No. 8 — March 1, 1996


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



MOF head Takemura promises a solution "by the end of the year" to the bad-loan problems of the seven failing housing loan companies. An ongoing disagreement between banks and agricultural cooperatives over cost-sharing has stymied announcement of a plan.


Midlevel American and Japanese government officials meet in Washington to make an initial assessment of progress under the October 1994 framework accord on insurance. The sessions are devoted mostly to a discussion of legislation passed at the end of May that will bring about the biggest overhaul in roughly 50 years in conditions of competition in Japan's insurance market. The Clinton administration and U.S. insurers are concerned that what is being billed as a liberalization move could backfire on American competitors.


Messrs. Kantor and Brown unveil at the White House an "unprecedented collaboration" between government and industry to track Japan's compliance with the terms of the automotive trade agreement as well as Japanese vehicle manufacturers' follow-up on their plans for expanded U.S. production and/or parts sourcing. The high-profile announcement of the monitoring effort is designed to blunt widespread criticism in the United States that the White House's optimistic assessment of the agreement's economic benefits is based largely on its own, unenforceable projections. Institutionalizing the monitoring process as well as a plan to release six-month assessments of the pact's effectiveness are both firsts for a bilateral trade agreement.


Total FY 1996 general account budget requests are 11.6 percent higher than the initial budget for the current fiscal year, MOF reports. Although this increase is the largest sought in seven years, requests for general operating funds come in at the cabinet-set ceiling of 4.2 percent.

The Bank of Japan lowers the discount rate by half a percentage point to an all-time low of 0.5 percent. Analysts portray the move as a preemptive strike against the results of the central bank's latest survey of short-term business confidence, scheduled for release only hours later. BOJ head Matsushita, however, tells a news conference that the action is designed to provide a monetary environment conducive to a recovery and to prevent the possible development of deflationary conditions. The timing of the cut generally takes BOJ watchers by surprise. Most speculation had centered around a drop in the discount rate close to the announcement of a new economic package, now expected September 20 or thereabouts. Some observers also indicate surprise at the size of the cut, although in reality the central bank simply is bringing the discount rate back in line with other short-term interest rates, which have been falling since the last discount rate cut in mid-April.

Treasury Secretary Rubin applauds the BOJ discount rate cut in a statement issued immediately after this move is announced.

An economic recovery is nowhere in sight. That is the conclusion analysts draw from BOJ's new tankan. The quarterly survey, conducted in August, indicates that business confidence has deteriorated among both manufacturing and nonmanufacturing firms as well as among small and large companies.

The cut in the discount rate adds momentum to the ongoing reversal of the yen-dollar exchange rate. In Tokyo trading the American currency ends at ¥99.83, up ¥1.12 from its day-earlier finish and its strongest close since early in the year. That performance, in turn, adds support to a stock market rally. The Nikkei average, which has closed in the 17,500 to 18,200 range for the previous three weeks or so, finishes at 18,279.55.

U.S. government data place the foreign share of Japan's semiconductor market at 22.9 percent in the April-June period. That cut of the business not only was below the October-December 1994 figure of 23.7 percent, but it represented a gain of just a tenth of a percentage point over the first-quarter 1995 outcome. The year's basically flat results to date should serve as a "major wake-up call," the Semiconductor Industry Association says in a prepared statement, adding that the latest market share number is a "matter of concern."


EPA shares the doubts about the economy captured in BOJ's new tankan. Its September economic report describes conditions as weak, particularly on the production front. Agency officials deny, however, that Japan has slipped back into a recession.


Mr. Murayama tells his economic advisers to beef up the public investment part of the pump-priming package expected to be released later in the month. He also directs the head of EPA to work out specific economic restructuring and deregulation steps for inclusion in the plan.

The dollar closes above the ¥100=$1.00 threshold in Tokyo trading.


Government officials leak to the press that the upcoming stimulus package will total more than ¥10 trillion ($100 billion).

The dollar breaks through ¥102 in Tokyo trading for the first time since late June 1994. Currency market analysts say BOJ bought dollars to accelerate the American currency's advance after it topped its previous 1995 high.


Discussions at a meeting of senior APEC officials in Hong Kong highlight the deep divisions within the forum over proposals put forward by Japan, the host of this year's annual leaders' summit, for achieving regional free trade. The disagreements add to the already intense pressure on Japan to draw up by mid-November a concrete, aggressive economic liberalization plan acceptable to all 18 group members.


The dollar remains on a roll, closing in Tokyo trading at ¥103.73.

Mr. Kantor says in a cable television interview that the United States wants to renew the 1991 semiconductor trade pact, which is due to expire in July 1996. Behind this position, endorsed in principle by the deputy cabinet members participating in the National Economic Council, is the White House's belief that an ongoing role for Tokyo in fostering cooperation between American chip suppliers and Japanese semiconductor users is necessary to ensure continuing sales and market share gains by U.S. competitors. Government and industry in Japan, however, are adamant that the controversial agreement has served its purpose and should be allow to expire on schedule. In the same interview Mr. Kantor says that Tokyo and Washington will hold the first round of consultations later in the month in connection with the Section 301 investigation of barriers in Japan's consumer photographic film and paper markets. That statement brings a sharp retort from Mr. Hashimoto, who says that the issues raised by Kodak will not be the subject of government-to-government discussions. He adds that Kodak should take its complaints to Japan's Fair Trade Commission.


