No. 8 — March 1, 1996


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



The upper house of the Diet approves FY 1994's second supplementary budget, empowering public agencies to begin disbursing needed earthquake rebuilding funds. The House of Councillors is expected to complete work on the FY 1995 general account budget later in the month.


Hoping to get the automotive negotiations off dead center, participants in a cabinet-level meeting of the White House's National Economic Council endorse the idea of advancing to an unspecified date in the spring the deadline for completing the Section 301 inquiry into regulatory barriers in Japan to sales of foreign replacement parts. Despite the enormous frustration in Washington over Tokyo's foot-dragging in the talks, some of Mr. Clinton's top economic advisers still question the wisdom of a get-tough strategy.


Business confidence remains generally positive despite the negative effects of the Great Hanshin Earthquake, the Bank of Japan reports on the basis of its latest quarterly sampling of corporate sentiment. The new tankan, conducted in February, indicates that manufacturing-sector firms are more upbeat about their prospects, while nonmanufacturing companies are about as optimistic about the future as they were three months earlier. In another key finding the survey suggests that the drop in capital spending almost has bottomed out.

A worldwide wave of dollar selling sends the American currency into a tailspin against the yen and European currencies. Analysts ascribe the market turmoil to several unconnected developments: the fallout from the Barings collapse, new worries about economic conditions in Mexico and the possibility that interest rates in the United States could be headed lower. The Federal Reserve Bank of New York, the Bank of Japan and more than a dozen European central banks independently go into the market to stem the dollar's decline, but the various interventions, all fairly limited in scope, have scant effect. The yen closes in Tokyo at ¥95.28=$1.00, in the process breaking the record of ¥96.35 set March 1 and the old high of ¥96.40 registered November 2, 1994. Finance Minister Takemura, International Trade and Industry Minister Ryutaro Hashimoto and other public officials emphasize that the latest movement in the yen-dollar exchange rate bears no relationship to economic fundamentals. They also worry aloud that it could be a roadblock to the nascent Japanese economic recovery.


The dollar's free fall continues against the world's other major currencies. Dollar buying by Japan's central bank caps the rise of the yen to ¥93.40 at the close of the Tokyo market.


Another global dollar sell-off propels the yen through the ¥90=$1.00 barrier. Repeated interventions by the Bank of Japan are no match for market forces, particularly with the Federal Reserve Board staying on the sidelines and top Clinton administration officials remaining mum about the plunging dollar. The yen ends in Tokyo trading at ¥89.40, a gain of more than ¥3 from its day-earlier close. Worries multiply in Japan about the impact of currency market developments on the economy's recovery, but the cabinet, holding an emergency session, is at a loss to devise a plan to reverse the yen's surge. BOJ governor Matsushita rules out monetary policy changes, saying that such moves are dictated by overall economic conditions.


The turmoil in the foreign exchange market spills over to the stock market, where the Nikkei sheds 2 percent of its value in ending at 16,621.31.


The dollar rebounds against the yen in Tokyo trading, pushing the Japanese currency back to ¥91.98. That day in Washington Secretary of the Treasury Robert Rubin mounts the White House's strongest defense of the dollar since the greenback began its plunge. "This administration believes a strong dollar is in American's national interest," he says. The treasury secretary also sends a message to currency speculators: "Our policy is to intervene when it makes sense and not to do so when it doesn't." Federal Reserve Board chairman Alan Greenspan weighs in, too, saying during congressional testimony that the dollar's weakness is "unwelcome and troublesome."


Using virtually the same language as it did in February, EPA says in its monthly economic report that the economy remains in "a gradual recovery trend." An agency briefer cites the limited economic impact of the Great Hanshin Earthquake as one reason for the carryover phrasing.

Corporate Japan joins the Clinton administration in panning a draft of the Murayama government's upcoming five-year deregulation plan. While giving Tokyo credit for releasing the package for comment before it appears in final form March 31, the critics complain that the 1,000-plus announced measures do not represent meaningful regulatory reform. Most of the proposed changes are recycled; the new ones are vague and imprecise. Moreover, timetables are in short supply.

American and other offshore semiconductor makers scored a breakthrough in the world's second-biggest chip market in 1994 by supplying 22.4 percent of Japanese demand, USTR Kantor announces. That share represented the first time the competition could claim more than 20 percent of Japan's market on an annual basis. Washington and Silicon Valley credit this achievement as well as the historic 23.7 percent of the business foreign manufacturers won in the October-December quarter first and foremost to the results-oriented 1991 transpacific semiconductor trade agreement.


