Japan's International Agenda 9780814728130

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Japan's Internationa l Agend a

Japan's Internationa l Agenda Edited b y Yoich i Funabash i

A Japan Cente r fo r Internationa l Exchang e Boo k

N E W Y O R K U N I V E R S I T Y PRES S N e w Y o r k an d Londo n

New Yor k Universit y Pres s New Yor k an d Londo n Copyright © 199 4 b y New Yor k Universit y All right s reserved Library o f Congres s Cataloging-in-Publicatio n Dat a Japan's internationa l agend a / edited b y Yoichi Funabashi . p. cm . Includes bibliographica l reference s an d index . ISBN 0-8147-2613- 5 1. Japan—Foreig n relations—1989- 2 . Japan—Foreig n economic relations. I . Funabashi , Yoichi, 1 9 4 4 - . DS891.2.J38 199 4 327.52—dc20 93-4000 4 CIP New Yor k Universit y Pres s books ar e printed o n acid-fre e paper, and thei r bindin g material s are chosen fo r strengt h an d durability . Manufactured i n th e Unite d States of Americ a c1 0

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Contents

Foreword vi

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Tadashi Yamamoto Preface x

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Yoichi Funabashi Introduction: Japan' s Internationa l Agend a fo r th e 1 9 9 0 s 1 Yoichi Funabashi 1. Japan' s Securit y Polic y i n th e 1 9 9 0 s 2

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Akihiko Tanaka 2. Technolog y an d th e Settin g fo r Japan' s Agend a 5

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Taizo Yakushiji 3 . U.S.—Japa n Macroeconomic Polic y Coordination : Agend a fo r the 1 9 9 0 s an d Beyon d 8

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Takatoshi Ito 4. Rul e M a k e r o f Worl d Trade : Japan's Trad e Strategy an d the Worl d Tradin g Syste m 1 1

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Kazumasa Iwata

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vi Contents 5. Japan' s Rol e i n Economi c Cooperatio n an d Direc t Foreign Investmen t 1 4

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Makoto Sakurai 6. Japan' s Internationa l Agenda : Structura l Adjustments 1 6 Heizo Takenaka Contributors 1 8 Index 1 9

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Foreword Tadashi Yamamot o

In Januar y 1 9 9 0 , th e J a p a n Cente r fo r Internationa l Exchang e ( J O E ) launched a new , independen t researc h projec t unde r th e titl e " J

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International Agenda. " Involving younge r Japanese scholars , this projec t w a s intende d t o provid e a n indigenou s reassessmen t of Japan' s nationa l interests i n th e contex t o f a changin g internationa l environmen t an d t o promote polic y debat e o n it s internationa l rol e withi n J a p a n an d i n it s major partners . Researc h w a s t o cove r eigh t topica l area s o f security ; relations wit h socialis t countries ; macroeconomi c policy ; structura l ad justments; trad e policy; economi c cooperation ; science , technology , an d environment; an d th e relationshi p o f domesti c politic s t o foreig n policy . The projec t w a s base d o n t w o premises . Th e first premis e w a s tha t changes i n th e internationa l environmen t an d Japan' s economi c succes s and broa d interest s requir e tha t J a p a n assum e a ne w internationa l role . In th e 1 9 8 0 s , J a p a n becam e a trul y globa l economi c p o w e r , an d thi s happened a t a tim e o f increase d strain s o n w o r l d systems . Th e " J

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P

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problem" school , i n fact , link s thes e t w o developments , arguin g tha t Japan's econom y an d politica l syste m ar e s o constructe d tha t J a p a n cannot b e deal t wit h withi n th e framewor k of th e p o s t w a r internationa l institutions. Other s se e J a p a n mor e benignl y a s " a p o w e r withou t pur pose." Clearl y Japa n mus t realiz e tha t i t i s bot h possibl e an d necessar y for J a p a n t o pla y a majo r leadershi p rol e i n shapin g th e internationa l institutions o f th e future . vii

viii Tadashi

Yamamoto

The secon d premis e w a s that th e Japanese domesti c politica l processe s constitute on e o f th e majo r constraint s o n J a p a n i n acceptin g it s ne w international responsibilities . Japan' s politica l system , i n contras t t o it s economy, ha s bee n slo w t o change , allowin g entrenche d group s t o pro tect thei r interests . Recen t politica l development s hav e brough t th e J a p a nese politica l syste m t o th e brin k o f crisis , encourage d reform-minde d activists withi n th e rulin g party , and fostere d debat e abou t possibl e ne w political alignments . Thes e development s hav e profoun d implication s for Japan' s foreig n polic y tha t nee d t o b e systematicall y explored . Th e research, therefore , w o u l d als o focu s heavil y o n th e relationshi p betwee n domestic politica l chang e an d a ne w internationa l agenda . Researc h i n each topica l are a w o u l d addres s th e questio n o f w h a t kin d o f domesti c political chang e i s neede d t o implemen t ne w policies . Over th e pas t decade , J a p a n ha s bee n examinin g it s internationa l agenda i n a n explorator y fashion . Th e effor t ha s bee n stimulate d b y external pressure s for J a p a n t o assum e mor e financial burdens , an d ha s evolved i n a piecemea l an d tactica l fashio n aroun d th e questio n o f "managing foreig n pressures. " T o date , th e exploratio n o f concret e policy alternative s ha s bee n largel y carrie d forwar d b y bureaucrats , those traditionall y responsibl e fo r publi c polic y i n J a p a n . Th e lac k o f a clear se t o f foreig n polic y objectives , however , ha s mad e i t impossibl e for th e bureaucrac y t o pla y it s previou s rol e a s th e arbite r o f publi c interests. Ther e i s increase d recognition tha t i n a more pluralisti c society , nongovernmental publi c polic y specialist s ar e neede d t o provid e a mor e integrated an d longer-ter m visio n o f foreig n polic y goals . In this polic y environment , w e believed , first, tha t th e Japan' s Interna tional Agend a projec t coul d mak e a distinctiv e contributio n t o domesti c public educatio n an d foreig n polic y debate . Second , w e believe d th e project coul d als o hel p J a p a n mak e substantia l contribution s t o interna tional polic y debat e o n th e broa d question s o f strengthenin g institution s to preserv e securit y an d promot e trad e an d development . Third , w e hoped th e projec t w o u ld enabl e scholar s an d expert s i n Nort h America , Europe, th e Asia-Pacifi c region , an d elsewher e t o engag e i n substantiv e dialogue o n critica l public polic y issue s wit h thei r Japanese counterparts. I believ e I ca n proudl y repor t t o reader s o f thi s volum e tha t thes e thre e objectives hav e bee n successfull y achieved ; we hop e tha t th e publicatio n of thi s volume an d it s siste r version i n Japanese, Nihon Senryaku Sengen, will contribut e t o th e internationa l a s wel l a s nationa l debate s o n thi s

Foreword i

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topic an d tha t th e policy-oriente d dialogue s wit h ou r oversea s counter parts hav e bee n promote d throug h suc h for a a s th e Trilatera l Commis sion T o k y o Plenar y Meetin g i n 1 9 9 1 , the Thirteent h European-Japanese Conference i n Apri l 1 9 9 1 , an d th e Eight h U . S . - J a p a n "Shimoda" Con ference o f Novembe r 1 9 9 0 , al l o f whic h use d som e o f th e draf t paper s written fo r thi s projec t as discussio n papers . The contributor s t o thi s publicatio n ar e younger Japanese nongovern mental foreig n affair s specialists , eac h wit h considerabl e internationa l experience an d committe d t o th e belie f tha t significan t polic y reform s are needed . A s th e organize r o f th e overal l project , I sincerel y hop e tha t this volum e outline s a n agend a tha t a ne w generatio n o f Japanes e politi cal thinker s believe s i s necessar y and feasibl e a s J a p an prepare s itself fo r a leadershi p rol e i n th e twenty-firs t century .

Preface Yoichi Funabash i

It w a s i n th e fal l o f 1 9 8 9 tha t I ha d a conversatio n wit h Tadash i Y a m a m o t o , presiden t o f th e J a p a n Cente r fo r Internationa l Exchang e ( J O E ) , whic h late r resulte d i n th e Japan' s Internationa l Agend a project , the forerunne r o f thi s volume . W e w e r e the n witnessin g th e en d o f th e Cold W a r w o r l d system , an d th e shap e o f th e subsequen t w o r l d orde r w a s totall y uncertain . I n thi s situation , w e agreed , J a p an w o u l d hav e n o choice bu t t o comprehensivel y revie w it s foreig n policy . W e furthe r agreed o n th e nee d t o stud y th e ne w internationa l environmen t an d it s effect o n th e fundamenta l premise s o f Japan' s foreig n policy . Obviously , Japan's externa l strateg y shoul d b e restructure d i n thi s ne w era , bu t w h a t w o u l d b e th e cor e o f Japan' s ne w foreig n polic y an d w h a t coul d and shoul d b e don e t o pursu e it ? I n orde r t o fin d answer s t o thi s question, w e decide d tha t w e neede d t o launc h a researc h projec t tha t attempted t o d r a w Japan' s self-portrai t i n th e p o s t - C o l d W a r er a an d identify it s role s i n th e n e w w o r l d . M o r e specifically , w e w e r e urge d t o identify a ne w foreig n polic y fo r J a p a n i n th e 1 9 9 0 s an d t o presen t th e results a s th e polic y proposa l fo r th e future . Thus, Tadash i Y a m a m o t o an d J O E launche d a multiyear , interdisci plinary researc h project unde r th e titl e " J P a

a n s

Internationa l Agenda. "

For thi s project , J O E organize d a tea m o f seve n well-know n expert s i n specific foreig n polic y field s tha t w e r e judge d t o b e o f highes t impor tance. The y w e r e , i n th e economi c realm , externa l trad e strateg y an d xi

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Funabashi

policy (Kazumas a Iwata) , macroeconomi c polic y (Takatosh i Ito) , struc tural adjustment s (Heiz o Takenaka) , an d economi c cooperatio n an d other financia l flow s t o developin g countrie s (Makot o Sakurai) ; and i n the political/securit y realm , securit y strateg y an d polic y (Akihik o T a naka), relation s wit h socialist s countrie s (Yutak a Akino) , an d interna tional implication s o f scienc e an d technolog y polic y (Taiz o Yakushiji) . I w a s designate d t o lea d thi s powerfu l team , a pleasan t an d stimulatin g but nevertheles s challengin g jo b fo r a generalis t lik e me , an d t o contrib ute a n introductor y chapte r integrating th e finding s an d insight s o f tea m members. Choice s o f individua l topic s w e r e admittedl y heavil y affecte d by ou r concern s abou t U . S . - J a p a n relations. Indeed , i t ca n b e sai d tha t underlying thi s projec t w a s a n urg e t o respon d intelligentl y t o criticis m of Japa n b y so-calle d revisionists , particularl y those advocatin g th e vie w that J a p an i s inherentl y differen t fro m th e res t of th e w o r l d an d thu s ha s to b e contained . The tea m me t severa l times a t variou s stage s of th e projec t an d mad e t w o trip s t o th e Unite d State s t o tes t idea s o n scholars , researchers , journalists, congressiona l staff , an d othe r intellectual s i n th e Unite d States. Simila r effort s w e r e als o mad e a t othe r JCIE-sponsore d intellec tual dialogue s suc h a s th e (U.S.-Japan ) Shimoda Conference , th e Euro J a p a n Conference , an d th e A S E A N - J a p a n Dialogue. Eigh t paper s ha d been mor e o r les s complete d b y Novembe r 1 9 9 1 , but w e r e the n update d and revise d t o adjus t t o th e rapidl y changin g internationa l environmen t since lat e 1 9 9 1 . H o w e v e r, th e change s i n th e socialis t w o r l d , particularly in th e forme r Sovie t Union , w e r e s o drasti c an d sweepin g tha t w e ha d t o drop Yutak a Akino' s excellen t pape r on tha t par t of th e world . Aside fro m th e substance , th e significanc e o f thi s polic y researc h project lie s i n th e fac t tha t i t w a s launche d b y a private , independent , nonprofit institution . I n J a p a n , publi c policy-makin g ha s lon g bee n mo nopolized b y th e bureaucracy . Political partie s an d legislator s hav e sim ply no t bee n equippe d wit h th e necessar y resources to engag e i n seriou s policy formulation . M o s t privat e "thin k tanks, " unlik e thei r America n counterparts, ar e to o bus y followin g th e guideline s establishe d b y th e companies o r agencie s t o whic h the y ar e attached to delive r independen t and timel y polic y proposal s o f thei r o w n . Japanes e academia , o n th e other hand , ha s tende d t o confin e itsel f i n th e ivor y t o w e r an d t o loo k d o w n o n policy-oriente d studie s a s somethin g demeanin g t o academi c inquiry. Journalist s have traditionall y opte d t o plac e themselve s outsid e

Preface xii

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the policy-makin g circl e t o retai n thei r objectivit y i n coverin g th e gov ernment. Suc h aversio n t o th e policy-makin g proces s ha s severel y crip pled th e privat e sector's abilit y t o presen t alternative s to th e governmen tal policies . Thi s project , thus , w a s als o a n attemp t t o formulat e a n alternative fo r Japan' s foreig n policy , a n ac t tha t i s hopefull y t o b e followed b y man y simila r attempts . In makin g specifi c polic y proposals , member s o f th e tea m w e r e wel l a w a r e o f th e numerou s domesti c obstacle s standin g i n th e w a y o f imple mentation, obstacle s describe d i n th e paper s tha t follow . W e ar e b y n o means optimist s concernin g th e pertinacit y o f thes e domesti c constraints . However, whe n on e tackle s suc h a majo r issu e a s a nation' s foreig n policy, particularl y w h e n on e desire s t o chang e it s direction , on e mus t retain som e leve l o f optimism . And , i n th e cours e o f deliberation , th e team cam e t o shar e a cautiousl y optimisti c outloo k o n thes e constraints . W e cam e t o believ e tha t J a p a n coul d chang e an d tha t ou r w o r k coul d make a difference . I w o u l d lik e t o tak e thi s opportunit y t o expres s m y utmos t gratitud e to Tadash i Y a m a m o t o , withou t w h o s e encouragement , organization , and intellectua l guidanc e neithe r th e Japan' s Internationa l Agend a proj ect no r thi s volum e w o u l d exist . I hav e a l w a y s bee n a n admire r o f hi s insights an d contributio n a s a genuin e "intellectua l entrepreneur. " Words o f thank s ar e als o i n orde r fo r Y a m a m o t o ' s competen t staff , including Hidek o Katsumata , Hiroshi Pete r Kamura, and Makit o Noda , w h o successfull y coordinate d thi s challengin g project . Th e projec t w a s made possibl e throug h generou s grant s fro m th e Joh n D . an d Catherin e T. MacArthu r Foundatio n an d Masahid e Shibusaw a o f Tokyo' s East West Seminar . Shibusaw a also activel y participate d in th e team' s discus sions an d hoste d on e o f th e team' s meeting s a t hi s Asi a Cente r i n O d a w a r a . Last , w e ar e ver y gratefu l t o ou r American , European , an d Asian friend s w h o too k tim e t o rea d ou r paper s and too k par t in ou r dis cussion.

Introduction: Japan' s Internationa l Agenda fo r th e 1990 s Yoichi Funabashi

J a p a n ha s increasingl y becom e a n enigm a t o th e res t o f th e w o r l d be cause o f a variety of seemin g inconsistencies . Japa n i s unquestionabl y a n economic an d technologica l superpower . Bu t i t remain s a n immatur e political player , keepin g a l o w profil e i n w o r l d politics : J a p a n ha s ofte n been describe d a s havin g a first-class econom y wit h "econom y class " politics. Eve n withi n it s econom y a ga p exist s betwee n th e world-clas s competitiveness o f man y o f it s industrie s an d th e humbl e livin g stan dards o f th e ordinar y Japanese . A s a result , J a p a n ma y appea r para mount an d stron g fro m on e angle , bu t i t ma y see m w e a k an d smal l fro m another. I n short , J a p a n i s difficul t t o fathom . Eve r sinc e i t debute d o n the internationa l scen e whe n i t defeate d powerful , imperia l Russi a a t th e beginning o f th e twentiet h century , J a p a n ha s seeme d heade d t o w a r d becoming a superpowe r quit e unlik e othe r nation s tha t hav e achieve d that status . In othe r w o r d s , J a p a n appear s heretical. One o f Japan' s priorit y task s is , thus , t o tr y t o fill thes e gaps . I n fact , efforts hav e alread y started , amon g whic h th e legislatio n o f a bil l en abling th e dispatc h o f noncombatan t Self-Defens e Force s t o assis t i n the Unite d Nation s Peac e Keepin g Operatio n (UNPKO ) activitie s i n Cambodia an d th e propose d visi t t o Chin a b y Empero r Akihit o meri t special attentio n becaus e the y directl y addres s th e weakes t point s i n 1

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Funabashi

Japanese foreig n policy : th e first ca n b e interprete d a s a n importan t ste p t o w a r d Japan' s large r presenc e an d greate r weigh t i n th e Unite d Na tions; th e latte r decisio n w a s take n i n orde r t o overcom e it s Asia n neighbors' mistrus t o f J a p a n . Nevertheless, thes e step s hav e jus t begu n an d the y hav e ye t t o reflec t national consensus . I n fact , Japanes e public opinio n ha s bee n spli t an d adrift. Japa n i s clearl y a t a crossroads . The mos t outstandin g evidenc e o f this w a s see n durin g th e Gul f Crisi s o f 1 9 9 0 .

1 . Crisi s A crisi s almos t a l w a y s reveal s th e rea l picture . Th e Gul f Crisi s reveale d the rea l J a p a n . I n th e momen t o f truth , a n economi c superpowe r foun d itself merel y a n automati c telle r machine , albei t on e tha t need s a coupl e of kick s befor e i t dishe s ou t th e money . Th e notio n tha t economi c p o w e r inevitably translate s int o geopolitica l influenc e i s a materialis t illusion . So argue d Charle s Krauthammer, an d man y Japanes e n o w see m t o 1

subscribe t o th e view . The Gul f Crisi s w a s th e manifestatio n o f th e failur e o f Japan' s leader ship. Whe n th e crisi s erupted , J a p a n ha d it s politicall y weakes t leader ship o f th e p o s t w a r era . Th e slo w an d cumbersom e decision-makin g procedures benefite d th e powerfu l bureaucracie s an d serve d th e statu s quo bu t w a s totall y unfi t t o respon d quickl y i n a crisis . In 1 9 8 9 Japan' s rulin g party , th e Libera l Democrati c part y (LDP) , had los t contro l i n th e Uppe r House , an d n o w i t encountere d grea t difficulty i n formin g a coalitio n wit h th e oppositio n parties , th e Demo cratic Socia l part y an d th e Komeito , o n it s respons e t o th e Gul f Crisis . The publi c w a s polarized . J a p a n ha d no t witnesse d suc h a divergenc e o f views o n a vita l issu e o f thi s magnitud e i n thirt y years . Certainly J a p a n manage d t o b e a par t o f th e internationa l coalitio n effort wit h it s 1 3 billio n dolla r contribution . Bu t i t coul d no t meaning fully mak e a "huma n resource " contributio n o n eve n a negligibl e scal e and fel l shor t eve n o f Korea' s dispatc h o f 1 5 0 medic s an d th e Philip pines' contributio n o f 1 9 0 doctor s an d nurses . In sum , th e Gul f Crisi s demonstrate d th e enormou s ga p betwee n Japan's economi c migh t an d it s immatur e politica l p r o w e s s an d still-lo w level o f rea l internationalization . There ar e man y Japanes e w ho ar e happie r n o w becaus e th e nationa l

Introduction: Japan's

International Agenda

for the 1990s 3

consensus w a s clearl y solidifie d agains t sendin g troop s abroad . M a n y feel tha t J a p a n di d w h a t i t coul d an d tha t w e , a s wel l a s th e foreigners , should no t expec t to o muc h o f J a p a n . Moreover , th e 1 3 billio n dollars , made possibl e onl y b y a ta x increase , w a s no t peanuts . I t w as mor e tha n Japan's Officia l Developmen t Assistanc e (ODA ) i n 1 9 9 1 , approximatel y $ 1 1 billion , whic h w a s th e larges t OD A disbursemen t b y a singl e coun try i n 1 9 9 1 . Besides that , th e Gul f W a r an d it s crisi s managemen t perhap s shoul d not b e viewe d a s a futur e patter n bu t rathe r as a uniqu e phenomenon . A "new w o r l d order " shoul d no t tak e fo r grante d th e w a y th e Gul f Crisi s w a s settle d an d th e w a y th e coalitio n strateg y w o r k e d. However, th e Gul f Crisi s an d W a r crystallize d an d magnifie d th e issues tha t J a p a n shoul d hav e addresse d long ago , bu t di d not . T o J a p a n , the Gul f Crisi s w a s , in a w a y , th e da y of reckoning . The pric e o f succes s ha s suddenl y starte d to confron t J a p a n exactl y a t the junctur e w h e n Japan' s economi c succes s ha s reache d it s peak . J apan's aggressiv e economi c expansio n ha s me t stron g resistanc e i n bot h the Unite d State s an d Wester n Europe . Japan's chroni c trad e surplu s ha s been a constan t politica l irritan t t o the m throughou t th e 1 9 8 0 s . Japan' s massive foreig n investment s hav e cause d protectionis t responses , partic ularly i n th e Unite d States . Th e rar e situatio n i n whic h th e world' s largest debtor , th e Unite d States , militaril y protect s th e world' s larges t creditor, J a p a n , ha s straine d thei r relationshi p an d th e worl d system . Japan's rapi d emergence a s a political militar y p o w e r with highl y sophis ticated dual-us e technologie s ha s mad e som e o f th e militar y planner s i n the majo r p o w e r s uneasy , especiall y i n th e Unite d States . A grou p o f revisionists ha s argue d tha t Japan' s specialness—it s uniqu e socioeco nomic structure—i s a destabilizin g facto r i n th e w o r l d syste m an d ha s proposed tha t J a p a n shoul d b e treate d separately. At th e sam e time , th e politica l stabilit y tha t ha s helpe d J a p a n achiev e its economi c goal s i n th e pas t suddenl y seem s shaky . Th e dominanc e o f the oppositio n partie s i n th e Uppe r Hous e electio n an d generationa l change withi n th e rulin g Libera l Democrati c part y clou d th e future . Nationalistic sentiment s suppresse d since Worl d W a r II , generated partly by economi c self-confidenc e an d partl y b y frustratio n wit h mountin g pressures fro m abroad , n ow surfac e mor e visibly . Th e deep-roote d paci fist tendencie s o f th e publi c i n Japa n ha s increasingl y constraine d Japan' s global an d regiona l engagements .

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Funabashi

The Gul f Crisi s brok e ou t exactl y whe n th e ga p betwee n Japan' s underdeveloped politica l capacit y t o sustai n a drea m o f a ne w globa l p o w e r an d it s seemingl y uncontrollabl e expansio n o f economi c p o w e r w a s mos t pronounced . Th e outcom e w a s a shockin g experience , rudel y awakening Japan t o it s inabilit y t o cop e wit h a crisi s affectin g it s vita l in terests. The internationa l environmen t i n th e 1 9 9 0 s wil l n o longe r allo w J a p a n t o follo w a one-dimensiona l economi c strategy . The cal l fo r Japa n to bea r a ful l shar e o f th e burde n t o sustai n th e w o r l d syste m ha s intensified, an d J a p a n k n o w s tha t i t mus t increas e it s share . However , the essentia l questio n is , fo r w h a t purpos e shoul d Japa n assum e a larger share o f th e burden ? J a p an mus t clearl y defin e it s objective s an d it s rol e in th e w o r l d rathe r than jus t respon d t o th e cal l quantitatively . Thi s wil l severely challeng e Japan' s long-standin g se t o f strategi c premise s an d policy foundations .

2. Japan' s Past Strateg y Japan's self-imag e a s a small , strategicall y nake d an d economicall y frag ile islan d natio n ha s change d a s i t ha s graduall y becom e a respecte d member o f th e w o r l d community . Japan' s inclusio n a s a foundin g mem ber o f th e Grou p o f Seve n (G-7 ) economi c summi t i n 1 9 7 5 helpe d transform th e Japanes e public's perceptio n o f it s o w n country . A decad e later, th e imag e o f economi c p o w e r w a s replace d b y tha t o f economi c superpower a s J a p a n suddenl y foun d itsel f th e world' s larges t credito r nation. Wit h th e collaps e o f th e W a r s a w Pac t an d th e en d o f th e Col d War, a ne w perceptio n o f Japa n a s a globa l economi c p o w e r wil l b e more widesprea d as th e w o r l d become s mor e polycentric . Ironically, a s Japan' s internationa l p o w e r ha s advance d sinc e th e 1 9 8 0 s , th e underpinning s o f it s politica l an d economi c system s an d conditions hav e bee n questioned . Japan' s rapidl y agin g population , unique lifelon g employmen t system , homogeneou s socia l fabric , "pluto cratic collusion " amon g leadin g industries , speculativ e "bubble s an d bursts" i n financial markets , an d it s complacenc y hav e bee n pinpointe d as vulnerabilitie s o r sign s o f decline . Th e sun , i t i s n o w declared , als o sets, an d th e immobilit y o f Japan' s politica l leadershi p an d syste m wil l accelerate th e decline . It is , however , to o earl y t o delive r a verdic t o n Japan' s decline .

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International Agenda

for the 1990s 5

Contrary t o th e argument s o f som e revisionists , J a p a n ha s a prove n capacity t o adap t t o ne w internationa l environments , a s i n th e case s o f the Meij i Restoratio n an d th e rebuildin g o f th e natio n afte r Worl d War II . Nonetheless, Japan' s strategi c premises ar e stil l basicall y conditione d by a historica l sens e o f vulnerability . The y ar e th e legacie s o f traumati c defeat an d determinatio n t o b e bor n again . Thes e legacie s ar e many, ye t the followin g stan d out : adaptatio n an d catch-up , concentratio n o n economic gains , followin g th e lea d o f th e Unite d States , and restrain t o f regional strategy.

1. Adaptation and

Catch-Up

Throughout it s moder n history , J a p a n ha s geographicall y an d histori cally fel t seclude d fro m th e world . Th e sharpene d sens e o f "latecomer " and "od d ma n out " i n th e w o r l d scen e ha s contribute d t o Japan' s familiar foreig n polic y behavio r o f bot h inward-lookin g exceptionalis m (ultranationalism i n p r e w a r day s an d pacificis m i n th e p o s t w a r era) an d desperate effor t t o catc h u p t o th e advance d nation s (rectificatio n o f unequal treatie s in th e Meij i perio d an d "GNPism " afte r World W a r II). Deeply confine d b y thi s mindset , J a p a n ha s seldo m trie d t o presen t itself a s a rul e make r i n th e w o r l d community . Th e rule s w e r e alread y there, an d J a p a n simpl y trie d t o adap t itsel f t o the m and , i f possible , t o excel i n playin g th e g a m e — a l t h o u g h , whe n face d wit h difficulty , i t jus t tended t o ignor e an d reject. In general , J a p an ha s lon g regarde d the internationa l environmen t a s something t o whic h i t mus t adjus t wheneve r a ne w situatio n arises . T o J a p a n , th e w o r l d orde r i s a give n an d J a p a n i s a reacto r par excellence . In on e Japanes e politica l scientist' s w o r d s , t o Japan , "th e w o r l d i s noth ing bu t a 'framework ' o r th e settin g whic h ca n chang e onl y mysteri o u s l y . " Prim e Ministe r Take o Fukuda' s "equidistanc e diplomacy " i n 2

large par t reflected th e psychologica l bloc k agains t definin g th e prioritie s of th e foreig n policy . Japan's apparen t obsessio n wit h th e stratificatio n an d rankin g o f it s status i n th e w o r l d als o testifie d t o it s lac k o f wil l t o defin e it s self-imag e and rol e i n th e world . Economis m o r "GNPism " w a s a strateg y t o eschew politica l involvement . Prim e Ministe r Zenk o Suzuki' s introduc tion of th e them e o f J a p a n a s the " 1 0 percen t nation" (ichiwari kokka) —

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a natio n occupyin g 1 0 percen t o f w o r l d G N P — a n d hi s cal l fo r hi s fellow citizen s t o mak e a greate r internationa l contributio n reveale d that J a p a n perceive d th e w o r l d an d it s statu s i n quantitativ e terms . Japa n conspicuously avoide d determinin g it s self-imag e an d rol e i n qualitativ e terms. Japan's forme r vice-ministe r fo r foreig n affairs , Takakaz u Kuriyama, lately argue d for Japan' s ne w diplomati c postur e b y coinin g th e phrase , "foreign polic y o f a majo r p o w e r wit h a n unassumin g posture. " Yet , this thrus t fo r a ne w postur e w a s expresse d b y attitudina l concept s rather tha n strategi c ones . Shintaro Ishihara' s much-publicize d b o o k — p e r h a p s th e bes t selle r w o r l d w i d e writte n b y a Japanes e i n th e lat e 1 9 8 0 s — m e r e l y worsene d the situatio n for , a s indicate d b y th e titl e o f th e book , Japan That Can Say No, i t w a s a rejection , not a projection , o f a nationa l psyche . Japan's weigh t an d stak e i n th e w o r l d econom y an d w o r l d politic s have increase d th e world' s interes t an d stak e i n Japan' s strateg y an d policy. Th e rol e ga p betwee n Japan's lac k o f projectio n an d othe r coun tries' increasin g expectation s o f J a p a n ha s widene d t o a precariou s de gree. J a p a n i s n o w a part of a give n orde r and mus t b e a n actor .

2. Concentration on

Economic Gains

Japan's mercantil e strateg y sinc e th e las t w a r w a s almos t unanimousl y supported b y th e publi c an d enthusiasticall y pushe d forwar d fo r fou r decades. Japan' s ne w determination , symbolize d b y th e "Peac e Constitu tion," w a s s o stron g tha t almos t al l th e response s an d energ y w e r e mobilized int o economi c reconstructio n an d expansion . Militar y an d security issue s w e r e constantl y pu t o n th e bac k burner . Noneconomi c policy goal s suc h a s internationa l peacekeepin g an d huma n right s w e r e never vigorousl y pursued . This exclusivel y economic-oriente d strateg y becam e increasingl y un tenable b y th e m i d - 1 9 8 0 s . First , th e scal e o f th e Japanes e econom y an d its oversea s penetratio n hav e cause d politica l repercussion s tha t force d Japan t o respon d politically . Th e voluntar y restriction s o n automobil e exports t o th e Unite d State s throughou t th e 1 9 8 0 s w a s typical . Second , Japan's credito r statu s compelle d i t t o endors e man y internationa l pro grams wit h strategi c implications— a Lati n America n deb t relie f pro gram, a n Eas t European recovery plan, Middl e Eas t peacekeeping, e t c . —

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for the 1990s 7

and t o chang e th e natur e o f it s economi c diplomacy . A t th e sam e time , louder criticis m o f "checkboo k diplomacy " i s likel y t o b e heard . Third , Japan's newl y acquire d an d develope d militaril y relevan t technolog y i s transforming J a p a n int o a countr y o f increasin g militar y significance . Japan's long-standin g nonmilitar y strateg y has bee n base d o n th e prem ise o f bein g a "have-not " i n term s o f indigenou s militar y resources . N o w this premis e i s shake n becaus e J a p a n clearl y belong s t o th e clu b o f "haves" du e t o it s military-relate d technology .

3. Following the

Lead of the United States

Throughout moder n history , J a p a n benefite d enormousl y fro m th e lib eral w o r l d economic system , whether th e hegemoni c p o w e r of th e syste m w a s th e Netherlands , Grea t Britain, or th e Unite d States . After absorbin g advanced technolog y an d good s fro m th e Dutc h vi a th e state-sanctione d outpost of f Nagasak i i n th e Ed o period , J a p a n w a s prepare d to modern ize whe n mos t countrie s o f th e non-Wester n w o r l d w e r e colonize d b y imperialistic p o w e r s . Th e Anglo-Japanes e allianc e durin g th e firs t t w o decades o f thi s centur y provide d a securit y blanke t fo r J a p a n tha t en abled i t t o overcom e it s deep-roote d fea r o f th e threa t fro m Russia . Rapid economi c developmen t an d trad e expansion , no t surprisingly , coincided wit h th e era . The U . S . - J a p a n allianc e i n th e p o s t w a r er a provide d bot h securit y and a marke t fo r Japanes e products. Japan' s economi c miracl e require d U.S. protection . Fo r man y Japanese , th e lesson s ar e clear . J a p a n pros pered whe n i t followe d th e leadershi p o f th e world' s mos t libera l eco nomic p o w e r . Henc e a strateg y o f followin g w a s born , cherished , an d developed int o almos t a n axiom . The strateg y ha s change d durin g th e Nakason e er a whe n J a p a n ha s tried t o see k a highe r profil e an d a broade r rol e i n w o r l d politics . Prim e Minister Yasuhir o Nakasone' s commitmen t t o th e Wester n allianc e based o n th e assumptio n o f globa l securit y a s "indivisible " reflecte d Japan's searc h fo r leadership . Nakasone' s high-ye n strategy , which con tributed t o layin g th e groun d fo r th e Plaz a Agreemen t i n 1 9 8 5 , w a s tantamount t o a declaratio n o f Japan' s ne w rol e a s a w o r l d banker . Nakasone's polic y chang e fo r fisca l expansio n tha t h e pledge d a t th e Venice Summi t i n 1 9 8 7 pave d th e w a y fo r Japan' s ne w tas k a s a n "absorber" c o u n t r y — a marke t p o w e r . Y e t th e habi t o f Japan' s leader -

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ship t o se e th e w o r l d merel y throug h th e pris m o f U . S . - J a p a n e s e relations limit s th e scop e o f it s foreig n policy . The deep-roote d hierarchica l relationship s i n Japanes e societ y ofte n make i t difficul t fo r th e Japanese t o perceiv e and execut e a more effectiv e foreign polic y becaus e o f thei r inabilit y t o assimilat e th e concep t o f equality i n internationa l relations . Japanes e "dependencia " psychol o g y — v i e w i n g Americ a a s a bi g b r o t h e r — a n d it s lac k o f initiativ e i n effect invite s gaiatsu (foreig n pressure) . Exploitation o f foreig n pressur e in orde r t o diver t domesti c attentio n a w a y fro m unpopula r policie s i s a strategy employe d universally . I t i s frequentl y employed , particularl y b y the industria l democracies , i n managin g th e ever-growin g relation s o f economic interdependence . I t ha s bot h positiv e an d negativ e effect s o n the stabilit y o f internationa l relationships . I n J a p a n , i t i s a mos t habitu a l l y — a n d ofte n unilaterally—use d pla y becaus e o f it s effectivenes s i n overcoming th e immobilit y o f th e Japanes e politica l system . Th e coinin g of a n entirel y n e w w o r d , gaiatsu, t o denot e foreig n pressur e indicates th e degree t o whic h i t ha s take n roo t i n Japan' s politica l culture . H o w e v e r , thi s tacti c cause s problems. First, th e us e o f foreig n pressur e does no t hel p generat e healthy polic y debates o r creat e a goo d milie u i n whic h t o promot e Japan' s o w n initiative. I t shift s debate s a w a y fro m th e issu e o f w h a t J a p an shoul d d o in it s o w n bes t interes t an d t o w a r d w h a t othe r countrie s w a n t J a p a n to do . Fo r thi s ver y reason , i t ofte n arouse s nationalisti c feeling s an d emotionalizes th e issues . Second, i t provide s a "cover " for thos e w h o actuall y pursue their o w n agenda (e.g. , sendin g Self-Defens e Force s abroad ) unde r th e guis e o f policy coordinatio n wit h others , particularl y wit h th e Unite d States . Abused gaiatsu politic s undermine s th e U . S . - J a p a n relationship becaus e it tend s t o perpetuat e th e patron-proteg e relationshi p an d love-hat e emotions betwee n th e t w o countries . Overdependence o n it s bilatera l relationshi p wit h th e Unite d State s undermines Japan' s creativ e diplomac y b y closin g of f othe r avenue s fo r foreign polic y initiatives . Th e Gul f Crisi s magnifie d th e problem . During th e crisis , J a p a n fel t lef t ou t fro m th e cor e o f th e decision making proces s o f th e coalitio n diplomacy . J a p a n i s no t a permanen t member o f th e U.N . Securit y Council . I t doe s no t belon g t o a collectiv e security bod y suc h a s N A T O , no r t o regiona l an d supranationa l organi zations suc h a s th e Europea n Community . Th e G- 7 mechanis m w a s no t

Introduction: Japan's

International Agenda

for the 1990s 9

mobilized fo r coalitio n buildin g amon g th e trilatera l countries . Ther e w a s n o urgen t meetin g amon g th e G-7 . No r w a s an y attemp t mad e t o coordinate policie s amon g th e politica l director s o f th e G-7 . Th e onl y G 7 workin g vehicl e w a s tha t o f th e finance ministers , an d it s missio n w a s simply t o writ e checks . Secretar y of Stat e J a m es A . Bake r III did no t visi t J a p a n . Lac k o f a sens e o f participatio n i n an d commitmen t t o a legiti mate decision-makin g body , althoug h partl y a resul t o f Japan' s constitu tional an d politica l constraints , lessene d publi c suppor t fo r a stronge r commitment t o a coalitio n strategy . J a p an fel t strategicall y nake d agai n and thu s w a s drive n t o furthe r relianc e o n relation s wit h th e Unite d States.

4. Restraint of

Regional Strategy

The bankruptc y o f th e Greate r East Asian Co-Prosperit y Spher e resulte d in a profoun d politica l an d psychologica l inhibition , affectin g Japan' s p o s t w a r strategy . Whenever J a p a n trie d t o asser t itself an d assum e lead ership i n th e region , i t w a s reminde d o f it s guil t i n th e p o s t w a r er a b y repeated warning s fro m Asia n leader s abou t Japan' s "ne w ambition " and reference s t o " a ste p t o w a r d becomin g a militar y giant. " The lac k o f a regiona l cooperativ e economi c an d militar y framewor k in Asi a an d th e Pacifi c region , suc h a s N A T O an d th e EEC , bot h o f which helpe d Wes t German y overcom e it s constraint s o n regiona l strat egy, handicappe d J a p a n . Th e Japanes e government' s attemp t t o intro duce a bil l t o enabl e Self-Defens e Force s t o b e sen t abroa d fo r th e purpose o f contributin g t o th e multinationa l force s i n th e Persia n Gul f area i n th e fal l o f 1 9 9 0 me t suspicio n an d oppositio n i n Asia n countrie s that feare d th e possibl e consequence s o f Japan' s p o w e r projection . Japan's reluctanc e an d resistanc e t o formulatin g a regiona l strateg y and th e heav y dependenc e o f it s economi c expansio n o n th e Unite d States an d w o r l d trad e hav e mad e Japa n on e o f th e fe w countrie s i n th e modern w o r l d wit h trul y globa l interests. Regionalis m w a s regarde d as 3

a tainte d w o r d bot h politicall y an d economically . I t w as ba d politic s an d bad economic s becaus e i t implie d politica l dominatio n b y a n ambitiou s hegemonic p o w e r an d a blo c econom y tha t threatene d t o destro y th e free tradin g system . Japan' s diversificatio n o f it s expor t markets , espe cially it s dependenc e o n th e U.S . market , unlik e th e concentratio n o n Asian market s i n p r e w a r days , encourage d Japa n t o devot e itsel f t o

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engaging i n th e globa l bu t U.S.-le d multilatera l economi c framework . Although J a p a n heavil y concentrate d it s OD A o n Asia n neighbors — more tha n 6 0 percen t o f al l ai d m o n e y — i t di d no t develo p a comprehen sive regiona l policy . This doe s no t mean , however , tha t J a p a n ha s no t develope d an y regional policies . I n fact , J a p a n ha s implemente d a serie s o f "ne w look " regional policies , includin g th e establishmen t o f forma l diplomati c rela tions wit h Kore a i n 1 9 6 5 ; th e launchin g o f OD A i n 1 9 6 9 , partiall y i n order t o improv e th e resilienc e o f th e t w o - y e a r old Associatio n o f South east Asia n Nation s (ASEAN) ; effort s t o normaliz e diplomati c relation s with Chin a i n v i e w o f Nixon' s abrup t approach t o Beijing ; consolidatio n of tie s wit h Asia n oi l producer s afte r th e t w o oi l crises ; and emphasi s o n "heart-to-heart" policie s t o w a r d s Asia n countrie s propose d b y Prim e Minister Fukud a immediatel y followin g th e fal l o f Saigon . Bu t thes e policies neve r full y blossome d du e t o constraint s impose d b y Japan' s negative wartim e legacie s i n Asia , absenc e o f a multilatera l framewor k in th e region , an d t w o regiona l "ho t w a r s " durin g th e Col d War . A t th e same time , th e Unite d State s als o trie d t o encourag e close r relation s between J a p a n an d it s Asia n neighbors , althoug h i t shoul d b e note d tha t the Unite d State s aime d t o confin e thes e relation s withi n th e large r framework o f th e Col d W a r . The bi g step s forwar d t o w a rd a singl e marke t take n b y th e Europea n Community an d th e Unite d States—Canad a Free Trad e Agreemen t sinc e the m i d - 1 9 8 0 s hav e force d J a p a n t o reconside r it s approach . Europea n integration ca n b e viewe d a s a classi c "challeng e an d response " case . I t w a s , i n larg e part , drive n b y th e challeng e fro m th e dynami c economie s of J a p a n an d othe r Asia-Pacifi c countries . N o w Europ e challenge s J a p a n . A unifie d German y a s a soli d nucleu s fo r an d Eas t Europ e a s a ne w eastern frontie r o f a colossa l Europ e sharpe n th e sens e o f challenge . Th e prospects o f Unite d S t a t e s - C a n a d a economi c integratio n b y th e en d o f the decad e an d a Unite d States—Mexic o Fre e Trad e zon e i n th e futur e also forc e J a p a n t o entertai n "ne w thinking " abou t th e regiona l framework. The aggressiv e bilateralis m o f U.S . trad e policy , th e prospec t o f U.S . military disengagemen t i n th e Asian-Pacifi c region , an d th e nee d t o incorporate th e People' s Republi c o f Chin a an d th e Sovie t Unio n a s responsible player s i n th e regio n wil l encourag e th e momentu m t o w a r d broad regiona l cooperation . I n th e multipola r w o r l d afte r th e en d o f th e

Introduction: Japan's

International Agenda

for the 1990s 1

1

Cold W a r , a regiona l framewor k ca n provid e som e sor t o f "safet y net " for eac h country . H o w e v e r , th e proble m remains : H o w viabl e i s Asian-Pacifi c regional ism, politicall y an d economically ? Ca n Japa n assum e leadership ? H o w does J a p a n relat e t o th e existin g framewor k o f th e w o r l d system ? Ther e have emerge d n e w orientation s fo r an d interest s i n Japan' s regiona l strategy i n recen t years . Influentia l busines s leader s suc h a s Y o t a r o Ko bayashi argu e fo r th e nee d fo r Japan' s re-Asianization . H o w e v e r , thi s may develo p int o a n anti-Western , particularl y anti-America n feelin g among Japanese . Japan's modernizatio n proces s has bee n lik e th e swin g o f a pendulum , first swingin g t o w a r d th e West , the n bac k t o indigenou s an d culturall y familiar Asia . Japan's soul-searchin g effor t t o defin e it s prope r self-imag e in th e w o r l d an d Asi a i s stil l haunte d b y legacie s o f pas t swings .

3. Japan' s N e w Strateg y Japan's ne w internationa l agend a fo r th e 1 9 9 0 s mus t respon d t o a variety o f ne w issue s an d challenges . 1. Global Civilian

Power

J a p a n mus t establis h it s self-imag e i n th e world . I t mus t expres s it s cherished value s an d self-enlightene d interests . Ye t a ne w self-imag e projection shoul d no t b e radical ; rather , a consciou s effor t shoul d b e made t o develo p i t incrementally . Japan' s unorthodo x p o w e r portfoli o ("economic gian t an d militar y d w a r f " ) shoul d no t b e viewe d a s a n unstable an d transitiona l phenomenon . O n th e contrary , th e portfolio' s very natur e give s J a p a n a golde n opportunit y t o defin e it s p o w e r an d role i n th e radicall y changin g w o r l d o f th e 1 9 9 0 s . Th e changin g natur e of p o w e r i n th e increasingl y interdependen t w o r l d wil l upgrad e eco nomic an d technologica l capacity , educationa l quality , an d th e develop mental mode l effec t i n whic h J a p a n excels . The widesprea d perceptio n tha t th e Gul f W a r , afte r all , underscore s the supremac y o f militar y p o w e r a s th e ultimat e p o w e r elemen t shoul d not alte r Japan' s ne w strateg y o f bein g a globa l civilia n p o w e r . J a p a n 4

should searc h fo r variou s avenue s o f enhancin g politica l p o w e r base d o n economic strength , no t o n militar y might , i n orde r t o stimulat e a ne w

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perception o f th e changin g natur e o f p o w e r i n th e w o r l d communit y an d the recognitio n tha t J a p a n shoul d b e accepte d a s a prototyp e o f th e global civilia n p o w e r . It ca n b e sai d tha t "globa l civilia n p o w e r " i s a concep t o f p o w e r tha t fits wel l wit h Japan' s long-ter m nationa l interests . I f Japan's adoptio n o f this concep t i s internationall y accepte d an d i f J a p a n thu s ca n contribut e to th e "civilianization " o f th e internationa l community , i t coul d i n tur n contribute t o th e creatio n o f th e internationa l environmen t tha t i s favor able t o Japan' s nationa l interests . Japan's economi c interest s ar e global, an d the y requir e Japan's globa l commitment. Thus , Japan' s p o w e r mus t b e globa l i n dimension . Sec ondly, i t mus t b e realize d tha t J a p a n i s fragil e becaus e i t i s a civilizatio n that ha s blossome d i n th e Fa r Eastern offshore o f th e Urasia n continent , strategically unprotected . N o w tha t th e threa t fro m th e Nort h o r th e USSR ha s receded , an d th e prospect s fo r effectiv e U.N . operatio n ar e brighter fo r th e firs t time , J a p a n ha s a bette r chance t o develo p itsel f int o a civilia n p o w e r . Furthermore , th e tim e ha s arrive d a t whic h Japan' s choice o f th e pat h t o w a r d civilia n p o w e r ma y itsel f affec t th e securit y environments o f th e internationa l community , particularl y th e Asian Pacific region . Thirdly , adoptio n o f th e pat h t o becomin g a globa l civil ian p o w e r wil l b e a natura l an d long-lastin g choic e o f th e Japanes e w h o had strongl y supporte d th e p o s t w a r peac e strateg y base d o n the , s o t o speak, secon d " s w o r d hunt" afte r th e firs t an d authenti c arm s abductio n implemented b y Toyotom i Hideyosh i i n th e sixteent h century . On th e othe r hand , som e question s ar e immediatel y raise d regardin g Japan's wil l t o develo p int o a globa l civilia n p o w e r : (1 ) Isn' t civilianiza tion o f J a p a n (an d Germany ) possibl e onl y wit h th e presenc e o f a super p o w e r , th e Unite d States ? (2 ) Isn' t th e Unite d Nation s unlikel y t o b e th e lender o f las t resor t i n th e internationa l securit y system ? (3 ) Wil l th e burden-sharing w o r k smoothl y wit h countrie s tha t ar e willing t o provid e military contribution s i f a civilia n p o w e r restrict s it s externa l militar y contribution, jus t a s J a p a n ha d don e durin g th e economi c sanctio n o n Iraq? A s indicate d b y thes e questions , th e concep t i s stil l plague d wit h problems an d uncertainty . Bu t the n w h a t wil l b e th e alternativ e availabl e to J a p a n ? I t may b e a n ordinar y choic e fo r a countr y o f Japan' s statu s t o become a militar y p o w e r , bu t a n importan t questio n i s whethe r th e United State s wil l approv e o f J a p a n takin g thi s ordinar y path . I n term s of it s contributio n t o th e Unite d Nations , Japa n shoul d limi t it s security -

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related contribution s t o th e leve l o f th e PK O and , instead , provid e numerous nonmilitar y contributions . Th e concep t o f securit y itsel f wil l develop int o a mor e comprehensiv e one , includin g suc h nonmilitar y elements a s th e environment , nonproliferatio n o f nuclea r arm s an d plu tonium, an d economi c development , whic h wil l enabl e J a p a n t o "demili tarize" it s contributio n t o internationa l security . J a p a n , then , ca n shar e a fai r burde n o f internationa l securit y a s define d b y thi s n e w concept . Japan's constitutio n w a s a blessin g t o th e Japanes e no t onl y becaus e it ha s remaine d th e underpinnin g o f Japan' s p o s t w a r democratic institu tions bu t als o becaus e it w a s imbued wit h universa l values. The constitu tion itsel f w a s a descendan t o f th e "ne w thinking " reflecte d i n Frankli n Roosevelt's "fou r freedoms, " th e Atlanti c Charter , an d th e Unite d Na tions Charter . The meaning s an d lesson s o f th e "Peac e Constitution" an d Hiroshim a should b e universall y shared . J a p a n ha s a specia l obligatio n t o mak e these meaning s an d lesson s no t slogan s bu t a legitimat e commo n heri tage o f humankin d b y ensurin g tha t the y ar e relevan t an d palatabl e t o other peopl e an d countries . J a p a n mus t pursu e t w o psychologicall y conflictin g mindset s an d styles—active engagemen t i n w o r l d peace an d self-restrain t a s a militar y p o w e r . J a p a n ca n an d shoul d overcom e it s uncertaint y ove r it s imag e and rol e i n th e w o r l d community . J a p a n shoul d pus h forwar d alon g th e path o f a globa l civilia n p o w e r with it s interest s reachin g wel l beyon d it s regional confines , whil e it s militar y postur e i s limite d t o th e self-defens e of it s islands .

