No. 8 — March 1, 1996


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



At a meeting in Toronto of Group of Seven finance ministers and central bankers Finance Minister Takemura and BOJ head Matsushita assure their counterparts that the Japanese economy remains on track for recovery despite the Great Hanshin Earthquake. Economic prospects in Japan and other member countries, normally at or near the top of the G-7 agenda along with exchange rate movements, take a back seat to the financial crisis in Mexico. The participants give their unanimous support to a revamped international rescue package totaling $50 billion. That amount includes a $20 million loan guarantee from the United States, a $17.8 billion standby credit from the International Monetary Fund and $10 billion in loans from Japan and Europe that will be channeled through the Bank for International Settlements.


The first FY 1994 supplementary budget, designed mainly to help farmers affected by market liberalization under the Uruguay Round agreement, is approved by the Diet's upper house, a day after it is cleared by the House of Representatives. In the meantime work continues on a plan to rebuild the area devastated by the Great Hanshin Earthquake. That extra budget will be submitted to the legislature in late February, but first the revenue-strapped government has to figure out how to finance the additional spending, which could total ¥900 billion ($9 billion).


The economy remains on the path to recovery, EPA says in its monthly economic assessment. The report's authors acknowledge, however, that they still are unsure what toll the Kobe-Osaka earthquake might take on growth.

Japan's coalition government — comprised of the Liberal Democratic Party, Prime Minister Murayama's Social Democratic Party of Japan and the New Sakigake Party — fails to meet its self-imposed deadline for devising a plan to streamline state-funded corporations, one of the coalition's platform planks. Disagreements between the LDP and the NSP concerning a proposed merger of financial organizations, buttressed by bureaucratic resistance to the prospect of relinquishing turf, causes the impasse. This setback, coming on the heels of Tokyo's delayed, confused and generally inept response to the Kobe-Osaka earthquake, raises fresh questions about Mr. Murayama's leadership longevity.


The 1995 Economic Report of the President disavows any attempt by the White House to "manage trade" or "set market share targets" in market access talks with Japan and other countries. "These criticism are and were disingenuous," says the report, drafted by the Council of Economic Advisers. At the same time the report touts the effectiveness of the Clinton administration's results-oriented Japan market-opening strategy as embodied in the framework negotiations, noting a jump in exports in the areas where agreements have been reached. The report's authors also reiterate Washington's strong interest in broad deregulation of the Japanese economy.

The financial services agreement, finalized in January, is signed in Washington.


Senior officials from the 18 countries represented in the Asia Pacific Economic Cooperation forum meet in Fukuoka to discuss progress on the trade and investment liberalization blueprint currently being drafted for presentation to the group's members in November. Some White House economic policymakers worry privately that Japan, APEC's current chair, is not committed to using the forum to pursue the ambitious market-opening initiatives endorsed by President Clinton and other APEC leaders at their November 1994 summit in Bogor, Indonesia.


The National Land Agency estimates that total property losses from the Great Hanshin Earthquake could reach ¥9.6 trillion ($96 billion), a figure not far from private-sector guesses. On the basis of this projection EPA subsequently calculates that 0.8 percent of the net national capital stock was destroyed by the temblor.


The framework automotive discussions resume in Tokyo at the expert level. The Japanese participants clarify what the government is prepared to do to help foreign competitors sell more vehicles in Japan and expand their original equipment and replacement parts business. These proposals, variants of initiatives that Washington had rejected as inadequate in September 1994, heighten worries within the Clinton administration that its March 31 target date for an agreement will come and go without a pact or even significant progress in that direction. U.S. trade officials accordingly begin to consider ways to persuade Japan to improve its offer. One option — pushed by the Big Three U.S. automotive manufacturers, one of the two major American parts trade groups and the United Auto Workers union — is accelerating by six months the statutory October 1, 1995 deadline for completing the White House-initiated investigation under Section 301 of the 1974 Trade Act of the aftermarket for parts in Japan. Another alternative is simply to make March 31 the formal deadline for agreement on the trio of framework automotive issues, with sanctions under Section 301 and/or other forms of reprisal taking immediate effect if this date is missed.