USTR Kantor calls Japan's ambassador to the United States to his office to deliver the message that the White House's new get-tough policy on the going-nowhere automotive negotiations is not a bluff. Washington is prepared to risk fallout on the volatile yen-dollar exchange market and the broader transpacific relationship from retaliating against Japan under Section 301, the senior U.S. trade official reportedly tells Takakazu Kuriyama. About the same time word leaks to the press that the Clinton administration has started to compile a sanctions hit list. Washington insiders also let reporters know that the White House is ready to make public its retaliation candidates, possibly as soon as April, if the automotive talks are not wrapped up quickly.


Tokyo's first cut at a new set of regulatory reform measures "… falls far short of the comprehensive deregulation objectives set out by the Japanese government last year," Mr. Kantor asserts in delivering the formal U.S. verdict on the draft report. The White House's top trade negotiator says that many of the proposals are vague and lack timetables for implementation and that others simply are carryovers of previously announced steps. An assessment of the March 10 package conducted by Keidanren (Japan Federation of Economic Organizations) also does not alter the influential business group's initial opinion that the plan is flawed.

MITI Minister Hashimoto challenges Washington's tactics for gaining from Japan's vehicle makers beefed-up plans for sourcing foreign-made production parts in the period after FY 1994. Although by mutual agreement this issue no longer is part of the government-to-government automotive negotiations, U.S. trade officials continue to insist that foreign parts purchasing targets that go well beyond the ones major car and truck manufacturers announced in March 1994 are critical to the successful wrap-up of the framework talks on automotive products. In a private letter to Mr. Kantor Japan's top trade official warns that the United States could be violating international trade rules if it "requests the Japanese auto companies to increase their purchases of particular auto parts in a 'de facto' coercive or discriminatory manner." Mr. Hashimoto also reiterates Tokyo's intention to file a complaint with the World Trade Organization if Washington retaliates against Japan under Section 301.


Mr. Kantor responds in kind to Mr. Hashimoto's strongly worded letter, stating that a Japan-initiated WTO complaint over Section 301 sanctions would not go unchallenged. The United States, he says, would counter such a move by asking the Uruguay Round-created arbiter of international trade disputes to conduct "a broad inquiry into Japan's lack of effective adherence to the [new organization's] market-opening objectives." 20

A poison-gas attack on Tokyo's subway system during the morning rush hour leaves 10 people dead and more than 5,500 injured. Although this human toll does not begin to compare with that from the Great Hanshin Earthquake, the attack — linked to a religious cult known as Aum Shinrikyo — shakes the public's confidence in their personal safety far more than the temblor.


Tokyo Kyodou Bank, Ltd. is established by the Bank of Japan and private financial institutions to take over the operations of two Tokyo-area credit cooperatives that failed in December 1994 under a mountain of nonperforming loans. The unprecedented action adds fuel to be debate already raging over the use of taxpayer funds to bail out financial institutions that not only had made unwise lending decisions but also apparently had violated lending limits and other regulations.


The Diet's upper house approves the FY 1995 general account budget. Never before has the legislature completed work on the national budget in less than two months.


The Nikkei average closes below the 16,000 level for the first time in 28 months, dragged down by sales of high technology issues by investors worried about the impact of the strong yen on these companies' business.


The Clinton administration forwards to Japan detailed written comments on the draft deregulation package. It faults Tokyo both for not acting on most of the 200-plus changes proposed by Washington and adding insult to injury by failing to provide explanations for its rejection of so many U.S. recommendations.


Another round of automotive talks, initially between the lead negotiators and later among government experts, suggests that Washington's pressure tactics have not had the desired effect of inducing flexibility in Tokyo's position. The United States tables new proposals on improving access for foreign automotive manufacturers to Japan's dealer network and deregulating the aftermarket for parts at the subcabinet-level talks, where Ira Shapiro, general counsel in the Office of the U.S. Trade Representative, joins Commerce's Mr. Garten as the cochair of the American delegation and Masahide Ochi, the Ministry of Transport's vice minister for international affairs, teams up with MITI's Mr. Sakamoto. Mr. Shapiro tells reporters in Tokyo that the American plans simply are extensions of previous ideas. Mr. Ochi offers a different interpretation during a separate press conference. He argues that Washington made what Tokyo considers to be "difficult new requests." Clinton administration trade negotiators also find no reason to be optimistic about a near-term breakthrough on Japanese vehicle makers' post-FY 1994 plans for buying more original equipment parts from foreign suppliers. Senior executives of Japan's four biggest automotive companies uniformly told U.S. Ambassador to Japan Walter Mondale during separate meetings earlier in the month that their company had no intention of revising the plans announced a year ago for buying foreign OE parts in the period beyond FY 1994.


