No. 8 — March 1, 1996


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



The Federal Reserve Bank of New York teams up with the Bank of Japan to buy dollars in Asian markets in an effort to halt the American currency's continued slide. The aggressive move, announced in Washington by Treasury Secretary Rubin, merely caps the yen's rise at ¥86.93 when trading in the Tokyo market ends. Later that day the Fed intervenes on its own during trading on the New York market.

Japanese stock prices take a big hit amid worries about the strengthening yen. The Nikkei average drops 4.7 percent in closing at 15,381.29.


Describing the dollar's drop against the yen and major European currencies as a free fall increasingly is on target, as the Japanese currency closes out the trading day in Tokyo at ¥86.33. With no end to the records in sight, influential government and political officials renew pressure on BOJ to cut the discount rate. They also become more vocal in criticizing the absence of effective Group of Seven coordination. The ongoing yen-dollar realignment additionally fuels the debate in Japan and abroad over whether the market turmoil is a yen problem or a dollar problem or a little of both.


Appearing before a congressional panel, Mr. Kantor states that Washington is on a "short timetable" to reach agreement with Tokyo on trade in automotive products. He also repeats that the White House is prepared to go the sanctions route if the negotiations continue to deadlock.


Coordinated intervention by the central banks of the United States, Japan and Germany in currency markets overnight fails to reduce selling pressures on the dollar. The yen finishes in Tokyo at another new high: ¥85.45.


The dollar again finds a new low against the yen despite repeated dollar buying by the Bank of Japan. With the yen ending trading in Tokyo at ¥84.23, unnamed cabinet officials disclose that the government will work out an emergency economic stimulus package within days in the hope of insulating the fragile recovery from the fallout of the strong yen.


Mr. Murayama directs his cabinet to devise by April 14 a concrete plan of action to rein in the soaring yen and prevent a double-dip recession. Outsiders expect only cosmetic measures, reasoning that actions strong enough to influence currency traders around the globe likely would encounter political and bureaucratic resistance at home. The prime minister issues the order after the yen flirts with the ¥80=$1.00 threshold in morning trading in Tokyo. At closing time the Japanese currency was at ¥82.65 — 22.4 percent higher than where it started 1995.


EPA concludes in its economic report for April that the economy remains on a gradual recovery track, but the agency cautions that the strong yen could have adverse effects on this trend. After a briefing on the report at a cabinet meeting Mr. Murayama reiterates the need for a package of measures that will prevent the recovery from falling victim to the high-flying yen.


Trying to decide what measures might be effective in calming exchange markets, members of the ruling Liberal Democratic Party/Social Democratic Party of Japan/New Sakigake Party coalition continue to float trial balloons in the Japanese press. One idea, promoted by an influential LDP member, is to set some sort of target for reducing Japan's huge current account surplus. This proposal draws a strong negative reaction from the bureaucracy — a not surprising response since Japanese trade officials repeatedly and adamantly have ruled out numerical targets of any type in the various framework negotiations with the United States.


Japan tables a new proposal on deregulation of the parts aftermarket as automotive negotiations resume in Washington at the expert level. The American participants quickly conclude that the plan does little to address the issues raised by the United States. They also deliver the word that a new Japanese offer for improving foreign access to the dealer network — presented like the one on replacement parts in response to the proposals the Clinton administration had made at the late March talks — is unacceptable. Washington's no-progress verdict dims expectations on both sides that subcabinet-level negotiations scheduled for April 17 and 18 will break any new ground.


The coalition parties formally call on the government to incorporate in the yen package a pledge to halve Japan's current account surplus in five years. This proposal reportedly is the main snag in finalizing the plan. Talks between cabinet members handling economic issues and ministry officials continue until 3 a.m. April 14 before the politicians finally abandon their quest.

Clinton administration officials disclose to a reporter for The New York Times that cabinet-level members of the National Economic Council reconfirmed the day before the government's willingness to retaliate against Japan if the two sides fail to achieve quick agreement on market access arrangements for vehicles and parts acceptable to Washington. While not commenting directly on this story, White House press secretary Mike McCurry notes during his regular briefing that "other options" would be considered if a near-term resolution of the U.S. automotive industry's Japan market access problems cannot be reached through negotiations. He also says that Mr. Clinton is prepared to act on the available options.


