No. 8 — March 1, 1996


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



Mr. Kantor, as expected, announces that USTR will pursue Kodak's Section 301 complaint of sales-limiting anticompetitive business practices in Japan's markets for consumer photographic film and paper. Washington has a year to investigate the charges and seek a resolution through consultations with Tokyo.


Mr. Hashimoto, reiterating the government's position that it will not negotiate with the United States under the threat of sanctions, says that Tokyo will refuse to hold Section 301 consultations with Washington on Japan's photographic film and paper markets.


The 18-member Asia Pacific Economic Cooperation forum takes a major step toward securing a broad consensus on the principles for achieving regional free trade at a meeting of senior APEC officials in Sapporo. Japan, this year's APEC chair nation and host of the November summit in Osaka, earns high marks from relevant Clinton administration officials for guiding the ambitious meeting agenda through a thicket of conflicting member interests and goals.


BOJ head Matsushita admits at a press conference what business analysts have been saying for some time: the economy's recovery has ended at least for the time being. He adds, though, that it is too soon to consider another cut in the discount rate.


The outlines emerge of a compromise that Japan at least believes could avert sanctions in the transpacific aviation dispute during subcabinet-level talks in Washington. News sources suggest that Tokyo is willing to approve the additional Asian routes sought by FedEx without first gaining U.S. agreement to review what Japan considers to be the unbalanced 1952 bilateral air transport pact. In exchange, though, Tokyo wants Washington to approve new routes for Japanese carriers and some other changes.


The central banks of the United States and Japan again surprise currency traders by coordinating intervention in exchange markets to support the dollar after the Fed trimmed the federal funds rate the day before for the first time in nearly three years and BOJ disclosed that it would let short-term market-determined interest rates fall. In Tokyo trading the dollar ends at ¥85.95, its highest close since the last joint dollar-propping action in late May. BOJ's credit-easing announcement gives a big kick to the slumping domestic stock market. The Nikkei average, which had gained 2.9 percent the day before, jumps 6.3 percent to finish at 16,213.08, the first time it has topped the 16,000 level in two months.

Washington requests consultations under the WTO framework with Tokyo on its liquor tax system, which the United States claims discriminates unfairly against bourbon and other "colored" spirits and, consequently, imports of these products. Canada asks for similar WTO talks the same day. The European Union initiated the challenge, having sought liquor tax consultations under the world trade body's auspices in mid-June. It maintains that Japan has not implemented fully a 1987 dispute-settlement ruling by WTO's predecessor that "like" products should be taxed identically and that all distilled alcoholic beverages should be taxed similarly, whether clear or colored.


The yen closes below ¥87 in Tokyo trading for the first time since the third week in May.


Perennially upbeat EPA acknowledges in its monthly economic report for July that the recovery, never robust, has ground to a halt, stopped by the strong yen, slowing exports, lagging residential home construction and other negatives. Agency analysts say that the key to overcoming the current "pause" is full-fledged implementation of the government's June 27 stimulus package and its April predecessor.

Prime Minister Murayama writes President Clinton seeking a reversal of the U.S. decision to pull out of multilateral negotiations designed to open banking and other financial services markets around the world. The plea reflects concerns within Japan's financial sector about the future of the country's vast operations in the United States if Washington is not a party to any agreement requiring most-favored-nation treatment of financial services providers, regardless of nationality.


MITI takes issue with the fact sheet on the automotive pact that USTR released immediately after the accord was initialed. It again seeks to distance both the government and the industry from the numbers penciled into the agreement for such things as how many dealers the Big Three might sign up and future purchases of production parts from abroad. These numbers are the Clinton administration's invention, the ministry says, adding that the automotive agreement still has not been finalized.


The October 1994 framework arrangement covering Japanese government procurement of telecommunications equipment and services is not producing the results expected, midlevel Clinton administration trade officials say during the first implementation review of the pact. According to U.S. calculations, overseas competitors won abut 3 percent of the telecommunications-related contracts let by publicly funded organizations in Japan in 1994. The Japanese participants in the Tokyo talks put that year's foreign market share at 7 percent, having added into their number sourcing from the offshore subsidiaries of Japanese companies. Both governments suggest that their figure indicates "some" increase over the comparable 1993 statistic.


