No. 8 — March 1, 1996


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



The Murayama cabinet approves a new economic plan spanning the FY 1995-FY 2000 period. The blueprint — developed by the Economic Council, which advises the prime minister, to replace one originally scheduled to run from FY 1992 through FY 1996 — is the first postwar economic plan to offer two different growth scenarios. The drafters ambitiously forecast that the economy can expand at an average annual rate of 3 percent in inflation-adjusted terms over the next five years if sweeping deregulation is undertaken and other policy prescriptions are implemented. If their recommendations for change are ignored, the report's authors warn, economic growth will plod along at a mere 1.75 percent yearly rate and be accompanied by rising unemployment and an expanding current account surplus.


With the approach of the government's yearend deadline for coming up with a plan to resolve the bad-loan problems of ailing mortgage providers amid few signs of movement by the main participants, the coalition parties offer a framework for handling the liquidation of these lenders. Under this plan a special organization would be formed to take over the underperforming and nonperforming loans, with the real estate put up as collateral for the lending sold. The guidelines also call for the conditional use of government-backed financing and emergency BOJ loans. The plan's drafters punt, however, on how jusen losses should be split between banks and agricultural cooperative-related financial institutions — the very issue that has stymie a resolution to date. Analysts reading between the lines conclude that the coalition parties believe that the banks that founded the home loan companies should shoulder most of the cost.


Banks that set up jusen are prepared to write off their outstanding loans as part of any liquidation plan but will not cover any additional costs, the chairman of the Japan Federation of Bankers' Association stresses.


The Nikkei average closes above the 19,000 mark for the first time since mid-January, helped in part by the record-setting performance of the New York Stock Exchange.


After a meeting in Tokyo of the framework's working group on deregulation and competition policy the American participants use terms like "disappointed" and "disheartened" to describe the reception given the new White House regulatory reform plan by the Japanese attendees, who represent 17 ministries and agencies. Even the prospect of another meeting before the government releases its revised deregulation program in March apparently does nothing to instill confidence in the Clinton administration that its sweeping proposal will be adopted wholesale — or even piecemeal.


An Administrative Reform Committee panel charged with suggesting changes in the government's regulatory reform package releases a 70-page report. Its contents add to the pessimism of Clinton administration officials and corporate executives in Japan and abroad about the near-term chances for substantive deregulation. Some of the group's recommendations are unequivocal. Critics complain, however, that the panel either took no specific position on the most controversial regulatory issues, such as the termination of the Large Retail Store Law, or resorted to the same vague language about actions and timetables that characterized most of the original deregulation program.


Analysts who believe that a recovery will occur sooner rather than later receive a boost from BOJ's new quarterly survey of economic conditions, conducted in November. Business confidence among large manufacturing companies, the most widely watched statistic in the tankan, improves, a result attributed to the weakening yen and corporate restructuring. Big nonmanufacturing concerns also indicate that they are more upbeat about their prospects. Troubling to many observers, though, is the fact that optimism among small firms has not changed. They also find worrisome a rising level of inventories, even among major manufacturers; that could spell trouble for future production.

Messrs. Kantor and Rubin express growing concerns about the Finance Ministry's plans for the April 1, 1996 liberalization of the insurance market in a letter to Mr. Takemura, informed Washington sources say. Reports coming out of Japan suggest that MOF, which is in the process of drafting regulations to implement the May changes to the insurance law, will allow life and nonlife insurers virtually unrestricted access to the so-called third sector — which includes health and other specialized insurance products and is the only part of the market where foreign insurers have made inroads — sometime next year. Such a move, the two U.S. officials reportedly tell the finance minister, would thwart a major objective of the October 1994 framework insurance pact. The Clinton administration interprets the relevant language of the agreement to mean that the third sector will not be opened to new competition until three years after foreign insurers are allowed to handle life and nonlife products.


MOF and MAFF will try to work out a solution to the jusen problem by December 20, the Finance Ministry's number two says. That is 10 days later than the date the ruling coalition set for a government plan. The main stumbling block to agreement is familiar: how to split mortgage providers' losses between banks and agricultural cooperatives. December 20 is the day the Ministry of Finance will present the draft general account budget for FY 1996. Consequently, it is the deadline for deciding whether government funds will be part of the jusen disposal scheme.