The government unveils its yen action plan. It commits Tokyo among other steps to compile early a substantial supplementary FY 1995 budget financed by general revenue bonds; expand basic public works programs; implement over three years instead of five the recently announced deregulation program; promote imports; help struggling financial institutions write off nonperforming loans within five years; and advance the yen as an international currency. Mr. Murayama and his cabinet go out of their way to talk up the package, but currency market players and stock market investors are decidedly unimpressed. The yen closes in Tokyo at ¥83.60, not much below its record April 10 finish of ¥82.65, while the Nikkei average drops 2.4 percent in ending at 16,047.89.

Hours after the government releases its yen rescue package the Bank of Japan reduces the discount rate to 1 percent from the 1.75 percent level in effect since late September 1993. The cut in the key lending rate to a historic low is designed, first and foremost, to forestall any further appreciation of the yen. Whether it will have that effect is questionable since market participants, anticipating the move, already have factored the discount rate cut into their strategies. Additionally, though, Japanese monetary policymakers hope a lower interest rate structure both stimulates domestic economic activity and puts a prop under the stock market.


Finance Minister Takemura briefs Treasury Secretary Rubin on the yen action plan while both are in Bali, Indonesia for a meeting of Asian Pacific finance ministers. The Japanese official reportedly argues that Washington needs to do more to defend the dollar. That view is not shared by the White House, which believes the problem basically is a strong yen, not a weak dollar. Mr. Rubin avoids commenting on the specifics of the new rescue package, but Clinton administration officials are said to be skeptical of the plan's effectiveness.


Currency market traders deliver their verdict on Japan's yen package and the discount rate cut. It is not favorable. The yen closes in Tokyo at a new high of ¥82.20 despite repeated BOJ intervention.


MITI's Mr. Sakamoto along with Mr. Ochi from the Transport Ministry meet in Washington with Mr. Garten of Commerce and USTR's Mr. Shapiro in another attempt to break the deadlock in the automotive negotiations. Neither side is optimistic about that outcome going into the talks. Both governments feel their back already is against the wall, although each continues to insist that an agreement could be hammered out quickly if the other were more flexible. The talks go nowhere. Speculation is rife about the timing of the White House's next move. Most observers expect the White House to publish a Section 301 retaliation hit list in early May, either right before or soon after Mr. Kantor sees MITI Minister Hashimoto at previously scheduled trade meetings in Vancouver, British Columbia. Thirty days would have to elapse before sanctions — assumed to be 100 percent penalty tariffs on made-in-Japan luxury cars — could be imposed. That would place the de facto deadline for an agreement in the days leading up to the annual summit of the leaders of the world's seven major industrial democracies in Halifax, Nova Scotia.


Political insiders in Tokyo reveal that the government and the ruling parties expect to have in place by late May an extra budget totaling at least ¥2 trillion ($20 billion), with that amount split between earthquake reconstruction and measures to cushion the impacts of the yen's surge.

The dollar continues to lose ground against the yen in Tokyo trading, even though BOJ is back in the market. The Japanese currency finishes at a record ¥81.15. That close provokes more complaints from members of Mr. Murayama's cabinet that Washington is not acting responsibly to halt the dollar's slide.

Mr. Ochi warns after the abortive automotive negotiations that Tokyo is prepared to walk away from the talks if the White House makes good on its implicit retaliation threat. He adds at a Washington press conference that Japan immediately would lodge a complaint with the World Trade Organization challenging the right of the United States to retaliate unilaterally under Section 301.


The dollar again comes under heavy selling pressure in early Tokyo trading, at one point falling below ¥80=$1.00. The latest trigger apparently is the news that the transpacific automotive negotiations remain stalled. BOJ support operations and a statement by President Clinton that the United States wants a stronger dollar help the American currency finish the day at ¥80.38, another new mark — and, as it turns out, the final record. Prime Minister Murayama again tries to jawbone the market now that the yen has soared 25.9 percent against the dollar since the start of 1995. He also reiterates that Japan has every intention of following through on the commitments made in its April 14 package.

