No. 8 — March 1, 1996


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



Just four months after Tokyo started to phase in the Uruguay Round pact's agricultural trade reform measures the government activates the accord's safeguard mechanism for foreign beef that is frozen for shipment to Japan. The trigger for the emergency import control step, which involves marginally higher tariffs through March 31, is the yen-fueled climb in beef arrivals, mostly from the United States.


Finance Minister Takemura announces a series of measures intended to encourage the yen to continue to back off from its recent peaks. The changes, mostly amounting to regulatory fine-tuning, individually and collectively are designed to facilitate the flow of outbound capital. The release of the package, a surprise, is followed by another surprise: coordinated dollar buying by the Fed and BOJ in the New York currency market. Together these actions add momentum to the trend toward a weaker yen apparent in July. The Japanese currency closes in Tokyo trading at ¥89.92 the day of the announcement, down ¥1.67 from its day-earlier finish. The following day it ends below ¥90 for the first time since mid-March.


The cabinet approves guidelines for compiling what is portrayed as a stimulative FY 1996 general account budget. Overall discretionary spending will be allowed to expand 4.2 percent, including a 5 percent increase in public works outlays.


Mr. Murayama reshuffles his 13-month-old cabinet, ostensibly to strengthen the government's ability to tackle the economy and other problems but in reality because of the dictates of coalition politics. The prime minister subsequently says that a second FY 1995 supplemental budget will be drafted; no timeframe is given, however.

The economy remains at a standstill, EPA concludes in its August economic report. The recent decline of the yen's value and the uptick in stock prices are about the only positive signs the agency can identify. In contrast, it says, business confidence is weakening, consumer spending is sluggish and housing starts are off.

American and other foreign banks increasingly are tightening credit access for Japanese financial institutions because of the mountain of bad loans banks in Japan have on their books, industry sources report.

Secretary of Agriculture Dan Glickman, in Japan on the first leg of a six-nation Asian tour, urges Ministry of Agriculture, Forestry and Fisheries officials to reconsider the tariff hike on frozen beef. He also attempts to head off the use of the safeguard provision for pork imports, which are nearing the limit that could trigger a higher duty.


BOJ governor Matsushita warns that time is running short for deciding how to deal with the huge volume of bad loans held by seven housing loan companies. A solution has been stalled by disagreement between the commercial banks that founded the jusen and the agricultural cooperative-related financial institutions that lent them money over how to share the disposal cost.


The reversal of the yen-dollar exchange rate continues. In Tokyo trading the Japanese currency closes at ¥93.36.


The dollar gains more strength in Tokyo trading, helped by intermittent BOJ intervention. It closes at ¥94.90.

The White House announces the completion of the transpacific automotive agreement previewed with so much fanfare at the end of June. As published by USTR, the formal text of the pact, which will remain in effect through the year 2000, runs to 30 pages. Appended to this document are the business plans Japan's top five vehicle makers released immediately after Washington and Tokyo announced agreement on the broad terms of the government-to-government pact. Attached as well are the Clinton administration's projections of how many additional dealer outlets in Japan will be handling Detroit's products by the year 2000 and how much extra parts business the Big Five should be doing with American suppliers over the medium term. Paired with these forecasts are the late June statements made by Messrs. Kantor and Hashimoto, including the one in which the MITI minister noted that the dealer and the parts numbers offered by his counterpart are not legally binding. The primary holdup to the finalization of the arrangement is the need to reach a consensus on how to monitor progress toward achievement of the accord's goals. In the end the United States and Japan agree to use two all-purpose gauges and 15 specific quantitative and qualitative objective criteria when they conduct their annual review of the agreement's operation.


The Fed and BOJ again catch foreign exchange traders off-guard. Joined by Germany's Bundesbank, the central banks cooperatively buy dollars in various markets overnight Tokyo time August 15. In local trading the yen drops at closing to ¥98.17. Stock market investors respond enthusiastically to the developments in the yen-dollar market. The Nikkei average, which had climbed 3.2 percent the day before, jumps 4 percent and finishes at 18,158.73, the first time in six months this indicator has scaled the 18,000 mark.


Treasury's Mr. Rubin says in an interview in The New York Times that Washington is committed to maintaining a strong dollar.


Moody's Investment Service delivers a wake-up call to major banks and banking authorities in Japan when it announces a new bank rating system designed to reflect the fundamental health of large banks around the world. The possible ratings range from A ("exceptional intrinsic strength") to E ("very weak … suggesting an eventual need for outside assistance"). Twenty-six of the 50 Japanese banks rated receive grades of D or lower; moreover, 13 of the nation's 21 biggest banks fall into this questionable category.

The International Monetary Fund faults Japan for foot-dragging in dealing with the financial sector's mountain of nonperforming loans. The government should have moved sooner and taken more decisive action, including the use of taxpayer money, to tackle the problem, especially at home loan companies and other smaller institutions, the multilateral organization asserts in its annual report on international capital markets. "Although a policy of regulatory forbearance, waiting for the gradual write-downs of losses, may have fewer direct costs, it has potentially greater indirect costs," IMF points out.


Representatives from the Japan Accreditation Board for Quality System Registration and the American National Standards Institute initial an agreement that commits JAB to implementation of a software quality standard that adheres to international specifications. The agreement averts a fight at least for the time being between the public-private Japanese organization and U.S. software houses.


Finance Minister Takemura says that a second FY 1995 supplementary budget will be ready by the end of September.


An exchange of letters between USTR Kantor and Secretary of Commerce Ron Brown on behalf of Washington and Japan's ambassador to the United States for Tokyo puts into effect the automotive trade agreement. MITI and the Transport Ministry use the occasion to challenge the spin Mr. Kantor's office had put on a number of the accord's provisions in an August 15 backgrounder and the accompanying description of conditions of competition in the Japanese markets for motor vehicles and parts. The two ministries assert at the beginning of their rebuttal that Washington's specific objectives for the pact are its own creation. They also take issue with the Clinton administration's version of what the various objective criteria contained in the arrangement are meant to measure. The report's authors additionally blame USTR for conveying the impression that the government-to-government agreement includes the White House's projections of how many additional dealer outlets in Japan will be handling Detroit's products by the year 2000 and how much extra parts business the biggest Japanese vehicle makers should be doing with American suppliers over the medium run.


The Japanese government's top spokesman reveals that the extra budget will be around ¥10 trillion ($100 billion), with most of that money earmarked for rebuilding in the area affected by the Great Hanshin Earthquake.


MOF announces that Kobe-based Hyogo Bank, Ltd., the largest second-tier regional bank, will be closed and its assets transferred to a new bank early in 1996. At the same time the Osaka prefectural government orders Kizu Credit Cooperative, a much smaller financial institution but still the biggest credit cooperative or shinkumi in Japan, to suspend operations except to repay depositors. The cost of the two bailouts in terms of public funds is expected to exceed ¥750 billion ($7.5 billion), which would wipe out almost all the reserves of the government's Deposit Insurance Corp.


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