2. Multiple Value-Oriented

Diplomacy

Japan's one-dimensiona l economi c strateg y must b e replace d by a multi ple value-oriente d strategy . I t is hig h tim e fo r th e w o r l d banke r to desig n and contribut e t o th e buildin g o f a n internationa l orde r base d upo n something mor e tha n economi c g r o w t h . In particular, four value s shoul d be give n muc h highe r priorit y a s goal s o f Japan' s internationa l strategy : the effor t t o b e a mode l fo r poore r countrie s an d t o giv e the m assistanc e for thei r economi c developmen t an d thei r gradua l promotio n o f demo cratic values , peacekeeping , promotio n o f huma n rights , an d promotio n of environmenta l protection . In th e 1 9 9 0 s , fo r th e first tim e i n it s moder n history , J a p a n wil l b e

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substantially fre e fro m securit y threat s fro m th e North , whethe r the y b e explicit o r latent , ideologica l and/o r military . Althoug h th e p o s t - C o l d W a r w o r l d surel y wil l se e man y smaller-scal e an d regiona l conflicts , an d even w a r s , suc h a s tha t i n th e Persia n Gulf , th e Asian-Pacifi c are a ma y have a bette r chanc e t o maintai n peac e tha n i n th e turbulen t day s o f th e 1 9 4 0 s (Pacifi c W a r ) , th e 1 9 5 0 s (Korea n W a r ) , o r th e 1 9 6 0 s (Vietna m War). Global interdependenc e an d a higher priorit y fo r th e economi c dimen sion i n statecraf t benefi t J a p a n i n th e sens e tha t the y sui t Japan' s peac e strategy an d enhanc e it s mean s throug h financia l an d economi c re sources. Japa n shoul d tak e advantag e o f thi s an d mobiliz e it s resource s to pursu e a broade r se t o f goal s aime d a t promotin g a compatibl e w o r l d order . As th e East-Wes t conflict i s recedin g rapidly , the North-Sout h conflic t is likel y t o b e intensifie d i n th e 1 9 9 0 s . Japan's experience , togethe r wit h that o f th e Asia n NIE s (Newl y Industrializin g Economies) , wil l hel p poorer countrie s develo p thei r economies . J a p a n shoul d multipl y it s effort t o transfe r it s technica l an d financial expertis e t o thes e countrie s so tha t i t wil l strengthe n thei r economi c foundation s an d stabiliz e thei r political superstructures. Japan's commitmen t t o peace , embodie d an d enshrine d i n it s "Peac e Constitution" an d subsequen t policies , shoul d b e give n a wide r contex t within whic h the y ca n b e mor e full y recognize d internationall y an d ca n simultaneously contribut e t o multilatera l peacekeeping . As fo r huma n rights , J a p a n ha s bee n reluctan t t o plac e thi s issu e o n its foreig n polic y agenda . Th e reason s fo r thi s vary . Japan' s foreig n policy-making i s no t usuall y unde r heav y pressur e from moralisti c grass roots movements . Th e dependenc e o f Japan' s econom y o n conservativ e and feudalisti c Saud i Arabi a an d it s sensitiv e relationshi p wit h Chin a and th e Republi c o f Kore a force J a p an t o thin k twic e befor e speakin g u p on huma n rights . Japan' s sens e o f guil t afte r Worl d W a r I I t o w a r d neighboring countries , especiall y Chin a an d Korea , puts a psychologica l brake o n criticizin g huma n right s violation s an d exertin g diplomati c pressure. Huma n right s i s someho w regarde d a s a "luxury " o f suc h countries a s th e Unite d State s an d France , which w e r e luck y enoug h t o claim mora l superiorit y becaus e o f victor y i n th e w a r. These constraint s wil l no t disappea r easily . However , Japa n shoul d reconsider the m an d tak e a mor e activ e stanc e o n huma n right s i n

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foreign policy . Protectin g huma n right s wil l b e mor e crucia l t o peacekeeping amon g nation s a s th e w o r l d wil l likel y fac e mor e ethni c and nationalisti c conflict s i n th e 1 9 9 0 s . Ensurin g tha t th e right s o f minorities ar e respected and internationall y monitore d i s th e mos t effec tive w a y t o preven t violations an d reduc e th e chance s o f conflict . J a p a n recentl y bega n t o explor e w a y s t o se t som e politica l condition s on it s economi c ai d policy . Th e governmen t o f Japa n explain s tha t fou r criteria—level o f militar y expenditure , potentia l o f atomic , biological , and chemica l (ABC ) w e a p o ns an d missiles , arm s trade, an d democratiza t i o n — a r e suppose d t o b e take n int o consideratio n i n futur e ODA . Th e n e w approach , althoug h it s effectivenes s stil l remain s t o b e seen , clearl y reflects th e stronge r yearnings an d demand s o f Japan' s publi c fo r huma n rights. An extremel y delicat e cas e concern s Japan' s relationshi p wit h China , as Japan' s torture d diplomac y afte r th e Tiananme n inciden t demon strated. Althoug h J a p a n canno t an d mus t no t moraliz e abou t it s foreig n policy an d mus t b e mindfu l o f it s strategi c relationshi p wit h China , J a p a n ca n mor e effectivel y conve y it s advic e an d remin d th e Chines e authorities, a s wel l a s th e Chines e people , o f Japan' s aspiration s fo r human rights . Otherwise, Japan's relationshi p wit h Chin a wil l b e v i e w e d more a s collusio n betwee n th e apparatchik s o f bot h rulin g partie s an d pursuit o f single-minde d economi c interest s bot h i n J a p a n an d abroad . This vie w w o u l d eventuall y undermin e th e valu e o f th e relationshi p a s the Japanes e an d Chines e peopl e wil l regar d i t mor e negatively . J a p a n als o ha s minorit y groups , althoug h the y ar e relativel y small . Japan's huma n right s diplomacy , first an d foremost , shoul d b e directe d t o w a r d it s o w n minorities , particularl y th e Korea n communit y o f som e six hundre d thousan d persons , t o enhanc e thei r statu s an d politica l an d economic rights . H o w e v e r , thi s i s no t enough . J a p a n shoul d pu t mor e emphasis o n huma n right s an d democrati c value s a s goal s o f it s foreig n policy an d a s a legitimat e expressio n o f th e aspiration s o f it s people . With th e fiftieth anniversar y of th e en d o f Worl d W a r I I approaching, i t is desirabl e that J a p a n haste n th e completio n o f it s roun d o f rectificatio n of wartim e vices . Th e propose d emperor' s tri p t o Chin a an d th e immi nent visi t t o Kore a mus t provid e J a p a n wit h opportunitie s t o squarel y face it s past , admi t an d apologiz e fo r it s pas t evils , an d offe r compensa tions wher e necessary . These act s wil l the n mar k th e beginnin g o f a ne w era whe n th e framewor k o f genuin e peac e an d stabilit y ca n b e con -

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structed. A t th e sam e time , J a p a n shoul d promot e join t studie s o n con temporary histor y wit h expert s fro m neighborin g Asia n countries , en courage th e join t authorshi p o f histor y textbooks , an d improv e th e quality o f histor y educatio n base d o n finding s fro m thes e join t w o r k s . Japan's expressio n o f value s i n foreig n polic y mus t b e matche d b y more strenuou s effort s t o mak e it s o w n politica l syste m mor e demo cratic, an d it s o w n economi c structur e mor e ope n an d liberal , s o a s t o make it s institution s an d practice s more compatibl e wit h like-minde d de mocracies.

3. Full Partnership and

Supportive Leadership

J a p a n lack s institution s throug h whic h i t ca n pursu e it s policies . Thi s constraint need s t o b e overcome . J a p a n shoul d searc h fo r variou s avenue s o f enhancin g politica l p o w e r based o n economi c might , no t o n militar y p o w e r , i n orde r to stimulat e a new perceptio n o f th e changin g natur e o f p o w e r an d th e recognitio n tha t J a p a n , i n thes e ne w terms , i s a p o w e r i n it s o w n right . Japa n shoul d b e allowed t o maintai n th e rol e o f a globa l civilia n p o w e r an d a ful l partne r with th e othe r majo r p o w e rs i n a polycentri c world . J a p a n shoul d initiat e a muc h fulle r partnershi p wit h th e Unite d State s from a globa l perspective . Japan' s "globa l partnership " wit h th e Unite d S t a t e s — a ne w loo k designe d i n th e meetin g betwee n Presiden t Georg e Bush an d Prim e Ministe r Toshik i Kaif u i n th e sprin g o f 1 9 9 0 — p r o v e d to b e a nonstarte r onl y severa l month s later . Y e t th e concep t shoul d b e defined an d develope d a s J a p an evolve s int o a mor e matur e partner. H o w e v e r , th e Japanes e shoul d no t believ e tha t thi s mean s equa l standing wit h th e Unite d States . It is no t necessar y or desirabl e fo r J a p a n to tr y t o obtai n suc h standing . Ove r th e nex t decade , Japan' s relation ship wit h th e Unite d State s a s wel l a s it s rol e ca n b e define d i n term s o f "supportive leadership. " It s leadershi p rol e shoul d no t b e principa l bu t should instea d b e supportiv e o f U.S . globa l postur e an d commitment . The Unite d State s wil l b e th e sol e superpowe r i n th e 1 9 9 0 s . Becaus e of it s superio r militar y resource s an d logistics , i t wil l probabl y b e th e only countr y wit h th e capacit y t o b e th e equivalen t o f th e "lende r o f th e last resort " in providin g a securit y blanke t i n a militar y crisis . Although som e argu e tha t th e Gul f W a r demonstrate d th e retur n o f an America n unipola r system , i t ca n b e safel y argue d tha t i t demon strated th e nee d fo r th e Unite d State s to exer t it s leadershi p i n a coalitio n

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effort. Bu t th e Gul f Crisi s i s onl y on e exampl e o f a threa t tha t wil l confront th e w o r l d i n th e future . Eve n a confiden t Unite d State s will no t a l w a y s b e abl e t o cop e wit h a diversit y o f threat s b y itself . First, i t wil l be , a t leas t i n th e foreseeabl e future , subjec t t o financia l limitations. Second , th e Unite d State s will hav e t o pa y mor e attentio n t o a wide r rang e o f issue s beside s securit y matters , such a s it s economy , th e environment, huma n rights , an d drugs . Thes e issue s wil l pos e problem s for th e traditiona l patter n o f U.S . hegemoni c leadershi p becaus e the y require collectiv e leadershi p an d polic y coordination . Third , th e Unite d States wil l graduall y disengag e militaril y fro m Europ e an d th e Asian Pacific regio n an d i s likel y t o fac e inward-lookin g an d eve n isolationis t sentiments an d politica l force s i n th e future . It is fo r thes e reason s tha t J a p a n ca n an d shoul d augmen t an d comple ment U.S . leadership . J a p a n ca n buttres s U.S . leadershi p wit h financial resources, a t leas t i n th e nex t decade . J a p an ca n pla y a leadin g rol e i n th e coordination o f macroeconomi c policies , economi c aid , environmenta l protection, an d high-technolog y development . M o r e specifically , Japan' s major tas k i n providin g supportiv e leadershi p i s t o stimulat e U.S . inter ests i n th e globa l open-trad e syste m an d manag e th e dolla r s o tha t th e United State s overcome s it s twi n deficit s whil e maintainin g noninfla tionary economi c growth . J a p a n als o ha s a n absorbe r function , princi pally fo r neighborin g Asian-Pacifi c countries , i n reducin g th e U.S . exter nal trad e imbalance an d lessenin g th e burde n o n th e Unite d States . Japan's supportiv e leadershi p shoul d no t b e viewe d a s a matte r o f simply followin g th e Unite d State s no r o f financially underwritin g U.S . military actions . Instead , J a p a n shoul d b e regarde d a s a provide r o f collective good s indispensabl e i n th e ag e o f collectiv e leadership . As th e Gul f Crisi s reminde d u s o f emotiona l resentmen t o n bot h sides , with it s perception s o f "rent-a-cop " versu s "automati c telle r machine, " it i s imperativ e fo r bot h side s t o defin e mutuall y compatibl e an d respect able role s i n pursuin g commo n goals . Accordingly , th e styl e an d patter n of exertin g leadershi p shoul d b e manage d i n a ne w fashion . J a p a n shoul d share decision-makin g o n crucia l globa l matter s a s a ful l partne r an d should mak e it s o w n majo r decision s i n consultatio n wit h th e Unite d States t o ensur e tha t thei r direction s an d prioritie s ar e harmonious . I t i s most critica l fo r bot h countrie s t o constantl y searc h fo r mutuall y com patible policie s vis-a-vi s th e Sovie t Unio n an d China , perhap s th e t w o most unstabl e bi g p o w e r s i n th e 1 9 9 0 s . The U . S . - J a p a n security allianc e shoul d continu e t o b e th e underpin -

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ning o f a dynami c an d soun d bilatera l relationshi p an d a n ancho r o f Asian-Pacific securit y i n th e foreseeabl e future . Japan' s allianc e wit h th e United State s i s th e thir d allianc e tha t J a p a n ha s forge d i n it s moder n history. H o w e v e r , unlik e th e Anglo-Japanes e allianc e i n th e earl y day s of th e centur y an d th e Axi s allianc e wit h German y an d Ital y i n prewa r days, th e U.S.—Japa n allianc e w a s not a mere inventio n o f realpoliti k bu t a fa r mor e pervasiv e engagement an d a symbo l o f friendshi p an d stabil ity betwee n t w o societies . I t ca n continu e t o functio n a s suc h an d b e a stabilizing facto r i n th e Asian-Pacifi c peac e structure . At th e sam e time , Japan's excessiv e bilatera l foreig n polic y orientatio n shoul d b e bette r balanced b y strengthenin g multilatera l (Unite d Nations , Genera

l

Agreement o n Tariff s an d Trad e [GATT]) , trilateral, and regiona l diplo macies: A s mor e constraint s wil l b e pu t o n U.S . leadershi p an d th e nee d for polic y coordinatio n become s stronge r i n th e future , a searc h fo r wider option s an d alternative s will b e necessary . Japan's contributio n t o this tas k i s th e essenc e o f supportiv e leadership .

4. Pacific Globalism J a p a n mus t no t delud e itsel f int o believin g tha t it s identit y ca n b e devel oped i n purel y regiona l terms , it s econom y sustaine d i n th e Asia n bloc , and it s politica l ambition s fulfille d i n integratio n i n th e area . Yet, J a p a n mus t hav e it s regiona l strategy . It s regio n mus t no t b e confined t o Asia , particularl y East Asia, bu t mus t b e widene d t o encom pass th e Asian-Pacifi c rim , includin g th e Unite d States . It s objectiv e i s to kee p th e regio n open , peaceful , an d democratic . Regionalis m thu s understood ca n b e calle d "Pacifi c globalism. " In th e comin g years , Japan' s strateg y for Pacifi c globalis m consist s o f three pillars: 1. T o promot e economi c growt h an d developmen t a s wel l a s liberaliz e and multilateraliz e trad e and investmen t i n th e region . 2. T o enhanc e th e peacekeepin g an d peace-buildin g mechanis m an d measures i n th e regio n b y maximizin g U.S . commitmen t an d en gagement. 3. T o incorporat e th e rapidl y changin g Socialis t countrie s (th e Sovie t Union, China , Vietnam , an d Nort h Korea ) into th e regio n a s respon sible player s in th e region .

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As fo r economi c liberalizatio n i n th e region , Japa n ca n sustai n an d reinvigorate U.S . globa l interest s an d postur e b y infusin g th e emergin g Pacific globalis m (e.g. , a ne w an d stron g interes t i n propellin g th e Uru guay Roun d o f th e Asia-Pacifi c Economi c Cooperatio n [APEC ] coun tries) int o th e agin g Atlanticis t globalis m i n plac e sinc e th e day s o f th e Atlantic Charter . By doin g so , J a p a n ca n pla y a constructiv e rol e i n deterrin g Europea n and Nort h America n regionalis m fro m becomin g exclusivis t an d ca n create a favorabl e milie u i n whic h t o integrat e th e Sovie t Unio n an d China int o th e region . I t als o ca n hel p mitigat e th e thrust s t o w a r d inward-looking an d nationalisti c actio n i n Asia n countrie s a s wel l a s th e call fo r a restrictiv e an d clos e regiona l grouping . In th e real m o f security , J a p a n i s constraine d fro m playin g a leadin g role an d i s likel y t o retai n thos e constraint s i n th e 1 9 9 0 s . Th e Unite d States stil l wil l b e require d t o pla y th e leadin g rol e a s th e stabilizin g country i n th e region , an d it s bilatera l allianc e wit h som e countrie s i n the region , particularl y J a p a n an d Australia , wil l b e th e ancho r o f th e security framework . Japan' s rol e wil l b e t o suppor t th e anchor . Bu t i t should thin k o f tha t rol e i n term s o f contributin g t o broade r regiona l security rathe r than Japan' s securit y alone . The countrie s i n th e Asia n regio n shoul d discus s securit y matter s with eac h othe r mor e directly . Thre e elements—th e Unite d States , th e reinvigorated Unite d Nations , an d th e countrie s i n th e r e g i o n — a r e in dispensable t o fosterin g a bette r securit y climat e i n Asia . The proble m fo r Japan' s regiona l strateg y lie s i n J a p a n itself . Japan' s reluctance t o fac e u p t o th e pas t colonizatio n o f Korea , invasio n o f China, dominatio n ove r Southeas t Asia , an d guil t fo r w a r c r i m e s — a n d its feebl e effor t t o educat e o r reeducat e it s peopl e abou t tru e history — generate a dee p suspicio n an d mistrus t al l ove r Asia . Reluctanc e als o creates complacen t an d self-indulgen t view s o f Japan' s o w n histor y among th e Japanese . N e w current s o f nationalisti c feeling , thoug h stil l amorphous an d undefined , ma y gathe r momentu m an d ru n a dangerou s course i f no t checke d an d redresse d b y studie s o f an d educatio n abou t the histori c facts . Th e perceptio n tha t J a p a n ha s no t com e t o term s wit h its o w n pas t constitute s th e fundamenta l constrain t o n a n effectiv e an d successful foreig n policy . Ironically, Japan' s stron g pacifis t tendencie s i n th e Gul f Crisi s simul taneously relieve d an d worrie d som e neighborin g countries . The y w e r e

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relieved tha t J a p a n resiste d militar y projectio n abroa d an d worrie d be cause o f it s isolationis t dangers . Some Southeas t Asia n countries , notabl y Thailand an d Malaysia , n o w see m t o b e mor e relaxe d abou t acceptin g Japan's politica l leadershi p i n th e region , whil e Northeas t Asia , China , and Kore a stil l ar e alarme d b y th e prospect . Nonetheless , th e perceptio n of J a p a n an d it s leadershi p i s subtl y changin g i n th e region . I t i s crucia l for J a p a n t o fac e u p t o th e pas t an d educat e it s o w n citizen s abou t it s modern histor y i f i t w a n t s t o pursu e a viabl e regiona l strategy .

4 . I s s u e s i n th e 1 9 9 0 s In th e 1 9 9 0 s , Japan' s relationshi p wit h th e Sovie t Unio n (an d th e Rus sian Republic ) ma y b e normalize d du e t o a possibl e settlemen t o f th e unresolved Norther n Territor y issue. I t may wel l b e tha t economi c devel opment i n Siberi a an d th e Pacifi c Maritim e Province s wil l gai n momen tum wit h th e infusio n o f Japan' s capita l an d technology . I t i s highl y advisable tha t reductio n o f militar y capabilit y i n th e regio n b e promote d by th e concerne d partie s (th e Unite d States , th e Sovie t Union , J a p a n , China, Sout h Korea , Nort h Korea , an d Canada ) i n tande m wit h multi national developmen t projects . The searc h fo r a peac e structur e in th e Northeas t Asia n regio n shoul d not cop y th e Conferenc e o n Securit y an d Cooperatio n o f Europ e (CSCE ) mechanism. Th e securit y environmen t an d politica l configuratio n o f Asi a are differen t fro m thos e o f Europe . I n Asia , particularl y Northeas t Asia , it i s mor e realisti c t o buil d multilayere d securit y regimes . Confidence building measure s (CBMs ) shoul d b e introduce d o n th e Korea n penin sula unde r th e auspice s o f th e Asia n "two-plus-four " (Nort h an d Sout h Korea, th e Unite d States , th e Sovie t Union , China , an d Japan) . Formal ization o f Korea-Chin a diplomati c relation s i n th e summe r o f 1 9 9 2 reflects th e accelerate d change s i n th e Eas t Asia n Col d W a r regime , an d this wil l positivel y affec t th e realizatio n o f "two-plus-four " negotiations . At th e sam e time , a trilatera l security dialogu e amon g J a p a n , Korea , an d the Unite d State s ha s becom e necessar y i n orde r t o insur e tha t thes e changes wil l no t abruptl y chang e th e Fa r Easter n securit y framewor k based o n securit y treatie s betwee n th e Unite d State s an d Kore a an d between th e Unite d State s an d J a p a n . W e shoul d thin k o f first establish ing a privat e consultativ e bod y amon g thes e thre e countries . Th e North ern Territor y area s shoul d b e demilitarize d alon g wit h th e introductio n of a fre e economi c zon e i n th e maritim e province s o f th e Sovie t Unio n

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and a fre e por t a t Vladivostok . Th e U.S . nava l nuclea r offensiv e capabil ity an d presenc e shoul d b e reduce d i n proportio n t o th e reductio n o f Soviet lan d nuclea r arsenal s an d logistics . Normalizatio n o f Russo-Japa nese relation s shoul d b e hastened , a s i t i s th e prerequisit e fo r Russia' s growth t o a stabilizin g forc e i n th e region . I t is als o a prerequisit e fo r th e preparation o f a stabl e structur e fo r "two-plus-four " arrangement s fo r the Korea n peninsula . Th e unresolve d territoria l disput e betwee n Russi a and J a p a n ma y presen t a goo d excus e fo r a thir d p o w e r interferin g i n this bilatera l issue . With regar d t o China , J a p a n an d th e Unite d State s shoul d regar d i t a s a regiona l p o w e r an d encourag e i t t o b e involve d i n Asian-Pacifi c eco nomic expansion . Ther e ma y emerg e a ne w politica l forc e i n Chin a suc h as " a ne w authoritaria n school " arguin g tha t Chin a shoul d joi n J a p a n to oppos e th e "huma n right s imperialis m o f th e Unite d States. " Ther e i s also a deep-roote d cultura l an d psychologica l affinit y t o w a r d Chin a i n J a p a n tha t ma y tak e politica l shape , helpe d b y mountin g frustratio n with Japan-bashin g by th e Unite d States . However , J a p a n shoul d refrai n from tryin g t o establis h a n exclusiv e specia l relationshi p wit h China . The "Peac e Constitution " an d subsequen t commitment s t o peac e should b e no t onl y vigorousl y maintaine d bu t als o translate d int o a stimulant fo r multilatera l peacekeeping . Japan's commitmen t t o th e Unite d Nation s shoul d b e enhanced . A s the Gul f Crisi s demonstrated , Japan' s lega l an d politica l preparednes s for thi s sor t o f crisi s i s totall y inadequate . Althoug h th e spiri t an d commitment o f th e "Peac e Constitution, " whic h prohibi t Japa n fro m sending militar y force s abroad , mus t b e respected , J a p a n mus t b e a much mor e activ e membe r o f th e Unite d Nation s an d mus t mak e it s nonmilitary resource s availabl e t o th e peacekeepin g effort s o f th e Unite d Nations. I t i s desirabl e tha t J a p a n b e grante d permanen t membe r statu s in th e Securit y Council . H o w e v e r , i t i s mor e advisabl e tha t i t shoul d develop som e informa l lin k betwee n th e Perm- 5 an d th e G- 7 t o provid e these group s wit h th e perspective s an d interest s o f Germany , J a p a n , an d the Europea n Communit y i n th e nea r future . Japan's PK O cooperatio n mus t b e implemente d strictl y unde r th e auspices o f th e Unite d Nations . I t migh t b e worthwhil e t o conside r establishing "join t PK O forces " wit h othe r Asia n countrie s unde r U.N . auspices. Someday , join t China-Japa n PK O o r Korea-Japa n PK O ma y contribute t o th e eliminatio n o f mutua l distrus t betwee n an d amon g these countries .

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The burde n sharin g an d responsibilit y sharin g shoul d b e pu t a t th e top o f th e agend a fo r polic y coordinatio n amon g trilatera l countrie s a s the w o r l d move s int o a n ag e o f coalitio n management . Althoug h i t should no t develo p int o a mechanica l formula , ther e shoul d b e mutua l understanding a s t o w h a t constitute s fai r contribution s o f eac h t o th e effort. J a p a n shoul d reconside r it s ai d polic y t o reflec t it s ne w cours e i n multiple value-oriente d diplomacy . Specia l attentio n shoul d b e pai d t o the peacekeepin g effort s o f eac h recipien t country . J a p a n shoul d mor e activel y lea d i n th e effor t agains t proliferatio n of nuclea r an d offensiv e conventiona l w e a p o n s an d technologie s b y committing itsel f t o it s long-establishe d principle s an d callin g fo r simila r commitments fro m othe r countries . Japa n shoul d expres s it s aspiration s in it s ai d policy , particularl y t o it s neighborin g countries , Chin a an d North Korea , t w o arm s suppliers t o th e Middl e East . Japan' s normaliza tion o f relation s wit h an d economi c ai d t o Nort h Kore a should b e base d on th e premis e tha t Nort h Kore a accept surveillanc e b y th e Internationa l Atomic Energ y Agenc y (IAEA ) an d commi t itsel f firml y no t t o develo p nuclear w e a p o n s . As fo r globa l environmenta l issues , Japa n shoul d commi t itsel f t o drastic cut s o f carbo n dioxid e b y th e en d o f th e century . Th e OD A devoted t o environmenta l protectio n i n recipien t countrie s shoul d b e separately manage d fro m ordinar y OD A an d shoul d b e give n mor e flexible treatmen t fo r multiyea r disbursemen t commitmen t an d politica l considerations. Regarding economi c policy , Japan' s agend a for th e 1 9 9 0 s should hav e three pillars : promotio n o f a libera l w o r l d tradin g syste m beyon d th e Uruguay Round ; tripo d currenc y managemen t syste m (dollar , yen , an d ECU [Europea n Currenc y Unit]) , alon g wit h macroeconomi c polic y co ordination o f th e G-7 ; an d Asian-Pacifi c regiona l economi c devel opment. Japan's ne w rol e unde r th e ne w circumstance s shoul d b e on e o f complementarity building—a n effor t t o complemen t eac h o f th e multi lateral, trilateral , and regiona l trad e and economi c arrangement s in pur suit o f a mor e ope n an d stabl e globa l economy . O n eac h level , J a p a n should tak e th e lea d t o invigorat e th e mechanism . J a p a n shoul d promot e the Urugua y Roun d an d pus h forwar d th e creatio n o f a Multilatera l Trade Organizatio n (MTO) . J a p a n shoul d als o promot e th e Fre e Trad e and Investmen t Agreemen t (FTIA ) amon g Organizatio n fo r Economi c

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Cooperation an d Developmen t (OECD ) countries . I t shoul d engag e i n the multilatera l Structura l Impediment s Initiativ e (SII ) wit h th e Unite d States an d Wester n Europe , preferabl y withi n th e framewor k o f th e OECD, an d se t i n motio n a ne w proces s of coordinatio n betwee n macroeconomic an d microeconomi c policie s i n th e G-7 . Japa n should , i n coop eration wit h th e Unite d State s and Wester n Europe , engage mor e full y i n a surveillanc e an d indicato r mechanis m t o manag e a mor e stabl e cur rency relationshi p amon g th e dollar , yen , an d ECU . I t will b e crucia l fo r the thre e countrie s t o intensif y thei r effort s t o promot e cooperatio n fo r political an d strategi c reasons, too . Concerning regionalism , J a p a n shoul d contribut e t o enhancin g th e APEC b y liberalizin g it s trad e an d economi c system s an d maintainin g vigorous domesti c demand . Th e APEC , still embryoni c an d lackin g cohe sion, shoul d graduall y b e transforme d int o a policy-coordinatin g bod y so tha t a t a certai n point i n th e futur e it s annua l meeting s ca n b e hel d o n a head-of-stat e leve l an d time d prio r t o th e G- 7 annua l summit . J a p a n , with th e Unite d State s an d Canada , ca n the n represen t it s interest s an d deliver it s messag e a t th e summit . Whe n th e APE C matures , i t i s worth while t o explor e th e possibilit y o f th e hea d o f th e APE C Secretaria t attending th e G- 7 summit s i n a fashio n simila r t o representatio n o f th e EC. Th e U.S . presenc e an d contributio n i s essentia l i n th e formatio n o f any Asian-Pacifi c regiona l arrangement . Thu s Japa n shoul d resis t th e call fo r a n Eas t Asia n Economi c Groupin g (EAEG ) b y Prim e Ministe r Mahathir o f Malaysia , due t o it s exclusivit y t o th e Eas t Asian region . Japan's leadershi p fo r mor e ope n economi c system s mus t b e roote d i n its o w n marke t liberalization . Th e SI I talk s targe t politicall y sensitiv e sectors suc h a s banking , securities , distribution , transportation , and con struction industries , whic h hav e mor e o r les s remaine d untouche d b y th e liberalization proces s i n th e pas t thre e decades . Th e SI I implementatio n process wil l hel p la y th e foundatio n fo r harmonizatio n o f Japan' s eco nomic an d socia l syste m b y graduall y breakin g u p th e iro n triangl e o f vested interests . B y settin g a n exampl e i n remedyin g it s noncompetitiv e structure, Japa n shoul d urg e other tradin g partners to d o likewise . 5 . Politica l C o n s t r a i n t s In th e 1 9 9 0 s , t w o taboo s o f liberalization , openin g th e ric e marke t an d admitting a n orderl y infusio n o f foreig n workers , a t las t wil l b e broken . The politica l implication s o f rice-marke t liberalization an d introductio n

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of foreig n w o r k e r s wil l b e s o enormou s tha t the y wil l forc e a chang e i n Japan's outdate d electora l syste m an d life-lon g employmen t system . Th e rice marke t ha s bee n treate d as a "sanctuary. " The powerfu l agricultura l cooperative lobb y ha s mounte d tremendou s pressur e o n politician s t o protect th e ric e market . I n th e genera l electio n o f earl y 1 9 9 0 , al l th e major politica l partie s pu t u p campaig n banner s abou t no t lettin g " a grain o f rice " int o J a p a n . Thi s ma y prov e t o b e th e las t gas p o f Japan' s most protectionis t forces . Opening th e ric e marke t wil l correc t th e underrepresentatio n o f met ropolitan politician s an d resul t i n mor e balance d representation . Ric e liberalization an d electora l refor m ma y b e th e histori c equivalen t o f the repea l o f th e Britis h Cor n L a w an d th e electora l revisio n o f th e mid-nineteenth centur y i n th e sens e tha t liberalizatio n wil l encourag e liberal domesti c constituent s t o sustai n a mor e ope n trad e an d economi c strategy. The life-lon g employmen t system , alread y under stres s in th e fac e o f a massive influ x o f part-tim e workers , a rapidl y agin g w o r k force , an d diversification o f th e compan y businesse s wil l b e fundamentall y shake n by th e influ x o f foreig n workers . I t wil l le t loos e th e regimente d an d hierarchical structur e o f th e "compan y standard " societ y an d wil l har monize uniquel y Japanes e managemen t int o a mor e internationall y com patible style . I n bot h cases , th e psychologica l an d politica l impact s wil l be fa r reaching . Nevertheless, J a p a n i s handicappe d b y it s o w n politica l constraint s o n an effectiv e an d dynami c foreig n policy . A s w a s alread y pointe d out , some politica l constraint s o n Japan' s foreig n policy-makin g an d globa l leadership stoo d ou t durin g th e Gul f Crisis—lac k o f initiativ e i n devel oping ne w policies , lac k o f globa l institution s wit h whic h Japa n ca n associate i n effectivel y pursuin g it s policies , lac k o f acceptanc e o f it s leadership fro m it s neighbors , an d lac k o f recognitio n an d realizatio n o f its uniqu e p o w e r portfoli o an d desirabl e responsibilit y sharing . J a p a n mus t examin e it s o w n politica l syste m an d decision-makin g structure t o overcom e thes e constraints . Th e behaviora l pattern s an d attitudes o f Japanes e societ y clas h wit h th e nee d fo r quic k an d dynami c formulation an d implementatio n o f foreig n policy . Th e structura l w e a kness o f th e leadership , highl y personalize d politica l allegiance s an d rela tionships amon g faction s an d parties , an d th e dominanc e o f por k barre l politics al l constitut e characteristic s of Japan' s politica l cultur e an d limi t

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and restrai n the o u t w a r d projection o f ne w aspiration s an d policies . Th e gap als o ma y b e a destabilizin g facto r i n w o r l d financial market s i n th e future. Th e inabilit y o f Japan' s leadershi p t o cop e wit h th e unrealisticall y high pric e o f lan d an d stocks , fo r instance , ha s alread y caused a dangerous bubble , an d a burst , in Japanes e financial market s and thereb y put a grave strai n o n Japan' s macroeconomi c policies . Japan's consumers , particularl y urba n dwellers , increasingl y find a gap betwee n Japan' s economi c wealt h an d th e qualit y o f thei r standar d of living , whic h sharpen s thei r politica l awareness . I n addressin g thi s gap, Japan' s bureaucrat s and politician s hav e becom e problem s rathe r than proble m solvers . The bureaucrac y and it s symbioti c "polic y tribes " in th e LD P hav e forme d "iro n triangles " wit h protecte d industrie s t o resist fundamenta l economi c an d socia l reforms . It w a s joke d i n J a p a n durin g th e SI I talk s tha t th e loya l oppositio n w a s n o w i n Washington , D.C. , o r tha t Presiden t Bus h acte d a s chie f o f the LDP' s larges t faction . Thi s disturbingl y catche s th e moo d o f dee p public frustratio n ove r th e inabilit y o f th e bureaucrac y an d politica l parties t o ac t withou t outsid e pressur e from th e Unite d States . The immobilit y o f Japan' s decision-makin g proces s i s exemplifie d well b y th e ubiquitou s gaiatsu politic s i n Japan , whic h help s kee p th e existing politica l orde r i n plac e b y blamin g foreigner s (often , Washing ton) fo r uncomfortabl e accommodations . Relianc e o n gaiatsu i s essen tially a functio n o f overcomin g th e immobilit y o f th e Japanes e system . And thi s immobilit y i s a product o f institutiona l an d cultura l factor s tha t include a bottom-to-top , consensus-oriente d decision-makin g process , the supremac y o f "domesticists " ove r internationalists , an d th e manne r in whic h domesti c politica l institution s mus t achiev e mutua l parit y i n burden sharing . J a p a n canno t develo p a n effectiv e internationa l rol e unti l ther e i s a significant measur e of domesti c politica l change . First, J a p a n ha s onl y on e politica l part y capabl e o f ruling . Ther e i s not ye t a viabl e two-part y o r multipart y system . Whe n th e voter s ar e especially unhapp y wit h th e government , the y wil l i n protes t vote fo r th e opposition, bu t man y o f thes e voter s sa y tha t thei r purpos e i s t o humbl e the LD P rathe r tha n t o vot e i t ou t o f office . Th e oppositio n ha s no t ye t developed th e psycholog y an d th e polic y position s require d of a govern ing party . Th e quasi-coalitio n amon g th e LDP , th e Democrati c Socialis t party, an d Komeit o durin g th e Gul f Crisi s w a s a tellin g exampl e o f

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political immaturity . Nevertheless , th e initiativ e fo r chang e mus t com e from politicians , no t fro m th e bureaucrats . They mus t pres s fo r long overdue politica l an d electora l refor m s o a s t o assur e faire r representation o f th e "silen t majority " i n big-cit y constituencies— a hug e blo c o f voters wit h a keene r awarenes s of Japan' s enlightene d self-interest—i n the politica l decision-makin g an d votin g processes . Politicians mus t star t lively an d constructiv e polic y debate s tha t wil l enhanc e th e abilit y t o develop meaningfu l polic y proposal s no t dependen t o n th e bureaucracy. They wil l hav e a bette r chanc e o f doin g s o i n th e comin g year s n o w tha t the ideologica l overtone s o f th e securit y issue—characteristi c of th e Die t debates i n J a p a n i n th e Col d W a r e r a — a r e fading . Second, Japa n wil l se e a generationa l chang e i n th e politica l leader ship o f al l th e majo r politica l partie s i n th e nex t decade . M o r e interna tional-minded, confident , an d self-assertiv e leaders will appea r in th e to p echelon o f th e leadership . At th e sam e time , n e w politica l w a v e s i n J a p a n — w o m e n , th e elderly , consumers, environmentalists , an d loca l governments—wil l gai n in creasing momentum . Som e wil l pus h J a p a n t o w a r d a mor e activ e rol e i n foreign policy , a s exemplifie d b y stron g overture s b y som e prefecture s on th e Se a o f J a p a n t o w a r d th e Pacifi c Sovie t Unio n an d pressure s from consumer s t o ope n agricultura l markets. Other politica l force s ma y counter wit h emphasi s o n heavil y domesti c issue s involvin g "protectio n of life. " J a p a n ma y hav e t o w a i t fo r a ne w generatio n o f leader s a s wel l as politica l partie s t o b e abl e t o persuad e th e peopl e tha t "protectio n o f life" i s increasingl y linke d wit h th e stabilit y an d welfar e o f th e w o r l d security an d economi c syste m t o whic h thei r voice s an d commitment s will contribute . Third, J a p a n mus t giv e highes t priorit y i n it s agend a t o strengthenin g its politica l leadershi p an d foreig n policy-makin g capabilitie s i n th e com ing decade . Th e nationa l debat e appear s to b e starting . I t will , withou t fail, encompas s th e broa d rang e o f issues—politica l an d electora l re form, educationa l reform , an d bureaucrati c reform. Hopefully, painfu l lesson s fro m th e experienc e i n th e Gul f wil l stimu late publi c interes t i n an d deman d fo r reformin g th e politica l syste m i n order t o realiz e an d sustai n Japan' s internationa l ne w role . Afte r all , a w o r l d p o w e r i s a p o w e r wit h commitmen t t o others . Japan' s pat h t o p o w e r — g l o b a l civilia n p o w e r — m u s t star t from th e commitmen t o f th e public t o refor m within . I n th e final analysis , thi s increasingl y seem s destined t o b e th e wil l o f th e public .

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Notes 1. Se e Charle s Krauthammer , "Th e Unipola r Moment, " Foreign Affairs 70 , no . 1 (1990-91) : 24. 2. Jun'ich i Kyogoku , Gendai minshusei to seijigaku (Tokyo : Iwanam i Shoten , 1969), 170 . 3. Rober t A . Scalapino , "Perspective s o n Moder n Japanes e Foreig n Policy, " Robert A. Scalapino , ed. , The Foreign Policy of Modern Japan (Berkele y an d Los Angeles : Universit y o f Californi a Press , 1977) , 399. 4. O n th e concep t o f civilia n power : se e Hann s W . Maull , "German y an d Japan," Foreign Affairs 69 , no. 5 (1990-91) : 92 .

1. Japan' s Securit y Policy i n th e 1990 s Akihiko Tanaka

The en d o f th e Col d W a r force s man y nation s t o reformulat e o r a t least rearticulat e their respectiv e securit y policies. Japa n i s n o exception . Japan's defens e polic y ha s lon g assume d tha t th e mai n threa t t o it s security come s fro m th e North . Bu t wit h th e complet e collaps e o f th e Soviet Union , n e w defens e plannin g i n a narro w sens e a s wel l a s redefi nition o f a mor e broa d securit y polic y ar e require d fo r Japan . I t i s obvious tha t th e en d o f th e Col d W a r hardl y mean s th e beginnin g o f a harmonious an d peacefu l world . N e w threat s ar e emerging; Iraq' s inva sion o f Kuwai t w a s th e mos t vivi d cas e i n point . Eve n i n Eas t Asia , where o n th e surfac e ther e ar e n o over t militar y conflicts , internationa l politics i s beginnin g t o se e som e source s o f instability : th e nuclea r threa t of Nort h Kore a i s no t ye t gone ; possibl e reunificatio n o f th e Korea n Peninsula ma y entai l militar y aspects ; tension s ove r th e T a i w a n strai t could b e heightened ; th e Sout h Chin a Se a migh t becom e a stag e o f arms competitio n amon g th e regiona l states ; security implication s o f th e current economi c regionalizatio n o f China , especiall y i n th e post—Den g Xiaoping era , ar e no t clear ; an d th e futur e o f th e Russia n Federatio n contains man y element s o f uncertainty . Japan , a geographica l neighbo r of Russia , a clos e all y o f th e Unite d States , and a n advance d industrial ized democrac y heavil y dependen t o n fre e flows o f internationa l trade , has t o reanalyz e thes e curren t trend s i n thi s securit y environmen t an d reconceptualize it s securit y polic y fo r th e comin g decades . 28

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In a n attemp t a t suc h reconceptualization , I wil l begi n b y summariz ing th e basi c orientatio n o f Japan' s securit y polic y i n th e p o s t w a r period. Thereafter I wil l analyz e th e natur e o f internationa l securit y i n th e post—Cold W a r period ; presen t a ne w agend a fo r Japan' s securit y polic y in th e 1 9 9 0 s ; and , finally, discus s som e specifi c polic y issues , thei r feasi bility, an d domesti c constraint s tha t ma y stan d i n th e w a y o f realizin g such ne w policies .

Basics o f J a p a n ' s P o s t w a r Securit y Polic y The basi c framewor k o f Japan' s securit y polic y i s largel y determine d b y the Constitutio n o f 1 9 4 7 an d th e securit y treat y wit h th e Unite d State s concluded i n 1 9 5 2 an d extensivel y revise d i n 1 9 6 0 . On e o f th e reason s w h y Japan' s securit y polic y ha s sometime s appeare d opaqu e an d de fense-related debate s hav e ofte n sounde d theologica l i s tha t th e historica l developments i n th e p o s t w a r period w e r e no t anticipate d b y th e Consti tution o f 1 9 4 7 . One o f th e clea r characteristic s o f th e Constitutio n o f 1 9 4 7 , writte n under th e stron g influenc e o f th e U.S . Occupatio n Forces , w as it s idealis tic an d pacifi c nature . Articl e 9 stipulates , Aspiring sincerel y t o a n internationa l peac e base d o n justic e an d order , th e Japanese peopl e foreve r renounce wa r as a sovereign righ t of th e natio n an d th e threat or use of forc e a s means o f settlin g internationa l disputes . In order to accomplis h th e ai m o f th e precedin g paragraph, land , sea , and air forces, a s wel l a s othe r wa r potential , wil l neve r b e maintained . Th e right o f belligerence o f th e stat e will no t b e recognized. 1

Under thi s constitution , J a p a n di d no t posses s militar y force s durin g most o f th e occupatio n period . Bu t wit h th e beginnin g o f th e Col d War, th e U.S . postur e t o w a r d Japan' s armament s changed , an d unde r Washington's stron g pressure , J a p a n bega n t o equi p itsel f wit h arme d forces unde r variou s names : th e Polic e Reserv e Force s w e r e create d i n August 1 9 5 0 unde r th e directio n o f Genera l Headquarter s (GHQ) ; th e Maritime Securit y Force s w e r e establishe d i n Apri l 1 9 5 2 ; th e Polic e Reserve Force s an d th e Maritim e Securit y Force s were reorganize d unde r the headin g o f th e Hoanch o (Securit y Agency ) i n Augus t 1 9 5 2 ; an d i n 1 9 5 4 , thes e force s wer e furthe r reorganize d a s th e Self-Defens e Force s (Jieitai).

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The Japanes e Self-Defens e Force s (SDF ) ar e currentl y compose d o f the Groun d Self-Defens e Force , wit h 1 5 6 , 0 0 0 personnel ; th e Maritim e Self-Defense Force , wit h fourtee n submarines , fifty-five destroyer s an d frigates (goeikan), an

d seventy-nin e reconnaissanc e airplane s (includin g

fifty P-3Cs) ; an d th e Ai r Self-Defens e Force , wit h nin e squadron s o f fighters (includin g 1 2 0 F - 1 5 J / D J s ) . I n term s o f expenditures , Japan' s 3

SDF i s on e o f th e larges t military force s i n th e w o r l d .

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Though som e i n Japa n argu e tha t th e curren t Self-Defens e Force s constitute "forces " th e constitutio n ban s an d ar e therefor e unconstitu tional, th e governmen t o f J a p a n ha s lon g maintaine d tha t th e sovereig n right o f self-defens e i s no t denie d b y th e constitutio n an d tha t Japa n ca n maintain suc h force s a s lon g a s the y ar e strictl y fo r th e purpos e o f self defense. Bu t becaus e o f th e clea r pacifi c intention s o f th e constitution , Japan's SD F i s restricte d i n it s tasks , are a o f operation , an d th e weapon s it i s allowe d t o procure . I n fact , accordin g t o th e interpretatio n o f the governmen t o f J a p a n , J a p a n coul d constitutionall y us e "minimall y necessary forces " onl y agains t "urgen t an d unjus t infringements " whe n no othe r mean s t o remov e the m ar e available . Thes e thre e p h r a s e s — "urgent an d unjus t infringement, " "n o othe r mean s available, " an d "minimally necessar y f o r c e s " — a r e usuall y referre d to a s th e thre e con ditions o f resortin g t o th e righ t o f individua l self-defense . Beyon d suc h individual self-defense , accordin g t o th e governmen t interpretation , th e constitution doe s no t allo w J a p a n t o exercis e "collectiv e self-defense. " The task s o f th e SDF , stipulate d b y th e 1 9 5 4 Self-Defens e Force s L a w, are primaril y t o defen d Japa n fro m direc t an d indirec t aggressio n an d secondarily t o preserv e publi c orde r i n J a p a n , whic h include s disaste r relief activities . Th e geographi c are a o f operatio n o f th e SD F i s no t clearly specifie d b y law , bu t th e governmen t o f J a p a n declare d o n vari ous occasions , includin g a numbe r o f Die t sessions , tha t th e SDF' s are a of operatio n i s no t necessaril y restricte d t o Japan' s territory , territoria l w a t e r s , o r territoria l spac e bu t tha t J a p a n coul d no t sen d arme d troop s to othe r countries ' territory , territoria l waters , an d territoria l spac e fo r military purpose s becaus e suc h dispatc h goe s beyon d stric t "self-de fense" an d henc e constitute s th e exercis e o f "collectiv e self-defense. " O n the hig h seas , ther e ar e n o lega l restriction s agains t th e militar y opera tions o f th e SD F othe r tha n th e "thre e condition s o f resortin g t o th e right o f self-defense. " A s fo r th e dispatc h o f th e SD F t o foreig n countrie s for noncomba t purposes , suc h a s i n th e cas e o f U.N . peacekeepin g

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operations, th e governmen t doe s no t interpre t suc h dispatc h t o b e un constitutional, bu t unti l th e passag e of th e Internationa l Peac e Coopera tion L a w in Jun e 1 9 9 2 , sinc e th e 1 9 5 4 SD F L a w did no t lis t suc h activit y as th e SDF' s task , i t ha d bee n considere d no t withi n th e mandat e o f the SDF . The w e a p o n s tha t th e SD F ca n procur e ar e onl y thos e "minimall y necessary" fo r self-defense , accordin g t o th e officia l interpretatio n o f th e constitution. Wha t constitute s "minimall y necessary " i n eac h specifi c circumstance depend s o n th e internationa l situation , th e leve l o f militar y technology, an d othe r conditions , but , i n th e government' s interpreta tion, suc h w e a p o n s t o b e use d exclusivel y fo r destructio n o f othe r coun tries (e.g. , ICBMs , long-range bombers , etc. ) ar e under n o circumstance s to b e possesse d b y J a p a n . A s fo r nuclea r w e a p o n s , th e governmen t interpretation o f th e constitutio n say s tha t th e constitutio n doe s no t prohibit nuclea r w e a p o n s pe r se ; i f nuclea r w e a p o n s ar e considere d "minimally necessary " for self-defense , th e constitutio n allow s J a p a n t o possess them , i n th e government' s interpretation . Bu t th e Basi c L a w o f Atomic Energ y doe s no t allo w J a p a n t o conduc t research , develop , o r use atomi c energ y othe r tha n fo r peacefu l purposes , an d a s a signator y of th e Nuclea r Nonproliferatio n Treaty , J a p a n i s als o prohibite d fro m possessing nuclea r w e a p o n s . Further , th e governmen t declare d o n vari ous occasion s tha t a s a matte r o f nationa l polic y J a p a n maintain s th e three nonnuclea r principle s o f no t possessin g nuclea r w e a p o n s , no t pro ducing them , an d no t permittin g thei r introductio n int o J a p a n . In additio n t o th e type s o f w e a p o n s , th e amoun t o f defens e expendi ture ha s als o bee n restricted , thoug h thi s quantitativ e restrictio n i s no t clearly anchore d t o an y specifi c law . Th e mos t clea r restrictio n w a s th e 1 9 7 6 cabine t decisio n t o conside r 1 percen t o f th e GN P t o b e th e ceilin g of th e annua l defens e budget . Thi s 1 percen t ceilin g w a s abolishe d i n 1 9 8 6 an d w a s replace d by a loose r an d mor e flexibl e schem e o f decidin g the annua l budge t "withi n th e definit e limit " o f th e Mid-Ter m Defens e Program. Another are a o f importan t self-restrain t i s tha t o f militar y exports . I n 1 9 6 7 , the n Prim e Ministe r Eisak u Sat o declare d th e "Thre e Principle s on Arm s Export, " whic h disallowe d export s t o (1 ) Communis t blo c countries, (2 ) countrie s subjec t t o embargoe s o n arm s expor t unde r th e U.N. Securit y Council' s resolutions , an d (3 ) countrie s engage d o r likel y to b e engage d i n a n internationa l conflict . I n 1 9 7 6 , Prim e Ministe r

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Takeo Mik i furthe r tightene d th e restrictions : (1 ) arm s export s t o area s specified i n th e Thre e Principle s shal l no t b e allowed ; (2 ) arm s exports t o other area s shal l b e avoided ; an d (3 ) expor t o f arm s production—relate d equipment shal l b e deal t wit h i n th e sam e w a y a s "arms " a r e .