The United States decides not to make this year's review of Japan's adherence to bilateral telecommunications trade agreements the vehicle for a new transpacific market access fight like it did in 1994. The survey, conducted under Section 1377 of the 1988 trade act, turns up no major implementation shortcomings. Subsequently, though, Washington discovers what could be a compliance problem with the framework's October 1994 Nippon Telegraph and Telephone Corp. procurement pact. In question is the post-March decision by NTT Personal Communications Network, Inc., a subsidiary formed to provide a new wireless communications service called PHS or personal handyphone system, not to commit to the open procurement procedures of the revised NTT agreement.


Japanese vehicle manufacturers will not issue revised plans for sourcing original equipment parts from abroad in the post-FY 1994 period, the acting head of the Japan Automobile Manufacturers Association says in Tokyo. Japanese trade policymakers maintain that U.S. insistence on new parts purchasing targets is the major obstacle to an automotive agreement.


The Nikkei average, which generally has shrugged off the effects of the record-setting yen, closes up 2 percent at 16,968.24 on top of a 1.6 percent gain the day before.


Finance ministers and central bankers of the Group of Seven industrial nations meet in Washington against the backdrop of the extraordinary instability in the world's foreign currency markets. Political and business leaders in Japan repeatedly have expressed hope that somehow the participants in the previously scheduled talks would find a way to reverse the yen's surge against the dollar. That hope, a recognized long shot, is dashed. In a communique issued at the end of more than five hours of discussions representatives of the seven governments express their belief that recent exchange rate movements have been excessive and should be reversed but they offer no new initiatives that might lead to a stronger dollar and a weaker yen. The talks are surprisingly nonconfrontational, as Washington, Tokyo and Bonn set aside for the time being their disagreement over which capital is responsible for the slumping dollar. At a meeting preceding the G-7 gathering Finance Minister Takemura again presses Treasury Secretary Rubin for a hike in U.S. interest rates and accelerated action to cut the federal budget deficit — dollar-propping moves also advocated by Germany and the International Monetary Fund. The top U.S. financial official reiterates during these talks and on other occasions that Washington's monetary and fiscal policies are the appropriate ones.


The United States and Japan move closer to a framework agreement aimed at promoting foreign direct investment in Japan during a sixth round of midlevel talks in Washington, the chief American negotiator reports. He adds, though, that "much more progress" is needed for the two sides to meet their revised goal of concluding an arrangement by early June.


The reaction of foreign currency traders to the G-7 communique, the first issued in two years, is hard to decipher. In Tokyo trading the yen initially moves significantly higher but then backs off some of its gains, closing at ¥82.56; that is within about a yen of its finish in the four previous trading days.


Midlevel American and Japanese officials meeting in Tokyo continue the search for ways to narrow the huge gaps between the two governments on the contents of an automotive pact after holding another round of talks in Washington April 19 and 20.


Laura Tyson, head of the National Economic Council, rejects a call from Japanese trade policymakers to limit the scope of the automotive negotiations to the issues of better foreign access to the dealer network and deregulation of the parts aftermarket. She reports that NEC participants agree that any agreement also must encompass purchases of OE parts.


USTR Kantor announces that no U.S. trading partner will be cited this year under Title VII of the 1988 trade act for discriminating against American products or services in government procurement. In 1993 and 1994 the Clinton administration harnessed the negotiating leverage provided by this measure to win, respectively, eventual reforms in the way Tokyo awards public works contracts and in time changes in the way the Japanese government buys telecommunications and medical equipment and services. In a carryover from the year before, however, the White House uses this annual survey to express its continuing concerns about how government organizations in Japan procure supercomputers and other types of computers.


The Clinton administration puts Japan on its new priority watch list of countries that provide what the United States considers to be inadequate protection of copyrights, patents and trademarks. This placement, the result of the Special 301 provision of the 1988 trade act, reflects Washington's continuing reservations about the ability of U.S. competitors to gain effective patent rights in Japan, two 1994 agreements on this issue notwithstanding.


President Clinton announces that Washington will embargo U.S. trade with Iran and investment in that country. Government spokesmen in Japan say that Tokyo will not necessarily follow suit, but they acknowledge that the pending White House move makes it even more difficult for Japan to release the second installment of a loan funding a dam project in Iran.


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