Hoping to get the economic recovery firmly back on track, the Murayama administration unveils a ¥14.2 trillion ($142 billion) package of extra spending and other steps. Economic policymakers are quick to point out the majority of the outlays envisioned — about ¥8 trillion ($80 billion) — represents fresh spending rather than reprogrammed expenditures. The centerpiece of the sixth stimulus package assembled by the government since August 1992 is the ¥12.8 trillion ($128 billion) earmarked directly or indirectly for public works projects. Included in the plan as well are measures designed to revitalize the real estate market and restore confidence in domestic stock markets. More deregulation is promised, too. The government also reiterates the cabinet's pledge to develop by the end of September a set of principles for resolving the financial sector's massive nonperforming loan problems and to have a concrete plan of action ready by yearend.

Reaction at home and abroad to the new stimulus package is positive. At the same time, though, most corporate executives and analysts in Japan question whether the plan will deliver the hoped-for result of economic expansion. Achieving that goal, they say, requires two ingredients missing from the package: innovation and boldness. The stretched-out timetable for crafting an attack on the bad-loan problem is particularly troubling to many experts.

Financial markets are unimpressed by the government's latest effort to jump-start the economy. The dollar finishes trading in Tokyo at ¥103.75, down from its day-earlier close of ¥104.18, despite BOJ dollar buying. Meanwhile, the Nikkei average ends at 18,198.64, off 1.5 percent from the day before.


Finance Ministry sources disclose that MOF plans to set up a special organization to dispose of the nonperforming loans held by jusen. Decisionmakers also are said to believe that most of the mortgage lenders should be shut down.


Daiwa Bank, Ltd., one of Japan's 11 nationwide commercial banks, reveals that it incurred $1.1 billion in previously undisclosed losses from bond trading at its New York City branch over 11 years. The trader responsible apparently successfully concealed the losses until July 23, when he informed headquarters in writing of his actions.


Midlevel American and Japanese aviation officials hold an opening round of talks on the cargo provisions of the 1952 transpacific air services pact. The review meeting, held in Tokyo, is a follow-up to the mid-July compromise that averted pending retaliation by Washington and threatened counterretaliation by Tokyo over FedEx's Asian beyond rights. Both sides say that they are looking for some kind of agreement by next March.


The Financial System Research Council, a MOF advisory panel charged with drafting a long-term solution to the financial sector's woes, releases an interim report somewhat short on specific recommendations. The group raises the idea that public money might be necessary to help bail out banks sitting on a mountain of bad loans, although it cautions that such a move should be a last resort. The council also calls for greater disclosure of nonperforming loans by individual financial institutions. Implicitly acknowledging that its report does not provide the expected clear road map for resolving the banking mess, the panel says that it will include more concrete proposals in its final report, due in December. The shortcomings of the initial report, on top of the Hyogo Bank and Kizu failures and the Daiwa Bank disclosure, further diminish international confidence in Japan's banking system. The "Japan premium" — the higher interest costs incurred by Japanese banks in international markets compared with their counterparts — accordingly widens in late September.

MOF policymakers embrace the Financial System Research Council's interim report and move to implement at least some of the recommendations that do not require legislative action. They announce, for example, that an early warning system will be set up to identify mismanagement in financial institutions and that procedures will be improved for dissolving failed banks.

The World Trade Organization agrees to form a dispute-settlement panel to rule on the European Union's charge that Japan's liquor tax system is discriminatory after the two parties fail to come to a resolution during bilateral consultations. At Japan's request similar complaints by the United States and Canada are folded in with the EU's.

With no political fanfare, President Clinton signs an executive order extending the Super 301 provision for 1996 and 1997. The controversial Japan-aimed U.S. trade measure empowers the White House to target for elimination self-identified priority foreign barriers to American exports and gives it the option to retaliate if negotiations do not produce agreement to remove the cited obstacles. Other than a change in dates the renewed Super 301 provision is identical to the one that was on the books for 1994 and 1995. MITI Minister Hashimoto along with other Japanese government spokesmen denounce the extension, arguing once again that Super 301 is inconsistent with international trade rules.


Mr. Kantor predictably announces that, for the second year in a row, no Super 301 priority foreign trade practices will be identified. At the same time, though, the White House opts to keep Japan on the Super 301 watch list for continued market access problems in the paper and wood products markets. Japanese trade policymakers immediately reject Washington's twin charges that Japan's markets for paper and wood products are closed and that Tokyo has not lived up to agreement obligations in these two areas.


The Murayama cabinet signs off on a ¥5.3 trillion ($53.3 billion) second supplementary budget for FY 1995. The package, which will be financed mainly through the issuance of construction bonds, is designed to implement the government's September 20 pump-priming plan.

The first follow-up meeting on the results of the December 1994 framework agreement on flat glass, held in Tokyo, proceeds fairly harmoniously, an outcome facilitated by expanded imports and sales of foreign-made products in 1995's first half.

The yen, which had fallen against the dollar in Tokyo trading to a closing low of ¥104.18 September 19, ends the third quarter at ¥98.20. Neither periodic BOJ intervention in the market nor at least one attempt by top Treasury Department officials to jawbone the dollar higher have succeeded in keeping the reversal of the yen-dollar exchange rate going.


Japan's trade surplus with the world contracts 11.8 percent in the July-September period from its year-earlier level to $26.7 billion. Export volume barely increased, reflecting the lagged impact of the skyrocketing yen in the spring, while real imports expanded at a double-digit rate despite the weakness in overall aggregate demand. Meanwhile, Japan's surplus in trade with the United States drops by a whopping 24.7 percent to $11.2 billion, raising the probability that the full-year 1995 bilateral imbalance will be the lowest since 1992.

Given the widespread view that the recovery in Japan ground to a halt over the summer and early fall, the only surprise in the third-quarter real GDP figures is that this measure of the economy's performance managed to stay in positive territory. The 0.6 percent annualized gain comes primarily from an unexpected source — much stronger consumer spending, although another jump in government fixed investment also helps.


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