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In additio n t o th e constitution , th e securit y treat y wit h th e Unite d States provide s anothe r importan t framewor k fo r Japan' s securit y pol icy. Th e 1 9 6 0 treaty , formally know n a s the Treat y of Mutua l Coopera tion an d Securit y betwee n J a p a n an d th e Unite d State s o f America , i s often characterize d as bein g asymmetrical ; the Unite d State s is obligate d by thi s treat y to defen d J a p a n whil e J a p a n i s no t obligate d t o defen d th e United States ; the Unite d State s is grante d the righ t t o maintai n it s base s in J a p a n fo r "th e purpos e o f contributin g t o th e securit y o f J a p a n an d the maintenanc e o f internationa l peac e an d stabilit y i n th e Fa r East, " while J a p a n i s no t grante d simila r rights. Th e forme r asymmetr y ha s 6

clearly resulte d fro m Japan' s constitutiona l limitation s a s describe d above; th e Japanes e governmen t ha s maintaine d tha t th e constitutio n does no t allo w J a p a n t o exercis e th e righ t o f collectiv e self-defense . Unlike th e N A T O alliance , th e U . S . - J a p a n alliance, thu s create d b y the securit y treaty , ha d no t create d substantiv e join t w o r k s t o improv e the effectivenes s o f th e allianc e unti l th e m i d - 1 9 7 0 s . Fo r one thing , quit e a fe w Japanes e w e r e incline d agains t furthe r militar y cooperatio n wit h the Unite d States , especially durin g th e Vietna m W a r , whil e man y othe r Japanese too k th e America n presenc e i n th e Asian-Pacifi c regio n fo r granted; fo r another , th e Sovie t Union ha d no t acquire d military capabil ity i n th e Fa r East to pos e direc t threat s to Japa n unti l th e lat e 1 9 7 0 s . But wit h th e Sovie t Unio n militar y buildu p i n Asi a i n th e lat e 1 9 7 0 s , several development s hav e bee n mad e t o substantiat e th e alliance . I n 1 9 7 8 , Guideline s fo r J a p a n - U . S. Defens e Cooperatio n w e r e agree d upo n by th e t w o countries , an d o n th e basi s o f thes e guideline s variou s studie s have bee n conducted ; th e studie s tha t hav e bee n give n priorit y includ e joint operations , defens e o f se a lane s o f communications , an d enhance ment o f interoperability . I n 1 9 8 1 , Prim e Ministe r Zenk o Suzuk i ex pressed Japan' s willingnes s t o mak e effort s t o protec t se a lanes . Join t exercises betwee n th e SD F an d U.S . force s hav e increase d in numbe r an d in scop e sinc e th e beginnin g o f th e 1 9 8 0 s (se e tabl e 1.1) . A s discusse d above, export s o f militar y w e a p o n s a s wel l a s militar y technolog y fro m J a p a n ar e strictl y controlled . Bu t i n 1 9 8 3 , th e Japanes e governmen t decided no t t o appl y thes e rule s t o th e Unite d States . Another importan t

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Table 1. 1 Japan-U.S . Join t Exercise s Year

3 4 3 5 7 7 7 7

MSDF 1 2 3 3 3* 3 5 4* 5 oo

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

GSDF

7 7* 7 9*

ASDF

3 11 10 12 10 12 10 13 12 16 13

UNIFIED

1 1 1 2

* includes th e Ri m o f th e Pacifi c Exercise s (RIMPAC )

development i s th e host-natio n suppor t fo r U.S . force s i n Japan ; th e budget fo r th e host-natio n suppor t increase d fro m 16 3 billio n ye n i n 1981 t o 262. 4 billio n yen i n 1 9 8 9 . To integrat e th e framework s create d b y the Constitutio n o f 194 7 and the securit y treat y wit h th e Unite d States , tw o guidin g concept s wer e developed i n th e mid-1970 s to earl y 1980s : th e standar d defens e forc e (kibanteki boeiryoku) an d comprehensiv e securit y (sogo anzenhosho). According t o th e Nationa l Defens e Progra m Outlin e adopte d o n Octo ber 29 , 1976 , the documen t tha t embodie s th e concep t o f a standar d defense force , Japan' s defens e goa l i s "th e maintenanc e o f a ful l surveil lance postur e i n peacetim e an d th e abilit y t o cop e effectivel y wit h situa tions u p t o th e poin t o f limite d an d small-scal e aggression, " an d th e defense capabilit y o f Japan shoul d b e "standardize d s o that , whe n seri ous change s i n situation s s o demand , th e defens e structur e ca n b e smoothly adapte d t o mee t suc h changes. " Wit h thi s sor t o f defens e capability, Japa n i s suppose d t o "repe l limite d an d small-scal e aggres sion, i n principle , withou t externa l assistance . I n case s where th e unas sisted repellin g o f aggressio n i s no t feasible , . . . Japan wil l continu e a n unyielding resistanc e b y mobilizing al l available forces until suc h tim e a s cooperation fro m th e Unite d State s i s introduced , thu s rebuffin g suc h aggression." Wha t concretel y ha s materialize d unde r thi s concep t i n th e 7

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1 9 8 0 s include s th e buildu p o f lan d defens e capabilit y i n Hokkaid o an d of antisubmarin e warfar e capabilit y aroun d J a p a n an d alon g th e se a lanes on e thousan d mile s sout h an d southwes t o f T o k y o . If th e goa l o f th e "standar d defens e force " i s t o dea l wit h purel y military threat s b y defensiv e an d restraine d defens e capabilit y wit h de pendence o n th e Unite d States , th e goa l o f "comprehensiv e security, " developed i n th e lat e 1 9 7 0 s t o earl y 1 9 8 0 s , i s t o defin e th e concep t o f security mor e broadl y b y givin g emphasi s t o nonmilitar y aspect s o f security. Th e repor t o f a blue-ribbo n commissio n appointe d b y Prim e Minister Masayosh i Ohir a define d securit y i n 1 9 8 0 a s "protectin g th e people's lif e fro m variou s form s o f threat " and argue d that ther e shoul d be thre e level s o f effort s fo r security : "effort s t o tur n th e overal l interna tional environmen t int o a favorabl e one ; self-relian t effort s t o cop e with threats ; an d a s intermediar y efforts , effort s t o creat e a favorabl e international environmen t withi n a limite d scop e whil e protectin g secu rity i n solidarit y wit h countrie s sharin g th e sam e ideal s an d interests."

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In retrospect , a numbe r o f ne w development s i n Japan' s securit y policy i n th e 1 9 8 0 s ma y b e interprete d i n term s o f thes e thre e level s a s introduced b y th e repor t o n comprehensiv e nationa l security . Continu ous annua l increas e i n defens e expenditures , procuremen t o f highl y so phisticated militar y equipment , an d effort s t o maintai n petroleu m re serves (a s o f 1 9 9 0 , 1 4 2 da y reserves ) ar e al l effort s o n th e unilateral , self-reliant level . Increasin g substantiatio n o f th e U.S.—Japa n allianc e through join t exercise s an d host-natio n suppor t i s o n th e leve l o f cooper ation wit h a like-minde d nation . Prim e Ministe r Nobor u Takeshita' s declaration a t th e Unite d Nation s i n 1 9 8 8 o f th e thre e pillar s o f interna tional cooperation—cooperatio n fo r peace , increase of Officia l Develop ment Assistance , an d promotio n o f internationa l cultura l exchange—i s a declaratio n o f th e intentio n t o promot e effort s o n th e leve l o f preserv ing peac e an d stabilit y i n th e internationa l system . Thus, b y th e en d o f th e 1 9 8 0 s , J a p a n seeme d t o hav e reache d a poin t where th e Japanes e w e r e mor e o r les s comfortabl e wit h thei r country' s security framewor k a s base d o n th e constitution , th e allianc e wit h th e United States , an d th e concept s o f standar d defens e force s an d o f com prehensive nationa l security . I n 1 9 8 9 , 6 7 percen t o f th e Japanes e w e r e i n support o f th e curren t formul a o f securit y policy : a combinatio n o f th e SDF an d th e U.S . alliance . Thoug h man y criticism s existe d a s t o th e organization o f th e SDF , lac k o f SD F sustainability , weaknes s o f logis -

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tics, an d lac k o f philosoph y an d coordinatio n i n Japan' s economi c assis tance policy , an y suggestio n o f a radica l departur e fro m th e curren t framework w a s no t take n seriously . However , radica l change s i n East West relation s i n 1 9 8 9 an d subsequen t internationa l event s hav e de manded tha t th e Japanes e seriousl y reexamin e thei r securit y policy .

N a t u r e o f I n t e r n a t i o n a l S e c u r i t y i n th e 1 9 9 0 s The en d o f th e Col d W a r ha s greatl y decrease d th e probabilit y o f th e w o r s t possibl e catastrophe : a n all-ou t nuclea r w a r an d a massiv e con ventional attac k b y th e W a r s a w Pac t arm y o n Wester n Europe . I t i s sometimes pointe d ou t tha t th e Col d W a r ha s no t quit e ende d i n Asia . I t is tru e tha t i n Asi a ther e remai n a numbe r o f source s o f internationa l conflict tha t w e r e mor e o r les s create d unde r th e influenc e o f th e Col d War. Bu t t o th e exten t tha t th e Col d W a r mean s a n ideologica l battl e a s well a s th e dange r o f a nuclea r w a r betwee n th e Unite d State s an d th e Soviet Union , i t i s ove r eve n i n Asia . As Sadda m Hussein' s invasio n o f Kuwai t i n Augus t 1 9 9 0 dramati cally showed , however , th e en d o f th e Col d W a r doe s no t entai l th e en d of securit y issues . Eve n i f i t i s unlikel y tha t majo r p o w e r s , includin g th e United State s an d Russia , wil l engag e i n large-scal e militar y conflict s with eac h other , a hos t o f danger s stil l exist : emergenc e o f adventure r regimes i n som e countries ; proliferatio n o f sophisticate d w e a p o n s ; eth nic conflicts ; destabilizatio n o f thus-fa r stabl e countries ; transnationa l terrorism; suppl y shortag e o f critica l resources ; collaps e o f th e w o r l d economy; globa l environmenta l destruction ; an d others . Thes e danger s are related , an d mor e ca n b e adde d t o thi s list . Bu t man y o f the m ar e threats no t clearl y define d an d analyze d i n traditiona l analysi s o f securit y policy; som e o f the m ar e no t eve n mentioned . Therefore , n o w tha t th e time whe n almos t al l internationa l conflict s hav e bee n interprete d i n terms o f th e East-Wes t confrontatio n i s behin d us , systemati c effort s t o analyze variou s type s o f threat s ar e calle d fo r i n orde r t o plac e the m i n proper perspective . Th e followin g i s a n attemp t t o classif y thes e an d other possibl e threat s int o fou r broa d group s accordin g t o th e degre e o f specificity an d identit y o f actor s involve d an d th e degre e o f th e actors ' aggressive intention s (figur e 1 . 1 ) .

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First, ther e ar e threat s comin g fro m specifi c an d clearl y identifiabl e

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Figure 1. 1 T y p e s o f Internationa l Threat s

• Clear I border | disputes I

aggressio

n

. threa tof ' aggressio n domestic . instability Specificity an d | Identity o f Actor s I

proliferation of weapon s i

collapse o f world econom y I 1

population I explosion i

Ambiguous | ^

| terroris

m

environmental problems '

Low Aggressiv

e Intentions Hig

actors wit h clea r aggressiv e intentions . Adventurou s regime s tryin g t o invade o r intimidat e thei r neighbor s ar e suc h threats . Sadda m Hussein' s Iraq an d Nort h Korea , whic h planne d an d actuall y bombe d a KA L airliner, ar e example s pa r excellence . Securit y polic y i n th e traditiona l sense ha s mainl y deal t wit h thi s typ e o f threat . Defens e plannin g i s ofte n made o n th e assumptio n tha t a certai n countr y coul d potentiall y becom e such a n aggressor . In man y circumstances , however , i t ca n b e difficul t t o identify th e rea l adventuris t unti l aggressio n actuall y take s place . Second, ther e ar e threat s t o internationa l securit y i n whic h actor s ar e clearly identifiabl e bu t thei r aggressiv e intention s ar e not . Territoria l disputes an d ethni c conflict s ar e examples . I n territoria l disputes , i t i s not difficul t t o pinpoin t th e irredentists . Irredentists ' intention s ar e clea r to th e exten t tha t the y see k t o restor e th e territor y the y claim . Bu t whether the y ar e willing t o resor t to arm s i s no t generall y clear . I n ethni c

h

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conflicts, i t i s no t difficul t t o identif y ethni c group s involve d i n a conflict , but i t i s no t generall y clea r whethe r the y ar e willin g t o resolv e th e conflict b y militar y means ; no r i s i t a l w a y s eas y t o pinpoin t th e identit y and whereabout s o f th e leadershi p o f a group . Domesti c instabilit y i s a more elusiv e threa t t o internationa l security . Thoug h i t i s no t s o difficul t to identif y whic h countr y i s politically , economically , an d sociall y unsta ble, i t i s no t a l w a y s easy t o identif y w h o th e significan t actor s ar e unles s and unti l a civi l w a r breaks out . An adventurou s regim e ma y emerg e a s on e part y i n a territoria l dispute, th e champio n o f a n ethni c group , o r a loca l contende r i n a civi l w a r . Bu t onc e th e adventurou s natur e o f on e part y i n a conflic t i s discerned, i t shoul d b e regarde d as th e firs t categor y o f threat . I n man y other circumstances , however , territoria l disputes , ethni c conflicts , an d internal instabilit y becom e militarize d no t b y th e existenc e o f a n aggres sor bu t a s a resul t o f spiral s o f hostilitie s an d mutua l distrust . I n thes e circumstances, i t i s extremel y difficul t t o identif y th e aggressors ; it ma y not b e morall y righ t t o d o so . Third, ther e ar e threat s i n whic h th e identit y an d whereabout s o f actors ar e no t clea r bu t ther e ar e clea r aggressiv e intentions . Transna tional terroris m i s a cas e i n point . Certainl y th e degre e o f identifiabilit y may vary . Sometime s suc h identitie s a s th e Germa n Re d Arm y Factio n (RAF), th e Provisiona l Iris h Republica n Arm y (IRA) , o r th e Japanes e Red Arm y ar e clear . Bu t no t always . An d eve n i n suc h case s o f clea r identity, i t i s difficul t t o pinpoin t wher e th e instigator s actuall y are . I n some cases , terroris m i s supporte d b y governments . Fo r example , Liby a and Syri a ar e reporte d t o hav e trainin g camp s fo r terrorists . M a n y other countrie s ma y b e involve d i n supportin g terroris t groups . Bu t th e difficulty i s tha t thos e countrie s tha t suppor t terrorist s ten d t o suppor t them withi n th e contex t o f deniability.

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The fourt h categor y o f threa t t o internationa l securit y ar e thos e wit h little clarit y o f acto r identit y an d lac k o f aggressiv e intentions : collaps e of th e w o r l d economy , populatio n explosion , sudde n suppl y shortage s of foo d o r critica l resources , large-scal e natura l disasters , an d destruc tion o f th e globa l environment . F e w countrie s w o u l d intentionall y at tempt t o destro y th e w o r l d econom y o r th e globa l environment . M a n y developing countrie s are , i n fact , tryin g t o contro l thei r populatio n growth. Nonetheless , suc h malfunction s o n a globa l scal e ar e possibl e and coul d threate n everyone' s security . Threats tha t ma y borde r o n th e secon d an d fourt h categor y ar e thos e

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that aris e fro m proliferatio n o f sophisticate d an d destructiv e w e a p o n s — nuclear, biological , an d chemica l w e a p o n s , an d ballisti c missiles . Though arm s exporter s ma y no t inten d t o destabiliz e th e world , the y may b e identified : th e Unite d States , th e U.S.S.R. , th e People' s Republi c of China , France , North Korea , Brazil, and others . Sudde n suppl y short ages o f foo d an d othe r resource s i s anothe r kin d o f threa t tha t ma y b e difficult t o classify . Th e threa t ma y b e cause d b y a n ac t o f a n aggresso r state o r ma y resul t fro m regiona l conflicts , a s i n th e case s o f th e first an d second oi l crises . Bu t th e threa t ma y tak e plac e becaus e o f natura l disasters o r large-scal e accident s (e.g. , large-scal e nuclear contaminatio n as a resul t o f a n acciden t a t a nuclea r plant) . Give n th e natur e o f th e distribution syste m o f foo d an d othe r resources , suppl y shortag e shoul d be considere d a phenomeno n i n th e fourt h categor y o f threat s because , even i f th e shortag e i s triggere d by a n aggressor' s decision o r b y spillove r from a regiona l conflict , th e proces s tha t coul d creat e a sudde n suppl y shortage involve s decision s o f larg e number s o f no t easil y identifiabl e actors—producer countries , consume r countries , distributin g compa nies, consumers , etc . Security i s a comple x problem , an d th e threat s mentione d abov e ar e naturally interrelated . Collaps e o f th e w o r l d econom y o r change s i n th e w o r l d econom y ma y aggravat e th e domesti c condition s o f a certai n country, an d i n tur n lea d th e countr y t o civi l w a r . Ou t o f suc h a civi l w a r , a n adventurou s regim e ma y emerg e and , unde r th e pretex t o f territorial dispute , i t ma y invad e a neighborin g country . Thes e develop ments ma y brin g abou t a n acut e shortag e o f natura l resource s o r pro duce a hug e numbe r o f refugees . Threat s to internationa l security , there fore, d o no t exis t i n isolation ; the y shoul d b e graspe d comprehensively . But fo r analyti c purposes , i t i s usefu l t o distinguis h differen t approache s to differen t type s o f threat . For th e first categor y of threat—threa t from a n adventure r country — deterrence an d containmen t ar e th e primar y feature s o f a preventiv e approach. I t i s necessar y fo r th e adventure r countr y t o b e full y a w a r e that aggressio n doe s no t pay , an d i t i s necessar y fo r outsid e countrie s t o control th e expor t o f arms , military-relate d technology , and , i f neces sary, othe r goods . Bu t deterrenc e an d containmen t ar e often mos t effec tive afte r th e aggressiv e natur e o f th e adversar y i s apparent . I f thes e methods ar e applie d unskillfull y whe n ther e i s stil l a chanc e fo r a civi lized regime , the y ma y unintentionall y creat e an adventurou s one .

Japan's Security Policy in the 1990s 3

9

The ultimat e preventiv e approac h t o thi s typ e o f threa t i s t o preven t the emergenc e o f a n adventurou s regime . Bu t ther e ar e n o eas y answer s for this . I f th e Kantia n vie w o f internationa l p e a c e — t h a t a republica n country doe s no t becom e adventurous—i s c o r r e c t ,

11

assistanc e t o demo -

cratic force s i n developin g countrie s i s on e preventiv e measure . An d if economi c prosperit y i s a preconditio n fo r democrac y i n developin g countries, economi c assistanc e i s anothe r measure . Bu t th e difficultie s are tha t economi c assistanc e doe s no t necessaril y brin g abou t economi c growth an d tha t economi c growt h doe s no t necessaril y creat e democ racy. Economi c developmen t unde r certai n circumstance s ca n creat e instability. Thus , wis e judgmen t i s imperative . But , i n an y case , t o reduc e the chance s o f militarizatio n an d t o limi t th e scal e o f militar y activities , regulation o f arm s exports t o thes e countrie s i s helpful . What a countr y shoul d d o afte r deterrenc e fail s i s actuall y w h a t th e traditional defens e polic y i s al l about . Eac h countr y sometime s trie s t o defend itsel f unilaterall y an d sometime s call s o n othe r countrie s t o hel p defend it . Alliance s ma y b e forme d beforehan d t o mak e i t easie r to resor t to collectiv e defense . I n th e p o s t - C o l d W a r era , unilatera l defens e a s well a s allianc e remai n th e majo r mean s o f defens e agains t thi s typ e o f threat. Bu t a s th e Gul f W a r clearl y indicated , collectiv e measure s carrie d out unde r th e auspice s o f th e Unite d Nation s ar e als o available . T o th e extent tha t emergenc e o f a n aggresso r regim e ma y tak e plac e virtuall y anywhere i n th e w o r l d , however , defensiv e capacit y shoul d includ e highly mobil e force s an d technologicall y sophisticate d forces . H o w thes e highly mobil e force s ar e organize d coul d b e a n importan t issu e i n th e future. Unde r th e curren t internationa l situation , realisticall y speaking , if collectiv e measure s ar e t o b e used , th e internationa l communit y con tinues t o depen d o n th e involvemen t o f th e Unite d States , th e onl y country n o w i n possessio n o f suc h mobil e an d sophisticate d forces . Among th e secon d categor y o f threats—territoria l dispute s an d eth nic conflicts—measure s t o preven t militarizatio n includ e goo d offices , mediation, arbitratio n b y neighborin g countries , regiona l internationa l organizations o r universa l internationa l organizations , confidenc e an d security buildin g measures , an d arm s control . Fo r ethni c conflict s an d internal instability , measure s designe d t o facilitat e economi c develop ment ma y help . An d w h e n thos e threat s exis t i n undemocrati c countries , encouragement o f mor e democratizatio n ma y als o help . (Bu t i n som e cases, a s discusse d above , economi c developmen t an d introductio n o f

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some democrati c institution s coul d provid e a short-ter m destabilizin g impact.) After militarizatio n o f territoria l disputes , ethni c conflicts , an d civi l disorders, defensiv e measure s tha t th e internationa l communit y ha s taken hav e involve d peacekeepin g force s o f th e Unite d Nation s o r othe r regional organizations , expor t contro l o f weapon s t o th e region , an d coordination o f mechanism s t o tak e car e o f refugees . Preventive measure s fo r th e thir d categor y o f threat—transnationa l terrorism—may includ e effectiv e polic e activitie s i n eac h country , in cluding effectiv e immigratio n control ; effectiv e sharin g o f informatio n among countries ; effort s t o persuad e a s man y countrie s a s possibl e no t to suppor t terrorists ; and , probabl y mos t important , effort s t o resolv e many ethni c conflict s throughou t th e w o r l d . Beyon d preventiv e mea sures, fe w mechanism s exis t t o effectivel y defen d internationa l securit y from thi s typ e o f menace . The fourt h categor y of threa t is mos t effectivel y prevente d by interna tional cooperation . I n preventin g furthe r proliferatio n o f sophisticate d w e a p o n s , arms-exportin g countrie s carr y a heav y responsibility . M o r e effective internationa l regime s ar e calle d for . T o preven t th e collaps e o f the w o r l d economy , th e role s o f th e advance d industria l democracie s are important ; suc h mechanism s a s G- 7 summit s shoul d becom e mor e effective. Sudde n suppl y shortage s o f foo d an d othe r resource s ca n b e prevented, first , b y preventin g th e firs t an d secon d categorie s o f threa t and, second , b y diversifyin g productio n site s an d technologica l improve ments. Fo r protectio n o f th e globa l environmen t an d preventio n o f a n adverse impac t fro m th e populatio n explosion , trul y globa l cooperatio n is essential . Countrie s i n th e Nort h ma y nee d t o accep t a large-scal e transfer o f wealt h t o countrie s i n th e Sout h i n orde r to reac h a n effectiv e agreement o n certai n measure s such a s protection o f tropica l forests . Coping wit h thi s typ e o f dange r whe n i t actuall y materialize s pose s serious difficulties . Certainl y ther e ar e som e unilatera l defens e measure s for som e o f them . Nationa l reserve s o f foo d an d resource s ca n hel p i n dealing wit h suppl y shortages . I n man y othe r cases , however , unilatera l defense measure s ca n b e counterproductiv e i f applie d b y ever y country , and ofte n defens e measure s simpl y d o no t exist . Autarky , o r a hig h degree o f self-protection , ma y enabl e on e countr y t o cop e wit h a collaps e of th e w o r l d economy . Bu t i f ever y countr y take s thi s posture , th e w o r l d econom y ma y collaps e unnecessarily . Whil e acquirin g nuclea r o r

Japan s Security Policy in the 1990s 4

1

Figure 1. 2 Salien t Measure s fo r Threat s

chemical w e a p o n r y ma y b e on e w a y fo r individua l nation s t o dea l with th e dange r arisin g fro m proliferatio n o f suc h w e a p o n s , thi s clearl y contributes t o th e dange r everybod y w a s tryin g t o avoi d i n th e first place. Finally , i f globa l environmenta l problems—globa l warming , de struction o f th e ozon e layer , pollutio n o f th e o c e a n s — b e c o m e reall y serious, ther e ar e n o effectiv e defens e measures . I n othe r w o r d s , fo r this typ e o f threat , preventio n i s fa r mor e importan t tha n defense , an d prevention require s wide-scale cooperation . Examining th e fou r categorie s o f threat , w e se e tha t preventiv e an d defensive measure s involv e differen t mechanisms . Bu t generall y speak ing, threat s locate d nea r th e upper-righ t corne r o f figure 1. 1 see m t o require mor e militar y means , an d threat s nea r th e lower-lef t corne r call fo r nonmilitar y mean s (se e figure 1.2) . Furthermore , mos t o f thes e measures ar e mor e effectiv e i f the y ar e applie d collectivel y rathe r the n unilaterally. T o cop e wit h a n adventure r regime , th e solidarit y o f th e

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opposing countrie s i s essential . T o preven t terroris t activities , informa tion-sharing amon g countrie s i s necessary . For the internationa l commu nity t o preven t territoria l disputes , ethni c conflicts , an d civi l disorder s from spillin g over , coordinated actio n b y neighborin g countrie s i s useful . And i t i s almos t impossibl e t o achiev e protectio n o f th e globa l environ ment withou t internationa l cooperation . T o sa y tha t internationa l cooperatio n i s necessary , however, doe s no t mean tha t i t i s easy . O n th e contrary , to th e exten t tha t th e "hegemoni c stability" theor y ha s som e validity , internationa l cooperatio n amon g major countrie s whe n ther e ar e no dominan t p o w e r s is difficult. If , du e 12

to th e relativ e declin e o f U.S . economi c p o w e r , th e Unite d State s take s either a n isolationis t polic y o r a n extrem e unilatera l policy , i t ma y b e difficult t o forg e a consensu s t o creat e a cooperativ e schem e i n dealin g with th e abov e securit y threat s i n th e 1 9 9 0 s . Bu t ther e ar e ground s fo r cautious optimism ; wit h th e en d o f acut e ideologica l conflict s betwee n the Wes t an d th e East , i t ha s finally becom e possibl e t o utiliz e th e framework o f th e U.N . Securit y Counci l t o cop e wit h securit y issues . Multinational effort s t o condem n an d contai n Ira q ma y b e th e beginnin g of rea l internationa l securit y cooperatio n i n th e 1 9 9 0 s .

T h e S e c u r i t y P o l i c y o f J a p a n i n th e

1990 s

If th e natur e o f internationa l securit y i n th e 1 9 9 0 s i s a s I have describe d above, the n w h a t shoul d J a p a n do ? Wha t ar e th e deficiencie s i n Japan' s security polic y an d policy-makin g apparatus ? Wha t ar e th e necessar y changes? Wha t ar e the constraint s o n makin g changes? First, th e basi c element s o f Japan' s defens e postur e i n th e p o s t w a r era do no t nee d t o b e altered ; limited capabilit y wit h a self-defens e doctrin e plus relianc e o n th e securit y treat y wit h th e Unite d State s ar e stil l vali d in th e 1 9 9 0 s . It is tru e that th e mai n sourc e o f concer n agains t which th e Japanese defens e apparatu s an d th e U.S . allianc e ha d bee n c r e a t e d — the Sovie t t h r e a t — h a s virtuall y disappeared . Bu t thi s change , thoug h important, doe s no t immediatel y justif y a wholesal e chang e i n th e basi c elements o f Japanes e securit y policy , includin g it s allianc e wit h th e United States . The concep t o f a "standar d defense force " an d th e princi ple o f "defensiv e defense " ar e still—in fact , m o r e — v a l i d afte r the disap pearance o f th e Sovie t threat . Furthermore , the Japan—U.S . allianc e ha s other importan t function s beside s copin g wit h th e Sovie t threat .

Japan's Security Policy in the 1990s 4

3

First, beside s th e threa t fro m th e Sovie t Union , othe r potentia l threat s have a l w a y s existe d i n Eas t Asia. Nort h Kore a may pos e th e firs t typ e o f threat onc e i t acquire s nuclea r w e a p o n s . I f th e curren t Nort h Korea n regime collapse s becaus e o f interna l difficulties , th e Korea n Peninsul a can b e destabilized . China , currentl y n o militar y threa t t o J a p a n , i s modernizing it s military , mos t notabl y it s navy , an d i n th e lon g ter m ca n become a potentia l sourc e o f militar y concer n i n th e region . Therefore , the U . S . - J a p a n allianc e i s stil l servin g th e functio n o f preventin g suc h potential threat s in th e region . Second, th e allianc e s h o w s th e join t commitmen t o f th e t w o larges t economic p o w e r s i n th e w o r l d t o libera l democrati c value s an d t o thei r close economi c cooperation . Th e preambl e o f th e securit y treat y say s that th e t w o countrie s desir e "t o uphol d th e principle s o f democracy , individual liberty , an d th e rul e o f l a w , " an d "t o encourag e close r eco nomic cooperatio n betwee n t h e m . "

13

Third, th e J a p a n - U . S . allianc e ha s serve d a s on e o f th e mos t im portant premise s o f internationa l securit y relation s i n Eas t Asia ; a s th e preamble an d articl e 6 o f th e treat y indicate, th e securit y treaty stipulate s continuing U.S . engagemen t i n th e Fa r East i n additio n t o U.S . commit ment t o defen d J a p a n . Th e fea r tha t a n independen t Japa n withou t th e U.S. allianc e w o u l d actuall y becom e militaristic , irresponsible , o r les s trustworthy i s exaggerated , and I believe th e curren t democratic politica l system ca n preven t J a p a n fro m becomin g so . Bu t i t i s a fac t tha t ther e are suc h widesprea d fear s amon g neighborin g countries—fear s totall y understandable give n Japanes e aggressio n i n th e are a hal f a centur y ag o and th e curren t overwhelmin g Japanes e economi c influenc e i n th e re gion. An d t o th e exten t tha t psychologica l factor s actuall y affec t sub stance i n internationa l politics , th e J a p a n - U . S . allianc e continue s t o serve th e importan t rol e o f reassurin g Asian nation s tha t J a p a n wil l no t become a militaristi c p o w e r again . In othe r w o r d s , th e basi c orientatio n o f effort s o n th e t w o level s o f comprehensive nationa l security—th e leve l o f it s defens e effort s an d th e level o f cooperatio n wit h like-minde d countries , especiall y th e Unite d States—need no t b e changed . An unchange d basi c orientation , however , doe s no t necessaril y mea n that defens e polic y doe s no t hav e t o b e reviewed . Indeed, th e en d o f th e Cold W a r force s J a p a n t o appl y majo r revision s t o th e curren t defens e policy i n th e followin g t w o respects . First , th e compositio n o f defens e capability mus t b e reviewed . During th e so-calle d N e w Col d W a r er a i n

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the 1 9 8 0 s , th e Self-Defens e Forces ' organization an d arm s procurement , though the y w e r e wel l withi n th e boundar y o f th e concep t o f "standar d defense force, " w e r e geare d t o w a r d defens e agains t th e threa t fro m th e North, emphasizin g antisubmarin e capabilitie s i n cooperatio n wit h U.S . forces. An d tha t w a s no t a mistak e a t all . N o w tha t Russi a ca n hardl y pos e a n actua l militar y threat , however , this emphasi s o n th e threa t fro m th e Nort h an d o n antisubmarin e capa bilities shoul d b e reviewed , taking int o consideratio n th e futur e develop ment o f th e U.S.—Russia n disarmamen t i n th e northwester n Pacifi c region. As fo r th e Groun d SDF , th e ne w Mid-Ter m Defens e Pla n ( 1 9 9 1 - 9 5 ) sets it s personne l ceilin g a t 1 5 3 , 0 0 0 wherea s it s actua l capacit y i s 1 8 0 , 0 0 0 . Bu t on e ma y wonde r whethe r i t i s stil l appropriat e t o statio n t w o mixe d force s o f twelv e division s i n eac h bas e nationwide . I t migh t be mor e appropriat e fo r th e post—Col d W a r standar d defens e forc e t o trim of f personne l an d maintai n a fe w mobil e force s instead . As fo r th e Maritim e SDF , w h a t wil l b e th e missio n o f destroyers , frigates, an d submarines ? Wil l Japa n stil l nee d destroyer s an d frigate s equipped wit h th e ver y sophisticate d anti-ai r aegi s system ? What ar e th e reasons fo r continue d procuremen t o f antisubmarin e PC-3s ? While i t i s natura l fo r th e Ai r SD F t o tr y t o cove r th e entir e territory , is i t no t appropriat e to reconside r th e continue d procuremen t o f suc h a n expensive fighter a s th e F-1 5 an d th e developmen t o f th e F S X ? O n th e other hand , w e shoul d b e prepare d fo r a ne w threa t fro m ballisti c missiles intentionall y o r accidentall y launche d o r stra y missile s fro m nearby regiona l conflicts . Nort h Korea' s missile s possibl y wit h nuclea r warheads ar e th e case s i n point . Thes e possibilitie s requir e tha t J a p a n seriously conside r th e desirabilit y o f creatin g a n effectiv e antimissil e defense system . In an y event , th e SDF s nee d t o b e trimmed , particularl y i n ligh t o f th e imminent decreas e i n th e proportio n o f th e younge r generatio n i n th e overall nationa l populatio n i n th e nea r future . Th e SD F reserv e syste m should thu s b e significantl y reforme d an d it s divisio n structur e reorganized. Th e futur e pla n shoul d includ e a polic y t o significantl y reduc e SDF personne l whil e a t th e sam e tim e increasin g th e numbe r bu t low ering th e averag e age o f th e curren t 4 7 , 9 00 SD F reserves. Furthermore, i t i s abou t tim e t o integrat e th e thre e SDF s int o a mor e unified structure . In orde r t o fulfil l th e missio n o f self-defens e o f suc h a n

Japan's Security Policy in the 1990s 4

5

island natio n a s J a p a n , a s ha s bee n lon g suggested , thre e separat e mili tary structure s of land , air , and maritim e force s ar e inefficient, especiall y given th e decreas e of population ; a mor e unifie d structur e is calle d for . Secondly, togethe r wit h thes e revision s o f SD F personnel , physica l defense capabilit y shoul d b e reduce d fo r th e tim e being , o r a t leas t freezed. I t i s tru e tha t a larg e portio n (78. 8 percen t i n F Y 1 9 9 1 ) o f Japan's defens e expenditur e ha s bee n occupie d b y obligator y expense s determined a t th e beginnin g o f th e budge t planning , suc h a s personne l expenses, foo d an d othe r overhea d expenses , an d paymen t fo r th e pro curements alread y ordered . I t i s equall y tru e tha t i n th e n e w Mid-Ter m Defense Plan , expense s fo r fronta l equipment , includin g arms , ar e t o b e reduced b y 2. 3 percen t annually . Nevertheless , tota l defens e expenditur e must b e reduce d o r freezed . Whe n th e defens e capabilit y compositio n i s readjusted t o th e ne w situatio n an d environment , i t shoul d b e possible , first o f all , t o reduc e personne l expense s a s wel l a s expense s fo r fronta l equipment. Secondly , unde r certai n circumstance s (when , fo r instance , a certain degre e o f nava l disarmamen t i s advance d i n th e wester n Pacific) , the Defens e Agenc y ca n cance l th e procuremen t o f equipmen t tha t ha d already bee n ordered , i f i t ca n induc e high-leve l politica l decisions . Thirdly, i t wil l b e ver y importan t t o reduc e defense expenditure s i f Japa n wishes t o pla y a constructiv e rol e i n internationa l politics , particularl y i n Asia. Whil e i t i s tru e tha t th e defens e expenditure s o f Japan' s neigh boring countrie s hav e bee n o n th e rise , the y d o no t immediatel y pos e any direc t threa t t o J a p a n . Moreover , i f J a p a n doe s no t reduc e it s defense expenditur e despit e th e en d o f th e Col d W a r , this ca n b e possibl y interpreted a s a symbo l o f Japan' s remilitarizatio n intention , regardles s of th e tru e conten t o f th e expenditure . I n orde r t o symbolicall y demon strate t o th e w o r l d tha t J a p a n doe s no t hav e an y ulterio r motiv e behin d such activitie s a s participatio n i n th e U.N.' s peacekeepin g operation s and th e SDF' s contributio n t o internationa l relie f activities , J a p a n mus t reduce it s defens e expenditure . What i s clearl y deficien t i n Japan' s effor t i n th e p o s t - C o l d W a r period, however , ar e it s effort s o n th e thir d level—t o preserv e an d enhance th e peac e an d stabilit y o f th e internationa l system . I t i s tru e that the n Prim e Ministe r Nobor u Takeshit a declare d thre e pillar s o f international cooperatio n i n 1 9 8 8 . But th e inadequac y o f Japan' s policy making apparatus—includin g th e lega l s y s t e m — w a s clearly reveale d by the reaction—o r lac k o f reaction , whic h ma y mor e properl y b e calle d

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paralysis—of th e Japanes e governmen t t o Iraq' s aggressio n agains t Ku wait. Th e followin g ar e possibl e change s tha t Japa n shoul d mak e i n it s policies t o cop e wit h eac h o f th e fou r categorie s o f threa t t o interna tional society . Japan ha s n o unilatera l militar y mean s fo r copin g wit h th e first cate gory o f threat—emergenc e o f a n adventure r state—unles s suc h a threa t is directe d agains t J a p a n . I f a clearl y adventure r regim e appears , a s i n the cas e o f Iraq , J a p a n shoul d suppor t th e militar y effort s o f th e Unite d States an d othe r countrie s i n orde r t o dete r aggressio n an d shoul d joi n in th e effort s t o contai n th e aggresso r regime. If , eventually , a U.N . forc e is create d t o cop e wit h thi s typ e o f threa t an d Japan' s neighbor s agree , J a p a n shoul d sen d th e SD F t o joi n th e U.N . forces , thoug h thi s ma y entail constitutiona l debate s i n J a p a n , whic h I wil l describ e below . Bu t in th e meantime , becaus e ther e ar e n o effectiv e U.N . force s wit h highl y mobile an d sophisticate d w e a p o n s , J a p a n shoul d giv e financial, logisti cal, an d othe r nonmilitar y suppor t t o multinationa l force s create d on a n ad ho c basis . The bes t w a y t o preven t a n adventure r regim e fro m launchin g a n invasion i s t o preven t th e emergenc e o f suc h a regime . Fo r tha t purpose , establishment o f a stabl e democrati c regim e an d economi c developmen t are th e bes t measures . Though thi s metho d i s no t a panacea, Japan coul d still offe r economi c assistanc e t o developin g countrie s s o tha t democrati c values an d economi c developmen t ar e promoted; fo r example , improve ment o f th e infrastructur e o f communicatio n network s an d promotio n of primar y an d secondar y educatio n can , a t leas t i n th e lon g term , contribute t o bot h democrati c value s an d economi c development . T o dea l wit h th e secon d categor y o f threat—territoria l disputes , eth nic conflicts , an d interna l instability—Japa n shoul d pla y a facilitatin g role w h e n appropriat e an d encourag e peacefu l resolutio n by , i f neces sary, extendin g inducement s i n term s o f economi c assistanc e t o th e parties concerned . J a p a n coul

d exten

peacekeeping effort s i n term s o f financial

d suppor

t t o multilatera

l

an d huma n resources . Th e

International Peac e Cooperatio n L a w , passed b y th e Die t i n Jun e 1 9 9 2 after mor e tha n a year-lon g debate , finally establishe d a lega l framewor k within whic h th e SD F coul d participat e i n th e U.N . peacekeepin g opera tions. Bu t th e curren t l a w stil l limit s Japanes e participatio n t o mostl y logistical suppor t fo r peacekeepin g operations . I t shoul d b e revise d t o enable full-scop e participatio n i n U.N . peacekeepin g operations .

Japan's Security Policy in the 1990s 4

7

The thir d categor y o f threat—transnationa l terrorism—seem s mos t effectively tackle d b y effectiv e polic y operation s i n eac h countr y a s wel l as b y th e sharin g o f information . J a p a n shoul d increas e cooperatio n with othe r countrie s i n developin g highl y sophisticate d bomb-detectio n equipment. I t shoul d als o mak e effort s t o preven t theft s o f nuclea r materials b y terrorists. Measures t o cop e wit h th e fourt h categor y o f threat—globa l prob lems—really requir e internationa l cooperation . I f Japa n i s preoccupie d with narro w an d short-ter m nationa l interests , le t alon e smal l sectoria l interests withi n J a p a n , multilatera l effort s wil l no t succeed . I n orde r t o make th e Urugua y Roun d successful , J a p a n shoul d agre e t o sto p th e banning o f ric e imports , fo r example . O n th e issu e o f proliferatio n of sophisticate d an d destructiv e w e a p o n s , J a p a n shoul d conside r usin g positive inducement s i n term s o f economi c assistanc e t o thos e countrie s that compl y wit h nonproliferation . T o cop e wit h globa l environmenta l problems an d variou s form s o f pollution , J a p a n shoul d exten d it s finan cial a s wel l a s technologica l support . T o achiev e th e abov e changes , J a p a n ha s t o overcom e variou s domes tic constraints—lega l systems , curren t bureaucrati c frameworks, domes tic politics , an d publi c opinion . Le t u s examin e suc h obstacle s t o (1 ) more activ e participatio n i n internationa l peacekeepin g an d security enhancing activities , (2 ) mor e flexibl e an d effectiv e us e o f economi c assistance fo r securit y purpose s a s define d here , an d (3 ) a mor e effectiv e central decision-makin g apparatu s under th e prim e ministe r tha t ca n ac t promptly an d properl y i n a n internationa l crisis . First, regardin g the issu e o f mor e activ e participatio n i n internationa l peacekeeping an d security-enhancin g activities , th e strengt h o f con straints var y accordin g t o th e us e o f th e SDF . I f th e SD F i s t o b e dispatched fo r unilatera l militar y action , th e constitutio n shoul d b e re vised. An d revisio n o f th e constitutio n i s extremel y difficul t becaus e i t requires th e suppor t o f a two-third s majorit y o f th e member s o f eac h House a s wel l a s majorit y suppor t i n a nationa l referendum . Unde r current circumstances , i t i s particularl y impossibl e t o chang e th e consti tution becaus e oppositio n partie s an d a sizeabl e numbe r o f LD P mem bers w o u l d oppos e a revisio n tha t w o u l d allo w th e dispatc h o f th e SD F for unilatera l militar y action . Eve n i f th e LD P w e r e united , sinc e i t doe s not hav e a two-third s majorit y i n th e Hous e o f Representative s (no r does i t hav e eve n a simpl e majorit y i n th e Hous e o f Councillors) , i t coul d

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not pas s suc h a resolutio n i n th e D i e t .

14

I n an y case , i f J a p a n w e r e t o

revise th e constitutio n t o allo w fo r unilateral militar y actio n abroad , that w o u l d creat e w a v e s o f internationa l concer n an d w o u l d destabiliz e international politic s i n Asia . Therefore , thi s i s no t a desirabl e course . As fo r a possibl e dispatc h o f SD F personne l t o a U.N . forc e a s define d by articl e 4 2 o f th e U.N . c h a r t e r ,

15

it s constitutionalit y i s debatable . I t

seems possibl e t o argu e tha t participatio n i n a U.N . forc e a s define d b y article 4 2 i s consisten t wit h th e renunciatio n o f w a r an d tha t militar y capacity t o b e use d b y suc h a U.N . forc e ha s nothin g t o d o wit h "force " as banne d b y th e constitution.

16

Bu t th e officia l governmen t interpreta -

tion o f th e constitutio n sai d i n 1 9 8 0 tha t i f th e missio n o f a "U.N . force " includes "th e us e o f force, " th e SD F i s no t constitutionall y allowe d t o participate i n i t .

17

Thus , t o realiz e suc h a dispatch , a t leas t a chang e i n

the officia l governmen t interpretatio n i s necessary . Bu t durin g th e Die t session i n th e autum n o f 1 9 9 0 , Prim e Ministe r Kaif u state d tha t h e w a s not plannin g t o chang e thi s interpretation . Further , sinc e th e SD F L a w does no t includ e suc h a missio n i n th e SDF' s objectives , a chang e i n tha t l a w o r a specia l l a w i s necessary . If th e dispatc h o f th e SD F i s t o a U.N . forc e w h o s e missio n doe s no t include th e us e o f force , th e governmen t interpretatio n o f th e constitu tion say s tha t i t i s constitutional . Bu t i n an y case , i f a U.N . forc e i s mad e under articl e 4 2 , a stron g cas e ca n b e mad e t o facilitat e dispatc h o f th e SDF eve n i f th e missio n o f th e U.N . forc e include s militar y operations , though sinc e th e U.N . charte r allow s member s t o decid e thei r form s o f participation, J a p a n w o u l d op t fo r a noncomba t missio n fo r it s SDF . A slightl y trick y cas e i s tha t o f a multinationa l forc e authorize d b y the U.N . Securit y Council , suc h a s a multinationa l forc e t o enforc e economic sanction s agains t Iraq . T o th e exten t tha t suc h multinationa l forces hav e a missio n involvin g "us e o f force, " sendin g th e SD F t o participate i n suc h force s i s unconstitutiona l i n th e curren t governmen t interpretation. Bu t i f th e "us e o f force " i s no t include d i n th e mission , J a p a n coul d sen d th e SD F pendin g change s o f th e SD F L a w o r a ne w special law . Sending th e SD F o n othe r U.N . peacekeepin g mission s i s legall y les s tricky, becaus e th e "us e o f force " i s no t generall y include d i n U.N . peacekeeping operations , an d thi s w a s mad e possibl e b y th e Interna tional Peac e Cooperatio n L a w mentioned above . As discusse d above , give n th e natur e o f threat s t o internationa l secu -

Japan's Security Policy in the 1990s 4

9

rity i n th e comin g decades , th e rol e o f nonmilitar y mean s fo r securit y i s increasing. Becaus e J a p a n impose s stric t limitation s o n th e us e o f mili tary capacity , a s describe d abov e i n detail , economi c assistanc e shoul d be give n mor e priorit y tha n befor e fo r th e purpose s o f securit y polic y i n a broa d sense . Bu t J a p a n ha s i n man y case s refraine d fro m attachin g political condition s t o it s economi c assistanc e because , i t i s explained , Japan's ai d i s motivate d b y humanitaria n consideration s an d th e a w a r e ness o f "interdependence " amon g nations . Furthermore , Japan' s ai d i s conducted o n th e "request " principl e (yosei shugi),

whic h require s tha t

J a p a n giv e economi c assistanc e onl y whe n a reques t i s mad e fro m a foreign country . I t i s tru e tha t J a p a n ca n us e it s o w n criteri a t o selec t various requests , but passivit y i s apparen t i n thi s formula . H o w e v e r , a clea r departur e of polic y w a s mad e i n th e sprin g o f 1 9 9 1 , when Prim e Ministe r Toshik i Kaif u announce d tha t " J P a

a n

wil l pa y ful l

attention i n th e implementatio n o f OD A t o th e followin g point s o f th e recipient countries : (1 ) trend s i n militar y expenditure ; (2 ) trend s i n th e development, production , etc. , o f w e a p o n s o f mas s destructio n suc h a s atomic w e a p o n s an d missiles ; (3 ) trend s i n th e expor t an d impor t o f weapons; an d (4 ) effort s fo r promotin g democratization , th e introduc tion o f a market-oriente d economy , an d th e securit y o f basi c huma n rights an d f r e e d o m s . "

18

Furthermore , o n Jun e 3 0 , 1 9 9 2 , th e Japanes e

government officiall y conclude d a n "Officia l Developmen t Assistanc e Charter"—the first officia l documen t t o describ e th e philosoph y an d principles o f Japan' s a i d — w h i c h reconfirm s Kaifu' s guidelines.

19

Though implementatio n o f th e ne w guideline s ma y rais e difficultie s i n concrete areas , i t i s importan t t o mak e the m k n o w n t o al l recipien t nations an d t o us e the m a s mean s t o persuad e suc h nation s t o accom plish th e goal s o f th e n e w guidelines . In additio n t o thes e difficultie s o n th e leve l o f policy , ther e i s a mor e difficult proble m i n decision-making—th e extremel y decentralize d an d overlapping natur e o f decision-makin g o n economi c assistance . Grant s are generall y controlle d b y th e Ministr y o f Foreig n Affairs , bu t ye n loan s are controlle d b y th e Ministr y o f Internationa l Trad e an d Industry ; ai d through internationa l organization s i s controlle d b y th e Ministr y o f Foreign Affair s an d th e Ministr y o f Finance . Implementatio n o f eco nomic assistanc e i s share d b y virtuall y al l ministrie s o f th e Japanes e government. Eve n thoug h th e four—ministry/agenc y meetin g (MOFA , MITI, M O F , an d Economi c Plannin g Agency ) i s suppose d t o coordinat e

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Japan's entir e ai d policy , i t i s no t clea r whethe r thi s mechanis m i s effective fo r flexibl e managemen t o f economi c assistanc e fo r securit y policy. Sinc e Japan' s Securit y Council , create d in 1 9 8 6 t o deliberat e o n important issue s o f defens e an d othe r emergencies , i s no t explicitl y i n charge o f economi c assistance , ther e ar e n o cabinet-leve l coordinatin g meetings o r staff.