A senior Ministry of Foreign Affairs official discloses that, for the time being, Japan will not release the second installment of a loan to Iran for the construction of a hydroelectric plant. Tokyo ended a long freeze on lending to Teheran in May 1993. That move caused a split with Washington, which argues that the government is helping a country that supports international terrorism.

The yen ends trading in Tokyo at ¥97.85, the first time it has closed higher than ¥98=$1.00 since mid-November. Traders cite technical factors.


Finance Minister Takemura raises the possibility in a speech that the government might let struggling financial institutions, large and small, fail rather than arrange mergers with healthy banks or bail them out with public funds. The comments reflect mounting criticism of the Bank of Japan's once-hailed December 1994 plan to rescue two Tokyo-based credit cooperatives facing bankruptcy because of huge volumes of nonperforming loans. Critics wonder aloud why taxpayer monies should be used to bail out a pair of reckless lenders that violated legal limits on lending to a single customer.


Dollar buying by the Bank of Japan does not prevent the yen from rising to a closing value of ¥96.82. The yen's gain adds to the selling pressure on the TSE, where the Nikkei average ends at 17,956.48. Both markets reverse course the next day, but the same two-day pattern plays out again in subsequent days.


Central bank head Matsushita says that economic activity in Japan already has returned to prequake levels.


Prime Minister Murayama's cabinet signs off on a ¥1 trillion-plus ($10.2 billion) addition to the FY 1994 budget to help the Kansai region get back on its feet after the Great Hanshin Earthquake. Nearly two-thirds of the funds are earmarked for rebuilding damaged or destroyed public infrastructure. The extra budget is sent immediately to the Diet along with the general account budget for FY 1995, which totals ¥71 trillion ($709.9 billion). That amount of projected spending is 2.9 percent below the level set in the initial FY 1994 general account budget. Finance Ministry planners argued successfully during the budget compilation process that fiscal austerity had to be the operating principle even if it affected the economy's recovery prospects. In their view issuing more general revenue bonds to finance expanded expenditures could swell the outstanding national debt to such an extent as to jeopardize current and future growth. On the second FY 1994 supplementary budget, however, sagging tax revenues leave MOF decisionmakers no choice but to back off from this position. Almost exactly half of the earthquake relief package will be financed through general revenue bonds.


Data compiled by the Japanese government indicates that the foreign share of public-sector procurement of computer hardware and software jumped in FY 1993 to 27.9 percent from 18.9 percent in the April 1992-March 1993 period.

The Murayama administration will release a draft of its five-year deregulation plan March 10, the government's top spokesman tells a press conference. The unprecedented move is designed to quell criticism, both domestic and foreign, about the lack of transparency in the bureaucratic drafting process. That is one of the complaints registered by Clinton administration officials during February 23-24 talks in Tokyo on deregulation. At the meetings the American side again fails to win from the Japanese participants a commitment to include in the upcoming regulatory reform program more than a few of the 200-plus specific proposals for change contained in the White House's November 1994 position paper.


The second supplemental budget for FY 1994 and the initial FY 1995 general account budget sail through the Diet's lower house.

The TSE takes a beating on word that a rogue trader at the Singapore securities subsidiary of Barings PLC has caused the collapse of the old-line British merchant bank by incurring $1.2 billion in losses on trades involving Japanese stock market index futures and Japanese government bond futures. The Nikkei average tumbles 3.8 percent on top of a 2 percent drop February 24 when news of the losses surfaced; it ends at 16, 808.70, the lowest close in 14 months.


The Nikkei regains some of its lost ground, thanks mainly to quick action by stock exchange officials in Japan. The roller coaster ride is not over yet, however. The stock market indicator goes down and up again in the following days, as foreign traders rush out of the market and then back in.


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 The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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