Hopes of a quick resolution to the aviation dispute fade during subcabinet-level meetings in Tokyo. American negotiators say that Japan must give FedEx the Asian beyond rights it seeks before the United States will consider additional routes for Japanese airlines and the other issues raised by Japan. The U.S. team states again that beyond rights for incumbent carriers like FedEx are automatic, not negotiable, under the 1952 bilateral air transport agreement.


Japan's 11 car and truck builders exceeded their collective goal of sourcing $19 billion worth of OE parts and materials in FY 1994 from U.S. suppliers for their American factories and domestic plants, the Japan Automobile Manufacturers Association, the compiler of the data, reports. Purchases added to nearly $19.9 billion. Companies with assembly operations in this country topped their aggregate target of spending $15 billion on U.S.-supplied parts, but the industry fell far short of buying $4 billion from U.S. parts manufacturers for made-in-Japan vehicles.


The Management and Coordination Agency issues the first deregulation white paper, following up on one of the promises Tokyo made in its March 31 regulatory reform program. The report offers a strong endorsement of the benefits of deregulation. It also lists the results of the changes initiated so far.


The first round of WTO consultations between the European Community and Japan over the latter's liquor taxation system — attended by both the United States and Canada — go nowhere. Tokyo defends as adequate the changes in taxes that it has made to date and disputes the EU's version of "like" products.

The mid-June agreement facilitating foreign direct investment in Japan is signed in Washington by representatives of the two governments.


Washington and Tokyo again narrowly avert a retaliation/counterretaliation scenario when DOT Secretary Pena and MOT Minister Kamei settle the transpacific fight over air cargo rights during negotiations in Los Angeles. Under the deal Japan immediately approves FedEx's seven requested Asian beyond routes, while the United States agrees to allow JAL and NCA to add six weekly cargo flights from Osaka's new airport to Chicago and beyond to Canada. In addition, the two governments will reopen the part of the 1952 aviation accord governing cargo traffic. These negotiations are to start in September, with a goal of reaching a conclusion within six months. A Japanese proposal to revisit the passenger terms of the treaty does not end up in the final draft, but members of Japan's delegation say that their American counterparts agreed informally to hold such discussions following the wrap-up of the cargo talks.


Government and industry in the United States are disappointed with the results to date of the October 1994 NTT procurement pact, midlevel Clinton administration officials tell their Japanese counterparts during the first formal follow-up session on the framework pact. That message is overshadowed at the San Francisco meeting, just as it was at the earlier talks on the government telecommunications procurement agreement, by the continuing controversy over whether the NTT affiliate set up to provide wireless PHS communications services should commit to following the same open procurement procedures as its parent. U.S. trade officials again make no headway with their campaign. Members of the Japanese delegation insist, for example, that Tokyo has no right to tell a private company how to conduct its business.


Elections for the Diet's upper house deliver a wake-up call to the year-old coalition government of Mr. Murayama. Turnout hits a record low. More important, the majority of people who do go to the polls reject the candidates backed by the three ruling parties, especially those running on the SDPJ ticket, in favor of candidates supported by the main opposition party. Analysts interpret these developments in part as a referendum on the government's handling of the economy's many problems. The prime minister says that he will not step down, a right of refusal he has since the tripartite alliance still controls the powerful lower house, but many pundits believe Mr. Murayama's departure is just a matter of time.


In the wake of the upper house election results Keidanren and three other major business organizations call on the government to take concrete steps to get the economy moving. Tax reform, deregulation and additional public investment are on their agendas.

In response to his July 11 letter Mr. Clinton assures Mr. Murayama that, even though Washington will not be a party to a pending international agreement liberalizing financial services around the world and ensuring MFN treatment for all providers based in signatory countries, the United States will guarantee equal national treatment to Japanese financial firms operating locally as long as Tokyo upholds its responsibilities under the various financial accords the two countries have signed.