20

One o f th e majo r characteristic s of Japan' s bureaucrac y are its highl y autonomous an d independen t ministrie s an d agencies . Minister s an d parliamentary vice-minister s ar e appointed b y th e prim e ministe r mostl y from amon g Die t members . Bu t parliamentar y vice-ministers ar e gener ally powerless . Aside fro m thes e t w o posts , ther e ar e virtually n o politi cal appointees ; th e highest-rankin g positio n afte r th e minister , tha t o f administrative vice-minister , i s occupie d b y th e mos t successfu l caree r bureaucrats, w h o s e appointmen t i s generall y mad e b y seniorit y an d reputation amon g fello w bureaucrats . An d becaus e o f a mor e tha n thirty-year-long symbiosi s betwee n th e rulin g LD P an d th e bureaucracy, in man y polic y areas , standar d operatin g procedure s hav e bee n firmly established. Therefore , unles s th e prim e ministe r i s reall y determined , h e cannot introduc e n e w policies , especiall y i f the y hav e somethin g t o d o with th e turf s o f multipl e ministrie s an d agencies . In securit y policy , ther e hav e bee n severa l attempt s t o creat e a cabi net-level coordinatin g mechanism : i n 1 9 5 6 , th e Defens e Counci l w a s established, an d i n 1 9 8 6 i t w a s replace d b y th e Securit y Council . Th e Security Counci l w a s create d because the Defens e Counci l ha d becom e a largely ratifyin g bod y rathe r tha n a deliberativ e body . Bu t th e Securit y Council, compose d o f th e prim e minister , th e foreig n minister , th e finance minister , th e chie f cabine t secretary , the chairma n o f th e Nationa l Public Safet y Commission , th e directo r o f th e Defens e Agency , an d th e director o f th e Economi c Plannin g Agency , ha s als o ende d u p bein g a ratifying body . An d wit h th e establishmen t o f th e Securit y Council , a reorganization o f th e Prim e Minister' s Offic e w a s als o made ; severa l n e w coordinatin g office s w e r e created : the Councillor' s Offic e o n Inter nal Affairs , th e Councillor' s Offic e o n Externa l Affairs , th e Securit y Affairs Office , an d th e Researc h an d Intelligenc e Office . Bu t durin g th e international crisi s triggered by Iraq' s invasio n o f Kuwait , the coordinat ing mechanis m unde r th e prim e ministe r di d no t appea r t o w o r k effec tively. Japan' s economi c sanction s an d othe r measure s w e r e decide d without convenin g Securit y Counci l meetings .

Japan's Security Policy in the 1990s 5

1

Part o f th e reaso n tha t th e centra l decision-makin g syste m lack s effec tive coordinatio n i s becaus e th e Prim e Minister' s Secretaria t i s under staffed and , furthermore , i s staffe d b y bureaucrat s on loa n fro m variou s ministries. Th e numbe r o f staf f o f th e entir e Cabine t Secretaria t is 1 7 6 ; within it , th e Councillor' s Offic e o n Externa l Affair s i s staffe d b y nine teen bureaucrats ; the Securit y Affair s Office , b y twenty-four ; an d th e Research an d Intelligenc e Office , b y twenty-four . It i s o f cours e th e rol e o f th e chie f cabine t secretar y to coordinat e th e views o f variou s ministrie s an d agencies . Bu t becaus e th e chie f cabine t secretary i s chose n fro m amon g th e member s o f th e Diet , h e o r sh e ma y not b e th e righ t person t o coordinat e internationa l affair s issues. A prim e minister i s supporte d i n foreig n affair s b y hi s secretaries , one o f w h o m i s sent b y th e foreig n minister . Bu t becaus e th e positio n o f secretar y to a prime ministe r i s no t ver y hig h i n th e Foreig n Ministry' s bureaucrati c ladder, h e o r sh e ma y no t wiel d effectiv e p o w e r ove r th e Foreig n Minis try, le t alon e ove r othe r ministries . Head s o f variou s office s o f th e Cabinet Secretaria t are generall y sen t b y differen t ministries , also ; i t i s difficult t o expec t the m t o pla y a coordinativ e role . I n othe r w o r d s , a prime ministe r o f J a p a n ha s n o officia l internationa l affair s advisors , powerful an d independen t o f eac h ministry . Given th e natur e o f parliamentar y democrac y an d th e traditio n o f a strong an d talente d bureaucracy , it ma y no t b e wis e t o impor t th e U.S . system o f th e Nationa l Securit y Counci l an d it s staff . Bu t i t i s possibl e and necessar y t o strengthe n th e staf f o f th e office s i n th e Cabine t Secre tariat. Furthermore , prime minister s shoul d creat e interministerial coor dination framework s i n norma l time s s o tha t the y ca n b e utilize d a t times o f crisis . In sum , becaus e Japan' s constitutio n preclude s th e us e o f militar y force a s a mean s t o achiev e nationa l goals , it s securit y polic y i s con strained i n compariso n with , fo r example , th e Unite d States , bu t J a p a n could stil l contribut e t o th e enhancemen t o f internationa l securit y i n th e 1 9 9 0 s a t leas t i n th e followin g w a y s : (1 ) J a p a n coul d participat e mor e actively i n U.N . peacekeepin g operations ; (2 ) bein g a countr y wit h th e self-imposed restraint s o f no t havin g nuclea r w e a p o n s an d o f no t ex porting w e a p o n s , J a p a n coul d engag e mor e activel y i n creatin g an d maintaining internationa l regime s tha t preven t proliferatio n o f sophisti cated w e a p o n s ; an d (3 ) fo r th e purpos e o f nonproliferatio n a s wel l as othe r purposes—resolutio n o f internationa l conflicts , promotio n o f

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democratic values , promotio n o f environmenta l protection—Japa n could us e economi c assistanc e an d othe r financial mean s a s positiv e in ducements.

Conclusion The en d o f th e Col d W a r w a s brough t abou t withou t a fronta l militar y clash betwee n th e Wes t an d th e East ; th e Wester n allie s w e r e abl e t o maintain militar y preparednes s without collapsin g thei r economie s whil e the Sovie t Unio n an d it s allie s almos t destroye d thei r economie s i n th e process o f buildin g u p thei r military . Th e soun d economi c bas e o f th e capitalist w o r l d seem s t o hav e bee n critica l i n bringin g abou t th e West' s "victory" i n th e Col d War . I n fact , i t i s a rar e phenomeno n i n w o r l d history tha t a chang e o f thi s magnitud e w a s achieve d withou t a majo r w a r , an d thi s fac t clearl y encourage s th e directio n tha t J a p a n ha s take n since it s defea t fro m a disastrou s w a r . A w o r l d i n whic h majo r interna tional issue s ar e resolved withou t w a r s i s a goo d w o r l d fo r a peopl e w h o "have determine d t o preserv e [their ] securit y an d existence , trustin g i n the justic e an d fait h o f th e peace-lovin g people s o f th e w o r l d . "

2 1

I t is ,

therefore, i n th e Japanes e basi c securit y interes t t o maintai n thi s tren d o f nonmilitary conflic t resolution . But clearly , th e en d o f th e Col d W a r doe s no t mea n th e complet e en d of th e usefulnes s o f forc e a s a mean s o f nationa l policy . Militar y mean s have als o playe d importan t role s i n endin g th e Col d W a r ; strategi c nuclear stabilit y a s wel l a s conventiona l militar y effort s hav e deterre d the actua l us e o f militar y forc e i n resolvin g conflicts . Furthermore , a s examined above , ther e ca n b e regime s i n th e w o r l d tha t ma y b e tempte d to us e forc e t o achiev e thei r ambitions , t o w a r d w h om militar y deterrenc e is stil l a n essentia l element . I n othe r w o r d s , militar y mean s ar e stil l necessary t o dete r thos e w h o ar e read y t o us e forc e t o achiev e thei r ambitions. I f Japan' s basi c securit y interes t i s t o preserv e a w o r l d o f nonmilitary conflic t resolution , i t i s essentia l fo r J a p a n t o suppor t effort s to contai n possibl e an d actua l aggressors . I f th e Unite d State s i s th e onl y military p o w e r i n th e w o r l d tha t ca n contai n potentia l aggressions , i t i s in Japan' s securit y interes t t o suppor t th e Unite d States . I f th e Unite d Nations i s regainin g authorit y an d effectivenes s i n copin g wit h aggressor states, i t i s i n Japan' s securit y interest s t o cooperat e wit h it .

Japan's Security Policy in the 1990s 5

3

T o preven t othe r type s o f threat s t o internationa l security—regiona l arms races , ethni c conflicts , instabilit y i n man y countries , terrorism , a collapse o f th e w o r l d economy , environmenta l disasters , proliferation o f sophisticated w e a p o n s — i s als o i n Japan' s securit y interest . Japanes e economic activitie s ar e global, an d thu s arme d conflict s i n distan t place s can affec t Japanes e econom y directly . J a p a n shoul d us e al l th e mean s at it s disposal—includin g O D A — t o preven t furthe r proliferatio n o f sophisticated w e a p o n s throughou t th e world . Thos e globa l issues , suc h as th e stat e o f th e w o r l d econom y an d environmenta l problems , k n o w no geographica l limits. Japan' s securit y interest s ar e n ow global . The securit y situatio n withi n Japan' s proximity , nevertheless , i s stil l crucial t o J a p a n ; peac e an d stabilit y i n Asi a an d th e Pacifi c i s clearl y th e most importan t securit y interes t o f J a p a n . Th e J a p a n - U . S . alliance , among others , i s th e basi c premis e o f almos t al l importan t internationa l relations i n th e area , withou t whic h th e ver y bas e o f th e curren t eco nomic g r o w t h o f th e Asian-Pacifi c regio n seem s extremel y fragile . Als o important ar e Japan' s goo d relation s wit h othe r neighbor s i n th e area . Given th e Japanes e wartim e conduc t i n th e are a a s wel l a s th e curren t increasing economi c integratio n wit h th e countrie s i n th e area , J a p a n should b e attentiv e t o th e v i e w s o f it s neighbors . Sometimes , Japan' s policy t o strengthe n th e solidarit y o f th e J a p a n - U . S . allianc e ca n invit e criticism fro m thes e neighbors ; Kaifu' s U.N . Peac e Cooperatio n Bil l w a s the mos t recen t suc h instance . I believ e tha t J a p a n shoul d accep t suc h a w k w a r d situation s a s a pric e o f it s pas t histor y o f militarism . Bu t i t i s in th e securit y interes t o f J a p a n t o persuad e it s neighbor s tha t improve ment o f J a p a n - U . S . relation s i n fac t contribute s t o th e peac e an d stabil ity o f th e regio n mor e tha n w o u l d a deterioratio n o f relation s betwee n T o k y o an d Washington . Finally, i t i s crucia l t o th e securit y interes t o f J a p a n t o improv e th e quality o f it s decision-making . Fo r a countr y prou d o f it s globa l eco nomic activitie s an d restraine d from th e us e o f militar y means , informa tion gathering , th e correc t analysi s o f information , an d promp t actio n based o n suc h analysi s ar e essential . Th e qualit y o f bot h routin e deci sion-making an d crisi s decision-makin g i s i n nee d o f improvement . J apan's bureaucrati c syste m fo r handlin g internationa l affair s ha s no t changed muc h sinc e th e en d o f Worl d W a r II , whe n J a p a n w a n t e d t o become a Switzerlan d i n th e Pacific . Som e fort y year s later , i n orde r t o become a light-armed , responsibl e economi c globa l p o w e r , J a p a n n o w

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needs expansio n a s wel l a s reorganizatio n o f it s syste m fo r makin g decisions abou t internationa l affairs .

Notes 1. Thi s i s fro m th e mos t commonl y use d Englis h translatio n o f th e Japanese Constitution. However , th e Japanese original allow s fo r variou s interpretations tha t ma y no t b e eas y t o deriv e fro m thi s Englis h translation . Fo r example, accordin g t o on e interpretation , th e firs t sentenc e i n th e secon d paragraph shoul d b e translate d a s "Land , sea , an d ai r forces , a s wel l a s other wa r potential , i n orde r t o accomplis h th e ai m mentione d i n th e preceding paragrap h [i.e. , t o settl e internationa l disputes] , wil l neve r b e maintained." Se e Soichi Sasaki , Nihonkoku Kenpo-ron (Th e Japanese Con stitution) (Tokyo : Yuhikaku , 1949) , 233 ; Hitosh i Ashida , Shin-Kempo Kaishaku (Interpretatio n o f th e Ne w Constitution ) (Tokyo : Daiyamondo sha, 1946) , 36. 2. Fo r a concis e revie w of Japan' s "rearmament, " see Makot o Momoi,"Basi c Trends i n Japanes e Securit y Policies, " i n Rober t A . Scalapino , ed. , The Foreign Policy of Modern Japan (Berkeley : Universit y o f Californi a Press , 1977), 3 4 1 - 6 4 . Fo r a mor e detaile d documentary , se e Yomiur i Shimbu n Sengoshi Han , "Saigunbi" no kiseki (Track s o f "Rearmament" ) (Tokyo : Yomiuri Shimbunsha , 1981) . 3. Boei-cho , Heisei Gannen-ban Boei Hakusho (198 9 White Pape r of Defense ) (Tokyo: Okurash o Insatsukyoku , 1989) , 3 1 6 - 1 7, 325. 4. Japan' s 198 8 defens e expenditur e wa s $15,29 8 millio n (a t 198 5 price s an d exchange rates) , compare d wit h th e Unite d Kingdom' s $22,63 7 million , France's $21,90 3 million , an d Wes t Germany' s $20,87 0 million . Se e International Institut e fo r Strategi c Studie s (IISS) , The Military Balance, 1989-1990 (London : IISS , 1989) , 2 0 8 - 1 1. 5. Accordin g t o th e U.S . Arm s Contro l an d Disarmament s Agenc y (ACDA) , Japan mad e "arm s export s wort h $32 0 millio n i n 1983 , $28 0 millio n i n 1984, $9 0 millio n i n 1985 , an d $2 0 millio n i n 1986. " Sinc e th e ACDA' s definition o f "arms " includes part s o f weapon s an d communication s an d electronic equipment , Japan' s "arm s exports " see m t o constitut e suc h "dual-use equipment. " 6. Articl e 5 of th e Japan—U.S. security treaty stipulates, "Eac h Party recognizes that a n armed attack against either Part y in th e territorie s under the admin istration o f Japa n woul d b e dangerou s t o it s ow n peac e an d safet y an d declares tha t i t woul d ac t t o mee t th e commo n dange r i n accordanc e wit h its constitutiona l provision s an d processes. " Articl e 6 stipulate s th e U.S . right t o us e base s in Japa n a s follows : "Fo r the purpos e o f contributin g t o the securit y of Japa n an d the maintenanc e o f internationa l peac e and stability i n th e Fa r East , th e Unite d State s o f Americ a i s grante d th e us e o f facilities an d area s in Japan b y its land, ai r and naval forces."

Japan s Security Policy in the 1990s 5

5

7. Boei Hakusho (Defens e Whit e Paper ) (Tokyo : Defens e Agency , 1981 , 1989). 8. Th e Comprehensiv e Nationa l Securit y Stud y Group , ed. , Repor t o n Com prehensive National Security, July 2, 1980 , 7. The 1989 Gaiko Seisho (198 9 Diplomatic Blu e Paper ) (Tokyo: Ministry o f Foreig n Affairs) virtuall y gives official endorsemen t o f th e three levels a s suggested in the report. According to th e Blu e Paper , the thre e pillars o f Japan' s securit y policy ar e "(1) activ e diplomacy t o mak e th e internationa l environmen t a s peaceful an d stable as possible, (2 ) smoot h an d effectiv e operatio n o f th e Japan-U.S . securit y system, an d (3 ) preparatio n of high-qualit y defens e capabilit y necessar y for self-defense." Heisei Gan-nen ban Gaiko Seisho (198 9 Diplomati c Blu e Paper), 15 . 9. Thi s sectio n i s a revise d versio n o f th e analysi s I mad e i n "Internationa l Security an d Japan's Contributio n i n th e 1990s, " Japan Review of International Affairs 4 , no. 2 (Fall-Winte r 1990) : 1 9 9 - 2 0 8. 10. Kar l W . Deutsch , The Analysis of International Relations, 3 d ed . (Engle wood Cliffs , N.J. : Prentic e Hall , 1988) , 1 9 3 - 2 0 2 ; Strategic Survey, 1 9 8 5 - 1 9 8 6 (London : Internationa l Institut e o f Strategi c Studies , 1986) , 19-28. 11. Immanue l Kant , Perpetual Peace (1795) , an Englis h translatio n found , fo r example, i n M . G . Forsyth , H. M . A . Keens-Soper , an d P . Savigear , eds. , The Theory of International Relations (London : Alle n an d Unwin , 1970) , 2 0 0 - 2 4 4 ; Michae l W . Doyle , "Liberalis m an d Worl d Politics, " American Political Science Review 80 , no. 4 (Decembe r 1986) : 1 1 5 1 - 6 9. According to Doyle, democracie s have rarely fought eac h other fo r th e last two centuries . Skepticism abou t this view also abounds . Se e John J. Measheimer , "Back to the Future : Instability i n Europe after the Col d War, " International Security 15, no . 1 (Summer 1990): 5 - 5 6. 12. Ther e is voluminous literatur e on th e "hegemoni c stability " theory. See , for example, Rober t Gilpin , War and Change in World Politics (Cambridge : Cambridge Universit y Press , 1981) ; Rober t Keohane , After Hegemony (Princeton: Princeton Universit y Press , 1984) . 13. Articl e 2 o f th e treat y stipulates , "Th e Partie s wil l contribut e towar d th e further developmen t o f peacefu l an d friendl y internationa l relation s b y strengthening thei r fre e institutions, b y bringin g abou t a better understanding o f th e principle s upo n whic h thes e institution s ar e founded , an d b y promoting condition s of stabilit y and well-being. They will seek to eliminat e conflict i n thei r internationa l economi c collaboratio n policie s an d wil l en courage collaboration betwee n them." 14. I n th e cas e o f th e Hous e o f Representatives , th e LD P governmen t ca n dissolve i t t o tr y t o increas e th e numbe r o f LD P members . Bu t unde r th e current electoral distric t system—the multiple-sea t constituenc y system—i t is empiricall y impossibl e fo r th e LD P t o gai n a two-third s majority . Th e political refor m efforts, currentl y contemplated withi n th e LDP , include th e introduction o f a single-constituency distric t system , which woul d theoreti cally mak e i t possibl e fo r th e LD P t o gai n a two-third s majority . Bu t eve n

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then, unles s a drasti c chang e i n th e electora l syste m fo r th e Hous e o f Councillors i s made , i t i s impossibl e t o gai n a two-third s majorit y i n th e Upper House . 15. N o U.N . force s unde r articl e 42 hav e bee n create d since th e five permanen t members o f th e Securit y Counci l faile d t o reac h agreement s t o creat e suc h forces a s stipulated b y article 43 i n 1947 . 16. A commissio n establishe d i n th e LD P heade d b y Ichir o Ozaw a maintain s this interpretation . 17. However , i t i s no t clea r whethe r th e ter m "U.N . force " a s use d i n th e government interpretatio n refer s to th e sam e "U.N . force " describe d unde r article 42 o f th e U.N . charter . 18. Ministr y o f Foreig n Affairs, Diplomatic Bluebook 1991 (Tokyo : The Japa n Times, 1992) , 131. 19. Fo r th e tex t o f th e ne w OD A Charter , se e Ministr y o f Foreig n Affairs , Japan's ODA 1992 (Tokyo : Associatio n fo r Promotio n o f Internationa l Cooperation, 1993) , 1 9 3 - 9 6. 20. I t i s possible , however , tha t th e prim e ministe r ca n conven e a cabine t meeting wit h th e participatio n o f relate d minister s an d ca n require , fo r example, th e Councillor' s Offic e o n Externa l Affairs, in the Prime Minister's Office, t o coordinat e ministers . Beside s th e relativ e weaknes s o f th e Prim e Minister's Offic e a s discusse d i n th e tex t below , a d ho c coordinatio n ma y result in a lack of coherenc e withou t producin g flexibility . 21. Preambl e of th e Japanese Constitution .

2. Technolog y an d th e Settin g fo r Japan's Agend a Taizo Yakushiji

Debates o n Japan' s internationa l agend a w o u l d no t hav e bee n seriousl y entertained durin g th e heigh t o f th e Col d W a r . Japan's rol e w a s trivial , and th e internationa l syste m w a s largel y managed b y t w o superpowers. If a fres h nee d fo r suc h a debat e emerge s today , i t ha s t w o causes . First, th e superpower s ar e les s "super" ; tha t is , the y hav e relativel y declined. Second , Japan' s p o w e r ha s risen . H o w ha s i t risen ? O f course , Japan ha s becom e economicall y an d technologicall y powerful , bu t th e political an d militar y implication s o f thi s remai n unclear . Technology increase s economi c strengt h an d thu s i s conventionall y regarded a s playin g a rol e i n th e ris e o f nations . J a p a n i s a notabl e example. H o w e v e r , les s familia r i s th e argumen t tha t a positio n o f technological leadershi p carrie s th e seed s o f nationa l decline . Th e rea sons ar e threefold . First, diffusio n o f technologie s cause s th e ris e o f formidabl e contend ers. Competitor s eventuall y emerg e when the y hav e succeede d i n techno logical "emulation, " meanin g technologica l "copying " plu s a significan t "improvement."

1

Second, technologica l supremac y promotes a blin d belie f i n economi c rationality an d efficiency . Fo r example , economicall y efficien t mas s pro duction wit h standardize d technolog y i s believe d t o ad d wealth , s o tha t new technologica l endeavor s tha t w o u l d shu t d o w n th e curren t profit 57

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able productio n line s ar e rejected . A n exampl e i s Genera l Electric' s rejection o f transistor s i n th e 1 9 5 0 s . Third, whe n a natio n assume s a technologica l lead , i t easil y develop s strong "techno-parochialism, " leadin g t o technologica l arrogance . Thi s arrogance blind s peopl e t o th e secre t o f preeminence , tha t is , "emulou s p o w e r . " Withou t th e copyin g an d improvemen t o f advance d technolog ies bot h abroa d and a t home , technologica l lead s quickl y e r o d e .

2

The internationa l syste m i s constitute d o f al l sovereig n states . There fore, th e declin e o r ris e o f majo r state s ca n distur b th e system . Technol ogy, throug h it s impac t o n nationa l p o w e r , play s a critica l rol e i n th e structure an d stabilit y o f th e internationa l system . This i s w h y Japan' s technologica l agend a i s s o significant . I f th e superpowers ha d no t declined , Japan' s technologica l agend a coul d re main largel y o f domesti c o r commercia l interest ; tha t is , J a p a n w o u l d seek t o enhanc e it s o w n technologica l capabilitie s o r hinde r thei r erosion. H o w e v e r , a s th e superpower s ar e decayin g i n bot h economi c an d technological leadership , an d a s J a p an ha s rise n t o technologica l preemi nence, th e agend a i s n o longe r jus t domestic , bu t trul y globa l i n it s impact. America's "Techno-Bashing " o f Japa n For th e tim e being , Japan' s technologica l agend a i s essentiall y bilateral in relatio n t o th e Unite d States . Th e reason s fo r thi s ar e th e subjec t o f this section . Since th e m i d - 1 9 8 0 s , th e Unite d State s ha s increase d it s "techno bashing" o f J a p a n . Thi s include s th e argumen t tha t U.S . firm s d o no t enjoy "symmetrica l access " to Japanes e firms' researc h and developmen t ( R & D ) o r th e government' s researc h consortia , th e IB M sui t agains t Hitachi fo r allege d industria l spying , th e violen t U.S . reactio n t o Toshib a H.I.'s sal e o f propelle r technolog y t o th e U.S.S.R. , effort s b y th e Unite d States t o restric t technolog y transfe r i n th e developmen t o f th e F S X aircraft, blockag e o f th e sal e o f Fairchil d Industrie s t o a Japanes e firm, and U.S . effort s t o promot e high-definitio n televisio n (HDTV) . 1. "Techno-Revisionism" Recently, a n ominou s n e w sympto m ha s emerged . I t is "techno-revision ism," whic h i s mor e seriou s tha n th e genera l revisionis t thesi s abou t

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9

J a p a n tha t ha s rise n i n th e West . Unlik e th e "general " revisionists , th e techno-revisionists se e J a p a n a s a genuin e Wester n capitalis t economy , but als o a s a n adversar y tha t exercise s fronta l attack s against th e Unite d States. Th e battl e i s on e o f technologica l warfare , i n whic h J a p a n mobi lizes th e ful l capacit y o f it s technologica l strengt h t o invad e an d the n occupy U.S . markets . A typica l expressio n o f thi s vie w i s "Technolog y and Competitiveness : Th e N e w Polic y Frontier, " b y B . R . Inma n an d D. F . Burton , J r .

3

Criticizing pas t America n foreig n polic y approaches , whic h w e r e overly base d o n militar y consideration s an d neglecte d th e overridin g importance o f commercia l technologies , th e author s insis t tha t nationa l security ca n n o longe r b e v i e w e d i n exclusivel y militar y terms ; economi c security an d industria l competitivenes s ar e also vital . They cal l fo r a shif t of America n foreig n policy , an d conten d that , sinc e importan t politica l allies ar e often hard-nose d economi c competitors , th e U.S . establishmen t can n o longe r affor d a cavalier attitude t o w a r d internationa l competitio n in industria l technolog y wit h allies . Inman an d Burto n d o no t explicitl y sa y tha t U.S . foreig n polic y should rethin k it s diplomati c tie s wit h J a p a n , bu t the y impl y it . I n th e five case s the y examin e (consume r electronics , semiconductors , super conductors, th e F S X fighter, an d high-definitio n television) , the y delin eate h o w America n invention s an d subsequen t marke t dominanc e w e r e exploited b y Japanes e superio r productiv e skills . The n the y w a r n U.S . foreign policymaker s tha t today' s commercia l technologie s ar e al l re lated i n a "foo d chain, " i n whic h on e technolog y eat s a w a y th e nex t technology, thi s secon d technolog y w a s h e s out th e thir d technology , an d so on . I n th e end , on e decisiv e technolog y control s al l relate d technolog ies. Th e implicatio n o f th e "techno-foo d chain " thesi s i s obvious : a division o f labo r i n technolog y base d o n internationa l cooperatio n w o u l d jeopardiz e the technologica l leadershi p o f th e Unite d States .

2. "Techno-Containment" Different i n th e styl e o f argumen t fro m tha t o f "techno-revisionism " bu t more o r les s i n th e sam e ton e i s th e argumen t b y Charle s H . Ferguson' s article i n th e Harvard Business Review.

4

Hi

s thesi s migh t b e regarde d a s

typical o f th e "techno-containment " theory . Ferguson assume s tha t nearl y al l industria l product s ar e being digital ized an d tha t th e America n digita l informatio n system s industr y i s

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threatened b y th e "predator y behavior" of Japanes e keiretsu companies . He argue s that Japanese keiretsu, o r affiliat e corporat e relations, compa nies bloc k foreig n application s fo r th e Japanes e patent s an d den y foreig n competitors' acces s t o technologie s an d market s ove r whic h Japanes e industries hav e control . Then , Ferguso n suggests that buildin g a n appro priate corporat e organizationa l comple x wil l allo w U.S . an d Europea n companies t o secur e their suppl y base s against strategic pressures exerted by th e integrate d Japanes e competitor s t o obtai n sufficien t financial returns fro m th e commercializatio n o f thei r o w n innovativ e designs . Politically importan t i s th e fac t tha t Ferguson , too, reject s the princi ple o f a divisio n o f labo r betwee n th e Unite d State s an d Japa n i n whic h Japanese producer s w o u l d specializ e i n commodit y manufacturing , while U.S . companie s w o u l d continu e t o lea d b y virtue of thei r comman d of th e highe r value-adde d activitie s o f design , software , system s integra tion, an d marketing . Hi s rational e i s ver y simila r t o tha t o f Inma n an d Burton's "technologica l foo d chain. " Ferguso n insists tha t i f thi s divisio n of labo r i s adopted , America n companie s wil l i n effec t becom e th e loca l design an d marketin g subsidiarie s fo r Japanes e competitors , w h o wil l exploit mos t revenu e returns. Under thi s logic , h e say s tha t n o w i s th e tim e t o buil d o n th e embry onic allianc e initiate d b y IB M an d Europea n companies , includin g com panies fro m Korea , T a i w a n , an d Singapore—tha t is , a multinationa l version o f keiretsu. 3. "Techno-Containment"

in

the Late Nineteenth Century

In 1 8 9 6 , t w o year s befor e th e Spanish-America n W a r , Ernes t E . Wil liams, a Britis h writer , w r o t e a boo k entitle d Made in Germany. A t tha t time, th e Unite d States , though it s industria l econom y w a s growin g very rapidly, w a s stil l a latecomer. Henr y Ford' s famous Model- T ha d no t ye t come ou t o n th e market , an d mos t America n aut o manufacturer s w e r e busy imitatin g Germa n an d Frenc h manufacturin g technologies . Befor e Thomas Edison' s ne w ligh t bulb s hi t th e marke t an d G E w a s founde d i n 1 8 9 2 , ther e w e r e alread y well-establishe d electrica l illuminatio n indus tries i n Europe . Th e industria l rivalr y then w a s no t betwee n th e Unite d States an d Japa n bu t betwee n Englan d an d Germany . Williams w a r n e d , Seeing how man y inventions have England for a birthplace, it is obvious tha t the present proportions o f Germa n industry can only have been attained by a careful

Technology and

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1

imitation o f thos e inventions . . . . But it i s significan t tha t th e Germa n inventiv e genius, whic h i n th e pas t was somewhat backward , i s no w developin g a t a rat e which bid s fai r soo n t o plac e th e Germa n beyon d th e nee d o f Englis h models . . . . Bu t i t mus t no t b e forgotte n tha t th e Germa n imitatio n i s no t a s a rul e inferior i n al l respects . In th e matte r of artisti c finish i t i s often—on e ma y say, as a rule—decidedly better. Nearly a centur y later , Ferguso n talk s abou t J a p a n i n muc h th e sam e tone. H e writes , "Japanes e companie s begi n wit h foreig n technology , progress t o interna l developmen t o f proces s technology , an d the n mov e to interna l produc t developmen t an d basi c R & D . . . . Japanes e produc ers ar e movin g fro m low-price d consume r good s an d 'clones ' t o high performance, high-value-adde d busines s an d industria l products. " Williams an d Ferguso n ar e strikingly similar . Logically , i f a compan y is behin d th e stat e o f th e art , it canno t hel p beginnin g wit h imitatio n o r clones-making. Example s ar e abundant . Thoma s Ediso n bega n hi s ligh t bulb researc h b y imitatin g Europea n precedents . Henr y For d bega n with revers e engineerin g o f th e Frenc h Renaul t model . America n fine chemical companie s bega n b y emulatin g Germa n dy e technologies . Therefore, i t i s n o myster y tha t bot h German y i n th e nineteent h centur y and today' s J a p an bega n wit h imitation . Since Ferguso n see s th e strengt h o f th e Japanes e informatio n system s industry i n th e vertica l alliance s o f a fe w keiretsu groups , h e propose s that America n an d Europea n companie s emulat e thi s peculia r typ e o f industrial organization . Nearl y a centur y ago , William s gav e a simila r policy recip e t o Britis h industrialists . William s said , "T o th e exten t t o which a foreig n countr y shut s ou t ou r good s fro m he r markets , t o tha t extent shoul d w e penaliz e he r good s i n ou r market . Then , w e mus t federate th e Empire , i n th e mos t practica l w a y — t h e w a y o f commerce . At presen t we ar e losing ou r gri p on ou r o w n colonie s an d dependencies , which ar e steadil y fallin g int o th e hand s o f th e Germans. " Not e tha t Williams als o propose d a n industria l federatio n t o bloc k a targe t coun try. Again , ther e i s n o conspicuou s differenc e betwee n Ferguso n an d Williams. Why ar e their argument s s o similar , eve n thoug h Ferguso n develope d his o w n logi c b y focusin g onl y o n th e informatio n system s industr y today, possibl y withou t knowin g o f Ernes t E. Williams ? A n explanatio n may li e i n essentia l similaritie s betwee n today' s informatio n system s industry an d th e nineteent h centur y dyestuf f industry . Germany, afte r imitatin g Britis h an d Frenc h precedent s i n artificia l

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dyestuff technolog y i n th e lat e nineteent h century , controlle d artificial dye-technology-based derivative s suc h a s photochemicals, pharmaceuti cals, processe d foods , syntheti c fuels , an d explosives . Wit h thos e deriva tives, German y achieve d quantu m leap s i n th e optical , agrichemical , medical, aircraft , an d rocke t industries . Thi s i s a classica l exampl e o f th e "techno-food chain " o f Inma n an d Burton . Today, th e Unite d State s ha s replace d England , an d J a p a n ha s re placed Germany . Eve n wit h respec t t o keiretsu, J a p a n resemble s Ger many. A s Joh n J . Beer note d i n hi s The Emergence of Industry, "Germa

the German Dye

n dy e producer s fel t the y coul d n o longe r affor d th e

luxury o f competin g wit h eac h other . The y w o u l d hav e t o eliminat e al l w a s t e an d avoi d al l duplicatio n i n thei r effort s t o undersel l thei r newl y arisen rivals . Th e merge r agreemen t betwee n th e Hoechst-Cassela-Kall e combine an d th e Agfa-Bayer-BAS F syndicat e wen t int o force. "

T h e S t r u c t u r a l B a s e s fo r A m e r i c a ' s E r o s i o n i n Civilian T e c h n o l o g y "Techno-revisionism" an d "techno-containment " illustrat e th e predomi nant vie w o f th e Unite d State s t o w a r d the Japanes e technologica l threat . The Unite d State s has bee n increasingl y irritate d by th e aggressivenes s o f Japanese firms' technologica l behavio r i n bot h th e w o r l d marke t an d the U.S . domesti c market . Apar t fro m Japan' s ris e a s a technologica l superstate, othe r reason s ma y als o accoun t fo r America n irritations , t w o of whic h ar e structural in nature : 1. I n 1 9 5 8 an d subsequen t years , th e Unite d State s overreacte d t o th e ''Sputnik Shock " an d pu t th e nation' s bes t an d brightes t int o th e military-related aerospace/compute r fields, thereb y dryin g u p huma n resources fo r civilia n technologies . Thi s late r contribute d t o th e so called industria l hollowin g o f th e 1 9 7 0 s . 2. A s technologica l advance s hav e take n place , th e demarcatio n be tween militar y an d civilia n technologie s ha s increasingl y becom e blurred s o tha t th e U.S . concentratio n o n militar y technologie s wil l have a cripplin g effec t unles s i t guarantee s spillove r o f civilia n tech nology int o militar y technology . Understanding th e first o f thes e cause s require s examinatio n o f th e generational change s i n America n scienc e an d technolog y policy . Th e

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second caus e i s bes t understoo d throug h a revie w o f th e diversit y o f definitions o f hig h technologies . 1. The "Generation Theory" There ar e three generation s o f post—Worl d W a r I I American technologi cal policymakers . Th e first generatio n maximize d th e us e o f civilia n technology fo r militar y purposes . I t w as in fac t a testamen t t o th e succes s of "spin-on " effects . Th e secon d generatio n s k e w e d valuabl e nationa l resources, huma n a s wel l a s physical , int o military-oriente d programs , thereby dryin g u p resource s fo r civilia n sectors . Lackin g commercia l technological expertise , th e thir d generatio n employe d stron g lega l mea sures agains t th e competin g countries , particularl y J a p a n, an d coul d no t reorient resource s t o bootstra p once-declinin g civilia n sector s a t home . The discontinuit y o f policie s amon g thes e thre e distinctl y differen t gen erations thu s confuse d U.S . technologica l policy , militar y a s wel l a s civilian. During Worl d W a r II , the traditio n o f th e Nationa l Researc h Counci l (NRC), whic h w a s create d b y W o o d r o w Wilso n i n Worl d W a r I , w a s carried ove r t o establis h th e Nationa l Defens e Researc h Counci l (NRDC) i n 1 9 4 0 an d th e Offic e o f Scientifi c Researc h an d Developmen t (OSRD) i n 1 9 4 1 . Th e Nazis ' Blitzkrieg , an d th e ful l exploitatio n o f scientific an d technologica l fruit s fo r w a r purposes , force d th e Unite d States t o tak e stron g measures . Unde r Vanneva r Bush' s presidency , th e OSRD commissione d majo r militar y researc h efforts, o f whic h th e mos t famous w e r e nuclea r energ y research , an embry o o f th e army' s Manhat tan Project , and rada r detectio n researc h conducted a t M.I.T . It i s wel l k n o w n tha t th e OSRD' s successfu l mission s w e r e dependen t on a n interpla y amon g government , industry , an d university . Fo r th e purposes o f th e w a r , the globa l preeminenc e o f America n manufacturin g technology helpe d th e most . Fo r example , Britain' s magnetron , a micro w a v e generato r fo r radar , w a s simplifie d an d manufacture d b y on e o f American's vacuu m tub e manufacturers , Raytheon . After th e w a r , Bus h an d othe r leadin g scientist s an d technologist s advocated th e creatio n o f a government-supporte d organizatio n fo r th e enhancement o f scienc e an d technolog y fo r peacefu l purpose , tha t is , t o maintain technologica l preeminenc e i n privat e sectors. H o w e v e r , Capi 5

tol Hil l looke d unfavorabl y upo n thei r idea s o n th e ground s tha t scien -

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tists an d technologist s w o u l d acquir e excessiv e politica l p o w e r . Afte r long congressiona l debate , a l a w w a s passe d i n 1 9 5 0 t o creat e th e National Scienc e Foundatio n (NSF) , whic h w a s limite d t o basi c scienc e and robbe d o f mor e importan t applie d missions . Wit h that , th e first generation, lik e Vanneva r Bush , Rober t Oppenheimer , Kar l Compton , and man y other s fade d a w a y fro m influentia l position s i n America n policy-making. In 1 9 4 9 , th e Sovie t Unio n explode d a n experimenta l atomi c bomb , ten year s i n advanc e o f America n expectations . M o r e shockingly , i n 1 9 5 7 th e Russia n Sputni k w a s successfull y launche d int o orbi t o n Octo ber 4 , ahea d of America' s Vanguard project ( a navy project). A mont h later , mindfu l o f crisi s fears , Dwigh t Eisenhowe r appointe d J a m e s R . Killian , th e first p o s t w a r M.I.T . president , t o hea d th e newl y created Presidentia l Scienc e Advisor y Committe e (PSAC) , w h o s e pri mary assignmen t w a s t o direc t America' s militar y an d relate d projects. In respons e t o th e Sputni k shock , Killia n advise d Eisenhowe r t o creat e the Nationa l Aeronautic s an d Spac e Administratio n (NASA) , th e A d vanced Researc h Projects Agency (ARPA ) of th e Departmen t o f Defense , the Nationa l Defens e Educationa l Ac t (NDEA ) o f 1 9 5 8 , an d th e Federal Council fo r Scienc e an d Technology , an d h e reshuffle d militar y missil e projects. Leading thes e n e w polic y institutions , th e secon d generatio n o f Amer ica's scienc e an d technolog y policymaker s climbe d th e ladde r t o th e government's high-rankin g posts . The y differe d fro m th e first generatio n in tha t the y w e r e principall y administrator s o r educator s rathe r tha n great scientist s o r technologists . Thei r mai n concer n w a s t o conten d against Russia n militar y technolog y i n th e mids t o f th e Col d War . A s reflected i n th e enactmen t o f th e NDEA , Americ a vacuumed the bes t an d brightest int o defens e research , thereby dryin g u p huma n resource s fo r the civilia n sectors . Serious result s becam e eviden t i n th e lat e 1 9 7 0 s , whe n America' s industrial productivit y decline d fo r th e first time . Befor e this , i n 1 9 7 1 , President Nixo n announce d th e formulatio n o f th e N e w Economi c Pol icy, i n whic h h e declare d the nonconvertibilit y betwee n U.S . dollar s an d gold, whic h eventuall y le d t o th e floating exchang e rat e regime. The t w o oi l shocks , i n 1 9 7 3 an d 1 9 7 9 , deal t seriou s blow s t o th e American econom y immediatel y afte r th e "Nixo n Shock, " causin g th e traditionally profitabl e America n aut o industr y t o begi n t o decline . Th e

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5

small, fuel-efficien t Japanes e car s quickl y slippe d int o th e America n market an d w o n th e stron g enthusias m o f America n consumers . Th e American aut o industr y ha d bee n i n a golde n ag e fo r a half-century ; since th e tur n o f century , th e brightes t graduate s of engineerin g school s had entere d int o thi s industry . H o w e v e r , a s discusse d above , th e federa l and defens e program s mad e b y th e secon d generatio n o f policymaker s resulted i n a shif t o f preciou s huma n resource s exclusivel y int o th e aerospace industr y an d th e military-contrac t division s o f corporations . Given th e threa t b y foreig n competition , trad e problems gav e birt h t o the thir d generatio n o f policymakers . I n 1 9 7 4 , U.S . trad e l a w experi enced th e first majo r revision sinc e 1 9 3 4 . A stronge r clause o n retaliator y actions agains t unfai r foreig n trad e practice s w a s added . Loca l conten t actions an d price-dumpin g suit s calle d fo r toug h America n negotiators . They constitut e th e cor e o f th e thir d generatio n policymakers , w h o ar e dealing wit h foreig n competitor s t o defen d U.S . nationa l securit y an d industrial competitiveness . The background s o f th e policymaker s o f thi s generatio n li e i n lega l o r policy administration , no t scienc e o r technology . Thus , thei r focu s i s no t on practicin g usefu l policie s t o sto p th e deca y o f America n technolog y a t home, bu t rathe r o n accusin g foreig n contender s o f unfai r busines s practices. Th e T o s h i b a - C O C O M incident , th e Supe r Article 3 0 1 negotia tion, th e F S X (Japan' s nex t suppor t fighter project ) controversy , an d th e Structural Impedimen t Initiative s (SII ) hav e al l bee n battlefield s fo r th e third generatio n o f policymaker s agains t Japan .

2. From the "Spin-Off" to

the "Spin-On"

The proces s o f U.S . industria l hollowin g w a s aggravate d b y th e 1 9 7 3 oi l shock, whic h cause d th e w o r l d pric e o f oi l t o multipl y fou r times . However, i f th e Sovie t Unio n ha d no t bee n anothe r hegemoni c p o w e r with overridin g militar y supremacy , a s demonstrate d b y Sputni k an d related missil e technologies , th e secon d generatio n w o u l d no t hav e fun neled s o muc h o f th e nation' s physica l an d huma n resource s into militar y technology. I n tha t sense , th e hollownes s o f America n industria l technol ogy di d no t resul t fro m th e oi l crisi s pe r se , bu t fro m th e internationa l politics o f th e Col d War . I n othe r w o r d s , America' s industria l hol lowness w a s a resul t o f polic y choices , no t o f natura l decay . Industrial hollowin g revive d survivor s of th e secon d generation , spur -

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ring the m t o develo p n e w ideologies . Durin g th e 1 9 7 0 s , whe n man y criticized federa l contract s fo r defense-relate d technologies , sayin g tha t they w o u l d invit e "gol d plating " o r "whit e elephanting " a t corporations, namely th e w a s t e o f mone y fo r unnecessar y R & D , th e secon d generatio n hit o n a usefu l polic y ideology , th e "spin-off " theory . The y argue d tha t huge federa l defens e program s w o u ld spil l ove r int o th e civilia n sector s and elevat e th e leve l o f America' s industrial technology , thereb y contrib uting t o th e societ y a t large . H o w e v e r , industria l hollowin g cam e muc h faste r tha n th e spillove r effects, leadin g th e secon d generatio n t o formulat e anothe r ne w polic y concept, calle d "dual-use " technolog y (DUT ) o r "spin-on " effects . DU T and "spin-on " bot h refe r t o th e spillin g o f civilia n hig h technolog y int o military applications . Suc h civilia n technolog y i s calle d a DU T an d it s vector o f caus e an d effec t i s th e revers e o f "spin-off " technology . With thes e t w o concepts , th e secon d generatio n o f policymaker s trie d to captur e foreig n technologie s i n civilia n use , i n particula r Japanes e technologies, fo r the y w o u l d hav e seriou s impact s o n U.S . nationa l security. A logica l corollar y o f thes e argument s i s tha t federa l suppor t should b e provide d fo r civilia n technolog y tha t ha s dual-us e functions , as thes e ar e allegedl y vita l t o America n security . Departmen t o f Defens e programs, suc h a s high-definitio n television , Sematec h ( a semiconducto r consortium), U S Memories , an d th e very-high-spee d integrate d circui t project (VHSIC) , w e re justifie d unde r thi s rationale . H o w e v e r , th e abov e rational e ha s a fata l flaw , sinc e on e ca n neve r b e certain whic h technologie s wil l b e DUTs . Suppose , fo r example , tha t semiconductor technolog y i s classifie d a s a DUT , bu t it s developmen t largely hinge s o n a wid e variet y o f consume r applications , makin g i t impossible t o federall y fun d al l th e relate d area s o f application . Th e resulting infeasibilit y o f imposin g rigorou s federa l spendin g accountabil ity ca n lea d t o willfu l oversights , politica l maneuvering , an d nepotism . This typ e o f mismanagemen t ca n misdirec t preciou s resources , contrib ute t o th e depletio n o f civilia n technologies , an d furthe r exacerbat e industrial decline . T h e Ris e o f J a p a n b y Emulou s P o w e r When on e natio n i s containe d b y another , a natura l reactio n i s t o build a simila r counterblockad e wit h th e hel p o f allies , o r t o nullif y

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containment b y suggestin g friendl y interdependen t cooperation . C . Fer guson, feelin g tha t th e U.S . informatio n system s industr y i s blocke d b y Japanese keiretsu, propose

s th e firs t option . J a p a n ha s continuousl y

chosen th e secon d option , namely , technologica l cooperatio n wit h th e United States . I n 1 9 8 0 , Prim e Ministe r Ohir a an d Presiden t Carte r signed th e J a p a n - U . S . Treat y o f Scientifi c an d Technologica l Coopera tion, whic h w a s renewed in 1 9 8 8 a t th e Toront o Summit . However, ther e remain s th e dange r tha t interdependen t cooperatio n in th e are a o f technolog y ca n ac t a s a collectiv e "witc h hunt " t o encircl e a targe t country . Ironically , becaus e J a p a n an d th e Unite d State s ar e tightly boun d i n a n interdependen t relationship , th e Unite d State s canno t help movin g t o encircl e Japan' s hig h technology . Befor e gettin g a t thi s point, le t u s se e w h a t hig h technolog y reall y means .

1. What Is High Technology? The phras e "hig h technology " ha s receive d popula r attention , bu t de bates o n hig h technolog y ar e ofte n shallo w du e t o th e lac k o f a clea r definition o f w h a t hig h technolog y reall y means . Fo r example , econo mists ar e prone t o se e hig h technolog y i n term s o f thei r favorit e variable, namely, money . The y defin e hig h technolog y a s somethin g tha t require s a larg e amoun t o f R & D expenditure . Alon g thi s line , internationa l cooperation achieve s legitimac y becaus e financia l burde n sharin g help s solve th e cost-overru n problems o f mos t high-technolog y projects . Politicians, o n th e othe r hand , ten d t o se e hig h technolog y a s relate d to militar y capabilitie s an d nationa l p o w e r . Thi s vie w als o ha s validit y in th e civilia n spher e sinc e a monopol y ove r a give n dual-us e technolog y critical t o militar y purpose s give s a countr y a stron g han d i n interna tional relations . Thi s fea r le d th e Unite d State s t o urg e J a p an t o partici pate i n th e SD I projec t an d t o tr y t o preven t th e transfe r o f aerospac e technologies a s part of th e F S X project. The abov e t w o characterization s ar e macroscopi c an d d o no t touc h on th e interna l o r microscopi c propertie s o f hig h technology . On e micr o definition state s tha t hig h technolog y introduce s a ne w produc t throug h hybridization o f t w o o r mor e radicall y differen t technologies . Suc h hy brid minglin g o f differen t technologie s ofte n involve s a traditiona l tech nology an d a frontie r one . A goo d exampl e i s th e digita l w a t c h . Another micr o definitio n see s hig h technolog y a s a radicall y ne w

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technology tha t wil l chang e th e p o w e r balanc e o f a n industry . Whe n a new technolog y i s firs t introduced , i t i s difficul t t o asses s it s marke t potential, s o tha t i t i s usuall y rejecte d b y th e establishe d sector s o f an industry . A g o o d exampl e i s th e introductio n o f transistors . Whe n transistors w e r e invented , opinion s abou t thei r marke t potential differe d between th e vacuu m tub e manufacturers , such a s G E an d Westinghouse , and th e electroni c instrumen t companies . Th e forme r grou p rejecte d transistors, an d th e latte r grou p accepte d them , whic h resulte d i n a shif t of p o w e r i n th e electronic s industry . Namely , th e principa l maker s o f transistors turne d ou t t o b e lesser-know n companie s lik e T e x a s Instru ments an d Motorola . Thi s peculia r characteristi c o f hig h technolog y helps a mino r playe r i n a n industr y overthro w th e majo r players : thi s can occu r literall y overnight , an d thu s creat e a ne w p o w e r regim e i n an industry . The thir d micr o featur e o f hig h technolog y i s tha t th e boundar y between scienc e an d technolog y increasingl y become s blurred , as ca n b e seen i n th e case s o f biotechnolog y an d superconductivity . Thi s propert y is th e ground s fo r th e abovementione d economi c definitio n o f hig h technology, sinc e larg e R &D investment s ar e necessary to explor e scien tific foundations . Given thes e characteristic s of hig h technology , on e ma y d r a w conclu sions abou t thei r politica l implications . I f w e admi t th e economists ' vie w that hig h technolog y require s hug e R & D investment , w e ar e compelle d to hol d th e vie w tha t hig h technolog y wil l facilitat e interdependen t relations amon g nations . Thi s argumen t i s th e prevalen t rational e adopted b y th e G- 7 Summi t countries , whic h usuall y suppor t interna tional scientifi c an d technologica l join t project s a s a symbo l o f produc tive internationa l cooperation . H o w e v e r , hig h technolog y als o involve s "hybridity, " an d th e success ful hybri d minglin g o f differen t technologie s generall y occur s o n a n abrupt, breakthroug h basis. This make s internationa l agreemen t on bud get appropriation s difficul t t o justif y fo r som e unrealisti c an d uncertai n projects. Fo r thes e reasons , a countr y shoul d develo p technolog y inde pendently. This independen t an d self-finance d effor t naturall y w o r k s t o destro y existing internationa l relations . Suppos e tha t a countr y withi n a n inter national cooperatio n schem e attain s a technologica l breakthrough . Thi s country ma y overthro w all othe r countries , leadin g t o th e breaku p of a n international cooperativ e scheme .