Two of Japan's 11 nationwide commercial banks announce that they will merge. News of the proposed tie-up between Mitsubishi Bank, Ltd. and Bank of Tokyo, Ltd. gives the TSE a much-needed fillip. The Nikkei average soars 3.6 percent to close at 16,681.73. Analysts and investors are excited about the merger in part because neither bank has suffered significant fallout from the problems plaguing the Japanese financial services industry. For example, both existing institutions have relatively few problem loans on their books.


The head of the National Police Agency is shot and seriously wounded on his way to work, adding to the already jittery public's worries about their physical well-being.

MITI releases its annual review of the import and export policies and practices of Japan's top 12 trading partners. The 408-page report includes for the first time an assessment of whether the cited measures are consistent with the provisions of the World Trade Organization. By the ministry's reckoning the United States is the major violator of international trade rules, having earned the equivalent of an unfair rating in nine of the 12 categories examined. Heading Tokyo's list of unfair U.S. trade policies and practices are unilateral procedures: Section 301 and the temporarily reinstated Super 301.

The president of the American Automobile Manufacturers Association, which represents General Motors Corp., Ford Motor Co. and Chrysler Corp., says that the Big Three are seeking at least 1,200 high-volume dealer outlets in Japan to sell their products. With a network of that size, he adds, U.S. automotive makers could sell 200,000 or more vehicles a year by 1998.


Mr. Murayama's government releases the final version of its five-year deregulation program — a package of 1,091 regulatory changes prefaced by a policy statement that incorporates much of the language on deregulation goals, principles and procedures suggested previously by Keidanren, government advisory groups and the White House. The addition of a framework for regulatory reform, especially the inclusion of an annual review-revision mechanism, wins applause from the Clinton administration. Still, U.S. trade officials immediately label Tokyo's FY 1995-FY 1999 deregulation agenda disappointing on balance since few of the deficiencies cited by the White House in its March 22 comments have been corrected. Of particular concern in Washington is the lack of promised action on regulations that directly or indirectly affect the sale of foreign vehicles and nondomestic replacement parts in Japan as well as the government's unwillingness to do much more than review the Large Retail Store Law. Japanese business organizations also are generally critical of the program.

The Clinton administration releases the 1995 National Trade Estimate Report on Foreign Trade Barriers. Publication of this catalog of market access problems around the world starts the clock on Super 301 — a Japan-targeted process that allows the White House to identify by September 30 priority foreign country practices for negotiations and possible retaliation if the talks fail to produce changes acceptable to the United States. Analysts examining the text of the Japan portion of the report conclude that U.S. trade policymakers currently do not intend to cite any Japanese trade barriers in the 1995 Super 301 round. Their reasoning is that the Japan chapter reads much more like an annual report than its 1994 counterpart, which indirectly presented a case for using the Super 301 mechanism to achieve the results that had eluded the Clinton administration in the framework talks and other negotiating forums.

The dollar ends a tumultuous quarter of trading in Tokyo at ¥88.40, only slightly better than the new low of ¥88.30 established the day before. The American currency has been drifting lower against the yen as well as key European currencies since mid-March, in the process setting one record after another. Periodic BOJ intervention in the Tokyo market has only slowed the dollar's descent against the yen, not reversed it. In fact, the central bank adds to the yen's problems March 31 by announcing that it has started guiding market-determined short-term interest rates lower rather than taking the step that currency market participants want — a cut in the discount rate. Interestingly, the strengthening of the yen in the latter part of March does not generate as much public handwringing by corporate executives and government officials as accompanied the currency's run-up in value earlier in the month.

Japan's huge overall trade surplus falls in the January-March period for the third straight quarter, dropping 9.2 percent to $28 billion, as imports expand almost twice as fast as exports. The surplus in trade with the United States continues to climb, however, reaching $13.1 billion compared with a first-quarter 1994 gap of $12.4 billion.

Japan's real gross domestic product ekes out an annualized gain of 0.5 percent in 1995's first quarter after contracting 4.2 percent in the October-December 1994 timeframe. The economy's weak performance comes as little surprise since consumer spending, expected to lead the way to a solid recovery, is held down by the string of disconcerting economic and social developments that buffeted Japan in the January-March quarter.


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