Japanese public in a hastily arranged 45-minute television and print interview. The president emphasizes that his reason for bowing out of the trip is due entirely to the budget impasse and "has nothing to do with Japan and America's relationship." He adds that the trip will be rescheduled as soon as possible. Mr. Clinton also reiterates that he remains committed "in total good faith" to solving the problems associated with the concentration of U.S. military bases on Okinawa.


The top-level participants in the third annual APEC summit, held in Osaka, reaffirm their "unwavering resolve" to achieve regional free trade and investment on the timetable adopted at 1994's meeting in Bogor, Indonesia. Nonetheless, the action agenda that the leaders sign papers over major differences concerning the scope of the forum's liberalization process, fudges the question of whether to extend APEC's market-opening measures to nonmember as well as member economies on a nondiscriminatory basis, and offers largely unimpressive initial national commitments to reduce trade and investment barriers. Despite the document's deficiencies, Japan generally wins good marks for drafting an action agenda that will move APEC toward its ultimate goal.

Vice President Al Gore, the president's stand-in at the APEC gathering and at the one-on-one meeting with Mr. Murayama, seeks to assure his Japanese host at a 50-minute get-together in Osaka of Mr. Clinton's continued commitment to Japan and Asia and of the importance of bilateral security ties.


Washington forwards to Tokyo a redrafted U.S. regulatory reform initiative that it hopes will be referenced when the Japanese government updates its deregulation plan next March. The paper draws substantially on the "comprehensive" recommendations that the White House submitted a year earlier. That carryover, U.S. officials say, reflects the fact that Tokyo failed to include in its original program the majority of measures offered by Washington. Interwoven with the recycled material, however, are numerous new proposals; they boost the length of the Clinton administration proposal to some 300 points from 200 or so. Mr. Kantor notes in announcing the submission: "Meaningful deregulation of the Japanese economy is critical to increasing market access. … Meaningful deregulation will also ensure that Japanese consumers and producers benefit from increased competition, lower prices, better selection and higher quality goods and services."

Briefing the press in Washington on talks he held with Mr. Hashimoto on the fringes of the APEC meeting in Osaka, Mr. Kantor says that he repeated U.S. government and industry concerns about how Tokyo planned to deregulate the insurance market. He notes that the October 1994 framework insurance agreement requires that "meaningful and substantial liberalization" take place in the life and the nonlife insurance businesses before "radical change" occurs in the so-called third sector where foreign insurers have been able to carve out some market share. Mr. Kantor notes that Vice President Gore also raised the insurance issue when it met with Mr. Murayama. The semiconductor trade agreement and Kodak's Section 301 complaint came up as well in both sets of talks, the top U.S. trade official reports. Mr. Kantor uses the news conference to take note of the second phase of MOT's deregulation of the automotive repair and replacement market. At the same time, though, he expresses concern about the slow pace at which the dealer network in Japan is being opened to American and other foreign vehicle suppliers.


MOF and BOJ unveil a plan to restructure Tokyo Kyodou Bank, established in March to take over the operations of two failed Tokyo-area credit cooperatives, into a Japanese-style Resolution Trust Corp., an organization set up in 1989 to clean up the U.S. savings and loan mess. The rechartered bank's first job would be to liquidate failed Kizu Credit Cooperative's assets. While calling the announcement a positive step, financial industry analysts question whether the revamped bank will be as effective as the RTC because of various implicit restraints on its activities.


The irregularities uncovered at Daiwa Bank's New York City branch and the unprecedented subsequent decision by U.S. banking authorities to kick the bank out of the American market are the subject of a Senate Banking Committee hearing. The star witness at this hearing and a similar one held December 5 by a House Banking and Financial Services subcommittee is Mr. Greenspan. Under questioning the chairman of the Fed, which has primary regulatory responsibility for operations such as Daiwa Bank's, admits that, in retrospect, his organization should have taken more seriously clear evidence that something was amiss at Daiwa Bank's New York City branch. He also says that the harsh action taken against Daiwa Bank was fully justified, given the nature of its alleged transgressions.


President Clinton signs into law a bill ending the 22-year ban on exports of Alaskan oil. While Japan long has been expected to be a major buyer of North Slope crude, any exports are likely to go to South Korea and Taiwan simply because Japanese refineries are ill-equipped to extract the high levels of wax found in Alaskan crude.


American and Japanese aviation negotiators hold a second round of discussions on the cargo provisions of the 1952 bilateral air services pact. Both governments present a blueprint for an overall cargo agreement at the Washington talks. The American side proposes a phased liberalization over five or more years, leading eventually to an open skies arrangement for freight service. This proposal falls on deaf ears. The Japanese team suggests instead that two or three cargo carriers from each country be given more operating latitude. This idea reflects Tokyo's position that any changes in rights should follow the principle of "orderly development." Afterward both U.S. government and industry people express concern that any balancing of the 1952 agreement in Japan's favor now will reduce Tokyo's incentive to liberalize in the future. That is why the Clinton administration is trying to nail down as much as it can in the way of a flight path toward more open skies.


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