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This i s a technologica l versio n o f th e famou s parado x o f w h a t th e advocates o f th e comple x interdependenc e thesi s cal l th e "vulnerabilit y of interdependence. " Thi s p a r a d o x doe s no t becom e a proble m unti l a leading countr y attain s technologica l preeminenc e an d othe r countrie s enjoy thei r role s i n th e internationa l divisio n o f labor . H o w e v e r, w h en a high-technology breakthroug h topple s suc h a leadin g country , interde pendence i n tur n serve s t o stimulat e collectiv e "witc h hunts. " Thi s ofte n takes th e shap e o f collectiv e encirclemen t o f a targe t countr y a s a viola tor o f internationa l harmony . I n thi s process , a countr y makin g a break through i s "contained. "

2. Three Prerequisites for

Successful Emulation

During th e heigh t o f th e Col d W a r , th e Unite d State s generall y enjoye d technological preeminence , bot h civilia n an d military . J a p a n w a s a semi peripheral countr y w h o s e primar y assignment w a s to suppl y vacuum s t o the U.S . market . In thi s technologica l divisio n o f labor , the Unite d State s and J a p an hav e bee n tightl y boun d t o eac h othe r fo r thei r mutual benefit . The Unite d State s lost preeminenc e i n civilia n technolog y fo r it s o w n reason, whic h stemme d fro m th e politica l natur e o f th e Col d W a r , an d J a p a n ros e b y attainin g th e hybridizatio n o f hig h technology . Becaus e these t w o thing s happene d simultaneously , th e precedin g U . S . - J a p a n bilateral interdependenc e coul d becom e a mean s t o contai n J a p a n . Un less th e Unite d State s ha s acces s t o Japanes e civilia n technologies , i t cannot maintai n militar y superiority , even i n th e p o s t - C o l d W a r era. H o w di d Japa n becom e a technologica l superstate ? I t w as no miracle . Thanks t o it s defea t i n th e Pacifi c W a r , Japan' s militar y researc h w as banned, s o tha t th e nation' s bes t an d brightes t w e r e mobilize d int o th e manufacturing o f civilia n products . This w a s the opposit e o f th e huma n resources polic y shif t o f America' s Nationa l Defens e Educationa l Ac t of 1 9 5 8 . Second, J a p a n coul d emulat e America n technologies , includin g qual ity control , b y manufacturin g captiv e product s fo r th e U.S . market . These include d black-and-whit e an d colo r televisions , tap e an d vide o cassette recorder s for America n broadcastin g stations, an d fuel-efficien t small car s fo r America n consumers . Third , J a p a n modifie d w h a t i t learned fro m America n products . Th e just-in-tim e (n o part s inventory ) system i s a g o o d example . Thi s i s a cas e o f bridgin g Japan's traditiona l approach o f organizin g th e part s supplier s i n a vertica l w a y t o th e

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application o f America n car-assembl y technology . Thi s represent s "hy bridity" betwee n a newl y transferre d technolog y o f ca r assembl y an d Japan's traditiona l managemen t styl e o f purchasin g aut o assembl y parts . In short , Japan's technologica l succes s lie s i n emulation . Several precondition s ar e require d fo r successfu l emulatio n t o en hance nationa l p o w e r . Th e first i s tha t a natio n shoul d b e integrate d politically. I f politica l integrit y ha s no t bee n achieved , nationa l consen sus fo r th e diffusio n o f advance d technolog y i s difficult . Moreover , economic suppor t tha t encourage s th e diffusio n o f technolog y wil l no t be forthcoming . The secon d preconditio n i s tha t th e socioeconomi c syste m shoul d b e almost th e sam e a s tha t o f th e countrie s fro m whic h th e technolog y i s emulated. Th e element s o f a socioeconomi c syste m t o b e copie d includ e market style , corporat e organization , education , an d industria l struc ture. Withou t suc h a n infrastructur e in common , transferre d technolog y will no t penetrat e s o quickl y int o a recipien t country . The thir d preconditio n i s tha t a recipien t countr y shoul d maintai n a unique cultur e o r traditio n tha t wil l b e conduciv e t o late r improvemen t of imitate d technologies . Sinc e thi s thir d qualit y ma y contradic t th e second qualification , i t mus t b e examine d further . N o countr y ca n increas e it s nationa l p o w e r onl y b y imitatin g foreig n technology. I f i t onl y produce s good s tha t ar e exactl y th e sam e a s thos e of othe r countries , superio r foreig n product s wil l easil y penetrat e int o the domesti c marke t unles s excessiv e protectionis m o r a stron g import substitutional polic y i s pursued . H o w e v e r , i f a countr y ca n graf t some thing differen t o r somethin g n e w ont o th e copie d technologies , i t stand s a g o o d chanc e o f surpassin g th e dono r countries . Thi s i s th e hear t o f international technologica l emulation . Japan's succes s i n hig h technolog y w a s based on thes e thre e precondi tions. First , sinc e 1 9 5 5 , w h e n th e Libera l Democrati c part y an d th e J a p a n Socialis t part y w e r e se t forth , J a p a n ha s enjoye d political stability , which ha s lef t industrialist s fre e t o concentrat e o n economi c recover y and technologica l enhancement . Second , afte r th e occupatio n army , which w a s predominantl y American , lande d i n J a p a n , Japanes e socio economic institution s becam e Americanized . Thu s ther e w a s n o socia l barrier t o th e assimilatio n o f America n industria l products . Thi s helpe d accelerate th e clone-makin g o f America n product s i n p o s t - W o r l d W a r II J a p a n . Third , a s show n i n th e cas e o f th e just-in-tim e system , J a p a n

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1

maintained th e Japanes e w a y o f doin g things . Thi s i s i n par t the basi s o f the revisionists ' thesis . Some produc t area s i n whic h J a p a n currentl y enjoy s w o r l d preemi nence ar e thos e i n whic h Japan' s uniqu e cultur e o r socia l institution s determine produc t quality . Therefore , i t wil l b e difficul t fo r othe r coun tries t o compet e wit h J a p a n i n thos e produc t areas , fo r the y d o no t shar e the sam e cultura l o r societa l conditions . O f course , i f the y develo p a n e w type o f produc t t o mee t thei r o w n cultura l o r socia l requirement s i n th e future, the y wil l hav e advantage s over J a p a n . Take th e example s o f lase r printers , fa x machines , o r liqui d crysta l displays. Wit h thes e products , Japanese consumer s hav e a strong "voice " on th e issu e o f produc t quality , an d the y strongl y deman d incessan t improvement i n quality . Th e Japanes e us e a mi x o f Chines e character s and phoneti c letters , an d reproductio n o f thes e require s higher-spee d printing an d mor e dot-matri x densit y tha n i s require d for simpl e alpha betical characters . Anothe r exampl e i s a semiconducto r chip . Japan' s long popula r histor y o f usin g abacuse s pave d th e w a y fo r th e adoptio n of th e lightweigh t electroni c abacus , namely , th e portabl e calculator , which late r bootstrappe d a n e w C-MO S semiconducto r market . Wit h this energy-savin g C-MOS chip , J a p a n control s almos t th e entir e lap-to p personal compute r marke t o f th e w o r l d . Japan' s superio r position s i n the civilia n technologie s ar e corroborated by R & D statistics . According t o th e 1 9 8 5 data , J a p an w a s placed a t th e to p wit h respec t to th e GN P shar e o f privat e R & D expenditure s (2.1 9 percent) , whil e American an d Wes t Germa n share s w e re 1.4 5 percen t an d 1.7 1 percent , respectively. H o w e v e r , i n term s o f absolut e amounts , accordin g t o th e 1 9 8 7 data , America n expenditure s fo r privat e R & D amounte d t o $ 6 0 billion, an d Japanese counterpart s amounted t o $ 4 3 billion . This doe s no t indicat e tha t U.S . activitie s i n developin g civilia n tech nologies surpas s thos e o f J a p a n , becaus e mos t U.S . privat e R & D in volves governmen t researc h contracts . Fo r example , accordin g t o th e 1 9 8 8 data , 6 2 . 4 percen t o f th e U.S . federa l R & D researc h budge t w a s for defens e contracts , amountin g t o $ 3 3 . 8 billion , an d a goo d portio n o f it w o u l d hav e gon e t o privat e contractors , whil e 4 7 . 6 percen t o f J a p a nese government' s R & D researc h w e n t t o universit y research , amounting onl y t o $ 5 . 8 billion . Therefore , i n term s of pur e expenditure s spent b y privat e sector s fo r researc h an d development , J a p a n probabl y surpasses th e Unite d States.

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Although J a p a n spend s a larg e amount o f mone y fo r privat e R & D , i t imports mor e technologie s fro m abroa d tha n i t export s t o th e world . The curren t export/impor t rati o i s betwee n 0. 8 an d 0 . 8 6 (accordin g t o the 1 9 8 5 an d 1 9 8 6 data) , an d thi s i s on e reaso n w h y J a p a n i s stil l accused o f bein g a technologica l free-rider . Fo r example , th e recen t Nikkei/Gallup surve y indicate s tha t som e American s (18. 7 percent ) fee l uneasy abou t futur e America n competitivenes s an d economi c strength , and a majorit y o f the m (62. 0 percent ) believ e tha t J a p a n i s a technologi cal free-rider . M o r e American s (74. 7 percent ) believ e tha t J a p a n onl y imports foreig n technologie s an d doe s no t transfe r it s o w n ; an d mor e than one-thir d ( 3 6 . 7 percent ) o f American s forese e tha t technologica l containment o f J a p a n wil l occu r fro m th e Unite d States.

6

It is obviou s tha t Japan's technologica l strengt h i s no t comprehensive , but i s ver y limited , reflectin g th e area s i n whic h J a p a n ha s successfull y achieved fai r emulation . H o w e v e r , thes e limite d area s ar e currently mos t profitable areas , an d the y ofte n occup y critica l point s i n w h a t Inma n and Burto n cal l th e "technologica l foo d chain. " Wha t th e w o r l d fear s about J a p a n i s exactl y this , no t tha t Japanes e technologie s ar e stron g i n every field. Therefore , unles s J a p a n propose s a ne w polic y i n recognitio n of thi s fear , J a p an wil l eventuall y b e contained . Thi s invite s th e questio n of whic h polic y option s ar e left fo r J a p a n .

Japan's Technolog y Agend a Any externa l polic y shoul d b e formulate d b y considerin g a t leas t fou r points: (1 ) th e ultimat e polic y objective ; (2 ) th e natur e o f th e w o r l d order; (3 ) th e gran d strategy; and (4 ) specifi c means . In diplomacy , th e ultimat e polic y objectiv e i s nationa l surviva l an d the prosperit y o f th e people . Th e sam e i s tru e fo r technology : namely , the ultimat e polic y objectiv e i s als o surviva l an d th e prosperit y o f tech nological actors , tha t is , privat e firms. Sinc e technologica l surviva l an d the prosperit y o f firms hing e o n th e abilit y t o emulate , th e ultimat e objective o f Japan' s technologica l polic y i s t o maintai n thes e capabilities . At present , America n high-tec h p o w e r ha s no t completel y deterio rated i n al l areas . H o w e v e r , U.S . hegemon y i n technolog y ha s ceased , and th e Unite d State s can n o w b e regarde d as "ordinary. " There ar e t w o other center s o f technologica l excellence—German y an d J a p a n . The y are no t equal ; eac h ha s it s o w n merit s an d demerits . B y takin g advan -

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tages o f it s o w n strengths , eac h ca n exer t influenc e i n th e internationa l technological arena . Cultivating n e w market s i n Wester n an d Easter n Europ e an d recon structing Eas t German y wil l absor b Germa n technologica l effort s fo r some time , containin g German y withi n Europe . Unles s th e Unite d State s and J a p a n aggressivel y ente r int o Europea n market s t o compet e wit h Germany's interests , ther e wil l b e n o seriou s technologica l confronta tions betwee n J a p a n an d German y o r betwee n th e Unite d State s an d Germany i n th e nea r future . One poin t i s c l e a r — G e r m a n y wil l achiev e th e statu s o f a technologi cal superpower . And, i f German y begin s t o transfe r technologie s t o Eas t European nations , i t wil l partiall y fulfil l on e importan t prerequisit e o f a techno-hegemon, namel y asymmetry . Moreover , futur e Germa n techno logies ma y becom e pervasiv e i n Easter n Europe , includin g th e Sovie t Union. Perhap s German y wil l tak e th e Russia n positio n a s th e techno hegemon i n th e forme r C O M E C O N region . Japan's gran d strateg y i s formulate d agains t thi s background . Four tiered, i t is , mor e precisely , a two-plus-tw o strategy . Th e first t w o tier s of th e strateg y ar e cognitiv e an d epistemologica l i n nature . The y ar e no t action oriented ; rather , the y ar e conceptuall y illuminatin g an d revea l general guidelines . O n th e othe r hand , th e secon d t w o tier s ar e ver y much oriente d t o w a r d th e actio n o f settin g fort h n e w polic y paradigms . They deman d a drasti c chang e i n curren t policy directions . The first tie r o f th e gran d strategy is th e taci t acceptanc e o f Germany' s vested interest s an d he r technologica l dominanc e i n Eas t an d som e Wes t European markets . Sinc e muc h effor t mus t b e spen t t o cop e wit h techno logical friction s wit h th e Unite d States , Japan shoul d avoi d extr a distur bances wit h German y i n unknow n territories . Join t venture s wit h Ger man firms migh t b e a goo d polic y alternativ e fo r Japanes e firms i n thes e areas. Th e U.S . marke t i s stil l th e mos t profitabl e an d secur e fo r mos t Japanese firms. The secon d tie r o f th e gran d strateg y i s t o se t a ne w polic y para digm—crisis managemen t a s oppose d t o crisi s prevention . S o far , J a p a n has bee n devote d t o crisi s preventio n i n it s effor t t o cop e wit h technolog ical confrontation s wit h th e Unite d States . Therefore, J a p a n ha s adopte d a low-key , accommodatin g postur e i n technologica l relation s wit h th e United State s i n orde r t o avoi d excessiv e frictions . When th e Unite d State s accuse d Japanes e firms o f dumpin g colo r

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televisions i n th e U.S . marke t in 1 9 6 8 , Japanese manufacturer s complie d by establishin g productio n site s i n th e Unite d State s i n 1 9 7 1 an d b y setting expor t quota s i n 1 9 7 7 . Japanes e aut o manufacturer s followe d suit i n th e lat e 1 9 7 0 s an d 1 9 8 0 s i n th e fac e o f U.S . charge s o f unfai r trade practices . Furthermore , th e Japanes e governmen t establishe d a voluntary restrain t agreemen t fo r aut o export s i n 1 9 8 0 . I n th e are a o f military technology , whe n th e Unite d State s demande d acces s t o J a p a nese military-relate d technologie s tha t w e r e embargoe d b y th e thre e principles o n arm s export , th e Nakason e Cabine t relaxe d th e rul e i n 1 9 8 3 an d mad e a n exception , allowin g th e transfe r o f militar y technol ogy fro m J a p a n t o th e Unite d States . These action s indicat e tha t J a p a n ha s attempte d t o preven t a clas h with th e Unite d State s i n technology , bot h civilia n an d military . H o w ever, th e potentia l fo r conflic t i s muc h w o r s e becaus e o f th e natur e o f high technologie s i n th e technologica l food-chain , i n whic h on e ke y technology control s al l others . Therefore , th e crisi s preventio n principl e is n o longe r realistic . J a p a n need s a clea r policy o f "crisi s management, " acknowledging tha t technologica l crise s are inevitable .

1. "Techno-Detente" Vigorous busines s activitie s b y privat e firm s i n searc h o f technologica l emulation lea d t o increase d independenc e tha t help s repai r economi c relationships. I f a n externa l forc e doe s no t intervene , thi s firm-leve l spontaneous adjustmen t shoul d b e effective . H o w e v e r , i f on e o f th e government s intervene s t o protec t technologi cal supremacy , techno-containmen t polic y i s a natura l response . I f a foreign governmen t undermine s th e laissez-faire , self-adjustin g natur e o f international techno-emulation , w h a t shoul d b e th e genera l principles o f Japan's policy ? First , i t shoul d b e base d o n th e expectatio n tha t othe r countries wil l tr y to n a r r o w Japanese firms ' internationa l busines s activi ties. Second , th e polic y shoul d tr y t o avoi d stimulatin g protectionis m abroad whil e breakin g u p oversea s containment trends . Third , i t shoul d maintain a domesti c environmen t tha t encourage s internationa l emula tion s o a s to avoi d th e parochia l mentalit y tha t "mad e i n J a p a n i s alway s the best. " I n th e meantime , i f J a p a n feel s containe d b y th e Unite d States , there coul d b e a short-sighte d reactio n base d o n nationalisti c sentimen t and fea r o f isolatio n fro m th e internationa l community . Technologica l

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5

parochialism w o u l d lea d t o th e los s o f Japan' s emulou s p o w e r . W e should neve r allo w suc h a reaction . Avoidanc e o f xenophobi a i s a n absolute imperative . Taking thes e thre e principle s int o account , I propos e a polic y o f "techno-detente." Thi s i s th e thir d tie r o f th e gam e strategy . B y "techno detente," I mea n a confrontationa l allianc e betwee n J a p a n an d th e United States . Accordin g t o th e secon d tie r o f th e gran d strategy , crisi s management, thi s i s no t typicall y a friendl y alliance , bu t a confronta tional on e base d o n crisis . Perhap s this migh t b e criticize d a s discouraging health y competitio n o f technolog y amon g firms , bot h domesti c an d international. H o w e v e r , I w o u ld counte r tha t health y fre e competitio n i s achievabl e only w h e n stron g contenders , or , simpl y put , enemies , respec t an d see k to emulat e eac h other , tha t is , w h e n technologica l parochialis m o r arro gance i s minimized . Therefore , i f oversea s contender s fad e fro m th e scene, health y fre e competitio n ca n n o longe r b e maintained . I n thi s very sense , paradoxically , techno-detente guarantee s a fre e technologica l competition. Th e legitimac y o f th e polic y o f techno-detent e lie s i n thi s rationale. Domestically, Japanes e firm s ar e fiercel y competin g wit h eac h other . Competition sometime s occur s withi n th e keiretsu group s an d some times betwee n th e keiretsu groups , dependin g upo n th e technologies . I f one firm introduce s a ne w produc t o r a n e w technology , othe r competi tors quickl y emulat e i t an d al l firms stan d o n th e sam e fronta l lin e i n a technological race . Techno-detent e envision s somethin g simila r amon g Japanese firms an d thei r America n counterparts . H o w e v e r, man y doub t that a tru e "borderless " competitio n amon g Japanes e an d America n firms i s possible . W h y ? First, despit e th e sloga n o f th e "borderless " era , "borderlessness " thus fa r involve s onl y impersona l element s suc h a s information , eco nomic goods , o r technologica l k n o w - h o w . Peopl e ar e not movin g freel y across borders , s o tha t ther e exist s a nationalisti c borde r within people' s minds. T o them , Japanes e firms ar e Japanes e an d America n firms ar e American. Techno-nationalism , techno-revisionism , an d techno-contain ment al l ste m fro m thi s mindset . Therefore , befor e th e interminglin g o f Japanese an d America n firms occur s i n a trul y borderles s fashion, the y will collid e wit h eac h other . Second, a s th e U.S.—Japanes e Science an d Technolog y Cooperatio n

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Treaty o f 1 9 8 8 s h o w s , competitiv e scheme s betwee n government s pre suppose th e authorit y o f th e contractin g sovereig n partie s wit h nationa l borders. Althoug h th e 1 9 8 8 treat y i s bette r tha n nothing , i t i s fa r fro m effective i n stimulatin g cross-borde r emulation. Th e reaso n rests in polit ical culture . Any specifi c mean s fo r techno-detent e canno t escap e fro m th e realit y that ther e i s a politica l border . Therefore , th e mean s shoul d ai m a t something contradictory : remov e th e border , but leav e i t wher e it lies . A national borde r ca n hel p retai n emulou s p o w e r . I n fact , th e contradic tory difficultie s associate d with th e implementatio n o f th e specifi c mean s for techno-detent e ar e related to th e dialectica l natur e o f emulou s condi tions. It i s a contradictio n tha t techno-detent e require s bot h th e remova l and existenc e o f th e border . Because of this , ther e i s n o clear-cu t answer to th e questio n o f h o w Japanes e firms shoul d expedit e thi s gran d strat egy. Th e mos t plausibl e tacti c migh t b e somethin g lik e th e "let-a-thou sand-flowers-bloom" approach . Thi s i s th e fourt h tie r o f th e gran d strategy. Thi s approac h aim s a t widenin g th e channel s o f bilatera l tech nological interactio n betwee n t w o countrie s a t th e privat e level . Join t ventures, employmen t o f America n workers , on-the-job-trainin g an d education o f America n engineers , direc t capita l investments , coproduc tion i n th e Unite d States , etc., ar e all desirable . Why a t th e privat e level ? Th e answe r i s simple : i t i s onl y th e privat e sector tha t ca n easil y g o beyon d nationa l borders . The y canno t com pletely escap e fro m nationality , bu t firms ca n behav e mor e freel y tha n the publi c sector . Moreover , the y ar e th e mai n actor s engage d i n emu lation. Since privat e firms d o no t spontaneousl y tak e a n open-doo r polic y fo r their ke y technologies , th e Japanes e governmen t mus t assum e responsi bility i n implementin g th e "let-a-thousand-flowers-bloom " approach . However, governmen t polic y shoul d see k t o encourag e th e desirabl e behavior o f firms indirectl y an d shoul d avoi d direc t coercio n sinc e thi s w o u l d destro y a g o o d competitiv e environment . Examples o f h o w t o facilitat e thi s approac h migh t b e t o (1 ) for m a n a w a r d committe e compose d o f industrialist s an d academics , bot h J a p a nese an d American s (simila r t o th e Demin g A w a r d Committee , whic h selects th e compan y tha t ha s practice d th e mos t successfu l qualit y con trol o n th e sho p floor) ; (2 ) giv e a sizeabl e gran t t o th e companie s o r

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persons w h o hav e devise d an d implemente d th e mos t effectiv e schem e for widenin g technologica l interaction s betwee n Japa n an d th e Unite d States (fo r example , America n Hond a M o t o r s o r NUMII , a G M - T o y o t a joint venture , coul d b e candidates) ; and (3 ) publiciz e thi s a w a r d interna tionally.

2. "Soft Hegemony" Since th e "let-a-thousand-flowers-bloom " approac h encompasse s in ducements o f man y kinds , it s overal l effectivenes s wil l continuousl y fluctuate. I n orde r t o compensat e fo r thi s volatility , w e nee d t o enhanc e Japan's politica l leverage . Without sufficien t politica l leverag e for J a p a n , the Unite d State s wil l no t agre e wit h techno-detente . Thi s i s becaus e most American s stil l believ e tha t U.S . hig h technologie s ar e superior. If J a p a n i s considere d a politica l dwarf , he r "let-a-thousand-flowers bloom" approac h cannot b e effective . Th e urgen t need t o enhanc e politi cal leverag e i s obvious , bu t th e questio n is , h o w ca n w e d o it ? Her e I propose a ne w concept , "sof t hegemony, " a s a strategi c concep t fo r achieving thi s end . In th e past , politica l hegemon y ha s bee n w o n b y mobilizin g har d resources, suc h a s militar y capabilities , economi c wealth , o r technologi cal assistance . By asymmetricall y dispersin g suc h resources , a hegemoni c country coul d influenc e th e behavio r o f th e followe r countries . A hege mon coul d the n achiev e a n ordered , hierarchical internationa l syste m a t its disposa l an d reig n ove r it . In th e theor y o f politica l p o w e r , thes e har d resource s ar e calle d th e "political base. " H o w e v e r , th e behavio r o f politica l actor s ca n als o b e influenced b y th e so-calle d sof t resource s such a s intellectua l persuasion , psychological threats , or flattery . In internationa l politics , p o w e r resource s have bee n v i e w e d predomi nantly i n term s o f har d resources , simply becaus e th e internationa l sys tem w a s often transforme d b y w a r , in whic h militar y capabilitie s backe d by economi c strengt h playe d a decisiv e role . Sinc e th e en d o f Worl d W a r II, however , th e rol e o f militar y capabilitie s ha s change d significantly . Although the y w e r e deploye d i n loca l w a r s , thes e w a r s themselve s di d not affec t th e balanc e i n th e internationa l syste m durin g th e entir e Col d W a r period . Cold W a r militar y capabilitie s functione d principall y a s a deterren t

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force t o maintai n th e stabilit y o f th e bipola r system . Then , a rol e shif t from militar y t o economi c capabilitie s occurre d wit h th e adven t o f de tente. A s th e advocate s o f comple x interdependenc e argue , economi c p o w e r ha s increasingl y playe d a primary role i n stirrin g the internationa l system. But , i n term s o f th e natur e o f th e p o w e r base , nothin g ha s changed, becaus e bot h militar y an d economi c capabilitie s ar e th e sam e in nature : tha t is , the y involv e har d resources. If a n argumen t base d o n sof t resource s i s extende d t o th e leve l o f international politics , ther e emerge s a ne w concep t o f "sof t p o w e r . " Joseph S . Nye , J r . , writes , The changin g natur e of internationa l politic s ha s als o mad e intangible form s o f power mor e important . . . . Powe r i s becomin g les s transferable , les s coercive , and les s tangible . . . . Co-optiv e powe r i s th e abilit y o f a countr y t o structur e a situation s o tha t othe r countrie s develo p preference s o r defin e thei r interest s i n ways consisten t wit h it s own . Thi s powe r tends t o aris e from suc h resource s as cultural an d ideologica l attractio n a s wel l a s rule s an d institution s o f interna tional regimes . Th e Unite d State s ha s mor e co-optiv e powe r tha n othe r coun tries. 7

Whether th e U.S . i s a soft-powe r gian t i s w o r t h debating , bu t th e impor tance o f sof t p o w e r itself i s no t questionable . H o w ca n J a p a n gai n sof t p o w e r ? Currently , Japa n ha s neithe r a n internationally acknowledge d ideology no r a worldwide-penetrating culture. Bu t a s Richar d Rosecranc e put s it , J a p a n i s a tradin g state . More over, sh e i s a technologica l state , too, wher e t wo conspicuou s technolog ies, namel y manufacturin g technolog y an d environmenta l and/o r energy saving technology , enjo y w o r l d preeminence . Amon g thes e thre e kind s of Japanes e preeminence , tradin g p o w e r an d manufacturin g p o w e r ar e classified a s type s o f har d p o w e r , s o tha t the y w o u l d no t hel p Japa n elevate it s soft-powe r capabilit y i n th e post—Col d W a r era . Therefore , let u s focu s o n th e thir d area , tha t is , environmenta l and/o r energy saving technologies . Today, environmenta l issue s suc h a s deforestation , greenhous e ef fects, ozon e holes , desertification , an d th e los s o f biologica l diversit y ar e becoming mor e an d mor e globalized . A s Jessic a Tuchma n M a t h e w s puts it , The assumption s an d institution s tha t hav e governe d internationa l relation s i n the postwa r er a ar e a poo r fit wit h ne w realities . Environmenta l strain s tha t transcend nationa l border s ar e alread y beginnin g t o brea k dow n th e sacre d

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boundaries o f nationa l sovereignty , previously rendere d porous b y th e informa tion an d communication revolution s an d the instantaneou s globa l movemen t o f financial capital . Th e onc e shar p dividin g lin e betwee n foreig n an d domesti c policy i s blurred , forcing government s t o grappl e i n internationa l forum s wit h issues that were contentiou s enoug h i n the domesti c arena. 8

J a p a n i s a leadin g countr y i n bot h environmenta l legislatio n an d technology. Admittedly , J a p a n i s no t a politica l superstate . But eve n a s a political dwarf , J a p a n migh t b e abl e t o gai n politica l leverag e if i t mor e actively engage s i n th e internationa l politic s o f th e globa l environment , departing fro m hithert o passiv e attitude s o f followin g a conservativ e course take n b y th e Unite d States , the Unite d Kingdom , an d othe r indus trialized countries . I t is quit e noteworth y tha t German y recentl y s h o w e d , at th e 1 9 9 0 Housto n Summit , a mor e assertiv e stance wit h respec t to th e global environment . I f J a p an play s a majo r role i n singlehandedl y givin g her superio r environmenta l and/o r energy-savin g technologie s t o coun tries w ho ar e seriously sufferin g fro m bot h securit y and economi c threats caused b y deforestation , desertification , aci d rain , etc. , Japa n w o u l d b e able t o fulfil l t w o prerequisite s to becomin g a "sof t hegemon, " tha t is , a hegemon capabl e of exercisin g co-optiv e p o w e r . These prerequisite s ar e exactl y th e sam e a s thos e necessar y fo r hard p o w e r hegemony . The y ar e (1 ) asymmetry ; an d (2 ) th e existenc e o f followers. Th e requiremen t of asymmetr y w o u ld b e fulfille d b y asymmet rical donatio n o f Japanes e environmenta l and/o r energy-savin g techno logies t o th e w o r l d , a s wel l a s it s activ e engagemen t i n environmenta l politics an d suppor t o f environmentall y sufferin g nations . Th e secon d requirement w o u l d b e consummate d whe n othe r majo r countries , in cluding th e Unite d States , w o u l d, i n du e course , revis e their conservativ e stances i n environmenta l politic s an d follo w th e cours e lai d ou t b y Japan.

Notes 1. Se e Taiz o Yakushiji , The Dynamics of Techno-Emulation, BRI E Workin g Paper no . 15 , Berkeley : Center fo r Internationa l Studies , Universit y o f Cali fornia, 1985 . 2. O n techno-parochialism , a simila r argumen t i s foun d i n Michae l L . Der touzos, e t al., eds., Made in America (Cambridge : M.I.T. Press, 1990) , ch. 3. 3. Foreign Affairs 69 , no. 2 (Sprin g 1990): 1 1 6 - 3 4.

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4. Charle s H . Ferguson , "Computer s an d th e Comin g o f th e U.S . Keiretsu, " Harvard Business Review 4 (July-Augus t 1990) : 5 5 - 7 0 . 5. Se e Vannevar Bush' s famou s report , Science, The Endless Frontier: A Report to the President (Washington , D.C. : Governmen t Printin g Office , 1945) . 6. Fo r mor e details , se e "Th e Furthe r Development of Natura l Energy, " Nikkei Sangyo Shimbun, Decembe r 6 , 1990 , 1 , 6 - 7 . 7. Josep h S . Nye, Jr. , "Sof t Power, " Foreign Policy 8 0 (Fal l 1990) : 1 5 3 - 7 1 . 8. Jessic a T. Mathews , "Redefinin g Security, " Foreign Affairs 68 , no . 2 (Sprin g 1989): 1 6 2 - 7 7 .

3. U.S.-Japa n Macroeconomic Polic y Coordination: Agend a fo r th e 1990s an d Beyon d Takatoshi It o

Policy coordinatio n i s critica l i n th e 1 9 9 0 s , a n er a i n whic h n o on e country dominate s th e w o r l d econom y o r w o r l d politics . Th e Unite d States, whic h ha d dominate d fo r th e previou s fou r decades , becam e th e world's larges t debto r i n th e m i d - 1 9 8 0 s , whil e J a p a n emerge d a s th e largest creditor . Th e las t year s o f th e 1 9 8 0 s witnesse d dramati c change s in Easter n Europ e an d th e Sovie t Union . Th e chang e i n th e politica l stance o f thes e countries , however , require s a majo r infusio n o f eco nomic assistanc e fro m th e Wester n world . I n orde r t o sustai n a move ment t o w a r d w o r l d w i de democracy , economi c prosperit y i s crucial , an d in orde r t o sustai n economi c prosperity , macroeconomi c coordinatio n among th e Unite d States , J a p a n, an d th e Europea n Communit y (EC ) i s critical. Th e nee d fo r funds , bot h fo r deb t relie f an d fo r aggressiv e development strategies , come s a t a tim e whe n th e Unite d State s ha s los t dominance o f th e w o r l d economi c order . A Marshal l Pla n i n th e 1 9 9 0 s is no t possibl e withou t cooperatio n fro m Japa n an d Germany . The experienc e wit h macroeconomi c coordinatio n amon g th e Grou p of Seve n countrie s (th e Unite d States , J a p a n , Germany , France , th e United Kingdom , Canada , an d Italy ) durin g th e 1 9 8 0 s provide s a n im 81

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portant lesson : polic y coordinatio n i s a n essentia l ingredien t fo r success ful managemen t o f th e w o r l d economy , bu t coul d becom e counterpro ductive i f misused . Th e macroeconomi c coordinatio n experienc e o f th e Group o f Fiv e (later , Seven ) countrie s durin g th e 1 9 8 0 s ca n b e conve niently divide d int o t w o periods , wit h n o coordinatio n occurrin g i n th e first hal f an d clos e coordinatio n occurrin g i n th e secon d half . Eac h regime involve d bot h advantage s and weaknesse s in polic y coordination . In th e firs t half , th e Unite d State s essentiall y refuse d t o admi t tha t it s fiscal an d monetar y polic y mi x w a s causin g twi n deficit s i n bot h fisca l budget an d curren t accounts . O n th e othe r hand , i t w a s widely acknowl edged amon g economist s tha t bot h tigh t U.S . monetar y polic y an d g r o w ing fisca l deficit s w o r k e d t o w a r d a highe r interes t rat e an d a n overvalu ation o f th e dollar . The growin g twi n deficit s becam e a majo r concern i n th e internationa l financial markets , an d th e ris e i n th e dolla r fro m th e summe r o f 1 9 8 4 t o the en d o f Februar y 1 9 8 5 w a s th e las t straw . Th e financia l market s became worrie d tha t th e hig h leve l o f th e dolla r migh t no t b e "sustain able" (Krugma n 1 9 8 5 ) . In J a p a n , on e o f th e to p prioritie s o f th e Ministr y o f Financ e durin g the firs t hal f o f th e 1 9 8 0 s w a s t o restor e balanc e i n it s governmen t budget. T a x bracket s an d basi c deduction s fo r incom e ta x an d inheri tance ta x rate s ar e no t indexed , s o tha t th e failur e t o adjus t bracket s fo r inflation an d rea l g r o w t h resulte d i n a gradua l reductio n o f deficits . Although th e Japanes e government w a s concerne d abou t growin g trad e surpluses, the y though t tha t U.S . policie s w e r e primarily responsible . U.S. polic y seeme d t o mak e a shif t i n earl y 1 9 8 5 , partl y i n respons e to th e growin g concern s o f th e financia l market s an d tradin g partner s and partl y becaus e o f a reshuffling amon g cabine t member s i n th e secon d Reagan administration . Afte r J a m es Bake r became secretar y of th e Trea sury, intervention s i n th e foreig n exchang e marke t w a s reinstate d fo r th e first tim e i n thre e o r fou r years . In 1 9 8 5 , a chang e i n U.S . polic y w a s welcome d b y majo r tradin g partners, especiall y J a p a n an d Germany . Th e Plaz a Agreemen t o n Sep tember 2 2 w a s a symbo l o f cooperatio n amon g th e Grou p o f Five . Th e dollar, whic h ha d bee n declinin g sinc e lat e February , accelerated it s fal l after thi s agreement . Despite th e correctio n o f th e misalignmen t o f exchang e rate s i n 1 9 8 6 and 1 9 8 7 , trad e imbalance s di d no t g o a w a y immediately . Th e la g

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seemed t o las t muc h longe r tha n th e usua l theor y suggested . The delaye d response i n pricin g behavio r amon g exportin g an d importin g firm s ma y be explaine d b y divers e exchange rat e expectations (It o 1 9 9 0 ) o r rationa l wait-and-see strategie s of th e firm s i n a perio d o f uncertaint y (Krugma n 1 9 8 9 ; Dixi t 1 9 8 9 a , 1 9 8 9 b ) . I t w a s als o discovere d tha t th e Japanes e manufacturers activel y engage d i n extensiv e "pricin g t o market, " whil e the U.S . manufacturer s di d no t (Marsto n 1 9 9 0 ) . Whateve r th e explana tion, th e implicatio n i s th e same : a prolonge d misalignmen t i s harmfu l to th e economy . This observatio n strongl y suggest s that policie s shoul d b e coordinate d to avoi d prolonge d fluctuation s i n exchang e rate s tha t amoun t t o mis alignment. Som e economist s recommen d "targe t zones " t o avoi d mis alignment (Williamso n 1 9 8 5 ; Williamso n an d Mille r 1 9 8 7 ; Krugma n 1988). Policy coordinatio n t o kee p th e U.S . dolla r lo w continue d durin g th e difficult perio d whe n trad e imbalance s apparentl y di d no t g o a w a y . Frequent meeting s o f monetar y authoritie s fro m th e Grou p o f Seve n (and late r th e Grou p o f Ten ) countrie s reaffirme d thei r commitmen t t o improving exchang e rat e management . Ther e appeare d to b e a n explici t target zon e (Funabash i 1 9 8 8 ; Ito 1 9 8 9 ) . The trad e imbalance s finally starte d t o respon d t o th e exchang e rat e changes afte r t w o years . Japanes e surpluse s bega n t o declin e i n 1 9 8 6 and U.S . deficit s als o decline d i n 1 9 8 7 . Th e imbalance s hav e decrease d significantly sinc e then . I t i s likel y tha t th e Japanes e curren t accoun t surplus cam e d o w n t o jus t abou t 1 percen t o f GN P fo r fiscal yea r 1 9 9 0 , partly du e t o th e oi l pric e hik e i n th e summe r an d fal l o f 1 9 9 0 . Th e adjustment o f th e U.S . curren t accoun t ha s bee n slowe r tha n th e J a p a nese counterpart . H o w e v e r, i f th e pac e o f defici t reductio n i s maintained , an accumulate d deb t w o u l d b e withi n th e "sustainable " size . (Thi s as sessment i s no t base d o n rigorou s econometri c w o r k , bu t o n simpl e arithmetic an d extrapolation. ) However, th e movemen t o f curren t account s i n bot h countrie s be came asymmetri c i n 1 9 9 1 . Th e siz e o f th e surpluse s mor e tha n double d in J a p a n , whil e deficit s shran k furthe r i n th e Unite d States . Ther e ar e several reason s w h y Japanes e surpluse s increase d i n 1 9 9 1 . First , som e part o f a shar p declin e i n curren t accounts i n 1 9 9 0 w a s du e t o transitor y factors—such a s contribution s t o th e multilatera l (allied ) force s durin g the Gul f W a r . Second , gol d investmen t account s distorte d th e officia l

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Figure 3 . 1 U.S.—Japa n Current Accounts i n U.S . Dollar s 100

statistics o n trad e into an d ou t o f Japan . Third , th e rea l exchang e rat e o f J a p a n ha s depreciate d sinc e 1 9 8 7 . As a result , w e hav e see n th e ris e an d fal l o f trad e "imbalances " i n the 1 9 8 0 s . Figur e 3.1 show s th e curren t accoun t surpluse s (o r deficits ) o f J a p a n an d th e Unite d State s i n U.S . dollars . Figur e 3. 2 show s th e sam e graph i n rati o t o th e respectiv e GNPs . Bot h figures, i n particula r th e GNP ratio , s h o w th e trad e imbalances finally disappearin g b y th e en d o f the 1 9 8 0 s . I t appear s tha t th e trad e imbalance s ar e headin g t o w a r d a soft landing . However, polic y coordinatio n emphasizin g exchang e rat e manage ment i s no t necessaril y th e ful l answer . I t i s strongl y suspecte d tha t inflation o f asse t price s i n Japa n fro m 1 9 8 6 t o 1 9 8 8 w a s cause d b y a monetary polic y tha t trie d t o kee p th e ye n fro m appreciatin g "to o much." Afte r th e initia l succes s i n depreciatin g th e dolla r b y th e Plaz a Agreement, th e monetar y polic y w a s switche d t o preven t to o muc h ye n appreciation i n 1 9 8 6 . Thi s polic y continue d unti l 1 9 8 8 b y lowerin g th e official discoun t rate s an d mone y marke t rates . Stoc k price s an d lan d

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Figure 3. 2 U . S . - J a p a n Current Account/GN P 6

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prices soare d i n th e sam e period . Genera l inflatio n w a s prevente d onl y by th e dramati c declin e i n oi l an d impor t prices . Hence , i t i s importan t to investigat e th e cost s o f coordinatio n fro m th e viewpoin t o f trade-of f between externa l an d interna l objectives . What ar e th e lesson s o f thi s experienc e fo r th e future ? I wil l pu t forward severa l proposals fo r th e 1 9 9 0 s . Policy coordinatio n i s no t a panacea . Pruden t domesti c fiscal an d monetary polic y ha s t o b e establishe d a s th e basi s fo r effectiv e interna tional polic y coordination . Ther e ar e t wo majo r concern s i n U . S . - J a p an policy coordination : a lac k o f fiscal disciplin e i n th e Unite d States , and a tendency t o w a r d Japanes e monetar y expansio n i n th e cas e o f rapi d yen appreciation . When th e ke y currenc y i s runnin g a larg e curren t accoun t deficit , th e international monetar y syste m i s potentiall y unstable . On e w a y t o retai n confidence i n th e U.S . dolla r i s t o establis h a n institutio n tha t w o u l d discourage th e Unite d State s from succumbin g t o th e temptatio n t o issu e debts tha t coul d b e redeeme d b y inflation . Th e internationa l monetar y

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system shoul d requir e th e Unite d States , o r an y othe r countr y i n th e Group o f Seve n tha t run s a curren t accoun t defici t ove r a certai n thresh old, t o issu e governmen t bond s denominate d i n foreig n currencies . Thi s is m y firs t proposal . The secon d proposa l i s t o establis h a "movin g targe t zone. " Th e target zon e experimen t i n th e secon d hal f o f th e 1 9 8 0 s w a s generall y successful. H o w e v e r , w h e n th e targe t zon e ha s th e reasonabl y narro w band necessar y t o mak e i t meaningful , frequen t revision s o f th e ceilin g and floo r level s ar e necessary as fundamental variable s change. Revision s can b e mad e eithe r i n th e for m o f automaticall y slidin g ceiling s an d floors o r i n th e for m o f contingenc y plans . Third, th e Japanes e monetar y authoritie s shoul d mak e th e Ban k o f J a p a n mor e independen t fro m th e Ministr y o f Finance , bot h i n th e lega l sense an d i n th e practica l sense . Th e monetar y policy-makin g proces s should b e mor e transparent , while poten t polic y tool s shoul d kee p mon etary polic y effective . Th e independenc e o f th e centra l ban k fro m th e Ministry o f Financ e i s important , a s i t w o u l d reliev e th e centra l ban k from th e constan t pressur e t o eas e monetar y polic y (o r t o dela y th e timing o f a n officia l discoun t rat e increase) . M o r e concretely : th e provi sion o f l a w tha t subordinate s th e Ban k o f J a p a n t o th e financ e ministe r should b e abolished ; th e practic e tha t e x - F i n a n c e Ministr y official s alternate wit h th e centra l ban k elit e fo r th e pos t o f governo r of th e Ban k of J a p a n shoul d b e ended ; an d th e short-ter m treasury bill marke t shoul d be expande d t o allo w ope n marke t operations . T o thi s end , th e transac tions ta x fo r near-maturit y long-term bond s shoul d b e abolished . I wil l n o w suppor t th e abov e remark s by considerin g fiv e topics : th e costs an d benefit s o f polic y coordination ; th e misalignmen t o f exchang e rates an d trad e imbalances ; "coordination " afte r th e Plaz a Agreement ; costs an d benefit s o f th e targe t zon e afte r th e Louvr e Accord ; an d proposals fo r th e future . 1 . P o l i c y C o o r d i n a t i o n , Benefits , a n d C o s t s Those w h o ar e i n favo r o f polic y coordinatio n amon g majo r industrial ized nation s mak e t w o arguments . Both ar e based o n th e fac t that , i n a n interdependent w o r l d economy , policie s i n on e countr y influenc e it s trading partners ' economies . The firs t argumen t cite s a welfar e improvemen t amon g countrie s w h e n th e spillove r effect s o n eac h othe r ar e take n int o account . Th e

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logic i s simila r t o tha t o f "mutua l backscratching. " If th e governmen t o f a countr y take s a n actio n independently , maximizin g it s o w n welfar e but disregardin g spillove r effects , th e result s fo r al l countrie s ar e les s than optimum . Take , for example , stimulativ e policie s a t a time o f globa l recession. I f suc h policie s ar e uncoordinated , th e w o r l d outcom e fall s short o f ful l recover y becaus e th e beneficia l effect s o f well-intende d national effort s spil l ove r int o othe r countries , whil e th e cost s ar e born e by th e initiatin g countr y alone . Th e initiatin g country , therefore , i s unlikely t o mak e a maximu m effort . Wit h coordination , spillove r effect s can b e reciprocate d so tha t th e leve l o f effort s wil l increas e t o "internal ize" spillove r effects.

1

The secon d argumen t fo r coordinatio n i s t o preven t a governmen t from bein g induce d t o tak e a short-sighte d policy , a n actio n tha t i s mos t likely fo r government s facin g politica l difficulties . Hence , internationa l policy coordinatio n become s a "disciplin e device. " Accordin g t o thi s argument, a t time s government s ar e not wel l intende d eve n fo r thei r o w n citizens i n tha t the y ma y adop t policie s tha t ar e politicall y favorabl e i n the shor t ru n bu t economicall y harmfu l i n th e lon g run . Fo r example , a policy stimulu s suc h a s a n injectio n o f fiscal expenditure s o r a n expan sion o f mone y suppl y migh t increas e employmen t an d produc e faste r growth withou t muc h inflatio n i n th e shor t run . H o w e v e r , i f th e polic y stimulus continues , peopl e wil l expec t th e inflatio n rat e t o rise , an d th e change i n expectatio n wil l resul t i n actua l inflation , an d ma y eve n resul t in run-awa y inflation . Hence , th e beneficia l polic y cause s har m i n th e long r u n .

2

If ther e i s polic y coordinatio n t o restrai n inflatio n effectively , sa y b y use o f a targe t zon e fo r exchang e rate s o r multilatera l macroeconomi c "surveillance," thi s kin d o f short-sighte d polic y ma y b e prevented . An other obviou s exampl e o f suc h a polic y i s th e beggar-thy-neighbo r pol icy, whic h depreciate s th e exchang e rat e i n orde r t o pus h export s t o trading partners . Depreciatio n o f th e currenc y ma y b e produce d b y expansionary monetar y polic y o r contractionar y fiscal policy , i f no t b y a blatant, direc t interventio n i n th e foreig n exchang e market . I f th e ex change rat e i s managed , this typ e o f polic y wil l b e prevented. Despite thes e advantages , policy coordinatio n ma y b e challenge d o n several grounds . Ther e i s a theoretica l possibilit y tha t coordinatio n ma y be counterproductive . Whe n a governmen t pursue s it s o w n objectives , disregarding it s o w n economy' s benefit , coordinatio n ma y allo w thi s government t o escap e punishment . I n othe r w o r d s , coordinatio n ma y

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weaken a disciplin e devic e tha t i s effectiv e i n th e absenc e o f coordinatio n (see Rogof f 1 9 8 5 ) . Suppos e tha t a governmen t put s a highe r weigh t o n the valu e o f employmen t relativ e t o inflation , compare d t o th e privat e sector. Th e expansionar y polic y woul d caus e currenc y depreciation , which w o u l d accelerat e inflation tha t come s fro m domesti c reason s any w a y . Th e currenc y depreciatio n w o u l d enhanc e th e cost s o f a policy tha t is undesirabl e fro m th e privat e sector' s poin t o f view . However , i f th e target zon e i s i n place , th e tradin g partner is oblige d t o tak e measure s t o stabilize th e exchang e rate , tha t is , t o tak e a n inflationar y polic y itself . Thus, a n automati c disciplin e devic e i s nullifie d b y th e exchang e rat e target i n thi s c a s e .