Offshore suppliers account for a substantially bigger share of government procurement in Japan than in the United States or the European Community, the first white paper on procurement concludes. Using the thresholds set in the GATT government procurement code the report's authors place the foreign share of Tokyo's procurement at 18 percent in 1994 versus 20 percent the year before and 14.2 percent in 1990.


American and other foreign semiconductor manufacturers, which treaded water in the Japanese market in 1995's first half, supplied an all-time-high 26.2 percent of Japan's chip requirements in the July-September period, Mr. Kantor's office reports. Both the U.S. trade official and the head of the Semiconductor Industry Association harness the new market share report to bolster the government-industry demand that the semiconductor trade agreement be extended beyond its current July 1996 expiration date. Argues Mr. Kantor in a press release, an extended arrangement is "critical" to maintaining the cooperative business environment that has facilitated progress toward a more open chip market in Japan. Mr. Hashimoto and EIAJ likewise claim that the third-quarter results validate their position that no compelling reason exists for the continued involvement by Washington and Tokyo in Japan's chip trade. MITI, in fact, issues a formal statement detailing the reasons for the Japanese government's opposition to an extended pact.


EPA concludes for the fifth straight month that the economy is at a standstill. Missing, though, from the summary of its December economic report is any reference to the economy's weakness. The head of EPA attributes this omission to an improving outlook for consumer spending, plant and equipment investment and residential construction. He adds that the main obstacle to a recovery is the sluggishness of industrial production.

The Finance Ministry unveils a series of regulatory changes designed to inject some life into the slumping securities market. Spokesmen describe the measures as comprehensive, ranging from easing credit rating requirements for issuers of commercial paper to relaxing the TSE listing requirements for foreign companies and expanding corporate stock option plans.

The coalition parties' FY 1996 tax proposal calls for a cut in the land-value tax in effect since the start of 1992 and a further reduction in the capital gains tax on real estate sales as part of a plan to use the tax system to help revive the economy. Among their recommendations as well is the continuation for another year of a temporary ¥2 trillion ($20 billion) reduction in national and local personal income taxes.


The Murayama cabinet adopts the government's pessimistic economic outlook for FY 1996. Price-adjusted GDP is expected to rise just 2.5 percent in the April 1996-March 1997 period compared with a revised FY 1995 figure of 1.2 percent. As gloomy as the new projection is, business forecasters in Japan and abroad believe that the government again is shooting too high. A survey of Japanese private-sector predictions suggests that, on average, real GDP will increase 1.9 percent in FY 1996. Moreover, the OECD calculates that the Japanese economy will expand just 2 percent in the year starting January 1, although that would be better than the organization's estimate of 0.3 percent real growth in 1995.

At a late night meeting the Murayama cabinet signs off on a controversial plan for liquidating the seven failing housing loan companies. The scheme — drafted at the eleventh hour by the coalition parties and the government in the face of a continuing stalemate between banks and agricultural cooperatives over how the losses of the jusen should be split — calls for the use of public funds to cover the difference between the unrecoverable loans made to the mortgage providers and what agricultural cooperative-related financial institutions are willing to absorb and other financial institutions propose to write off. The cost to taxpayers is estimated at ¥685 billion ($6.9 billion) in FY 1996 and at least double that over time. The agreement, which apparently was shoved down the throats of the bankers, is a clear victory for the agricultural cooperatives. They only have to forgive about 10 percent of the money they lent the jusen, while banks will have to give up claims to most of their loans. Critics waste no time blasting the government for agreeing to a taxpayer-supported bailout of the jusen.


Mr. Murayama and his top advisers approve a ¥75.1 trillion ($751 billion) draft general account budget for FY 1996. Spending on that order will require the government to sell a record-breaking ¥12 trillion ($120 billion) in deficit-financing bonds in addition to whatever it borrows for public works projects.


Fuji Photo Film files new material with USTR that it says proves beyond any doubt that Kodak's charges of anticompetitive business practices by the Japanese photographic products market leader are off target. Going to the crux of its competitor's argument, Fuji Photo Film says that a nationwide survey indicates that Kodak film is stocked by the retailers that account for the vast majority of film sales in Japan. The head of Kodak immediately claims that Fuji Photo Film's latest filing in no way changes the facts in the company's Section 301 complaint. That position receives a same-day boost from USTR's Mr. Shapiro, who says in a prepared statement: "Our investigation to date indicates that the barriers to market access in Japan facing Kodak and other foreign companies in the film and photographic paper sector remain very substantial." He again presses Tokyo for government-to-government negotiations, a call that is rejected out-of-hand the next day by the Foreign Ministry's chief spokesman.