Only broad deregulation of the nonmanufacturing sector will get the economy permanently back on a growth track, EPA bluntly argues in its annual economic report. Going far beyond what economic policymakers in Tokyo have been willing to consider to date, the agency suggests that weak firms need to be weeded out and employment levels adjusted. In short, the principle of competition must take priority over the survival of individual companies, the goal of Japanese policy up to now. The authors of the report readily acknowledge the huge short-run costs of their proposed course of action but maintain that sweeping deregulation would bring substantial long-term gains.


The latest index of coincident indicators, which tracks current economic trends, and two other new economic reports suggest to analysts that Japan is teetering on the brink of a double-dip recession.


A MOF advisory group gives qualified approval for the use of public funds to help financial institutions dispose of their bad loans. In general, the panel recommends, taxpayer money should be used only as a last resort.


Midlevel Clinton administration officials participating in the first annual review of the October 1994 agreement on government procurement of medical technology say that the pact seems to have produced some positive results based on the limited amount of data currently available. They credit publicly funded organizations with making a good-faith effort to implement the pact. The main U.S. concern expressed at the Tokyo meeting is that the value of medical equipment procurement in 1994, the review year, shrank and that spending in future years will continue to be cramped because of budget constraints. Accordingly, sales of equipment made overseas could fall even as the foreign market share increases.


The Clinton administration again turns up the heat on Japan over access by foreign architectural, engineering and construction companies to the public works market during a review of the 1988 Major Projects Agreement and related market reforms. Data for FY 1994 revealed that foreign companies won just 0.2 of the value of public works contracts let by the government, an even smaller share than the year before. The U.S. participants in the Tokyo talks do not threaten sanctions for the meager results, but they do air a long list of complaints about implementation of the various reforms.


Kodak outlines in a submission to USTR seven specific steps that it believes the Japanese government must take to ensure an end to the exclusionary business practices that the big U.S. multinational claims limits its access to the consumer photographic film and paper markets.


The United States is disappointed with the results to date of the April 1992 paper and paperboard agreement, American government officials tell their Japanese counterparts during a review of the pact in Tokyo. They point out that the foreign market share only expanded to 4 percent in FY 1994 from 3.7 percent in FY 1991. The U.S. side blames this outcome on Tokyo's failure to take adequate steps to encourage the use of imported paper and paperboard as well as on lax antitrust enforcement. The Japanese participants point to a lack of effort by foreign suppliers.

A EU-spearheaded drive to salvage a multilateral financial services agreement after the United States abruptly pulled out of the negotiations succeeds. Key international players, Japan included, sign off in Geneva on an interim agreement to liberalize their banking and other financial services markets in line with the offers they had on the table at the time of the U.S. walkout. Under the plan Tokyo, for example, will extend to MFN partners the benefits of financial pacts negotiated with Washington. The interim arrangement, scheduled to go into effect August 1, 1996, will expire at the end of 1997. Before then the participants hope to hammer out a permanent agreement, one that the United States is willing to sign.


Cosmos Credit Corp., a failing Tokyo-area credit cooperative (shinkumi), is ordered to shut its doors. Analysts, if not policymakers, worry that the Cosmos collapse, preceded by big withdrawals by depositors, could lead, domino-style, to the collapse of other problem-plagued shinkumi and even larger and generally healthier credit associations (shinkin), as worried consumers try to protect their savings by withdrawing what they have on deposit.

Fuji Photo Film rebuts Kodak's charges of exclusionary business practices in a 585-page report entitled Rewriting History: Kodak's Revisionist Account of the Japanese Consumer Photographic Market. The Japanese industry leader charges that its rival conveniently distorted or ignored hundreds of facts about the Japanese market to suit its own purposes. Fuji Photo Film reiterates that Kodak's relatively small share of consumer film and paper sales in Japan is solely the result of management missteps.


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