3

There ar e t w o other , mor e practica l argument s agains t coordination . First, eve n i f al l theoretica l assumption s ar e in favo r o f coordination , th e "true" mode l o f th e w o r l d ma y no t b e know n b y th e policymaker s (se e Frankel an d Rocket t 1 9 8 8 ) . I n fact , the y typicall y believ e i n differen t models. Fo r example , suppos e tha t th e Unite d State s an d J a p a n agree d on macroeconomi c targets , suc h a s inflatio n an d th e growt h rate s of th e t w o countries . Th e Unite d State s ma y us e th e Federa l Reserv e Board's Multicountry Mode l ( M C M ) t o calculat e it s o w n polic y fo r th e goo d o f a coordinate d G- 2 w o r l d , whil e th e Japanes e governmen t ma y us e th e Economic Plannin g Agency' s (EPA ) w o r ld model t o deriv e its o w n polic y package. Bot h model s als o tak e int o accoun t th e othe r countries ' poli cies. H o w e v e r , i f th e M C M an d EP A model s hav e differen t structure s (or structura l parameters), then coordinatio n ma y resul t i n failure . Eve n if th e model s agree , bu t th e model s ar e not "true, " mistaken polic y ma y result. Franke l an d Rocket t (1988 ) conducte d simulation s usin g th e representative macroeconomi c model s o f th e w o r l d an d cam e t o th e conclusion tha t welfar e i s improve d b y coordinatio n i n onl y abou t hal f of on e thousan d case s that ar e possible combination s o f w h a t i s believe d by government s an d w h a t i s truth . Thi s exercis e s h o w s tha t i t i s im portant fo r government s t o agre e on th e model s thei r cooperativ e effort s are base d on an d t o mak e sur e the model s ar e good ones . The secon d practica l poin t i s tha t eve n i f coordinatio n i s desirable , and eve n i f recognitio n o f th e tru e mode l i s possible , th e magnitud e o f benefit fro m coordinatio n ma y b e small . Oudi z an d Sach s (1984 ) esti mated th e gai n b y th e Unite d State s as bein g a "utilit y equivalen t o f one half percentag e poin t o f GN P i n eac h o f th e nex t fe w years. " Thei r estimate w a s abou t th e sam e fo r German y an d Japan . In summary , fo r variou s reasons , i n th e secon d hal f o f th e 1 9 8 0 s

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many economist s starte d questioning th e axio m tha t polic y coordinatio n is a goo d thin g (se e Feldstei n 1 9 8 7 ) . This , however , doe s no t mea n tha t they al l ar e agains t coordination . Instead , th e majorit y opinio n amon g economists i s tha t althoug h polic y coordinatio n i s basicall y beneficial , there ar e man y caveats . With thes e argument s fo r an d agains t coordina tion i n mind , le t u s n o w revie w U.S . an d Japanes e policie s i n th e 1 9 8 0 s . 2. Misalignmen t o f Exchang e Rate s an d T r a d e Imbalances, 1 9 8 0 - 8 5 In th e first hal f o f th e 1 9 8 0 s , th e trad e defici t o f th e Unite d State s g r e w i n concer t wit h Japan' s increasin g trad e surplus . M a n y economist s pointed ou t the n tha t ther e w e r e t w o major , connecte d problem s behin d the trad e imbalances : th e exchang e rat e misalignmen t durin g th e perio d 1 9 8 1 - 8 5 , an d macr o Savings-Investmen t (SI ) imbalances . Le t u s exam ine thes e issues . First, observ e tha t a country' s productio n ha s t o b e consume d b y th e private sector , investe d b y th e privat e sector , expende d b y th e govern ment, o r exported . Import s ar e als o adde d t o consumption , investment , or governmen t expenditure . Hence , trad e balance , whic h i s th e differ ence betwee n export s an d imports , i s th e differenc e betwee n w h a t i s produced an d w h a t i s absorbe d domestically—tha t is , th e su m o f con sumption, investment , an d governmen t expenditure . Not e tha t govern ment expenditure s are , at leas t partly , financed b y ta x revenues—tha t is , by transfe r o f resource s fro m th e privat e secto r t o th e government—an d the transfe r doe s no t affec t th e absorptio n calculation . Th e differenc e between ta x revenue s an d governmen t expenditure s i s define d a s th e fiscal surplu s o r deficit . O n th e privat e secto r side , a n introductio n o f taxes wil l chang e nationa l produc t int o disposabl e incom e (define d a s national produc t les s taxes) . Thus , th e differenc e betwee n th e disposabl e income les s consumption—tha t is , s a v i n g s — a n d investmen t define s th e S — I balances o f th e privat e sector . I n summary , th e followin g relation ship mus t h o l d :

4

I shal l refe r t o thi s a s th e identit y equation . Th e 1 9 8 0 s starte d wit h high inflatio n cause d b y th e secon d oi l crisi s i n 1979—80 . Th e Unite d

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States introduce d a tigh t monetar y polic y i n 1 9 7 9 tha t di d no t star t t o ease unti l th e summe r o f 1 9 8 2 . A cautiou s stanc e (tha t is , on e tha t kep t interest rate s relatively high) , i n fact , continue d unti l 1 9 8 4 . O n th e fiscal side, th e Reaga n ta x cu t o f 1 9 8 1 , combine d wit h hi s militar y buildup , caused a larg e governmen t deficit . Th e ta x cut , bot h o n earne d incom e and o n capita l gains , w a s base d o n th e belie f tha t a reductio n i n rat e w o u l d stimulat e willingnes s t o suppl y mor e labo r an d mor e capita l investment s o tha t th e leve l o f ta x revenue s w o u l d increase . Suppl y sid e economics w a s proven w r o n g : th e leve l o f ta x revenue s di d no t ris e wit h the rat e cut ; th e Reaga n administratio n create d on e o f th e w o r s t fiscal deficits i n U.S . history ; an d lowe r capita l gain s taxe s di d no t caus e investment t o ris e enoug h t o compensat e fo r th e rat e cut. Moreover , th e decrease i n th e privat e saving s rate , wit h investment s bein g relativel y stable, certainl y contribute d t o increasin g trad e deficits . By th e identit y equation , a governmen t defici t alon g wit h negativ e private ne t saving s necessaril y mean s a trad e deficit. Withou t a n increas e in privat e saving s o r a decreas e i n privat e investment , fiscal deficit s necessarily mea n trad e deficits. Th e trad e deficit w a s in thi s sens e mainl y a macr o phenomenon . Th e othe r sid e o f th e curren t accoun t (tha t is , trade account s plu s transfers ) defici t i s th e capita l inflo w tha t finances the paymen t o f ne t imports . The identit y equatio n s h o w s tha t correctio n o f trad e imbalance s re quires correctio n o f macr o balance s a s wel l a s trad e barriers . I n fact , tariff an d nontarif f trad e barriers an d cultura l o r noncultura l discrimina tion agains t foreig n commoditie s w e r e certainl y declinin g i n J a p a n throughout th e first hal f o f th e 1 9 8 0 s . Hence , trad e barrier s (tha t is , protected, close d market s create d b y regulation s an d uniqu e tradin g practices) canno t b e th e hear t o f th e trad e balanc e problem . Instead , serious proposal s shoul d attemp t t o correc t th e savings-investmen t bal ances i n th e t w o countries . From 1 9 8 3 t o 1 9 8 6 , w h e n th e twi n deficit s soared , th e ris e i n U.S . interest rate s w a s relativel y moderat e despit e larg e fiscal deficits . Thi s w a s du e t o larg e capita l inflows , particularl y fro m J a p a n , whic h helpe d meet th e fun d deman d fro m th e U.S . governmen t sector . A s a result , rea l economic g r o w t h remaine d high . I n tha t sense , U.S . economi c perfor mance w a s not bad , given th e U.S . fiscal an d monetar y economi c policie s then i n place . H o w e v e r , i t w a s unfortunat e tha t disciplin e w a s no t imposed o n th e U.S . government : th e hig h interes t rat e w o u l d hav e choked th e econom y an d induce d a polic y switc h ha d th e capita l fro m

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J a p a n no t bee n allowe d t o flow a s freel y a s i t did . Sinc e J a p a n an d Germany w e r e reluctan t t o rais e interes t rate s t o matc h U.S . interes t rates, capita l flows w e r e unabl e t o sto p dolla r appreciation . Thei r expor t industries enjoye d a boo m fro m th e U.S . polic y mix . The combinatio n o f expansionar y fiscal policie s an d restrictiv e mone tary policie s le d t o a relativel y hig h interes t rate , whic h attracte d capita l from abroad . Th e stron g dolla r i n tur n hur t th e competitiv e positio n o f U.S. exporter s i n w o r l d markets . Th e dolla r appreciatio n fro m 1 9 8 2 t o the beginnin g o f 1 9 8 5 becam e k n o w n a s "misalignment. " Th e ke y t o understanding th e misalignmen t w a s th e capita l flow. Sinc e th e pressur e to purchas e th e dollar-denominate d asset s w a s s o strong , th e self-cor recting mechanis m o f trad e deficit s leadin g t o currenc y depreciatio n di d not occur . M a n y economist s believ e tha t th e pressur e o f th e capita l inflow t o th e Unite d State s w a s cause d b y a particula r U.S . polic y mix , while th e U.S . governmen t maintaine d tha t th e stron g dolla r w a s a resul t of w o r l d investors ' preferences . Th e U.S . governmen t rejecte d Japanes e and Europea n criticis m o n th e caus e o f th e misalignment . Thus , interna tional coordinatio n w a s no t possibl e i n th e first hal f o f th e 1 9 8 0 s . Since J a p a n ha d highe r overal l productivit y growt h an d lowe r infla tion tha n th e Unite d States , the ye n i n th e lon g ru n shoul d hav e appreci ated agains t th e dollar . Suppos e tha t th e exchang e rate s o f 1 9 7 3 an d 1 9 8 0 , th e t w o year s whe n th e Japanes e curren t accoun t w a s nearl y zero , w e r e , respectively , th e "equilibrium " exchang e rat e at th e time , an d the n extrapolate th e lin e t o 1 9 8 9 . Th e "equilibrium " exchang e rat e i s show n by th e broke n lin e i n figure 3 . 3 . Sinc e th e exac t plac e o f th e "equilib rium" exchang e rat e i s no t k n o w n wit h muc h confidence , thi s lin e should b e regarde d a s a n approximation . However , deviation s o f th e actual exchang e rat e (th e soli d line ) fro m th e equilibriu m rat e w e r e s o spectacular tha t ther e ca n b e n o mistak e tha t ther e w a s a misalignment . A rapi d increas e i n th e U.S . curren t accoun t deficit s fro m 1 9 8 2 t o 1 9 8 5 finally compelle d th e U.S . governmen t t o chang e it s position . I n particular, th e dolla r appreciatio n fro m th e summe r o f 1 9 8 4 t o th e beginning o f 1 9 8 5 w a s regarde d by man y a s a "bubble. " Ther e w e r e n o fundamental reason s fo r a shar p appreciation . A t th e sam e time , th e question o f whethe r th e leve l o f th e dolla r w a s "sustainable " becam e th e focus o f attention , bot h i n th e academi c w o r l d an d i n th e politica l arena . Krugman (1985 ) strongl y argue d tha t th e prevailin g leve l o f th e dolla r w a s no t sustainabl e sinc e th e resultin g trad e deficit s impl y a snowballin g of externa l deficits .

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Figure 3. 3 Yen/Dolla r Rat e ¥/$

A switc h fro m a n internationall y uncoordinate d polic y t o a coordi nated on e w a s inevitable . Th e actua l chang e i n polic y ha d t o wai t unti l J a m e s Bake r II I assume d th e positio n o f treasur y secretar y fro m Donal d Regan. O n Septembe r 2 2 , 1 9 8 5 , minister s o f th e monetar y authoritie s o f the Grou p o f Fiv e gathere d i n th e Plaz a Hotel , an d the y announce d agreement o n polic y measure s designe d t o pus h d o w n th e valu e o f th e dollar. Thi s w a s th e beginnin g o f polic y coordinatio n i n th e secon d hal f of th e 1 9 8 0 s . Fro m th e Plaz a Agreemen t o f Septembe r 1 9 8 5 t o th e Louvre Accor d o f Februar y 1 9 8 7 , ther e w e r e frequen t negotiations , an d strong step s w e r e take n t o correc t th e overvaluatio n o f th e dolla r (se e Funabashi 1 9 8 8 ) . Th e proces s w a s a remarkabl e success , a s th e dolla r depreciated vis-a-vi s th e majo r tradin g partners ' currencies b y 6 0 percen t in a yea r o r t w o . Fo r example , th e ye n w a s trade d a t 2 6 3 ye n pe r dolla r in Februar y 1 9 8 5 ; b y Augus t 1 9 8 6 i t stoo d a t 15 2 ye n pe r dollar . Figur e 3.3 reveal s tha t th e overvaluatio n o f th e dolla r quickl y disappeared . Feldstein (1987 ) deemphasize d th e succes s o f coordinatio n represente d by th e Plaz a Agreemen t b y pointin g ou t tha t th e degre e o f dolla r depreci ation fro m Februar y 1 9 8 5 t o Septembe r 1 9 8 5 (pre-Plaza ) w a s a s larg e a s that fro m Septembe r 1 9 8 5 t o Apri l o f 1 9 8 6 (post-Plaza) . However , i t

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w a s a surpris e i n th e marke t tha t th e dolla r depreciate d s o quickl y afte r the Plaz a Agreement , an d i t w a s throug h polic y coordinatio n tha t th e pre-Plaza correctio n o f th e bubbl e w a s continued . In summary , th e secon d hal f o f th e 1 9 8 0 s s a w a sof t landin g o f trad e imbalances, aide d b y a declin e i n oi l price s (t o b e discusse d i n th e nex t section). A s w e al l know , th e succes s o f th e Plaz a Agreemen t an d th e Louvre Accor d le d t o th e appropriat e exchang e rate . U.S . governmen t deficits finally starte d t o decline , an d investmen t i n J a p a n increase d rapidly. M a n y w e r e optimisti c tha t th e macr o imbalance s w o u l d con tinue t o shrin k i n th e 1 9 9 0 s .

3 . " C o o r d i n a t i o n " afte r th e P l a z a A g r e e m e n t , 1985-87 A close r loo k reveal s that th e roa d t o coordinatio n w a s no t a s smoot h a s it appeared . In th e thre e month s afte r th e Plaz a Agreemen t o f Septembe r 1 9 8 5 , th e Ban k o f J a p a n , alon g wit h th e Federa l Reserv e an d othe r central banks , sol d dollars . H o w e v e r , th e pledg e i n th e Plaz a Agreemen t to brin g d o w n th e dolla r w a s quickl y rescinde d i n M a r c h 1 9 8 6 , whe n the Ban k o f J a p a n "reversed " th e directio n o f interventio n t o slo w d o w n the pac e o f ye n appreciation , a fac t forgotte n i n man y recen t writings . The Japanes e monetar y authorities , wit h possibl e pressur e fro m th e business community , decide d tha t th e ye n ha d appreciate d enoug h an d that mor e appreciatio n w o u l d caus e seriou s damag e t o it s expor t indus try. I n fact , ther e wer e indication s o f a n "appreciatio n recession " (endaka fukyo). Thi s conflicte d wit h th e U.S . vie w tha t mor e appreciatio n of th e ye n w a s neede d t o brin g d o w n th e siz e o f th e trad e imbalance s between th e t w o countries . M y stud y (It o 1 9 8 7 ) o f th e intradail y exchang e rat e movemen t indi cates tha t mor e tha n hal f o f th e appreciatio n fro m Januar y t o Augus t 1 9 8 6 w a s cause d b y oi l pric e decline . Durin g thi s period , th e ye n ap preciated approximatel y fro m 1 9 0 ye n pe r dolla r t o 1 5 0 ye n pe r dollar , while oi l price s decline d fro m 2 8 dollar s t o 1 0 dollar s (late r bouncin g back t o 1 8 dollars) . I f th e oi l pric e decline , whic h i s a chang e i n th e "fundamentals," buil t majo r pressur e t o appreciat e th e ye n i n th e first half o f 1 9 8 6 , th e polic y t o counte r th e pressur e b y interventio n w a s inappropriate. Interventio n i s mos t effectiv e i f i t i s unsterilized—tha t is , if foreig n exchang e interventio n i s don e withou t affectin g domesti c

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money s u p p l y — a n d th e unsterilize d interventio n amounte d t o a n in crease i n th e mone y supply . (Thi s poin t becam e mor e importan t i n 1 9 8 7 , as I will explai n i n th e nex t section. ) The rif t betwee n J a p a n an d th e Unite d State s concernin g whethe r th e yen shoul d appreciat e mor e continue d unti l th e fal l o f 1 9 8 6 . I n th e meantime, th e ye n appreciate d to th e leve l o f 1 5 0 ye n pe r dolla r despit e the Ban k o f Japan' s interventio n i n suppor t o f th e dolla r (sellin g o f the yen) .

4 . C o s t s a n d Benefit s o f th e T a r g e t Z o n e afte r the L o u v r e A c c o r d The Louvr e Accor d o f Februar y 1 9 8 7 i s usuall y regarde d a s havin g initiated th e syste m o f a "targe t zone fo r exchang e rates. " Th e communi que indicate d tha t th e monetar y authoritie s o f th e Grou p o f Seve n countries w a n t e d t o maintai n exchang e rate s a t aroun d "th e curren t level." Althoug h ther e w a s n o mentio n o f a rang e i n th e writte n accord, it w a s widel y reporte d tha t th e monetar y authoritie s a t leas t talke d about a range , if the y di d no t agre e on one . A targe t zone , sometime s calle d a referenc e range , i s a ban d o f ex change rate s tha t th e centra l bank s ai m t o maintai n b y adjustin g fiscal and monetar y policies , includin g interventions . Theoretically , i t ha s bee n shown t o contai n exchang e rat e fluctuatio n b y influencin g th e expecta tions o f th e marke t participant s (Krugma n 1 9 8 8 ; Williamso n 1 9 8 5 ; Williamson an d Mille r 1 9 8 7 ) . H o w e v e r , th e theoretica l w o r k o n thi s concep t assume s tha t th e cho sen targe t zone i s a maintainabl e on e fro m th e viewpoin t o f "fundamen tals." Pu t differently , th e targe t zone i s assume d t o includ e th e "equilib rium" rate . Th e possibilit y o f th e targe t zon e bein g broke n i s no t accounted fo r i n th e theoretica l model . The targe t zon e w a s reportedl y revise d twic e i n 1 9 8 7 . I n April , th e lower boundar y fo r th e ye n decrease d (tha t is , i n th e directio n o f a stronger yen) , an d then , afte r Blac k M o n d a y i n October , furthe r ye n appreciation w a s allowed . (Se e figure 3 . 4 , whic h i s adapte d fro m It o [ 1 9 8 9 ] , an d se e als o Funabashi' s [1988 ] documentations. ) Ther e ar e t w o possible explanations : first, tha t th e revision s w e r e triggere d b y newl y available n e w s ; second , tha t th e targe t zon e w a s se t incorrectl y an d

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5

Figure 3. 4 Y e n / $ afte r G 5

proved impossibl e t o defend , s o tha t a revisio n becam e necessary . Th e latter possibilit y i s mor e likely . Changes i n foreig n exchang e reserve s are reasonably good indication s of th e degre e o f intervention . Th e increas e i n foreig n exchang e reserve s for J a p a n indicate s th e purchas e o f th e dolla r b y th e yen . Durin g th e year 1 9 8 7 , th e foreig n exchang e reserve s increased fro m $ 4 2 billio n t o $ 8 1 billion . Thi s increas e o f almos t $ 4 0 billio n w a s quit e extraordinary, since th e reserv e increased only $ 1 6 billio n i n 1 9 8 6 an d onl y $ 1 7 billio n in 1 9 8 8 . Eve n thoug h man y dollar s w e r e purchased , the targe t zone, an d the revise d targe t zone , w e r e no t defended . Thi s strongl y implie s th e second explanation . What w e r e th e sid e effect s o f heav y interventions ? Intervention s w e r e

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most likel y unsterilized , becaus e mone y suppl y (M 2 + CD ) growt h unexpectedly accelerate d i n 1 9 8 7 . I t ha d a n 8. 9 percen t (ove r th e pas t four quarters ) g r o w t h rat e i n th e firs t quarte r o f 1 9 8 7 , an d i t ros e t o 1 1 . 4 percen t b y 1 9 8 8 . Moreover , th e increas e wen t w a y beyon d th e Bank o f Japan' s o w n "forecasts. " As mone y suppl y growt h accelerated , the marke t interes t rat e declined . The yea r 1 9 8 7 i s als o know n a s th e yea r o f "asse t inflation" ; th e national averag e of lan d price s (a s officiall y poste d b y th e Lan d Agency ) increased 2 5 percen t durin g 1 9 8 7 , th e larges t increase i n fiftee n years . I n particular, th e lan d pric e i n T o k y o increase d 6 9 percent , th e larges t increase sinc e th e surve y starte d in 1 9 7 1 . The lin k betwee n th e targe t zone an d asse t pric e inflatio n provide s a n example o f h o w polic y coordinatio n migh t affec t domesti c economy . The asse t pric e inflatio n o f 1 9 8 6 - 8 8 di d no t resul t i n a genera l inflatio n of consume r prices . H o w e v e r , wholesal e price s droppe d 9 percen t i n 1 9 8 6 an d 4 percen t i n 1 9 8 7 , whil e consume r price s virtuall y staye d th e same. Tha t consume r price s remaine d constan t whe n the y shoul d hav e gone d o w n ca n b e take n a s a sig n o f inflation . Another proble m i n 1 9 8 7 w a s tha t trad e imbalance s betwee n th e United State s an d J a p a n di d no t diminish . Th e "J-curv e effect " suggest s that change s i n trad e balance s la g behin d exchang e rat e changes . H o w ever, thi s la g w a s believe d t o las t somethin g lik e si x month s or , a t most , one year . Th e t w o - y e a r dela y prompte d debate s amon g economist s an d provoked U.S . congressiona l criticism . U.S . frustratio n w a s reflecte d i n the adoptio n o f "Supe r 3 0 1 , " a provisio n attache d i n 1 9 8 8 t o a genera l trade bil l requirin g retaliatio n agains t "unfai r practices " (b y U.S . defi nition). There ar e severa l explanation s fo r th e significan t dela y i n trad e bal ance adjustment . First , Japanese exporters adjuste d thei r price s t o com pensate fo r th e exchang e rat e change s s o tha t th e dollar-denominate d prices i n th e Unite d State s w o u ld no t chang e muc h (Marsto n 1 9 9 0 ) . Thi s pricing behavior , k n o w n a s "pricin g t o market, " reflected th e exporters ' efforts t o retai n thei r share s o f th e market . Second , w h e n firm s suspec t that exchang e rat e change s migh t b e temporary , thei r productio n an d marketing decision s emplo y a "wait-and-see " strateg y unti l th e ne w equilibrium rat e i s established . Hence , durin g th e waitin g period , ther e is to o littl e chang e i n locatio n o f productio n o r price s o f import s t o cause a larg e correctio n o f th e trad e imbalance s (se e Krugma n 1 9 8 9 ; Dixit 1 9 8 9 a , 1 9 8 9 b ) . Third , th e surve y dat a s h o w tha t th e marke t

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participants di d no t expec t th e shar p exchang e rat e change s unti l the y had happened . The y tende d t o expec t tha t a larg e exchang e rat e w o u l d be temporar y (se e It o 1 9 9 0 a ) . Fo r example , a w e e k afte r th e Plaz a Agreement, w h e n th e rat e w a s 2 2 5 ye n pe r dolla r a s compare d t o 2 4 0 yen pe r dolla r th e previou s w e e k , th e averag e marke t participan t ex pected th e dolla r t o g o bac k t o 2 3 0 ye n pe r dolla r i n si x months . This lin e o f argumen t show s tha t i t i s importan t t o preven t a larg e "misalignment." Hence , a targe t zon e ma y b e a goo d idea . H o w e v e r , once a larg e misalignmen t (say , dolla r overvaluation ) ha s occurred , a temporary opposit e misalignmen t ma y b e neede d t o brin g th e rat e to a n equilibrium valu e (Krugma n 1 9 8 9 ) . A cumulativ e mistak e canno t b e corrected b y bringin g th e leve l t o equilibrium . Fro m thi s viewpoint , i t w o u l d hav e bee n a bette r polic y t o le t th e ye n appreciat e t o th e leve l o f 1 2 0 ye n pe r dolla r a s earl y a s 1 9 8 7 . Th e targe t zone implemente d b y th e Louvre Accor d w a s righ t i n th e lon g run , bu t i t faile d t o conside r th e large misalignmen t o f th e precedin g five years .

5 . P r o p o s a l s fo r th e 1 9 9 0 s : T h e U n i t e d S t a t e s a n d th e International M o n e t a r y Syste m Let u s summariz e th e lesson s o f th e 1 9 8 0 s fo r polic y coordination . Th e first hal f o f th e decad e exemplifie s th e dange r o f noncoordinatio n i n terms o f th e undiscipline d fiscal polic y o f th e Unite d States . Th e secon d half o f th e decad e provide s a n opposit e example : th e establishmen t o f a target zon e resulte d i n to o expansionar y a Japanes e monetar y policy , which contribute d t o asse t pric e inflation . The dange r o f n o coordinatio n i s al l to o clea r fro m th e U.S . experi ence i n th e first hal f o f th e 1 9 8 0 s , whic h produce d histori c deficit s tha t affected al l othe r majo r tradin g partner s i n on e w a y o r another . Thi s experience prove s tha t polic y coordinatio n i s i n genera l beneficial . H o w ever, i t mus t b e use d carefully . First , policy coordinatio n mus t b e closel y tied t o appropriat e domesti c policies . Second , whe n a targe t fo r coordi nation seem s t o produc e undesirabl e sid e effects , i t shoul d b e revise d promptly. The International Monetary

Order

In orde r t o maintai n disciplin e i n monetar y an d fiscal policies , variou s devices othe r tha n polic y coordinatio n shoul d b e introduced . Sinc e th e

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dollar i s a ke y currency , th e trad e deficit s o f th e Unite d State s ca n become quit e larg e i f ther e i s n o automati c disciplin e device.

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discipline devic e is , o f course , a targe t zone. H o w e v e r , a targe t zone ha s been convincingl y show n t o hav e it s o w n limitations . Anothe r disciplin e device i s a typ e o f Gramm-Rudma n legislatio n tha t limit s fisca l deficit s and impose s automati c spendin g cuts . H o w e v e r , experienc e ha s show n that thi s wil l no t b e a reliabl e devic e unles s ther e i s a continuin g desir e for fisca l restrain t i n th e U.S . Congress . A mor e radica l refor m w o u l d be t o requir e th e Unite d State s t o issu e foreign-currenc y denominate d government bond s (simila r t o th e so-calle d Carte r bonds ) whe n trad e deficits (o r ne t foreig n assets ) g o beyon d a certai n threshold . Thi s kin d of commitment , whic h ma y b e unpopula r i n th e Unite d States , wil l enhance th e long-ru n economi c welfar e of th e Unite d State s as well a s it s major tradin g partners . This als o answer s the asse t settlemen t questio n discussed below . In additio n t o creatin g a disciplinar y devic e fo r U.S . governmen t deficits, i t i s necessar y to conside r a fundamenta l institutiona l chang e i n the internationa l monetar y syste m i n orde r t o preven t anothe r episod e of sever e misalignment . Th e ke y currenc y countr y i s n o w th e larges t ne t borrower i n th e w o r l d , an d th e Unite d State s wil l n o longe r b e abl e t o keep borrowin g fro m abroa d t o financ e governmen t deficit s i n th e 1990s. This i s th e ol d questio n o f w h a t i s a n appropriat e asset settlemen t fo r the ke y currenc y country. I n the fina l stag e of th e Bretton-Wood s system , European countries , notabl y France , insiste d tha t th e Unite d State s b e willing t o "settle " th e deb t cause d b y "dolla r overhang " b y sellin g gol d in exchang e fo r dollars . Th e questio n di d no t completel y becom e moo t after th e floatin g exchang e rat e system cam e int o place . One possibilit y fo r a ne w internationa l monetar y orde r w o u l d b e t o use a baske t (som e kin d o f mix ) o f th e dollar , th e yen , an d th e EC U fo r foreign reserv e requirement s o f th e majo r countries . Th e sam e baske t could b e use d a s th e uni t o f internationa l borrowin g b y a debto r na tion's government . During th e 1 9 8 0 s , ther e w e r e othe r kind s o f asse t settlements . Afte r being saturate d by larg e holdings o f U.S . governmen t securities , Japanes e investors diversifie d thei r portfolio s b y increasin g share s o f equitie s (most notabl y i n 1 9 8 7 - 8 8 ) , direc t investment , an d rea l estat e ( 1 9 8 8 - 8 9 ) . Th e purchase s of Rockefelle r Center , Firestone , an d Colum -

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bia Picture s are only a fe w conspicuou s example s o f a n alternativ e mean s of asse t settlement i n th e er a of deregulate d capital movement . Toward Institutional Harmonization As barrier s t o internationa l movement s o f good s an d capita l hav e bee n lowered, institutiona l harmonization , suc h a s tax harmonization , simila r antitrust legislatio n an d implementation , etc. , i n additio n t o macr o pol icy coordinatio n amon g th e majo r develope d nations , hav e becom e im portant issues . Fo r example , whe n traditiona l capita l control s ar e abol ished, capita l taxatio n mus t b e coordinate d i n orde r t o eliminat e th e possibility tha t unilatera l capita l movements , induce d b y th e differentia l in ta x treatment , wil l disrup t th e functio n o f th e w o r l d capita l market . Traditional ta x have n countrie s ar e al l to o smal l t o b e easil y countere d by, fo r example , interes t equalizatio n taxatio n o f th e majo r advance d countries. H o w e v e r , i f a countr y a s larg e a s th e Unite d State s decide s t o play suc h a game , th e effec t coul d b e enormous. Transactio n cost s hav e 6

been lowere d b y technologica l progres s in communication , s o tha t i t ha s become mor e importan t i n th e 1 9 9 0 s t o harmoniz e ta x treatmen t o f w o r l d capita l incom e an d movement . Other area s o f harmonizatio n includ e regulation s regardin g the bank ing an d securitie s businesse s (universa l bankin g i n Europ e versus separa tion o f th e t w o sector s i n th e Unite d State s an d Japan) ; antitrus t legisla tion an d implementation ; government-busines s relation s i n J a p a n an d Europe; an d regulation s o n ne w financial products . I t appear s t o b e inevitable tha t thes e regulation s an d barrier s wil l converg e t o w a r d a uniform w o r l d standard , if onl y gradually. One particula r example o f th e are a tha t need s t o b e harmonize d i s th e lack o f a short-ter m governmen t securitie s marke t i n J a p a n , whic h 7

causes a t leas t t w o significan t problems . Th e Ban k o f J a p a n canno t rel y on ope n marke t operation s a s a n importan t monetar y tool . Th e centra l bank stil l use s direc t loan s wit h l o w interes t rate s t o larg e bank s t o control th e mone y supply . Thi s practic e i s criticize d b y othe r countrie s as subsidizin g Japanes e financial institutions . (A s a respons e t o thi s criticism, th e Ban k o f J a p a n expande d th e lis t o f institution s eligibl e fo r direct loan s i n 1 9 9 0 . ) Second , foreig n institutiona l investor s sh y a w a y from th e Japanes e marke t becaus e th e lac k o f safe , short-ter m asset s makes i t har d t o "park " funds whe n adjustin g portfolios . Fo r "interna -

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tionalizing" th e ye n i t i s absolutel y necessar y to hav e a deep , short-ter m government securitie s market. In orde r to creat e such a market , at leas t on e o f th e followin g mus t b e done: (1 ) transaction s o f middle - an d long-ter m governmen t securitie s should b e exempte d fro m th e securitie s transaction s tax ; (2 ) "repurchase agreement" transaction s shoul d b e exempte d fro m th e securitie s transactions tax ; an d (3 ) "near-maturity " long-term bond s shoul d b e exempte d from th e securitie s transaction s tax . M a n y economist s advocat e thes e institutional changes . H o w e v e r , th e T a x Burea u o f th e Ministr y o f Fi nance ha s resiste d them . 6 . J a p a n ' s Initiativ e i n th e 1 9 9 0 s The rol e o f J a p a n i n enhancin g th e chanc e o f bette r w o r l d economi c management canno t b e overemphasized . Th e Unite d State s ha d take n the initiativ e fo r economi c an d politica l innovatio n durin g mos t o f th e p o s t w a r period . H o w e v e r , th e economi c "size " o f J a p a n an d o f a unite d Europe wil l match , i f no t exceed , tha t o f Nort h America . Withou t th e cooperation o f th e financia l p o w e r s o f J a p a n an d th e EC , i t wil l b e impossible t o implemen t ne w economi c arrangement s an d initiatives , such a s solvin g accumulate d debt s i n Lati n America n countries , infusin g capital i n Easter n Europea n countrie s an d th e Sovie t Union , and , mor e generally, enhancin g th e function s o f internationa l organizations . Unfor tunately, Japan' s initiativ e i n th e spher e o f economi c relation s i n th e 1 9 8 0 s ha s bee n disappointing . I t w as rar e fo r Japa n t o tak e th e initiativ e to hel p solv e existin g problems , suc h a s trad e conflicts , an d t o establis h a ne w economi c order , such a s a new trad e organization tha t strengthen s the existin g Genera l Agreement on Tariff s an d Trad e ( G A T T ) .

8

In the res t of thi s section , I will emphasiz e fou r categorie s of contribu tions that , I think, J a p a n shoul d mak e i n th e future : (1 ) reassessmen t o f policy coordinatio n an d th e rol e o f th e Ban k o f J a p a n ; (2 ) refor m o f Japan's politica l system ; (3 ) initiative s i n internationa l organizations ; and (4 ) initiative s i n th e U . S . - J a p a n bilateral relationship . Reassessment of

Policy Coordination and

the Role of the

Bank of Japan The Japanes e monetar y an d fisca l authoritie s shoul d reevaluat e thei r priorities a s the y loo k t o w a r d th e twenty-firs t century . First , recal l tha t

U.S.-Japan Macroeconomic

Policy

Coordination 1 0

1

the polic y t o resis t ye n appreciatio n i n 1 9 8 6 an d 1 9 8 7 ma y hav e bee n counterproductive afte r all . I n a sense , th e polic y favore d exporter s an d land owner s a t th e expens e o f import-consumin g citizen s an d renter s (through asse t pric e inflation) . Althoug h i t i s unclea r tha t thi s kin d o f judgment w a s actuall y made , i t w a s a n obviou s byproduc t o f th e targe t zone an d o f polic y coordination . Second , i f th e trad e deficit s w e r e t o b e reduced quickl y (mostl y fo r politica l reasons) , th e Japanes e authoritie s could hav e employe d a differen t polic y mix . Namely , th e monetar y policy coul d hav e bee n tighte r an d fiscal policie s coul d hav e bee n mor e expansionary. Th e I S balanc e (recal l th e identit y equation ) implie s tha t the expansionar y fiscal policie s o f 1 9 8 6 an d 1 9 8 7 w o u l d hav e reduce d the Japanes e trad e surpluses . I hop e tha t lesson s fro m th e 1 9 8 0 s wil l contribute t o bette r internationa l polic y coordinatio n an d domesti c pol icy management . The targe t zon e concep t shoul d b e modifie d i f i t i s trie d agai n i n th e 1 9 9 0 s . First , w h en i t i s trie d again , participants shoul d mak e certai n tha t the rang e include s a correc t short-ru n a s wel l a s long-ru n equilibriu m level. Second , i n th e lon g run , th e targe t shoul d b e adjuste d t o reflec t changes i n th e fundamentals . H o w e v e r , revision s o f zon e ceilin g an d floor b y step s ma y promp t speculativ e attacks , just as the fixed exchang e rate ha s done . T o avoi d this , a "movin g targe t zone" ca n b e constructe d using, fo r example , th e interes t rat e differential . Th e movin g targe t zon e in 1 9 8 7 w o u l d hav e looke d lik e th e on e depicte d i n figure 3 . 5 . (See , fo r details, It o 1 9 8 9 . ) In orde r to assur e the benefit s o f polic y coordination , th e independen t role o f th e Ban k o f J a p a n shoul d b e strengthened . Th e fiscal authorit y o f J a p a n i s tie d t o th e electio n cycl e an d i s thu s mor e susceptibl e t o short sighted goals . (Recal l th e exampl e o f a "no t well-intended " polic y pre sented i n sectio n 1 o f thi s paper. ) Th e Ban k o f J a p a n , i f mor e indepen dent, ma y b e bette r abl e t o pursu e th e goa l o f preventin g (asset ) pric e inflation. Som e measure s migh t b e (1 ) t o abolis h th e articl e tha t make s the Ban k o f J a p a n subordinat e t o th e finance minister ; an d (2 ) t o en d th e practice b y whic h a n e x - F i n a n c e Ministr y officia l alternate s wit h th e central ban k elit e fo r th e Ban k o f J a p a n governo r post. Fo r example, th e practice ca n b e change d s o tha t majo r change s i n monetar y policy , suc h as officia l discoun t rat e changes , ar e decide d withi n th e Ban k o f J a p a n before the y ar e reporte d t o th e Ministr y o f Finance . M o r e authorit y i n foreign exchang e marke t intervention s ma y b e give n t o th e Ban k o f

1 0 2 Takatoshi

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Figure 3 . 5 Slidin g Zon e Experimen t

Japan. Thi s w o u l d avoi d th e politica l rif t betwee n th e t w o authoritie s that ofte n cause s delay s i n implementin g necessar y changes .

Reform of

Japan's Political

System

It is ofte n pointe d ou t tha t Japanese economi c p o w e r is no t accompanie d by politica l p r o w e s s . Durin g th e 1 9 8 0 s , Japanese policymakers, bureau crats, an d politician s alike , too k littl e initiativ e i n trad e conflict s o r policy coordination . Th e Unite d State s an d Japa n engage d i n numerou s negotiations, talks , an d workin g groups , suc h a s th e negotiation s fo r voluntary automobil e expor t restraints ; negotiations regardin g beef an d citrus imports ; th e yen/dolla r workin g group ; th e Market-Oriente d Sec -

U.S.-Japan Macroeconomic

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Coordination 1 0

3

tor Selectiv e (MOSS ) talks ; the semiconducto r agreemen t and U.S . retali ations fo r it s violation ; th e Super-30 1 negotiations ; an d complaint s about cellula r phone s an d amorphou s patents . Almos t a l w a y s , th e United State s "demands " tha t action s b e take n b y th e Japanese , an d th e Japanese reluctantl y compl y o r compromis e onl y afte r a lon g dela y an d U.S. "threats " of retaliation . I interpre t thi s patter n o f demand-and-compromis e a s a produc t o f the Japanes e an d U.S . politica l systems . Th e Japanes e positio n i s deter mined b y specia l interests , no t economi c principle s suc h a s th e principl e of competitio n an d fre e market , whic h coul d b e use d t o chang e policy . U.S. demands , o r "foreig n pressure, " i s virtuall y th e onl y sourc e o f policy innovation . Th e Ministr y o f Financ e an d th e Ministr y o f Interna tional Trad e an d Industrie s hav e skillfull y use d foreig n pressure s t o break veste d interes t group s withou t politicall y humiliatin g them , sinc e U.S. demand s hav e stil l bee n viewe d a s politica l given s (shoganai). Thi s is probabl y du e t o inerti a stemmin g fro m th e occupatio n perio d afte r World W a r II , an d t o th e fac t tha t losin g t o U.S . governmen t pressures, as oppose d t o domesti c politica l competitors , i s no t considere d a politi cal l o s s .

9

On th e othe r sid e o f th e Pacific , blamin g Japa n ha s provide d a n eas y w a y ou t o f politica l troubles . Th e Democratic-controlle d Congres s an d the Republica n Whit e Hous e compete d fo r politica l vantag e b y vyin g with eac h othe r i n bein g toug h agains t "unfair " tradin g practices . Eve n though th e tru e caus e fo r economi c problem s i s know n t o b e domestic , politicians ten d t o blam e foreigners . Fo r example , man y economists , whether Japanes e o r Americans , hav e argue d tha t a majo r caus e o f th e U.S. trad e deficits i n th e m i d - 1 9 8 0 s w a s large fiscal deficits , no t Japanes e "unfair tradin g practices," i f the y existed . M a n y i n th e U.S . Congres s di d not listen . Moreover , some i n Congres s justifie d th e threat s of retaliatio n against J a p a n a s th e onl y w a y t o focu s th e attentio n o f th e Whit e Hous e on th e seriousnes s o f th e trad e deb t problem . A s a long-tim e w o r l d leader, th e Unite d State s i s no t accustome d t o listenin g t o othe r coun tries, bu t instea d act s a s a policema n self-appointe d t o ensur e fre e mar kets. J a p a n becam e a targe t partl y becaus e i t seeme d tha t J a p a n ha d succeeded i n economi c growt h withou t employin g full-scal e "fre e mar ket" principles . The demand-and-compromis e styl e o f negotiatio n i s increasingl y viewed b y th e American s a s a shrew d delayin g tacti c o f J a p a n (Pres -

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towitz 1 9 8 8 ) , an d i s v i e w e d b y th e Japanes e a s unwante d U.S . interven tion i n Japanes e interna l affair s (Ishihar a and Morit a 1 9 8 9 ) . It is dangerous t o continu e i n thi s mode . Moreover, t o focu s narrowl y o n th e U . S . - J a p a n relationshi p i s a fundamental mistak e fo r J a p a n . I t alienate s th e E C an d w e a k e n s multi lateralism b y internationa l organizations . I n fact , Europea n countrie s have repeatedl y expresse d concern s ove r U . S . - J a p a n negotiation s o n various issues , includin g th e semiconducto r agreement . Fro m th e long run strategi c poin t o f view , J a p a n , alon g wit h th e res t o f th e w o r l d , i s much bette r of f i f politica l prioritie s ar e give n t o multilatera l negotia tions an d agreements. The Japanes e politica l system , includin g bureaucrat s and politicians , must chang e i n orde r t o avoi d seriou s futur e trad e conflicts . T o brea k vested interest s an d t o enhanc e consume r welfare , it shoul d adop t som e principles an d shoul d ac t accordin g t o them , no t waitin g fo r foreig n pressure. Suc h a n ew principl e migh t b e dedicatio n t o consumer-oriente d policies o r t o creatin g a societ y tha t coul d experienc e affluence . A n important them e i s t o shif t politica l prioritie s fro m "stabilit y o f busi ness" ( a cod e phras e referrin g t o protectio n o f veste d interests , incum bents, an d "in-groups" ) t o "consume r welfare " ( a cod e phras e fo r fre e entry an d competition) . Case s ar e abundant : th e Daite n ho , a l a w re stricting constructio n o f large-scal e retail stores ; financial deregulation s on deposi t interes t rates ; an d ric e importation . I t i s importan t t o hav e some sloga n o r principl e t o us e agains t veste d interes t groups . Th e M a e k a w a Repor t ha d suc h a mission , bu t it s recommendation s w e r e no t well implemented .

Initiatives in International Organizations International organization s an d institution s suc h a s th e Worl d Bank , th e IMF, an d G A T T shoul d b e reemphasized . Th e cooperatio n o f develope d countries i n a multilatera l framewor k will b e mor e importan t tha n ever , partly becaus e th e U.S.—Japa n bilateral agreement s hav e recentl y pro duced a n antagonisti c atmosphere , an d partly because movement t o w a r d regionalism, spawne d b y E C 1 9 9 2 an d th e Nort h America n Fre e Trad e arrangement, ma y becom e a threa t to th e w o r l d trading system. Japanese capita l i s a usefu l resourc e fo r internationa l organizations . Some argu e tha t Japan' s larg e trad e surplus—tha t is , it s capita l out -

US—Japan Macroeconomic flow—is a

Policy

Coordination 1 0

5

n importan t sourc e o f developmen t fund s fo r Lati n Americ a

and Easter n Europe. H o w e v e r, thi s argumen t mistakes result s for causes . If productiv e investmen t opportunitie s exist , investmen t wil l tak e place , wherever th e financial sourc e is . Eve n i n th e latte r hal f o f th e 1 9 8 0 s , Japanese long-ter m investmen t w a s mor e tha n trad e surplus . H o w e v e r , this characteristi c dramaticall y change d i n 1 9 9 1 . Japanes e long-ter m capital becam e a n "inflow " despit e relativel y larg e curren t accoun t sur pluses. Basically , J a p a n appeare d t o hav e receive d dollar s fo r invest ments i n additio n t o havin g earne d dollar s throug h trade . This w a s jus t the revers e of th e previou s years , whe n th e short-ter m capita l movemen t became a hug e "outflow. " Ther e ar e t w o w a y s t o characteriz e thi s situation. Eithe r J a p a n repai d borrowing s b y sellin g long-ter m asset s abroad o r foreigner s w i t h d r e w short-ter m yen-dominate d asset s an d bought long-ter m yen-dominate d assets . A clos e examinatio n (It o 1 9 9 3 ) reveals tha t th e latte r characterization is close r t o reality . It i s importan t fo r J a p a n t o thin k abou t w h a t contribution s i t ca n make throug h internationa l organizations . H o w e v e r , ther e ar e severa l constraints i n thi s area . First, J a p a n i s underrepresente d i n mos t internationa l organizations . Although th e quot a fo r J a p a n i n th e Worl d Ban k an d th e IM F i s 6 percent, Japanes e professiona l staf f i n eac h organizatio n constitute s onl y about 1 percent , includin g thos e w h o ar e basicall y "o n loan " fro m th e Japanese ministrie s an d th e centra l bank , and , i n th e cas e o f th e Worl d Bank, som e Japanes e firms. Th e situatio n i s simila r i n th e Unite d Nation s and othe r internationa l agencies . Ther e ar e severa l reason s fo r thi s un derrepresentation, on e o f whic h i s th e lifetim e employmen t syste m i n J a p a n , whic h prevent s thos e w h o w a n t t o retur n t o J a p a n i n midcaree r from gettin g goo d jo b opportunities . Domesti c a s wel l a s internationa l job mobilit y mus t b e enhanced . Anothe r reaso n i s tha t Japanes e firms and th e Japanes e bureaucrac y emphasize "genera l skills" (all-roun d gen eralists traine d i n variou s task s an d positions ) rathe r than "professiona l skills." Hence , man y w h o ar e judge d usefu l i n domesti c term s canno t function adequatel y i n professiona l position s i n internationa l organiza tions tha t requir e highl y professiona l skills . Japa n mus t accep t an d nur ture professional s b y treatin g an d rewardin g them better . Second, th e agend a fo r J a p a n i s no t wel l articulated . "Initiative " an d "public relations " ar e no t traditiona l trait s o f th e Japanes e politica l process. M a n y politica l decisions , includin g th e selectio n o f prim e minis -

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ters, hav e bee n decide d behin d close d door s an d b y in-grou p consulta tions. Th e Japanes e decision-makin g proces s itsel f i s no t "transparent, " and a s a resul t othe r countrie s becom e puzzled , cautious , an d suspiciou s of Japan' s intentions . Thi s mus t change .

Initiatives in

the Bilateral Relationship

U.S.—Japan bilatera l trad e negotiation s i n th e 1 9 8 0 s produce d tempo rary compromise s bu t contribute d t o a long-ter m deterioratio n i n th e public opinio n o f eac h countr y t o w a r d th e other . Th e semiconducto r agreement an d it s aftermath , an d th e designatio n o f J a p a n a s a n unfai r trading partne r i n S u p e r - 3 0 1 , create d stron g resentmen t i n Japan . I n the Unite d States , th e repeate d patter n o f U.S . demand s an d Japanes e concessions, i n additio n t o S u p e r - 3 0 1 , yielded a perceptio n amon g som e of th e America n public tha t Japan's succes s is base d upon unfai r busines s practices. Sinc e bilatera l negotiation s bea r a politica l cost , a s explaine d above, ther e need s t o b e a bette r institutiona l framewor k fo r resolvin g U . S . - J a p a n problem s befor e the y becom e politicized . There ar e t wo step s t o plac e th e U . S . - J a p a n bilateral relationship i n a wider perspective . First , J a p an ca n pursu e a leadershi p rol e i n interna tional organizations , suc h a s th e IMF , th e Worl d Bank , an d G A T T . M a n y difficul t problems , suc h a s lending t o Eas t European countries an d former Sovie t republics , canno t b e solve d throug h internationa l vehicle s alone. J a p a n an d th e Unite d State s hav e t o tak e leadershi p i n thes e organizations. J a p a n ha s no t acte d a s a leade r i n th e past . I n orde r t o avoid a frustratin g bilatera l relationship , Japa n ha s t o lear n h o w t o tak e a leadin g rol e i n multilatera l organizations . Second, expandin g th e fre e trad e zon e beyon d Nort h Americ a t o include J a p a n mus t b e considered . Ther e ar e many obviou s politica l an d economic obstacle s t o suc h a n arrangement , bu t th e benefit s o f suc h a n agreement w o u l d see m t o outweig h th e cost s fo r U.S.—Japa n relations. In th e presenc e o f th e fre e trad e zone , mos t question s abou t bilatera l trade talk s an d conflict s becom e moot . Politica l energ y an d resource s can b e shifte d fro m bilatera l negotiation s t o leadershi p i n multilatera l international organization s an d domesti c issues . Thi s w o u l d b e a desir able chang e fo r J a p a n .