The Financial System Research Council's final report on how to fix the financial sector's problems fills in some of the blanks in its September draft. The MOF advisory group recommends that taxpayer money be used only to liquidate failing credit cooperatives (shinkumi) and then just for the next five years; all other troubled financial institutions would be left to fend for themselves. The panel suggests as well that all financial institutions, not simply big banks, be required to provide more detailed information on their nonperforming loans starting in April 1998 and that deposit insurance premiums be hiked seven times.

AAMA complains in a letter to Mr. Kantor about the limited success of the U.S. Big Three automotive makers in signing up Japanese dealers. The pace must pick up dramatically if Detroit is to meet the U.S. government-endorsed goal of having an additional 200 sales outlets by yearend 1996, the trade association argues, adding that a vastly expanded distribution system is essential to achieving another White House-backed objective of the automotive trade pact: selling 300,000 Big Three vehicles a year in Japan by the end of the decade.


The Murayama cabinet gives final approval to the FY 1996 general account budget, which includes ¥685 billion ($6.9 billion) to bail out failed housing loan companies. At ¥75.1 trillion ($751 billion) total projected outlays are 5.8 percent above their initial FY 1995 level, but discretionary spending is set to raise just 1.3 percent. That hardly is enough to give the economy a boost, critics say, even taking into account a 4.1 percent increase in public works spending. They add that the initial FY 1996 Fiscal Investment and Loan Program, a second capital budget that the government has used in the past to stimulate the economy, will not take up the slack since expenditures will go up only 1.9 percent.


The unemployment rate hit a new high of 3.4 percent in November, the Management and Coordination Agency reports.

Tokyo and Washington announce that Mr. Clinton's scratched November Japan trip has been rescheduled for April 16 through 18. The president will meet with Prime Minister Murayama April 17.


The Nikkei average, on a roll since late November, closes above the 20,000 threshold for the first time since October 1994. It retreats from its 20,011.76 close in the last two trading days of the year, ending 1995 at 19,868,15. That is a slim 0.7 percent higher than its yearend 1994 finish but a whopping 37.2 percent above its 1995 closing low, reached July 3.


USTR Kantor delivers a surprisingly upbeat assessment of the results of the automotive trade agreement on the six-month anniversary of its initialing. He says that he is "pleased with the progress made to date," singling out deregulation of the aftermarket for parts in Japan and increased investment by Japanese vehicle manufacturers in their U.S. operations.


The yen ends the 1995 trading year in the Tokyo market at ¥102.93 after spending almost all of the fall and the early winter in the ¥100 to ¥102 range. Over the course of the year the Japanese currency fell 1.7 percent against the dollar. Its 1995 average of ¥94.1 is another record, however, because of the steep run-up in the yen's value in the spring.


Japan's worldwide trade surplus fell in 1995 to its lowest level in three years — $107.1 billion or 11.4 percent below 1994's record, capped by a 25.7 percent contraction to $22.9 billion in the fourth-quarter imbalance. Exports, although up 12 percent for the year to $443 billion, increased just 3.4 percent in volume terms despite fairly strong economies in many of Japan's most important trading partners. Just as sales abroad were reined in by the cumulative effects of the strengthening yen during the two previous years or so, exchange rate changes helped to boost imports 12.5 percent in volume terms and 22.3 percent on a value basis to $335.9 billion, a remarkable jump given that the Japanese economy spent much of the year dead in the water. More important in the transpacific context, Japan's trade surplus with the United States shrank last year to $45.6 billion from 1994's all-time high of $54.9 billion. U.S.-bound shipments edged up just 2.8 percent to $120.9 billion, while purchases of American-sourced products climbed 20.2 percent to $75.4 billion.

GDP figures for 1995's final quarter will not be out until mid-March. At best analysts expect to see marginal growth. Direct and indirect government spending presumably gave some lift to domestic demand, with consumer spending playing a supportive role. Nonetheless, a contracting external sector probably offset much of whatever homegrown expansion occurred.

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