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7

7. C o n c l u d i n g R e m a r k s T o creat e a bette r w o r l d i n th e 1 9 9 0 s , J a p a n, th e Unite d States , and th e European countrie s mus t bette r coordinate thei r macroeconomi c policie s and harmoniz e institutions . J a p a n mus t bette r expres s it s agend a an d stress internationa l (multilateral ) cooperation , rathe r tha n narrowl y fo cus o n th e U . S . - J a p a n (bilateral) relationship. Bot h J a p a n an d th e Unite d States hav e t o pu t thei r o w n house s i n order . Onl y whe n eac h countr y has pu t it s hous e i n orde r will polic y coordinatio n becom e productive . I t is importan t i n th e 1 9 9 0 s that policy cooperatio n g o beyon d th e U . S . - J a pan bilatera l relationship . Multilatera l organization s an d institutions , such a s th e I M F , th e Worl d Bank , an d G A T T , shoul d b e strengthened . Policy coordinatio n i n th e are a o f exchang e rat e managemen t an d a fre e trade zon e mus t b e expande d beyon d a two-countr y framework . Fo r example, a J a p a n - N o r th America (th e Unite d States , Canada, an d M e x ico) fre e trad e zone shoul d b e seriousl y considered . If thes e proposal s ar e adopted , J a p a n , th e Unite d States , an d th e res t of th e w o r l d w o u l d mov e t o w a r d a mor e prosperou s w o r l d wit h fewe r conflicts an d confrontations .

Notes I hav e benefite d fro m comment s o n a n earlie r version b y Fre d Bergsten , Yoichi Funabashi, Rober t Lawrence, an d Edwar d Lincoln . Thi s project has bee n partly supported b y the Nationa l Institut e fo r Researc h Advancement (NIRA ) throug h the Japan Cente r for Internationa l Exchang e (JOE) , an d partly by a Ministry o f Education gran t (Monbusho Kagak u Kenkyuhi [No . 02630048]). 1. Th e situatio n ca n b e understoo d a s a n applicatio n o f th e "prisoner' s di lemma." A noncoordinated equilibriu m i s a suboptimal Nas h solution, whil e a coordinate d equilibriu m i s optimal . Thi s lin e o f argumen t wa s firs t pro posed b y Hamad a (1976) . Se e als o othe r paper s i n Buite r an d Marsto n (1985). 2. Thi s argumen t i s base d o n th e framewor k o f a n "expectation-augmented " Phillips curve , which show s an inflation-unemployment tradeoff , an d a political busines s cycle s theory . Fo r th e former , se e an y intermediat e macroeco nomics textbook , an d for the latter, see Ito (1990b). 3. Th e secon d exampl e o f undesirabl e coordinatio n i s th e cas e wher e the gov ernment ha s a credibilit y proble m (se e Keho e 1989) . I f th e privat e secto r suspects tha t th e governmen t migh t ta x capita l incom e i n th e future , invest ment wil l b e les s tha n optimal . Th e governmen t doe s no t hav e an y wa y t o

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convince th e privat e sector tha t a hig h ta x wil l no t occu r i n th e future . Th e situation woul d be the same in the case of ope n economie s wit h coordination . In th e cas e o f noncoordination , internationa l competitio n woul d driv e th e capital ta x t o zero ; otherwise , capita l fligh t woul d hav e harmfu l effect s o n the hig h ta x country . Hence , polic y coordinatio n tha t prevent s capita l ta x competition i s a bad idea. 4. Th e savings-investment balanc e approach can be derived from the two identi ties. First , recall the definitio n of GNP , Y = C + I + G + X - M , wher e Y denotes GNP , C consumption , I investment , G governmen t expenditure , X exports, an d M imports . Th e secon d identit y i s th e househol d budge t con straint, Y - T = C + S , wher e S stand s fo r saving , T fo r taxes . B y substituting ou t Y from th e tw o equation s an d arranging terms, we obtain (S - I ) + ( T - G ) = ( X - M) , where (S — I ) is the private-sector savings and investment difference , ( T - G ) i s th e governmen t (fiscal ) surplus , and ( X — M) i s the trad e surplus. In th e firs t hal f o f th e 1980s , the macroeconomi c position s o f Japa n an d the United State s could b e illustrated as follows : (S-I) +

U.S.

Japan

( T - G )=

(X-M )

++

0

++

5. However , theoreticall y thi s argumen t i s no t reall y a proof . Se e Krugma n (1989, 115) . Sinc e dependenc e o n importe d essentia l good s i n th e Unite d States is less than in other countries, the cost of defaul t an d of trad e sanction s is lowe r fo r th e Unite d States . Thus, i f th e internationa l communit y i s les s dependent o n trade , it theoreticall y stop s lendin g t o th e Unite d State s a t a lower leve l of deb t in ratio to GN P tha n for other, smalle r counties . 6. Currently , interes t incom e i s no t withhel d b y U.S . depositor y institution s whether a depositor i s a resident or nonresident a s long a s it presents proper tax IDs . I n contrast , interes t incom e i s withhel d a t the rat e of 2 0 percen t i n Japan, regardles s of th e origi n o f th e mone y (wit h a n exceptio n fo r othe r central banks and international agencie s for the purchase of Japanese government bonds) . Th e U.S . Treasur y demands tha t withholdin g shoul d b e abol ished. Th e Japanes e Ministr y o f Financ e take s th e positio n tha t th e curren t tax treat y institute s withholdin g o f interes t income , tha t th e Unite d State s unilaterally waive s the righ t to withhold , an d tha t withholdin g i s les s costl y in assessing tax liability . 7. Ther e ar e several kinds o f governmen t securitie s in Japan : "treasur y bonds" (TBs) o r governmen t securitie s wit h les s tha n one-yea r maturities ; "fisca l bonds" (FBs ) or sixty-day revenue-smoothing securities ; "middle-term" (five year maturity ) discount bonds ; and "long-term" (mostly ten-year , and sometimes twenty-yea r maturity) government bond s wit h coupons . TB s are issued at discoun t b y auctio n (fo r financia l institutions , no t fo r individuals ) bu t FBs are mainl y issue d to th e Ban k of Japa n (du e to it s low interes t rate). TB s and

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10

9

FBs ar e exemp t fro m securitie s transactio n tax , bu t middle-ter m an d long term government bond s ar e not. Hence , i t becomes prohibitivel y expensiv e t o trade middle-ter m o r long-ter m bond s nea r maturity . Th e volum e o f TB s i s not enoug h t o for m a dee p marke t tha t ca n withstan d ope n marke t opera tions by the Ban k of Japan . 8. A notabl e exceptio n i s th e Miyazaw a Plan, advocatin g a schem e o f helpin g heavily indebte d countries . However , thi s wa s only recentl y replace d b y th e Brady initiative , whic h i s very similar t o th e Miyazaw a Plan. 9. Th e followin g jokes , o n th e sam e theme , highligh t thi s kin d o f view : (1 ) A two-party syste m work s i n Japan , th e LD P fo r big-busines s specia l interest s versus the United States for consumers ; (2 ) the United States Trade Representative (USTR ) i s the bes t consumer advocat e one ca n get in Japan . References Buiter, Wille m H. , an d Richar d C . Marston , eds . (1985) . International Economic Policy Coordination. Cambridg e University Press . Dixit, Avinas h (1989a) . "Entr y an d Decision s o f a Fir m unde r Uncertainty. " Journal of Political Economy 97 : 6 2 0 - 3 8. (1989b). "Hysteresis , Impor t Pricing , an d Pass-Through. " Quarterly Journal of Economics 104 : 2 0 5 - 2 8. Feldstein, Marti n (1987) . "Rethinkin g Internationa l Economi c Coordination. " A lectur e o n th e occasio n o f th e fiftiet h anniversar y o f Nuffiel d College , Oxford, October . Frankel, Jeffrey A., an d Katharin e E. Rocket t (1988) . "Internationa l Macroeco nomic Policy Coordinatio n Whe n Policymaker s D o No t Agre e o n th e Tru e Model." American Economic Review 78 : 318—40. Funabashi, Yoich i (1988) . Managing the Dollar: From the Plaza to the Louvre. Institute fo r Internationa l Economics , May . Hamada, Koich i (1976) . " A Strategi c Analysis o f Monetar y Interdependence. " Journal of Political Economy 84 : 6 7 7 - 7 0 0. Ishihara, Shintaro , an d Aki o Morit a (1989) . "No " to ieru Nihon (Japan That Can Say "No"). Tokyo : Kobunsha . Ito, Takatosh i (1987) . "Th e Intradail y Exchang e Rat e Dynamics an d Monetar y Policies afte r th e Grou p o f Fiv e Agreement. " Journal of the Japanese and International Economies 1 : 2 7 5 - 9 8. (1989). "Wa s Ther e a Targe t Zone? " I n JCI F Polic y Stud y Series , no . 14, June. (1990a). "Foreig n Exchang e Rat e Expectations : Micr o Surve y Data. " American Economic Review 8 0 (Jun e 1990): 4 3 4 - 4 9. (1990b). "Th e Timin g o f Election s an d Politica l Busines s Cycle s i n Japan." Journal of Asian Economics 1 : 135—56. (1993). "O n Recen t Movement s o f Curren t Accounts an d Capita l Flow s of Japan. " I n T . It o an d A . O . Krueger , eds. , Macroeconomic Linkage:

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Ito

Exchange Rates and Capital Flows. NBE R Eas t Asia Seminar on Economics , vol. 3 . University o f Chicag o Press . Kehoe, Patric k J. (1989) . "Polic y Cooperatio n amon g Benevolen t Government s May B e Undesirable." Review of Economic Studies 56 : 2 8 9 - 9 6. Krugman, Pau l (1985) . "Is the Stron g Dollar Sustainable? " I n The U.S. Dollar: Prospects and Policy Options. Federa l Reserve Bank of Kansa s City. (1988). "Targe t Zone an d Exchang e Rat e Dynamics." Nationa l Bureau of Economi c Research , working paper no. 2481 , January. (1989). Exchange-Rate Instability. Cambridge , Mass.: MIT Press. Marston, Richar d C. (1990) . "Price Behavior in Japanese an d U.S. Manufactur ing." NBER working paper no. 3364 , May. Oudiz, Gilles , an d Jeffre y Sach s (1984) . "Macroeconomi c Policy Coordinatio n among th e Industria l Economies. " Brooking s Paper s on Economi c Activity , no. 1 . 1 - 6 4 . Prestowitz, Clyd e V., Jr. (1988) . Trading Places. Ne w York : Basi c Books. Rogoff, Kennet h (1985) . "Ca n Internationa l Monetar y Polic y Cooperatio n B e Counterproductive?" Journal of International Economics 18 : 1 9 9 - 2 1 7. Williamson, Joh n (1985). The Exchange Rate System. 2 d ed. Institute of International Economics . Williamson, John , an d Marcu s H . Mille r (1987) . Targets and Indicators: A Blueprint for the International Coordination of Economic Policy. Institut e for International Economics , September.

4. Rul e Maker of World Trade: Japan's Trade Strategy and the World Trading System Kazumasa Iwata

1. Structura l Change s i n Worl d Trad e Now tha t muc h o f th e militar y threa t b y Communis t countrie s ha s disappeared, economi c friction s betwee n th e Unite d State s an d Japa n could reemerg e a t th e forefron t o f politica l debates . Notably , afte r th e Gulf Wa r Japa n wa s criticize d fo r it s failur e t o pla y a stronge r rol e i n constructing a ne w worl d order . Th e failur e t o conclud e th e GAT T Uruguay Roun d talk s i n Decembe r 199 0 undermine d th e bas e o f th e multilateral fre e trad e syste m an d increase d th e risk o f mountin g protec tionism i n the forthcoming decade . It is of critica l importance tha t Japa n move t o maintai n th e fre e trad e syste m tha t ha s bee n th e mainsta y of Japan' s remarkabl e economi c success . Japa n face s th e challeng e o f transforming it s trad e polic y fro m th e reactiv e polic y o f th e pas t t o a rule-based polic y conduciv e t o constructio n o f a ne w globa l an d libera l trading system . Looking bac k t o th e 1980 s we ca n discer n fou r remarkabl e structura l changes tha t gav e ris e t o majo r challenge s t o th e worl d tradin g system . The first structura l chang e wa s a marke d tendenc y towar d formatio n o f regional groupings , whil e th e globalizatio n o f marke t economie s pro Ill

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ceeded. Globa l marke t activit y w a s facilitate d b y technologica l develop ment i n informatio n flo w an d communicatio n an d b y th e conversio n o f Communist countrie s t o market-oriente d economies . Bu t a t th e sam e time ther e emerge d a stron g tendenc y t o w a r d formin g thre e regiona l groupings consistin g o f th e extende d Europea n region , includin g th e Eastern Europea n countries ; th e U.S.-le d region ; an d th e Japan-centere d Western Pacifi c region. Th e advanc e o f Japa n an d Asia n countrie s i n 1

the pas t decad e precipitate d th e mov e b y th e forme r t w o group s t o w a r d regional groupings . Secondly, rapi d technologica l innovatio n cause d drasti c change s i n international competitivenes s wit h regar d t o high-tec h products . Th e high-tech industrie s ar e characterized by economie s o f scal e an d dynami c efficiency arisin g fro m larg e learnin g effects . Th e developmen t o f high tech industrie s require s heav y R & D investment , thereb y causin g signifi cant spillove r effect s o n relate d sectors . Th e linkag e externalities , cou pled wit h larg e learnin g effects , lur e government s t o adop t strategi c trade policie s t o "create " comparative advantage s an d t o shif t th e profi t from foreig n firm s t o domesti c firm s unde r a n oligopolisti c marke t struc ture. Th e succes s stor y o f Japan' s industria l policy , thoug h i t w a s a product o f specifi c historica l circumstances , provoke d som e U.S . official s and scholar s t o advocat e th e industria l policy' s promotin g expor t an d "managed trade " arrangement s wit h regar d t o high-tec h products : Ty son (1990 ) argue s fo r extendin g bilatera l sectora l arrangement s suc h a s the U . S . - J a p a n semiconductor agreemen t t o multilatera l manage d trad e arrangements. The thir d chang e w a s th e increasin g rol e o f intrafir m trade . I n th e 1 9 8 0 s ther e appeare d a ne w w a v e o f direc t investmen t amon g advance d economies an d som e o f th e newl y industrializin g countries . Th e surg e o f direct investmen t b y J a p a n i n th e Unite d State s an d Asi a afte r 1 9 8 5 strengthened busines s linkage s throug h capita l movemen t an d expansio n of intrafir m trade . U.S. multinationa l firm s exporte d $ 7 1 . 3 billio n t o oversea s affiliate d companies i n 1 9 8 6 , whil e importin g $ 6 5 . 6 billio n fro m them . Thes e figures amoun t t o 3 1 . 4 percen t an d 1 8 . 0 percen t i n tota l expor t an d import, respectively . I n th e cas e o f J a p a n , th e share s o f intrafir m expor t and impor t ar e large r tha n thos e o f th e Unite d States ; th e share s o f total export s an d import s amounte d t o 3 2 . 0 percen t an d 2 6 . 0 percent , respectively, wit h th e intrafir m trad e balanc e bein g i n larg e surplu s

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Table 4 . 1 Intrafir m T r a d e i n th e Unite d State s an d J a p a n Total Value

Share in Total Export and Import

$71.1 billio n $3.6 $31.6 $19.7

31.8% 13.8 55.9 32.6

$65.5 $7.3 $29.8 $9.2

24.4 7.5 38.3 10.3

Japan (1986 ) Export North Americ a Europe

$97.9 $64.9 $21.1

32.0 54.1 21.1

Import North Americ a Europe

$29.4 $16.6 $3.8

26.0 50.9 22.5

U.S. (1986 ) Export Japan Canada Europe Import Japan Canada Europe

( $ 6 8 . 4 billion ) i n 1 9 8 6 . Notably , th e intrafir m trad e imbalanc e w a s marked i n Nort h American—Japanes e bilatera l trade (tabl e 4 . 1 ) . Moreover, ther e exist s a stron g tren d t o w a r d "competitiv e alliances " among bi g multinationa l firms. I f w e includ e internationa l trad e base d on license s an d contract s o n technology , marketin g (distribution , sales , and us e o f bran d name s suc h a s origina l equipmen t manufacturin g [OEM] exports) , an d join t R & D i n intrafir m trade , the n abou t hal f o f the internationa l trad e amon g advance d economie s ca n b e identifie d a s intrafirm trade , broadly defined . International facto r movement s ar e replacin g internationa l trad e based o n differenc e o f endowment s (interindustr y trade) , internalizin g the adjustmen t cost s o f trad e in good s an d trad e barriers. Thi s lead s t o a smaller shar e of interindustr y trad e and expansio n o f intrafir m trad e an d establishment trade , th e latte r o f whic h ca n b e identifie d a s trad e i n services. I t ma y als o internaliz e trad e frictio n relate d t o interindustr y trade, becaus e i t create s employmen t an d contribute s t o a n increas e i n

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exports o f th e hos t country . Further , national interest s wil l b e dilute d b y the increase d importance o f foreig n market s for multinationa l firms . On th e othe r hand , intrafir m trad e ma y giv e ris e t o mor e intens e friction ove r investment . I t ma y als o reinforc e th e tendenc y t o w a r d a more oligopolisti c marke t structur e of w o r l d trade . The increasin g num ber o f gra y are a measures , measure s o n th e margi n o f fre e trad e prac tices, supporte d b y governmen t interventio n als o serv e t o maintai n a n oligopolistic marke t structure . Further , i f import s ar e dominate d b y intrafirm trade , thi s ma y constitut e a n obstacl e t o marke t acces s fo r foreign companie s i n th e downstrea m distributio n secto r o f th e oligopo listic structur e (Lawrenc e 1 9 8 7 ) . I n addition , a s internationa l trad e in creasingly resemble s trad e in th e domesti c econom y du e t o th e increase d mobility o f productio n factors , th e trad e disput e become s mor e closel y connected wit h difference s i n domesti c regulation s an d th e issue s o f industrial organization . Thi s point s t o th e nee d t o creat e a singl e marke t within a wide r regio n o r o n a globa l basi s b y harmonizin g domesti c regulations, institutions , an d law . If intrafir m trad e i s carrie d ou t o n th e basi s o f a subdivisio n o f the productio n proces s withi n multinationa l companies , i t ma y lea d t o increased intraindustr y trade . Intraindustr y trad e accounte d fo r mor e than hal f o f th e trad e i n advance d economies ; th e exceptio n w a s J a p a n , where hal f o f import s i s primar y commodities , notabl y energy . Th e peculiarity o f natura l endowment s an d rapi d structura l chang e i n pro duction an d export s w o r k e d t o maintai n Japan' s intraindustr y inde x a t a lo w level . Notably , th e self-sufficien t processin g structur e playe d a n important rol e i n determinin g th e shar e o f intraindustr y trad e (Iwat a 1991). Dornbusch propose d manage d trad e agreement s differen t fro m Ty son's, namely , t o increas e U.S . manufacture d export s t o J a p a n b y 1 5 percent a year . H e cite s th e lo w leve l o f intraindustr y trad e a s evidenc e of marke t closedness . Y e t Japan' s intraindustr y trad e inde x exhibit s a marked risin g tren d fo r manufacture d products sinc e 1 9 8 7 . I f th e overal l trade imbalanc e effec t i s adjusted , it ros e t o abou t 0. 5 i n 1 9 8 9 , whic h i s close t o th e U.S . leve l an d mainl y reflect s th e increasin g o u t w a r d pro cessing o f manufacture d product s an d th e diversifie d deman d fo r con sumers' good s (tabl e 4 . 2 ) .

2

A fourt h structura l chang e w a s th e expansio n o f trad e i n services . The transformatio n t o w a r d a servic e econom y i n advance d countrie s

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Table 4. 2 Intraindustr y T r a d e i n M a j o r Countrie s lntraindustry Trade Index (1989)

U.S. Japan EC non-EC Germany France

All Products

Manufactured Products

0.55 0.28 0.85 0.64 0.78 0.73

0.64 0.49 0.91 0.76 0.65 0.81

Estimation by Lincoln (1985) All Products Manufactured Products 0.54 0.23

0.61 0.26

0.63 0.74

0.67 0.82

Source: MITI , Annual Surve y on Trad e in 1990 , Lincoln (1990) . Note: * Trade imbalanc e effec t i s adjusted with respec t to manufacture d products .

reinvigorates trad e i n services . I f w e defin e trad e i n service s a s th e su m of invisibl e trad e (transportation , tourism , insurance , patents , royalties , and investmen t revenu e abroad ) an d unilatera l labo r incom e transfer , w e se e tha t i t expande d mor e rapidl y tha n trad e i n good s i n th e 1 9 8 0 s . Since investmen t revenu e i s regarde d a s th e r e w a r d fo r managemen t services rendere d b y th e hom e compan y t o a n affiliate d company , i t i s included i n trad e in services . Trade i n service s can b e divide d int o thre e groups . On e grou p consist s of service s splintere d fro m th e proces s o f producin g goods . Th e secon d group i s trad e i n service s accompanie d b y internationa l movemen t o f production factors ; on e typ e o f thi s categor y i s establishmen t trad e (fo r instance, constructio n engineerin g an d retai l banking ) an d anothe r i s trade i n professiona l service s (e.g. , th e service s o f lawyer s an d accoun tants). Thir d i s trad e in service s accompanied b y internationa l movemen t by consumer s (fo r instance , tourism) . Thus , trad e i n service s i s cruciall y connected t o regulation s an d barrier s on direc t investmen t an d interna tional labo r mobility . In addition , trad e in service s embrace s the service s embodied i n good s and productio n factors ; intermediat e servic e inpu t i s embodie d i n good s and ca n b e include d i n trad e i n services . J a p a n ha s a defici t i n trad e i n services i f i t i s measure d b y figures liste d i n invisibl e trade , whil e th e United State s s h o w s a larg e surplus , notabl y wit h respec t t o patent s an d royalties. Bu t th e pictur e change s i f w e adop t a broade r definitio n o f services tha t include s service s embodie d i n goods . Bot h J a p a n an d th e

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Table 4. 3 T r a d e i n Services : Th e Unite d State s an d J a p a n ($ billion ) Invisible Trade

Trade in Goods Total

Separated Trade

World Export Import

752.0 (42.6% ) 825.5 (47.1% )

1767.2 1753.9

U.S. Export Import

143.3 (66.2% ) 122.7 (36.3% )

216.2 337.8

61.4* 228.6 * 16.7* 165.4 *

289.9* 182.5*

Japan Export Import

45.5 (26.2% ) 50.7 (43.0% )

173.6 118.0

31.9 122. 18.0 79.

154.0 97.1

Embodied

—— ——

—

—

1 1

Source: IMF , Balance of Payments Statistics, Sazanam i an d Urat a (1990) . Note: * indicates th e figure i n 1982 . The estimate s ar e separated , an d embodie d trade s i n servic e ar e derive d fro m th e input-outpu t tables o f Japa n an d th e Unite d States.

United State s ar e ne t exporter s o f service s (tabl e 4 . 3 ) . I t ma y b e note d that th e embodie d service s tak e o n a muc h large r shar e o f trad e i n services tha n d o splintere d services . This fac t le d Grube l (1989 ) t o conclud e tha t ther e i s n o nee d fo r a new roun d o f negotiation s o n services . H e find s tha t fre e trad e i n good s and fre e establishmen t trad e ar e sufficien t t o cove r trad e i n services ; conceptually h e identifie s th e splintere d service s a s value-adde d embod ied i n goods . Bu t service s suc h a s finance , insurance , an d dat a banks ' services ar e mor e an d mor e disembodie d fro m productio n o f goods , an d are trade d independentl y fro m trad e i n goods . These structura l change s challeng e th e fre e trad e system . Th e w o r l d economy i s i n th e proces s o f formin g a singl e market , bu t ther e i s als o a drift t o w a r d regionalis m an d manage d trad e unde r a n oligopolisti c mar ket structure . Trad e issue s becom e muc h mor e comple x an d mor e deepl y rooted i n differen t domesti c institution s an d regulations . A strategi c trade polic y increasingl y look s attractiv e fo r obtainin g monopolisti c rent. Despit e th e globalizatio n o f marke t activity , ther e hav e emerge d "trade w a r s " amon g regiona l group s base d o n strategi c polic y an d insti tutionalized o r judicialize d protectionism . I n addition , gra y are a mea sures unde r a n oligopolisti c marke t structur e hav e bee n erodin g th e fre e trade syste m an d replacin g i t wit h a manage d trad e system .

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2 . M a i n S h o r t c o m i n g s o f th e G e n e r a l A g r e e m e n t o n Tariffs a n d T r a d e ( G A T T ) When th e G A T T w a s established , thoug h legall y onl y o n a provisiona l basis, i t implie d th e establishmen t o f a n internationa l institutio n t o promote an d maintai n globa l fre e trad e i n th e w o r l d economy ; i t brought abou t a bi g shif t o f trad e policy fro m protectionis m t o commit ment t o internationall y agree d upon rule s an d norm s b y th e contractin g parties. H o w e v e r , th e norm s an d principle s o f G A T T w e r e undermine d by challenge s arisin g fro m structura l changes an d revive d mercantilisti c trade policies . The G A T T provide s a framewor k o f norm s fo r th e w o r l d tradin g system an d a foru m fo r negotiation . I t als o provide s detaile d code s o f behavior fo r th e participatin g countrie s i n th e for m o f lega l right s an d obligations, althoug h th e enforcemen t an d compensatio n mechanis m i s not stron g enoug h t o solv e al l th e trad e disputes . Thi s lega l structur e i s significantly differen t fro m thos e o f othe r internationa l institution s lik e the I M F , the IBRD , an d th e OECD . As norm s w e ca n mentio n nondiscrimination , liberalizatio n o f trad e barriers, reciprocit y i n concessions , an d multinationalism . Th e centra l norm i s nondiscrimination . I t guarantee s competitio n amon g privat e enterprises o n a n equa l basi s i n th e internationa l marketplace . Whe n governments appl y trad e restriction s uniforml y withou t regar d t o th e origin o f products , th e efficienc y o f resourc e allocatio n wil l b e secure d through th e marke t mechanism. I n addition , th e nor m o f nondiscrimina tion check s th e tendenc y t o w a r d selfis h an d discretionar y mercantilis t trade policies . The unconditiona l most-favored-natio n clause , nationa l treatment , and transparenc y ar e th e rule s an d procedure s base d o n th e nor m o f nondiscrimination. Th e unconditiona l M F N commitment s hel p t o mini mize th e cost s o f rul e formatio n a s wel l a s transactio n cost s a t customs . They als o serv e to promot e a generalizatio n o f liberalizin g trad e policy ; they functio n a s th e "mutua l insurance " (Patterso n 1 9 8 7 ) tha t th e bene fits o f barrie r reduction s throug h negotiatio n wil l b e secure d by preclud ing tradin g partner s fro m givin g mor e favorabl e treatmen t t o othe r countries. Both th e nondiscriminato n nor m an d th e unconditiona l M F N proce dure have , however , bee n undermine d an d modifie d i n th e proces s o f pragmatic adaptatio n t o changin g circumstances . A s a result , th e G A T T

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became a "trouble d institution " (Jackso n 1 9 9 0 ) o r eve n a n "instrumen t of illiberalism " tendin g t o protec t th e politica l interest s o f politician s and bureaucrat s (Grube l 1 9 8 9 ) . Th e mai n shortcoming s o f th e G A T T can b e divide d int o fiv e categories : (1 ) insufficien t coverag e o f G A T T ; (2) derogatio n fro m G A T T norms ; (3 ) increasin g gra y are a measure s outside th e G A T T ; (4 ) lac k o f clarit y o n unfai r trad e practice s i n th e G A T T article s an d th e cod e agreements ; an d (5 ) lac k o f lega l integrit y and rul e implementatio n o f th e G A T T . The negotiation s a t th e G A T T hav e traditionall y focuse d o n manufac tured goods . Th e trad e o f agricultur e w a s lef t outsid e o f th e G A T T i n the mid-1950 s b y th e motio n o f th e U.S . an d EC . Th e U.S . acquire d th e waivers fro m th e G A T T unde r pressur e fro m Congres s base d o n th e Agriculture Adjustmen t L a w , whil e th e E C strengthene d protectio n o f the agricultur e secto r b y embarkin g o n th e Commo n Agricultur e Polic y (CAP). Th e turnaroun d o f U.S . trad e polic y o n agricultur e product s i n the Urugua y Roun d talk s collide d wit h th e EC' s CAP , whic h constitute s the cor e o f economi c integratio n withi n E C countries . The G A T T traditionall y pai d scan t attentio n t o trad e i n services ; rather, i t tende d t o tak e u p issue s o f th e lowes t denominato r o f th e participating countries . Revived nationalis m an d mercantilis m becam e mor e pronounce d afte r the 1 9 5 0 s . Th e firs t majo r attac k o n norm s w a s th e permissio n t o establish th e EEC , th e EF T A, th e fre e trad e are a agreements , an d othe r regional agreement s suc h a s th e U.S.—Canad a Automobil e Produc t Ar rangements. Ther e ar e n o w mor e tha n sixt y suc h arrangements . Eve n today G A T T take s a n extremel y la x stanc e t o w a r d free trad e are a forma tion an d ha s no t strictl y monitore d complianc e wit h articl e 2 4 , whic h requires fo r fre e trad e agreement s th e liberalizatio n o f substantiall y al l trade an d les s restrictiv e tarif f barrier s t o w a r d third countries . The secon d attac k o n norm s w a s th e Multifibe r Arrangemen t (Short Term Arrangemen t i n 1 9 6 1 , Long-Ter m Arrangemen t i n 1 9 6 2 , Multi fiber Arrangemen t i n 1 9 7 4 , 1 9 7 7 , 1 9 8 1 , an d 1 9 8 6 ) . Thi s sectora l ar rangement initiate d institutiona l protectio n o r manage d trade , followe d by mor e informa l o r bilatera l arrangement s o n footwear , television , stee l (worldwide expor t limitatio n i n 1 9 8 4 ) , automobiles , an d semiconduc tors. Althoug h th e M F A serve d t o preven t mor e sever e bilatera l trad e restriction o n textiles , th e G A T T provide d a framewor k o f institutiona l protection tha t buil t discriminator y safeguard s int o th e w o r l d tradin g system o n a forma l basis .

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The thir d attac k w a s th e approva l o f specia l an d discriminator y pref erences fo r th e trad e o f developin g countrie s (Genera l Syste m o f Prefer ence). Firs t proposed i n Unite d Nation s Conferenc e o n Trad e and Devel opment (UNCTAD) , th e GS P w a s authorize d b y th e enablin g claus e o f the understandin g a t th e Toky o Round . The fourt h attac k w a s th e cod e agreement s a t th e T o k y o Round . Th e conditional M F N w a s applie d b y th e Unite d State s t o th e code s o n subsidies an d countervailin g duties , governmen t procurement , an d tech nical standards . G A T T lega l argument s justifie d th e U.S . stanc e o n th e first t w o codes .

Gray Area Trade Practices The increasin g numbe r o f gra y are a trad e practice s outsid e th e frame w o r k o f tht G A T T ( 2 4 9 i n Septembe r 1 9 8 9 ) demonstrate s th e ineffec tiveness o f th e safeguar d mechanism , a s exemplifie d b y th e difficult y i n reaching agreemen t o n discriminator y applications , surveillance , tim e period o f degressivity , an d structura l adjustment , a s wel l a s d r a w b a c ks in disput e settlemen t mechanisms . Th e G A T T escap e claus e (articl e 19) , which i s a descendan t o f th e U . S . - M e x i c o Reciproca l Agreemen t o f 1 9 4 3 , i s regarde d by man y government s a s inadequate , s o arrangement s outside th e G A T T hav e bee n devised . Measures suc h a s th e Voluntar y Expor t Restrain t (VER) , th e Expor t Restraint Agreemen t (ERA) , th e Voluntar y Restrain t Agreemen t (VRA) , and th e Orderl y Marketin g Agreemen t (OMA ) ca n b e regarde d as selec tive safeguard s agains t particula r source s o f imports , typicall y institute d as a compromis e wit h protectionism . Th e V E R s ofte n lac k transparenc y and easil y accommodat e politica l pressur e t o w a r d protectionism . The y evade nationa l lega l problem s an d G A T T disciplines . Th e monopol y ren t distributed t o exportin g firms seem s t o compensat e o r overcompensat e for th e los s incurre d b y th e agreement . Th e consumer s o f importin g countries suffe r mos t fro m th e highe r pric e o f importe d goods , whil e domestic firms an d politician s shar e th e ren t wit h foreig n firms. I n thi s sense th e V E R dominate s tarif f policy . I t ca n b e interprete d a s a carte l agreement o n profi t sharin g o r a s a revers e dumpin g practic e endorse d by th e governments . O n th e othe r hand , th e Voluntar y Impor t Expan sion (VIE ) can b e regarde d as expor t protection . Tyso n ( 1 9 9 0 ) advocate s the VI E a s a ke y elemen t o f rule-oriente d manage d trade , whic h ma y

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contribute t o increasin g trad e by removin g th e marke t barriers stemmin g from unfai r busines s practices. Unfair Trade Practices G A T T article s pertainin g t o antidumpin g duties , subsidies , an d counter vailing dutie s lac k clarity . Th e additiona l code s agree d upo n a t th e T o k y o Roun d ar e haunte d b y ambiguit y an d contradiction . Antidump ing l a w s an d countervailin g dutie s ten d t o b e employe d fo r th e purpos e of protectin g domesti c industry . Antidumpin g calculation s o f unfai r prices i s ofte n difficul t t o implement , notabl y i n th e cas e o f increasing return-to-scale industry . Difference s i n economi c systems , suc h a s em ployment systems , add t o th e difficult y o f correctl y constructing cost . T o a certai n exten t "unfairness " reflect s difference s i n economi c structur e among differen t countries . I f a structura l chang e arisin g fro m th e re quirements o f internationa l trad e i s to o rapi d an d costly , the n th e safe guards an d antidumpin g dutie s w o r k a s a buffe r t o rebalanc e the burde n of th e cost s o f structura l adaptation . I f w e accep t thi s interpretatio n o f unfairness, the n w h a t i s neede d mos t i s internationa l agreemen t o n th e application o f th e principl e o f nationa l treatmen t i n domesti c compe tition policy , combine d wit h suppor t fo r structura l adaptatio n an d adequate compensation . Currently , structura l adaptatio n relie f i s onl y available t o developin g countrie s throug h th e Worl d Bank , whil e com pensation i s limite d t o th e suspensio n o f G A T T obligation s (GAT T article 2 3 ) .

Lack of Legal Integrity and

Rule Implementation

The G A T T i s base d o n a provisiona l treat y wit h a comple x w e b o f side code s an d internationa l agreement s an d provisions . I t i s extremel y difficult t o chang e th e rule s becaus e th e decision-makin g proces s i n th e G A T T i s base d o n consensus . Moreover , th e implementatio n o f G A T T rules i s impede d b y loopholes , foru m shopping , an d th e exercis e o f political p o w e r . These shortcoming s an d weaknesse s o f th e G A T T w e r e product s o f the trad e policie s o f majo r countries , notabl y th e Unite d State s an d th e EC. Th e chang e i n th e trad e policy o f th e Unite d State s a s th e creato r o f the syste m affecte d th e functio n an d rol e o f th e G A T T significantly .

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M a n y article s o f th e G A T T hav e thei r origi n i n U.S . trad e law . I n contrast, J a p a n w a s a passiv e nor m taker , bu t he r passiv e reactio n t o U.S. trad e policy le d t o th e weakenin g o f th e G A T T system .

3.

GAT T an d Japan's Trade P o l i c y

The mai n l a w s relevant to trad e policy ar e the L a w on Foreig n Exchang e and Foreig n Trade Control, couple d wit h th e Governmen t Ordinanc e o n Export an d Impor t Control , th e L a w o n Expor t an d Impor t Transac tions, an d th e Custom s Tarif f L a w . The Ministr y o f Internationa l Trad e and Industr y (MITI ) implement s administrativ e guidanc e base d on thes e l a w s , ordinances , an d othe r l a w s governin g regulate d industries . Th e first l a w liste d abov e authorize s th e ministe r o f MIT I t o introduc e a n import quot a syste m an d a n expor t approva l system , whil e th e secon d law acknowledge s th e formatio n o f expor t an d impor t cartel s tha t ar e exempt fro m th e Antimonopol y L a w . The thir d la w prescribes the condi tions fo r th e us e o f antidumpin g an d countervailin g duties . When J a p a n w a s permitte d t o ente r th e G A T T i n 1 9 5 5 , fourtee n countries invoke d articl e 3 5 (nonapplicatio n o f G A T T obligations ) against J a p a n . A t firs t Britai n attempte d t o appl y discretionar y an d selective safeguard s against J a p an a s a n alternativ e t o articl e 3 5 . Bu t fo r Japan bot h articl e 3 5 an d discretionar y an d selectiv e safeguard s implie d severe restriction s o n it s competitiv e textil e exports . Britai n faile d t o apply selectiv e safeguard s agains t J a p a n becaus e o f th e difficult y i n amending th e G A T T articles . I n 1 9 5 6 J a p a n accommodate d th e U.S . request fo r voluntar y expor t restrain t o n textiles . Bu t th e Unite d State s insisted o n concludin g a n agreemen t a t th e administrativ e leve l i n 1 9 5 7 . This agreemen t w a s extende d a t th e G A T T unde r th e U.S . initiativ e t o the M F A i n 1 9 6 1 . In 1 9 6 3 J a p a n becam e subjec t t o articl e 1 1 , whic h prohibit s th e us e of a tarif f fo r balance-of-paymen t reasons . Durin g th e cours e o f th e 1 9 6 0 s an d 1 9 7 0 s J a p an promote d liberalizatio n o f trad e and investment , resulting i n a l o w e r averag e tarif f rat e tha n thos e o f othe r industrialize d countries afte r th e T o k y o Round . A t th e sam e time , J a p a n accommo dated th e U.S . reques t fo r voluntar y restrain t o f export s o f variou s products. J a p a n acte d a s a passiv e nor m taker , regardles s of th e origi n or legitimac y o f th e internationa l norms . In accommodatin g U.S . requests , administrative guidanc e w a s utilize d

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on th e basi s o f th e L a w o n Expor t an d Impor t Transaction s an d th e Ordinance o n Expor t Control . Th e MIT I issue d directive s t o creat e th e export carte l o n television s ( 1 9 6 3 - 7 3 ) an d colo r television s ( 1 9 7 7 - 7 9 ) on th e basi s o f th e L a w o n Expor t an d Impor t Transactions . Withou t these directives , th e expor t carte l w o u l d hav e violate d th e Antitrus t L a w o f th e Unite d States . Actually , th e agreemen t betwee n th e U.S . government an d Japan' s Stee l Expor t Associatio n o n expor t restrain t o f steel ( 1 9 6 9 - 7 1 ) w a s brough t t o cour t becaus e o f th e violatio n o f th e Antitrust L a w by th e U.S . Consumers ' Union . I n th e cas e o f automobile s ( 1 9 8 1 - 9 0 ) , th e MIT I simpl y issue d a directiv e allocatin g expor t quota s to th e companie s concerne d an d monitore d thei r adherenc e o n th e basi s of th e Foreig n Exchang e Contro l L a w . In J a p an i t i s rar e tha t privat e enterprise s initiat e petition s agains t th e trade polic y measure s o f th e government . Bu t thi s di d occu r wit h respec t to th e U . S . - J a p a n agreemen t o n syntheti c fibe r an d w o o l product s i n 1 9 7 0 . Th e agreemen t w a s th e outcom e o f a politica l bargai n involvin g export restraint s an d th e reversio n o f Okinaw a t o J a p a n . Th e Japanes e government implemente d a voluntar y quantitativ e expor t restrain t o n synthetic fibe r an d w o o l product s base d o n th e Ordinanc e o f Expor t Control. Bu t th e Japanes e Textil e Industr y Federatio n presente d th e cas e to a cour t an d argue d tha t th e applicatio n o f th e ordinanc e violate s article 1 1 o f G A T T (prohibitio n o f quantitativ e restrain t o f import s an d exports) an d articl e 2 0 o f th e constitutio n (freedo m o f occupatio n an d trade). Th e judgmen t w a s no t delivere d becaus e th e federatio n withdre w the lawsui t du e t o th e renegotiatio n o n textil e a t G A T T i n 1 9 7 4 . Y e t this case cast s doub t abou t th e consistenc y o f administrativ e discretionar y measure wit h th e G A T T an d th e Constitution . Thi s cas e pointe d t o th e need o f mor e rule-base d trad e polic y equippe d wit h mor e clarit y o f principles an d transparenc y in th e decision-makin g process . It also raise d the issu e o f consistenc y o f domesti c l a w s an d ordinance s wit h th e G A T T rules . Another cas e w a s th e petitio n b y th e neckti e producer s o n th e impor t restriction base d o n th e L a w of Sil k Yar n Pric e Stabilization . Th e neckti e producers insiste d tha t th e sil k yar n protection violate s freedo m o f occu pation an d trad e calle d fo r i n th e constitution . Th e sui t w a s rejecte d b y the court , whic h pointe d a s recours e t o th e safeguard s claus e (GAT T article 19) . Bu t th e lega l procedur e t o appl y th e safeguard s claus e i s no t clearly state d i n domesti c l a w s . Actually , th e safeguard s provision s o f

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the Foreig n Exchang e Contro l L a w canno t b e employe d b y privat e parties, althoug h i t i s possibl e t o exer t politica l influenc e o n th e govern ment's decision . I t i s withi n th e discretio n o f th e governmen t (Matsu shita 1 9 9 0 ) . Judging fro m pas t history , Japan' s trad e policy w a s largel y a reactio n against th e restrictiv e measure s o f it s tradin g partner s and thei r govern ments' reques t t o liberaliz e acces s t o it s market. J a p a n ha s scarcel y 3

taken initiativ e t o strengthe n th e libera l w o r l d tradin g system . I t i s unfortunate tha t J a p a n i s see n a s a proponen t o f manage d trad e despit e the fac t tha t i t w a s oblige d b y foreig n countrie s t o adop t "voluntary " export restrain t fro m th e beginnin g o f it s membershi p i n G A T T . More over, J a p a n i s regarde d b y foreig n observer s a s a successfu l cas e o f adopting strategi c policy ; Tyso n an d Zysma n (1989 ) name d thi s polic y the "movin g ban d o f protectionism " (liberalizin g trad e onl y afte r over investment i n a protected domestic marke t accompanied b y concentrate d exports abroad) , although th e polic y simpl y move d t o w a r d trade liberalization afte r catchin g u p wit h th e leve l o f Wester n technology , albei t maybe to o slowl y an d gradually . Thi s i s no t a n unusua l historica l pat tern i n economi c development . It ma y b e note d tha t J a p a n lack s judicia l instrument s b y whic h t o implement "strategi c policy" i n th e sens e o f affectin g a partner' s behavior b y influencin g th e partner' s expectation. Asid e fro m th e antidumpin g and countervailin g dutie s provisions , Japanes e trad e l a w s d o no t allo w private businesse s t o initiat e petitions . Th e detaile d procedure s o n anti dumping dutie s an d countervailin g dutie s w e r e give n onl y recently , i n 1 9 8 6 ; thu s fa r onl y thre e case s hav e bee n brough t forwar d for petitio n (cotton thread s fro m Kore a an d Brazi l an d ferrosilico n fro m Brazil) . This lac k o f judicia l instrument s suggest s that th e G A T T shoul d b e mor e important i n solvin g trad e dispute s fo r J a p a n tha n fo r th e Unite d States. Y e t J a p a n ha s remaine d largel y a passiv e participan t i n G A T T negotia tions. Th e initiativ e t o revitaliz e th e G A T T stemme d fro m th e Unite d States, whic h ha s becom e mor e an d mor e "strategic " i n implementin g trade policy . The U.S. Move toward Strategic

Trade

Policy

In contras t t o Japan' s trad e policy , U.S . trad e polic y i s muc h mor e judicialized an d subjec t t o constitutiona l constraints . Ther e i s a n unre -

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solved ambiguit y i n U.S . constitutiona l l a w wit h respec t t o th e divisio n of p o w e r betwee n th e executiv e branc h an d Congres s wit h regar d t o policy-making i n internationa l trad e matters . Th e Reciproca l Trad e Agreement Ac t o f 1 9 3 4 fo r th e first tim e conferre d upo n th e presiden t broad advanc e authorit y t o negotiat e an d conclud e reciproca l trad e agreements. Unde r thi s condition , th e presiden t accepte d G A T T . Thi s trade authorit y w a s periodicall y renewed , allowin g th e Unite d State s t o negotiate tarif f reduction s throug h th e G A T T . H o w e v e r , th e G A T T ha s never bee n consente d t o b y Congres s a s a treat y obligation ; i t w a s regarded a s a n "executiv e agreement " superseded by domesti c l a w unti l 1974. The tensio n betwee n Congres s an d th e executiv e branc h increase d during th e 1 9 6 0 s . The Trad e Act o f 1 9 7 4 impose d constraint s o n execu tive discretion , whil e delegatin g t o th e presiden t advanc e authorit y t o negotiate nontarif f barrier s i n th e T o k y o Roun d an d recognizin g G A T T as a bindin g internationa l treat y through th e authorizatio n o f appropria tions fo r financial contribution s t o G A T T . Th e Congres s impose d con straints o n presidentia l discretio n i n a n attemp t t o ensur e tha t th e Unite d States w o u l d no t exten d th e benefit s o f trad e barrie r reductio n t o th e industrial countrie s tha t refuse d t o reciprocat e adequatel y i n th e T o k y o Round negotiation . Sectio n 3 0 1 w a s adde d t o th e trad e l a w a s a stron g w e a p o n agains t th e free-ride r proble m inheren t i n th e unconditiona l M F N o f th e G A T T . Further , Congress judicialize d existin g impor t relie f measures, includin g safeguards , antidumping, an d countervailin g duties , thereby empowerin g privat e partie s t o initiat e petition s agains t foreig n industry. Contingen t protectio n flourishe d afte r th e mid-1970 s (tabl e 4.4). Ten year s later , th e 1 9 8 4 ac t w a s th e first broa d legislatio n initiate d by Congress , instea d o f th e executiv e branch , sinc e Smoot-Hawley . Thi s authorized th e presiden t t o negotiat e a Fre e Trad e Are a Agreemen t with Israe l an d othe r countries . Subsequently , th e Omnibu s Trad e an d Competitiveness Ac t o f 1 9 8 8 strengthene d retaliatio n agains t unfai r trade practice s i n a n effor t t o increas e th e internationa l competitivenes s of U.S . industries . Section 3 0 1 w a s amende d t o enabl e th e executiv e branc h t o adop t mandatory o r discretionar y retaliatio n whe n a partne r country exercise s unjustifiable, unreasonable , o r discriminator y measures . "Unjustifiable " measures ma y includ e impediment s t o U.S . trade , suc h a s anticompeti -

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Table 4 . 4 Antidumpin g Dutie s an d Countervailin g Dutie s Initiate d b y the Unite d State s Antidumping Duties 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

22 39 27 10 10 27 15 44 44 17 14 19 38 44 61 65 43 33 25

7 13 13 3 6 9 4 12 3 4 1 3 5 6 3 6 9 10 5

Countervailing Duties

7 75 35 22 60 43 11 13 9

Safeguards

2 6 4 2 6 3 5

Source: GATT-A D an d CVD Committees .

tive busines s practice s expor t targeting . " S u p e r - 3 0 1 " (section 1 3 0 2 ) pre scribes th e obligation s o f th e UST R t o presen t th e Annua l Nationa l Trade Estimat e t o Congres s an d t o specif y th e priorit y unfai r trad e practices an d priorit y countrie s withi n thirt y day s o f th e presentatio n o f the estimate . I t enable d unilatera l determinatio n o f reciproca l fairnes s under th e discretio n o f th e executiv e branch . I n 1 9 8 9 J a p a n , Brazil , an d India w e r e specifie d a s priorit y countries . I n th e cas e o f J a p a n , unfai r trade practice s w e r e cite d fo r supercomputers , satellites , an d lumber . In 1 9 9 0 thi s provisio n expire d i n vie w o f th e progres s mad e t o w a r d market access . The "Structura l Impediments Initiatives " dialogu e betwee n th e Unite d States an d J a p a n w a s als o begu n i n orde r t o avoi d escalatio n o f retalia tion base d o n sectio n 3 0 1 an d sectio n 3 3 7 (protectio n o f intellectua l property). Th e Bus h administratio n face d t w o tasks : th e nee d t o brin g about th e succes s o f th e Urugua y Roun d an d th e nee d t o contai n th e

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protectionism o f Congress . Priorit y w a s give n t o removin g barrier s t o market acces s an d correctin g bilatera l trad e imbalances.

4

Disappointment wit h th e 1 9 8 2 G A T T Ministeria l Meetin g adde d momentum t o th e mov e t o w a r d bilateralism . Th e drif t t o w a r d bilater alism ma y b e viewe d a s a presidentia l counterattac k agains t th e mor e drastic protectionis m o f Congress . Th e Unite d State s embarke d o n th e formation o f a fre e trad e are a wit h th e intentio n o f furthe r extendin g i t to Centra l an d Lati n America. Ambassador William Broc k of th e Reaga n administration describe d th e mov e a s a Super-GAT T because i t aime d t o prompt trad e liberalizatio n b y includin g a wide r rang e o f issues . H o w ever, fro m th e viewpoin t o f foreig n observers , trad e polic y unde r th e 1 9 8 8 ac t seem s t o impl y a retur n t o th e bilateralis m an d aggressiv e reciprocity base d o n threat s o f retaliation , instea d o f promises , tha t had characterize d U.S . trad e polic y befor e 1 9 2 2 . Fro m a game-theor y viewpoint, th e curren t U.S . trad e polic y ca n b e describe d a s a polic y based o n a "tit-for-tat " strategy . Although admittin g th e merit s o f strategi c trade policy base d o n a tit for-tat strategy , suc h a s simplicit y an d uniqueness , Dixi t (1987 ) argue d that U.S . trad e polic y lacke d clarit y a s t o th e condition s o f retaliatio n and th e certaint y o f retaliatio n (provocability) , whil e i t satisfie d th e requirements o f nicenes s (no t bein g th e first t o defect ) an d forgiveness . He conclude d tha t a trad e polic y base d o n strategi c moves , notabl y threats, wil l no t w o r k well . Japan's trad e polic y als o apparentl y satisfie d th e forgivenes s require ment, bu t lacke d clarit y an d provocability . Moreover , Japa n misse d the opportunit y t o b e nic e b y accommodatin g U.S . request s fo r expor t restraint. Japan' s trad e polic y w a s broadl y reactiv e instea d o f strategic , although it s export-oriente d industria l polic y ma y hav e create d th e im pression tha t J a p a n pursue d a "strategic " policy . Importance of

the Uruguay Round

In vie w o f th e defect s o f th e G A T T , th e Unite d State s too k th e initiativ e to embar k o n a ne w roun d o f trad e negotiation s i n 1 9 8 2 . Th e Unite d States focuse d o n agricultura l trade , an d ne w area s suc h a s trad e i n services, trade-relate d investmen t measures , an d intellectua l propert y rights; th e excessiv e surplu s o f agricultura l product s o n th e w o r l d mar ket becam e obviou s i n th e 1 9 8 0 s , whil e agricultura l subsidie s ros e enor -

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mously ( $ 2 0 0 billio n a year , accordin g t o th e OEC D estimate) . Th e United State s foun d tha t it s comparativ e advantag e i n trad e i n service s w a s no t bein g reflecte d i n it s marke t positio n overseas . Additionally, th e United State s hope d t o kee p th e Europea n countrie s fro m excessivel y inward-looking regionalis m ("Fortres s Europe") . Although ther e appeare d t o b e significan t progres s o n a numbe r o f subjects suc h a s tariffs , nontariffs , natura l resourc e products , tropica l products, an d rule s o f produc t origin , th e negotiation s deadlocke d o n the issu e o f agricultura l trade . Th e issue s addresse d i n th e Urugua y Round ma y b e summarize d b y th e followin g nin e areas . 1. Regardin g agricultura l products , th e Unite d State s initiall y pro posed t o conver t quantitativ e trad e barrier s t o tariff s an d t o ai m a t reducing bot h tarif f an d expor t subsidie s t o th e agricultura l secto r t o zero i n te n years . A revise d proposa l sough t a targe t tarif f reductio n o f 7 5 percen t o n domesti c subsidie s an d 9 0 percen t o n expor t subsidies . The E C Commissio n mad e a counterproposa l t o reduc e agricultura l protection 3 0 percen t ove r te n year s startin g i n 1 9 8 6 , base d o n th e aggregate measuremen t suppor t ( A M S ) .

5

Japa n insiste d o n excludin g

rice an d som e dair y product s fro m tarifficatio n becaus e o f th e foo d security. I n Septembe r 1 9 9 0 J a p a n accepte d a 3 0 percen t reductio n i n domestic protection . H o w e v e r , th e U.S . an d E C position s coul d no t b e compromised i n th e Decembe r 1 9 9 0 ministeria l conference , an d thi s difference remain s th e ke y bloc k t o th e conclusio n o f th e Urugua y Round. 2. Regardin g services , i t w a s agree d upo n t o establis h th e righ t o f national treatment , th e transparenc y o f barriers , an d progressiv e liberal ization o f trad e i n services . Ther e remain s th e issu e a s t o whethe r w e should includ e i n th e negotiatio n service s involvin g th e movemen t o f capital an d labor , notabl y unskille d migran t labor . I n addition , th e E C argues fo r effectiv e marke t acces s base d o n reciprocit y an d discrimina tory treatmen t agains t countrie s tha t d o no t compl y wit h reciprocity . The Unite d State s seem s t o accep t th e E C proposal , whil e J a p a n object s to th e ide a o f discriminatio n o n th e groun d o f th e principl e o f reci procity. 3 . Regardin g trade-relate d investmen t measure s (TRIMs) , th e trade off betwee n th e nee d fo r developmen t an d th e privat e incentiv e t o inves t is no t resolved . Developin g countrie s argu e that loca l conten t an d expor t performance requirement s serv e t o promot e developmen t an d thu s ar e

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justified b y G A T T articl e 17c . Y e t it i s necessar y to exclud e ne w barrier s and establis h th e red-ligh t prohibition s agains t offensiv e performanc e requirements fo r export , trad e balancing , employment , loca l manufac turing, an d loca l conten t a s wel l a s foreig n exchang e restriction s b y host countries . 4. Regardin g trade-relate d intellectua l propert y right s (TRIPs) , i t i s necessary t o creat e consensu s o n a minimu m standar d o f protectio n o f property right s (copyright , patent , trademark , design , trad e secrecy) . Developing countrie s argu e that th e issu e mus t b e handle d b y th e Worl d Intellectual Propert y Organizatio n (WIPO ) asid e fro m th e prohibitio n against pirate d an d counterfei t goods . Bu t th e WIP O lack s a n effectiv e enforcement mechanism . I n addition , ther e exist s a basi c difficult y i n striking a balanc e betwee n th e provisio n o f incentiv e fo r knowledg e creation (innovation ) an d th e us e o f th e knowledg e (technolog y trans fer). Amon g develope d countrie s ther e ar e als o differen t view s o n th e patent syste m ( a first-to-invent

o r a first-to-file

method ) an d o n th e

extension o f copyrigh t t o neighborin g rights , give n th e divergen t pre scriptions o f domesti c l a w s o n patents . 5. Regardin g safeguards, opinion i s divide d a s to whethe r ther e coul d be selectiv e activatio n o f safeguards . Selectiv e applicatio n o f safeguard s not onl y violate s th e nondiscriminatio n principl e bu t als o create s veste d interests i n th e countrie s no t bein g targeted , a s th e M F A ha s demon strated. The U . S . - C a n a d a Fre e Trad e Are a Agreemen t allowe d selectivit y in disput e settlement s o n safeguar d measures : th e disput e settlemen t mechanism i s regarde d a s on e o f th e majo r accomplishment s i n th e adjudication o f contingen t measures . Th e agreemen t exempte d eac h country fro m others ' globa l safeguar d restrictions whe n th e partner s d o not for m a n importan t par t o f th e injury . Thi s violate s articl e 2 4 (free trade area) , whic h require s remova l o f al l safeguar d measures . I t als o negates th e ful l applicatio n o f th e M F N o f articl e 1 9 (safeguar d mea sures). Thus , a t th e Urugua y Roun d th e Unite d State s move d fro m support o f nonselectivit y t o suppor t o f limite d selectivit y subjec t t o multilateral surveillanc e an d degressivity . It i s eas y t o se e w h y th e E C pushe s strongl y t o adop t th e selectiv e approach; th e formatio n an d extensio n o f regiona l grouping s ca n b e strengthened throug h discriminator y applicatio n o f safeguard s t o th e third-person countries . Th e U.S . commitmen t t o th e bilatera l free-trad e

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agreement wit h Canad a anticipate d th e U.S . mov e t o w a r d selectivity . Japan stand s firm agains t applicatio n o f selectiv e safeguard s becaus e o f the bitte r experienc e o f havin g articl e 3 5 invoke d agains t i t whe n i t entered th e G A T T . Y e t i t ma y b e note d tha t J a p a n accommodate d th e request b y th e Unite d State s an d th e E C o n th e V E R s , whic h ar e th e functional equivalent s o f selectiv e safeguard s originatin g fro m th e nee d for structura l adaptation . Ther e i s a trade-of f betwee n th e abolitio n o f gray are a measure s an d th e adoptio n o f selectiv e applicatio n o f safe guards unde r clearl y state d conditions an d tim e limits . 6. Regardin g textile s an d clothing , i t w a s agree d a t Montrea l i n December 1 9 8 8 t o phas e ou t th e restriction s unde r th e M F A , sinc e the y were deeme d GATT-incompatible . Ther e appeare d t w o proposals : th e global quota s metho d (advocate d b y th e Unite d States ) o r gradua l dis mantling o f al l M F A restriction s base d o n th e M F A growt h solutio n (b y raising th e impor t ceilin g o f th e M F A ) i n te n year s (advocate d b y th e developing countrie s an d Japan) . 7. Regardin g subsidie s an d countervailin g duties , i t w a s agree d t o prohibit export-promotin g subsidie s whil e specifyin g th e condition s fo r triggering countervailin g dutie s an d limitin g them t o five years ' duration . The Unite d State s w a s reluctan t t o broade n th e green-ligh t subsidies , while th e E C i s mor e toleran t t o w a r d subsidies . Subsidie s fo r regiona l development, precompetitiv e R & D , environmenta l protection , an d em ployment adjustmen t w e r e include d i n th e green-ligh t subsidies . Bu t there remain s th e issu e o f th e exten t t o whic h subsidie s t o precompetitiv e R & D ar e t o b e permitted . I n addition , J a p a n insist s tha t subsidie s fo r structural adjustmen t i n declinin g industrie s suc h a s shi p buildin g an d coal minin g b e permitted . 8. Th e Unite d State s proposed t o allo w fo r retaliatio n agains t "repeat dumping" whil e th e E C suggeste d adoptio n o f th e rul e agains t "screw driver plants " an d th e "expor t o f parts " tha t ar e designed t o circumven t antidumping duties . J a p a n object s strongl y t o retaliatio n agains t repea t dumping. On e complicatio n i s interrelation s o f thes e suggeste d measures with th e T R I M s . T o avoi d antidumping , a compan y mus t obe y th e loca l content requirement , bu t thi s ma y contradic t th e objec t o f th e T R I M s . 9. Regardin g disput e settlement , th e E C an d J a p a n propos e t o pro hibit unilatera l retaliation : th e U.S . practice , base d o n sectio n 3 0 1 , w a s found t o b e incompatibl e wit h G A T T rules . Whil e i t seem s difficul t to strengthe n th e enforcemen t mechanis m o f G A T T pane l decisions ,

1 3 0 Kazumasa

Iwata

contracting partie s ar e likel y t o agre e no t t o bloc k th e establishmen t o f panels, th e adoptio n o f pane l reports , o r complianc e wit h pane l deci sions. Th e introductio n o f a n appellat e tribuna l o f lega l expert s ma y be approved . J a p a n seem s t o hav e bee n successfu l i n supportin g it s positio n o n safeguards, th e M F A , subsidies , an d countervailin g duties . However , Japan canno t escap e blam e wit h respec t t o th e failur e t o agre e o n ag ricultural trade , althoug h thi s failur e stemme d fro m a disput e betwee n the Unite d State s an d th e EC . I n orde r t o sav e th e G A T T negotiation , i t is o f utmos t importanc e fo r J a p a n t o joi n wit h th e Unite d State s t o persuade th e E C regardin g agricultural trade liberalization. Japa n shoul d make concession s o n agricultura l products ; th e partia l liberalizatio n o f rice import s shoul d b e implemente d wit h th e ceilin g o f 2 percen t (0. 2 million tons) , o r 5 percen t o f domesti c production , despit e th e resolutio n against liberalizatio n o f ric e import s a t th e Diet . I t i s als o desirabl e t o impose som e constraint s o n expor t subsidie s fo r agricultura l products . The Unite d State s ma y mak e a concessio n i n delayin g th e tim e allowe d for tarifficatio n an d i n th e siz e o f tarif f reduction . I n ne w area s suc h a s services, includin g th e TRIP s and th e T R I M s , progress may occu r despit e resistance b y developin g countries . Wit h respec t to unfai r trad e practices and safeguards , w e nee d mor e far-reachin g solutions , a s discusse d be low, i f th e cor e proble m lie s i n th e rebalanc e of th e burde n o f adjustmen t costs amon g countrie s wit h differen t economi c structure . Give n th e dis harmony an d widesprea d disappointmen t amon g participant s i n th e Uruguay Roun d talks , w e ma y nee d t o restructur e th e w o r l d tradin g system mor e fundamentally .

4 . N e w W o r l d T r a d e S y s t e m afte r th e Uruguay Roun d Depending o n th e degre e o f succes s o f th e Urugua y Round , ther e ar e four alternativ e scenario s fo r th e formatio n o f a ne w w o r l d tradin g system i n th e 1 9 9 0 s . The first scenari o w o u l d b e th e formatio n o f thre e regiona l groupings . If th e Urugua y Roun d run s aground , ther e wil l b e a n increase d inclina tion t o w a r d th e formatio n o f regiona l groupings . Bu t th e formatio n o f regional grouping s ma y reduc e w o r l d welfar e du e t o discriminatio n among th e thre e areas . Krugma n (1989 ) argue s convincingl y tha t th e

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three grouping s scenari o w o u l d b e th e w o r s t , given monopolisti c compe tition an d th e optima l tarif f availabl e t o eac h region ; th e large r siz e o f a regional groupin g implie s a large r trade-creatio n effect . Nevertheless , this kin d o f groupin g i s accompanie d b y a n eve n large r trad e diversio n and a highe r optima l tarif f rate . In th e secon d scenario , a cod e approac h t o strengthenin g th e G A T T system coul d b e taken . Th e Atlanti c Counci l o f th e Unite d State s (1975 ) once propose d a " G A T T plus" base d o n code s i n th e for m o f a package deal. Thi s approac h w as als o develope d b y Hufbaue r an d Schot t ( 1 9 8 5 ) . Several economist s advocat e th e usefulnes s o f a cod e a p p r o a c h — n o t a bly o n subsidies , safeguards , an d services—i n securin g a balanc e be tween nondiscriminatio n an d th e penaltie s o f fre e ridin g (Baldwi n an d Richardson 1 9 8 7 ) , whil e other s regar d th e cod e approac h a s a seriou s derogation fro m G A T T norms . The cod e approac h ca n promot e liberalizatio n o f trad e an d invest ment i n th e Pacifi c area , whic h consist s o f countrie s a t differen t develop ment stage s (Iwat a 1 9 8 8 ) . Thi s approac h i s essentiall y base d on plurilat eralism: th e most-favored-nation s claus e i s applie d onl y t o thos e w h o w a n t t o participat e i n th e liberalizatio n process . Thus i t replace s uncon ditional M F N b y conditiona l M F N , wit h th e ai m o f eliminatin g fre e riding. The thir d scenari o fo r th e creatio n o f a ne w w o r l d tradin g syste m w o u l d involv e establishmen t o f a n OEC D fre e trad e an d investmen t area. A cod e approac h centerin g o n th e conditiona l M F N concep t w a s advanced i n a proposa l t o establis h o n OEC D fre e trad e an d investmen t area b y G . Hufbaue r ( 1 9 8 9 ) . H e anticipate s limite d succes s fo r th e Uruguay Roun d an d argue s fo r a n enlarge d free-trad e an d investmen t area. A n OECD-FTI A i s attractiv e i n t w o respects . First , i t ma y hel p discourage th e E C fro m adoptin g a n excessivel y inward-lookin g policy . Second, i t w o u l d see m relativel y eas y t o realiz e a n OECD-FTI A i n vie w of th e accomplishmen t o f trad e an d investmen t liberalizatio n b y th e OECD membe r countries . I t is encouragin g tha t i n M a y 1 9 9 0 th e OEC D member countrie s reache d agreemen t o n liberalizatio n o f direc t invest ment base d o n nationa l treatmen t wit h respec t t o taxation , subsidies , and governmen t procurement . Thi s agreemen t preclude s ne w require ments o n loca l conten t an d othe r regulations . One o f th e majo r defect s o f thi s proposa l i s th e discriminator y effec t it coul d hav e o n developin g countries . Hufbaue r contend s tha t suc h

1 3 2 Kazumasa

Iwata

discriminatory effect s ma y b e minor , du e t o highe r growt h i n th e area , easy entr y t o th e area , an d diminishe d gra y are a measures . However , i t seems likel y tha t th e tensio n betwee n th e Sout h an d th e Nort h ma y b e heightened, unles s institutiona l arrangement s are mad e regardin g access to a dispute-settlemen t mechanis m withi n th e OECD-FTI A b y devel oping countries . Anothe r proble m i s duplicatio n a t th e leve l o f interna tional organizations . Bot h th e G A T T an d th e OEC D w o u l d virtuall y become lega l constitution s fo r trad e policy. I n addition , eve n mor e tha n the G A T T Secretariat , the OEC D lack s expert s o n l a w an d disput e set tlement. In vie w o f th e mov e t o w a r d regionalis m b y th e E C an d th e Unite d States an d th e thus-fa r unsuccessfu l outcom e o f th e Urugua y Roun d talks, Malaysia' s Prim e Ministe r Mahathi r bi n M o h a m e d propose d th e East Asia n Economi c Group , excludin g Australia , the Unite d States , and Canada. Th e Unite d State s criticize d th e proposa l whil e J a p a n ha s no t expressed an y officia l view . Y e t Japan' s basi c thrus t o f polic y lie s i n open regionalis m o f th e Pacifi c area , includin g th e Unite d State s an d Canada; J a p a n ha s alread y take n th e initiativ e t o develo p th e Pacifi c Economic Cooperatio n Conferenc e (PECC ) an d th e Asia-Pacifi c Eco nomic Cooperatio n (APEC ) togethe r wit h Australi a an d Singapore . These institution s ar e oriente d t o w a r d ope n regionalis m an d ca n b e characterized b y informalit y an d flexibility ; nondiscriminatio n i n actio n and nonexclusivit y o f internationa l relation s constitut e th e cor e princi ples o f ope n regionalism . Increasin g busines s tie s betwee n U.S . an d Japanese multinational s create d b y direc t foreig n investmen t an d th e concomitant o u t w a r d processing o f high-tec h industrie s ha s contribute d to th e productio n an d export s o f Asia n countries , althoug h th e shar e o f foreign capita l i n tota l capita l stoc k i s smalle r tha n fo r Lati n America n countries. Japa n i s expecte d t o pla y a ke y rol e i n absorbin g Asia n exports o f manufacture d product s an d i n providin g capital , manage ment, an d technolog y t o Asia n countries . Regardles s o f th e succes s o r failure o f th e Urugua y Roun d talks , ope n regionalis m i n th e Pacifi c are a will continu e t o evolv e i n th e forthcomin g decade . Th e clos e busines s interdependence amon g th e Unite d States , J a p a n , an d th e Asia n coun tries seem s t o negat e th e formatio n o f a n Asia n blo c i n th e nea r future . The fourt h an d fina l possibl e scenari o w o u l d entai l th e establishmen t of a multilatera l trad e organization. Jackso n (1990) propose d t o restructure th e w o r l d tradin g syste m b y legall y consolidatin g th e G A T T t o

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establish th e Worl d Trad e Organizatio n (WTO) . Thi s proposa l w a s endorsed b y Ital y an d the n Canada , an d i t receive d basi c accor d a t th e Quadrangular Meetin g o f Trad e Minister s i n M a y 1 9 9 0 . Th e E C pre ferred t o nam e i t th e "Multilatera l Trad e Organization " (MTO) , puttin g emphasis o n th e importanc e o f multilateralism , a s oppose d t o unilater alism o r bilateralism , i n disput e settlements . A t th e G- 7 Summi t i n Jul y 1 9 9 0 i t w a s agree d tha t th e issu e o f th e M T O shoul d b e discusse d afte r the Urugua y Round . Th e Functionin g o f th e G A T T Grou p (FOG ) ha s taken u p th e issu e a s a n agend a item . The mai n purpos e o f th e M T O i s t o restor e the G A T T a s a n interna tional organizatio n comparabl e t o th e I M F an d th e IBRD . Thi s ide a w a s originally envisage d i n th e Havan a Charte r fo r th e Internationa l Trad e Organization (ITO ) an d w a s revive d i n 1 9 5 5 a s th e Organizatio n fo r Trade Cooperatio n (OTC) . I t aim s a t (1 ) achievin g lega l integrit y fo r th e G A T T article s an d variou s code s an d othe r arrangements ; (2) improvin g dispute settlemen t procedure s t o preclud e foru m shopping ; an d (3 ) pro viding a n interfac e mechanis m fo r ne w participatin g nonmarke t econ omies. The M T O i s reminiscen t o f th e Internationa l Trad e Organizatio n with a universa l membershi p principle , whic h allow s th e fulles t feasibl e participation o f al l countries . Universa l membershi p correspond s t o th e notion o f collectiv e securit y unde r th e aegi s o f th e Unite d Nations . I t may b e recalle d tha t th e U N charte r regard s th e G A T T a s a specialize d agency unde r th e U N system . Th e universalit y principl e ha s gaine d its importanc e i n constructin g a ne w w o r l d order . Th e transitio n o f Communist countrie s t o a market-oriente d syste m augment s th e nee d for th e G A T T a s a n interfac e mechanis m t o facilitat e trad e amon g nations wit h differen t economi c systems . U.S. Presiden t Truma n withdre w ratificatio n o f th e IT O i n vie w o f strong congressiona l resistanc e i n Decembe r 1 9 5 0 . I f th e M T O ca n really functio n a s a supe r internationa l organizatio n t o settl e dispute s and t o effectivel y enforc e pane l decision s i n membe r countries , thi s i s a n ideal solutio n fo r solvin g trad e problems . Bilatera l an d regiona l ap proaches t o removin g difference s o f economi c structur e among differen t countries wil l b e replace d an d integrate d b y th e M T O ; disput e settle ment wil l b e monitore d multilaterall y s o tha t th e sid e effect s inheren t i n a bilatera l o r plurilatera l approach to fre e trad e may b e minimized . It i s encouragin g tha t majo r countrie s ten d t o rel y mor e o n recours e

1 3 4 Kazumasa

Iwata

to pane l decision s i n solvin g trad e disputes ; i t i s interestin g t o not e tha t for th e firs t tim e th e Unite d State s change d domesti c l a w t o mak e i t compatible wit h th e G A T T i n 1 9 8 1 , in respons e t o th e complain t b y th e EC o n th e Domesti c Internationa l Corporatio n (DISC) . Further , in 1 9 8 8 J a p a n implemente d liberalizatio n o f te n agricultura l product s base d o n the decisio n o f a panel . A t th e sam e time , Japa n fo r th e firs t tim e initiated a G A T T pane l base d o n articl e 2 3 an d Antidumpin g Cod e 1 5 . The pane l w a s agains t the applicatio n o f a n antidumpin g dut y b y th e E C on part s importe d fro m J a p a n . Th e E C als o starte d to giv e mor e atten tion t o G A T T panel decisions . I t seems promisin g t o creat e norms an d t o consolidate a lega l constitutio n b y strengthenin g th e dispute-settlemen t mechanism o n a multilatera l basis .

Economic Aspects

of

Restructuring the

GATT

Aside fro m th e lega l aspects , w e shoul d no t dismis s th e economi c o r game-theoretical aspect s of restructurin g the w o r l d trading system. From the standpoin t o f economist s committe d t o globa l liberalism , trad e pol icy issue s mus t b e handle d o n th e basi s o f economi c principle s o f effi ciency an d incom e distribution . Th e polic y recommendation s b y suc h economists ar e straightforward : 1. Adop t a trad e polic y o f unilatera l liberalizatio n an d adher e t o th e nondiscrimination nor m an d th e unconditiona l M F N procedure ; in a competitive marke t structure , unilatera l liberalizatio n o f trad e im proves th e welfar e o f th e country , eve n thoug h tradin g countrie s maintain protection . 2. Provid e structura l adjustmen t assistanc e throug h internationa l insti tutions t o industrie s sufferin g fro m dynami c change s i n trad e struc ture; a structura l adjustmen t fun d a t th e G A T T ma y b e funde d b y collecting subsidie s an d tarif f revenue s fro m al l th e countries . Thi s fund coul d provid e internationall y monitore d subsidie s an d serv e t o solve th e proble m o f structura l adaptatio n an d incom e distribution . Moreover, i t ma y b e desirabl e t o provid e subsidie s t o precompetitiv e R & D t o avoi d excessiv e R & D rivalr y amon g competin g nations , thereby counterin g th e mov e t o w a r d technonationalism . 3. Appl y a standardize d antimonopol y l a w t o al l countrie s t o inhibi t monopolistic gai n an d t o protec t consumers ' interests . Thi s wil l di -

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minish th e merit s o f adoptin g strategi c trade policy i n orde r to snatc h monopolistic ren t an d wil l serv e t o preven t th e tendenc y t o w a r d a n oligopolistic marke t structure. 4. Harmoniz e domesti c regulations , law , an d taxatio n system s t o secur e market opportunitie s fo r all . For th e economist s w h o firml y believ e tha t a libera l economi c orde r emerges spontaneousl y fro m rationa l behavio r b y individuals , th e free trade regim e i s supporte d b y th e rationa l self-interes t o f individuals . Th e commitment t o globa l liberalis m b y nation s i s inherentl y consisten t wit h individualism. Thos e w h o commi t unilaterall y t o fre e trad e ma y b e described a s "everyda y Kantinesians" seekin g perpetua l w o r l d peace . But gam e theorist s w o u l d conten d tha t th e proble m o f a n interna tional economi c orde r arise s fro m a discrepanc y betwee n individua l rationality an d a nation' s rationality . Eve n i n a perfectl y competitiv e market, th e governmen t i s lure d t o rais e tariffs t o a n optima l leve l i f tha t country ca n affec t th e pric e i n th e w o r l d market . B y raisin g tariff s tha t w a y th e countr y enjoy s a n additiona l terms-of-trad e gai n (optima l tar iff). Unde r imperfec t competition , th e opportunit y t o snatc h monopolis tic ren t b y adoptin g strategi c trade an d industria l policie s i s widened . Every countr y pursue s it s o w n strategi c trad e policy , explicitl y o r implicitly. Wha t i s require d ar e rule s fo r implementin g strategies . Cer tain strategie s mus t b e eliminate d fro m th e rang e o f choice s o r mus t b e constrained b y rule s i f w e w a n t t o preserv e a cooperativ e solution.

6

When th e G A T T w a s established , i t implie d a peac e treat y endin g th e trade w a r o f th e 1 9 3 0 s . Thi s peac e treat y ca n b e regarde d as a coopera tive solutio n tha t bring s abou t a Paret o improvemen t i n th e w o r l d economy trappe d in a Prisoner' s Dilemm a situation .

Cooperation by

Uncooperative Behavior

Within a framewor k of repeate d games base d on rationa l behavio r o f th e players wit h a n infinit e tim e horizon , i t ca n b e show n tha t a cooperativ e solution ca n b e supporte d b y uncooperativ e strategi c behavior , give n sufficient patienc e o r far-sightednes s o f th e players . Bu t th e cooperativ e solution i s no t necessaril y stable ; i t i s susceptibl e t o defec t an d distur bance. Moreover , i f th e player s ar e ver y patien t (whic h implie s tha t th e discount rat e o f futur e benefi t i s clos e t o zero) , the n an y rationa l payof f

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can b e supporte d a s a n equilibriu m outcome ; ther e exis t to o man y equilibriums (thi s i s k n o w n a s the "Fol k Theorem" ) (Friedma n 1 9 8 6 ) . On th e basi s o f th e evolutionar y approach , Axelro d (1986 ) argue s that cooperatio n emerge s fro m normativ e behavio r b y individual s em ploying a tit-for-ta t strategy . A player' s strategy is normativ e i n th e sens e that i t ca n affec t th e othe r party' s expectation i n th e directio n th e playe r desires. Recen t U.S . trad e polic y puttin g emphasi s o n reciprocity , th e conditional M F N , an d retaliatio n accord s well wit h th e tit-for-ta t strat egy. Bu t th e conditiona l M F N violate s th e nor m o f nondiscrimination , while unilatera l judgmen t o n unfairnes s an d bilateralis m o f retaliatio n against unfai r countrie s i s no t compatibl e wit h th e multilateralis m an d due proces s o f G A T T .

7

Th e threat s implici t i n th e strateg y ar e no t

necessarily creditabl e becaus e gai n fro m unilatera l fre e trad e i s presum ably muc h large r tha n los s fro m trad e w a r ; this strateg y lacks subgam e perfection. I n addition , th e tit-for-ta t strateg y does no t secur e a cooperative solution , althoug h i t intend s t o induc e cooperation ; i f th e partne r defects once , the n endles s defectio n (trad e w a r) follows .

Stabilizing a Cooperative Solution Binding agreement s or norm s ca n w o rk to sustai n an d stabiliz e a cooper ative regime . Axelrod (1986 ) proposes t o appl y metanorms t o strengthe n the effectivenes s o f norms . "Metanorm " refer s t o punishmen t no t onl y against violator s bu t als o agains t anyon e w h o refuse s t o punis h th e defector. I t presuppose s a stric t enforcemen t mechanis m tha t ma y con tradict individua l liberalism . Th e alternativ e t o th e establishmen t o f metanorms i s law . Another w a y t o stabiliz e a cooperativ e solutio n i s t o prohibi t th e us e of th e strateg y o f " a l w a y s noncooperate " o r " a l w a y s defect " an d t o provide incentive s fo r adoptin g th e strateg y of " a l w a y s cooperate. " Y e t unilateral liberalis m coul d provid e incentive s fo r othe r countrie s t o ac t as fre e rider s o r foo t draggers . Thi s hold s tru e wit h respec t t o th e unconditional M F N . I t mus t b e remembere d that excessiv e provisio n o f public good s coul d destro y th e libera l order. In orde r t o eliminat e adoptio n o f th e " a l w a y s defect " strategy , i t seems necessar y t o increas e th e cos t o f defectio n t o a prohibitiv e level . The publi c choic e theorist s w o u l d propos e changin g th e votin g rule : passage o f legislatio n o n trad e restrictio n measure s agains t fre e trad e

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Table 4 . 5 Payof f Matri x o f th e "Prisoner' s Dilemma " an d th e "Stag Hunt " (A) Prisoner's Dilemm a Cooperation Noncooperation (B) Stag Hunt Cooperation Noncooperation

Cooperation

Noncooperation

5/5 87-3

-3/8 0/0

Cooperation

Noncooperation

8/8 51-6

-6/5 -3/-3

should requir e a two-third s majorit y bot h a t th e nationa l an d th e inter national leve l (GATT) . Thi s ma y hel p eliminat e th e choic e o f th e "al w a y s defect " strategy.

8

As a n alternativ e t o a votin g rule , th e proposa l t o rais e th e economi c cost o f protectio n b y establishin g rule s t o lev y a n internationa l ta x o n protection an d trade-distortin g measure s shoul d b e considered . Com bined wit h internationa l subsidie s fo r structura l adaptations, the interna tional ta x w o u l d w o r k t o transfor m th e payof f matri x o f countrie s fro m the Prisoner' s Dilemm a int o th e Sta g Hunt , wher e th e cooperativ e gai n is large r tha n th e cheatin g gain ; tha t is , th e gai n o f huntin g sta g cooperatively i s large r tha n tha t o f uncooperativ e rabbi t huntin g ( J . J. Rous seau). Tabl e 4 . 5 present s the payof f matri x o f th e Sta g Hun t i n compari son wit h th e Prisoner' s Dilemma . Th e los s i s large r i f th e t w o player s adopt th e " a l w a y s defect " strategy . The gai n o f renegin g i s smalle r du e to th e tax , whil e subsidie s ar e provide d fo r a cooperativ e strategy . As a result, th e internationa l ta x an d subsid y syste m strengthen s th e coopera tive regime . I t could als o serv e to reinforc e th e enforcemen t an d compen sation mechanism s (GAT T articl e 2 3 o n nullificatio n an d impairment) .

5. Conclusio n an d Polic y P r o p o s a l From th e precedin g analyse s w e ca n d r a w severa l polic y proposal s fo r restructuring th e w o r l d tradin g syste m an d fo r th e trad e policy require d of J a p a n . 1. T o maintai n a fre e trad e system , th e Urugua y Roun d mus t b e

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successful. J a p a n shoul d ac t positivel y t o ensur e th e succes s o f th e nego tiation b y allowin g th e liberalizatio n o f agricultura l products, includin g rice: th e Unite d State s mus t refrai n fro m implementin g a

unilatera l

trade policy . Th e nondiscriminatio n principl e mus t b e preserve d fo r safeguards, whil e th e M F A restriction s mus t b e dismantle d withi n te n years base d o n th e M F A growt h approach . I t i s adequat e t o agre e o n codes o n trad e i n services , th e T R I M s an d th e TRIPs ; the y provid e the basi c framewor k o n th e righ t o f establishment , nationa l treatment , transparency, nondiscrimination , an d th e minimu m standar d of protec tion o f intellectua l property . 2. J a p a n shoul d suppor t an d promot e th e lega l restructurin g o f th e G A T T (MTO ) t o strengthe n th e multilatera l disput e settlemen t an d enforcement mechanisms . 3 . Thi s lega l restructurin g ca n b e supplemente d b y th e introductio n of a n internationa l ta x an d subsid y syste m int o th e G A T T . First , th e structural adjustmen t fun d mus t b e create d a t th e G A T T t o rebalanc e the cost s o f adjustmen t arisin g fro m dynami c chang e i n comparativ e advantage. Thi s ma y diminis h th e nee d t o rel y o n contingen t protection , gray are a measures , and , thus , manage d trade . Further , i f th e fun d provides subsidie s t o precompetitiv e R & D a s a n internationa l publi c good, i t w o u l d serv e to mitigat e R & D rivalr y and preven t technonation alism fro m bein g dominant . J a p a n shoul d tak e th e lea d i n providin g th e basic R & D t o th e w o r l d econom y t o w a r d of f th e criticis m b y tradin g partners o f havin g a selfis h "strategi c policy. " Second , i t i s necessar y to eliminat e protectionis m (th e " a l w a y s protect " strategy ) b y levyin g international taxe s o n protection . 4. J a p a n shoul d see k t o harmoniz e domesti c regulations , administra tive procedures , an d l a w wit h internationa l standards . Notably , stan dardization o f antimonopol y l a w acros s border s is importan t i n vie w o f the tren d t o w a r d a n oligopolisti c structur e o f w o r l d trad e an d abus e o f strategic trad e policy. Th e consisten t an d strengthene d competitio n pol icy ma y diminis h th e incentiv e t o adop t strategi c policy aime d a t gainin g monopolistic rent . Minilateralis m an d plurilateralis m coul d pla y certai n roles i n achievin g thi s goal . Bu t th e resul t o f liberalizatio n o f trad e arising fro m harmonizatio n mus t b e easil y accessibl e t o th e third-perso n countries. Multilatera l trad e negotiation shoul d consciousl y ai m a t reap ing th e result s o f minilatera l o r plurilatera l approaches to fre e trade. 5 . I t is desirabl e to transfor m th e SI I dialogue int o a mor e permanen t

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institution t o dea l wit h trad e disputes . Th e SI I went beyon d th e scop e o f usual trad e negotiation s an d focuse d o n issue s no t covere d a t th e Uru guay Roun d o r th e bilatera l negotiatio n base d o n S u p e r - 3 0 1 . The SI I can be interprete d a s a n attemp t t o prepar e th e nex t stag e fo r a single market o r "borderless " econom y b y promotin g th e harmonizatio n o f administrative procedures , institutions , regulations , busines s practices , and competitio n policy . Th e SI I wil l als o w o r k t o reduc e nontarif f barriers an d th e nee d t o us e contingen t protection. A t som e stag e thi s 9

mechanism mus t b e transferre d to th e newl y create d M T O . 6. An y mov e t o w a r d close d regionalis m i n th e Asia-Pacifi c are a should b e avoide d regardles s o f th e succes s o r failur e o f th e Urugua y Round talks . J a p a n shoul d continu e t o tak e th e initiativ e i n promotin g free trad e an d investmen t i n th e Pacifi c i n clos e collaboratio n wit h th e United States ; J a p a n shoul d ac t a s a n absorbe r o f manufacture d prod ucts an d a provide r o f capita l an d technolog y i n thi s area .

Notes 1. Fo r a mor e detaile d descriptio n o f th e thre e regiona l groupings , se e Iwat a (1990). 2. Lincol n find s all methods o f adjustmen t of overal l trade imbalance unsatisfac tory an d employ s onl y a n unadjuste d intraindustr y index . Bu t internationa l comparison o f indice s seem s to requir e some for m o f adjustment , if a country registers a large trade imbalance. 3. Voluntar y expor t restraint s wer e implemente d eithe r a t th e reques t o f th e U.S. governmen t o r b y unilatera l action . O n th e issu e o f relation s betwee n the constitutio n an d th e ordinanc e i n Japa n wit h respec t to trad e policy, se e Matsushita (1988) . 4. Th e United States' first move towar d bilateralism was the U.S.-Canada Auto motive Product s Agreemen t i n 1965 , wherei n th e tw o countrie s obtaine d a waiver fro m thei r MFN obligation s a t the GATT . In the 1980 s the ne w wave surged wit h th e Caribbea n Initiative (1983) , which wa s followed b y the Free Trade Are a Agreemen t wit h Israe l (1985) , Mexic o (1987) , an d Canad a (1988). Bilatera l negotiation s wit h Japa n i n th e Market-Oriented-Sector Selective (MOSS ) i n th e earlie r par t o f th e 1980 s brough t abou t modes t success. The y wer e superseded by th e Structura l Impediments Initiative s (SII ) after 1989 . 5. Th e aggregat e measurement suppor t i s th e inde x o f protectio n i n term s o f market access , domesti c pric e support , an d expor t subsidies : th e AM S ex cludes nontrade distortin g measure s from th e public subsid y equivalent (PSE) . 6. Japan' s industria l polic y i s ofte n cite d a s a successfu l case . But the economi c

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basis fo r th e industria l polic y i s shaky . Suzumur a an d Okun o (1987 ) con clude tha t th e rol e o f industria l polic y ca n b e foun d onl y i n th e cas e o f coordination failure , informatio n acquisition , an d information sharin g under incomplete information . Thes e role s hav e little relationship t o strategi c trade policy aime d a t obtainin g monopolisti c ren t an d protectin g th e domesti c market. 7. U.S . trad e policy seem s t o b e i n a halfwa y hous e wit h respec t to th e condi tional MFN , whic h wa s abandone d i n 192 2 unde r th e Hardin g administra tion. Bilatera l reciprocal negotiation wa s initiated wit h th e Cobden-Chevalie r Treaty i n 1860 . Thi s approac h entaile d negotiatin g chao s wit h costl y an d uneasy renegotiation s wit h prio r signees necessitated ever y time ne w bilateral agreement was reached. The fac t that the cost ca n be rendered more tolerabl e by multilateralism wa s one o f th e factors that moved U.S. trade policy toward multilateralism. 8. Grube l (1989 ) propose s t o adop t th e chang e i n votin g procedure . Alterna tively, i t ma y b e possible t o declar e in th e constitutio n tha t trad e restriction s are inconsistent wit h a n individual's freedo m o f occupatio n an d trade. It may be recalle d that th e invocatio n o f articl e 35 require s a two-thirds majorit y at the GATT. 9. Th e Structural Impediments Initiativ e wa s the first attempt to make proposals on fisca l polic y coordination . Fisca l policy coordinatio n i s regarded as one o f the mos t difficul t areas , eve n fo r E C countries . Th e initia l U.S . reques t o n expansion o f publi c investmen t wa s excessive ; th e reques t t o increas e th e public investment-GN P rati o b y 3 - 4 percentag e point s i n th e forthcomin g decade ma y reduc e th e curren t accoun t surplu s t o zer o o r eve n negative , given the constan t domestic-saving s rati o and private-investment ratio . Japan would ceas e t o b e a capita l exporte r sinc e it s financia l powe r woul d b e eroded.

References Atlantic Counci l o f th e Unite d State s (1975) . GATT Plus: A Proposal for Trade Reform. Washington , D.C . Axelrod, R . (1981) . "The Emergenc e of Cooperatio n amon g Egoists. " American Political Science Review 75 , no. 2 (June) . (1986). "A n Evolutionar y Approac h t o Norms. " American Political Science Review 80 , no. 4 (December) . Baldwin, R . E . (1988) . Trade Policy in a Changing World. Harvester Wheatsheaf. Baldwin, R . E. , an d J . D . Richardso n (1987) . "Recen t U.S . Trad e Policy an d Its Global Implications. " I n C . I . Bradford, Jr., an d W. H . Branson , eds., Trade and Structural Change in Pacific Asia. Universit y o f Chicag o Press . Dixit, A . (1987) . "Ho w Shoul d th e Unite d State s Respon d t o Othe r Countries ' Trade Policies?" In R. M. Stern , ed., U.S. Trade Policies in a Changing World Economy. MI T Press .

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Dogauchi, M . (1989) . "Internationa l Trad e in Service s from th e Japanese Viewpoint." Georgia Journal of International and Comparative Law 19 , no. 2 . Dornbusch, R . (1990) . "Polic y Option s fo r Free r Trade : The Cas e fo r Bilater alism." I n R . Z . Lawrenc e and C . L . Schulz , eds. , An American Strategy in the 1990s. Brooking s Institution . Friedman, J . W . (1986) . Game Theory with Application to Economics. Oxfor d University Press . Grubel, H . (1989) . "Doe s th e Worl d Nee d a GAT T fo r Services? " I n Hans Jurgen Vorerau , ed., New Institutional Arrangements for the World Economy. Springer-Verlag . Hufbauer, G . C . (1989) . Backgroun d Pape r t o "Th e Fre e Trade Debate " (Reports of the Twentieth-Century Fund Task Force on the Future of American Trade Policy). Ne w York : Priorit y Press Publications. Hufbauer, G . C, an d J. J . Schot t (1985) . "Trading for Growth: The Next Roun d of Trad e Negotiations." Policy Analyses in International Economics, no . 11 , Institute fo r Internationa l Economics . Iwata, K . (1988) . "U.S.-Japa n Economic Relations : A Japanes e Perspective." Working Pape r no . 7 , Departmen t o f Socia l an d Internationa l Relations , University o f Tokyo , September. (1989). "Change s o f Economi c an d Trad e Structure in th e Pacific-Basi n Area." Pape r presente d fo r th e Asia-Pacifi c Conferenc e organize d b y th e FAIR, June. (1990). "Economi c Perspectiv e i n th e 1990s. " Pape r presente d a t th e U.S.-Japan Busines s Conferenc e a t Osaka, July. (1991). "Japan' s Intraindustr y Trade and Intrafirm Trade in th e 1980s. " Paper presente d fo r th e Secon d Asia-Pacifi c Conferenc e organize d b y th e FAIR, 9 - 10 May . Jackson, J . (1989) . The World Trading System. MI T Press. (1990). Restructuring the GATT System. Roya l Institut e o f Interna tional Affairs . Kondo, T . (1989) . "I s Normative Behavio r Needed t o Maintai n Socia l Order? " Mimeo, July . Krugman, P . (1989) . "I s Bilateralis m Bad? " NBE R Workin g Paper , no. 2972 , May. Lawrence, R . Z . (1987) . "Imports in Japan: Close d Market s or Minds?" Brookings Paper s on Economi c Activity , no . 2 . Lincoln, E . J. (1990) . Japan's Unequal Trade. Brooking s Institution . Matsushita, M. (1988) . International Economic Law (i n Japanese). Yuhikaku . (1990). "Comment s o n Antidumpin g La w Enforcemen t i n Japan. " I n J. H . Jackso n and E . A . Vermulst , eds. , Antidumping Law and Practice—A Comparative Study. Harveste r Wheatsheaf . Patterson, G . (1987) . "Commen t o n 'Multilatera l an d Bilatera l Negotiatin g Approaches fo r th e Conduc t o f U.S . Trad e Policies ' (Joh n H . Jackson). " In R . M . Stern , ed. , U.S. Trade Policies in a Changing World Economy. MIT Press. Sazanami, Y. , an d H . Urat a (1990) . Service Trade (i n Japanese) . Toyo Keiza i Shinposha.

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Schott, J . J ., ed . (1990) . Completing the Uruguay Round: A Result-Oriented Approach to the GATT Trade Negotiations. Institut e fo r Internationa l Eco nomics. Schott, J . J . , an d M . G . Smith , eds . (1988) . The Canada—United States Free Trade Agreement: The Global Impact. Institut e fo r Internationa l Economic s and Institute fo r Researc h on Publi c Policy . Stern, R . M . (1987) . U.S. Trade Policies in a Changing World Economy. MI T Press. Stern, R . M. , P . H . Trezise , an d J . Whalley (1987) . Perspectives on a U.S.Canada Free Trade Agreement. Brooking s Institution . Suzumura, K., and M. Okun o (1987). "Industrial Policy i n Japan: Overvie w and Evaluation." I n R . Sat o an d P . Wachtel , eds. , Trade Friction and Economic Policy. Cambridg e University Press . Tyson, L . (1990) . "Manage d Trade : Makin g th e Bes t o f th e Secon d Best. " I n R. Z . Lawrenc e and C . L . Schulz , eds. , An American Strategy in the 1990s. Brookings Institution . Tyson, L. , an d J . Zysma n (1989) . "Developmenta l Strateg y an d Productio n Innovation i n Japan." I n C . Johnson, L . Tyson, an d J . Zysman , eds. , Politics and Productivity: The Real Story of Why Japan Works. Ballinger .

5. Japan' s Rol e i n Economi c Cooperation an d Direc t Foreign Investmen t Makoto Sakurai

In th e 1 9 8 0 s th e positio n o f developin g countrie s wit h regar d t o globa l money flo w w a s quit e differen t fro m tha t o f th e 1 9 6 0 s an d 1 9 7 0 s . I n spite o f th e developmen t an d growt h o f th e w o r l d economy , man y developing countrie s foun d themselve s facin g problem s suc h a s hug e debt burdens , seriou s deficit s i n thei r balanc e o f payments , highe r infla tion, an d s o on . Especiall y i n globa l mone y flow , developin g countrie s a s a whol e ha d a negativ e ne t resource s transfe r i n th e 1 9 8 0 s . An d eve n 1

n o w w e ca n se e a ne t resource s transfe r fro m developin g t o develope d countries. Unde r thi s patter n o f globa l mone y flow i n th e 1 9 8 0 s , Japa n has appeare d as a ne w an d majo r capital-exporting economy . Japan's economi c cooperatio n ha s begu n t o sharpl y increas e i n term s of volum e o f fund s sinc e abou t th e m i d - 1 9 8 0 s . I t registere d the highes t growth, alon g wit h item s relate d to nationa l defense , i n th e fiscal expen diture o f th e budget . Currently , J a p a n ha s turne d ou t t o b e th e world' s greatest dono r o f economi c cooperation . Furthermore , in th e latte r hal f of th e 1 9 8 0 s , accumulated deb t problems o f th e thir d w o r l d , particularly in Lati n America n countries , hav e g r o w n serious . Thi s ha s induce d J a p a n t o activel y exten d financial cooperatio n t o thes e countrie s a s a 143

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part o f it s deb t relie f measures , in additio n t o providin g Officia l Devel opment Assistanc e (ODAs) . Also , th e historica l w a v e o f democratizatio n that occurre d i n Easter n Europ e i n 1 9 8 9 ha s pose d a n importan t ques tion abou t th e economi c reconstructio n t o tak e plac e i n th e decad e t o follow. I n thi s respect , th e rol e tha t J a p a n wil l pla y i n th e are a o f economic an d financial cooperatio n wil l b e regarde d as significant . J a p a n actuall y implement s economi c an d financial cooperatio n i n th e diversified form s o f ODA , financial cooperation , technologica l coopera tion, an d direc t foreig n investment , amon g othe r things . Japan' s par t i n the internationa l communit y i n th e 1 9 9 0 s wil l becom e notabl e i n th e area o f suc h contributions . H o w e v e r , in spit e o f th e stee p an d substantia l expansion i n th e volum e o f fun d flows , th e existin g domesti c syste m stil l resembles th e on e tha t cam e int o bein g i n th e 1 9 7 0 s an d laste d unti l th e first hal f o f th e 1 9 8 0 s , remindin g u s o f variou s task s tha t nee d t o b e carried ou t an d problem s tha t nee d t o b e solved . In th e 1 9 9 0 s th e potentia l financial need s fro m developin g countrie s (heavily indebte d developin g countrie s i n Lati n Americ a an d developin g countries i n Asia ) an d Newl y Democratizin g Countrie s (NDCs ) i n Eas t Europe wil l b e great . H o w e v e r , th e presen t situatio n o f worldwid e sav ings i s no t sufficien t t o satisf y potentia l w o r l d w i d e financial needs . Economic cooperatio n an d financial cooperatio n wil l becom e on e o f the majo r card s in th e internationa l p o w e r gam e unde r th e "post—Col d W a r " syste m i n th e 1 9 9 0 s . Here I wil l attemp t t o loo k int o Japan' s curren t problems , payin g particular attentio n t o economi c cooperation , an d wil l als o touc h o n newly emergin g task s facin g Easter n Europe an d Lati n America n coun tries. Finally , I will tak e u p th e issu e o f globa l economi c cooperatio n an d the task s involved i n thi s respect. 1 . J a p a n ' s T r a n s f o r m a t i o n int o a C a p i t a l E x p o r t e r and a M a j o r P o w e r i n Economi c Assistanc e Japan's internationa l balanc e o f payment s fo r calenda r yea r 1 9 8 9 w a s comprised o f th e curren t accoun t balanc e o f payments , registerin g $ 5 7 billion i n surplus , an d th e long-ter m capita l accoun t balanc e o f pay ments, indicatin g $ 8 7 . 9 billio n i n deficit . Thus , th e countr y turne d ou t to b e th e bigges t capital-exportin g countr y i n th e world . I n term s o f external ne t assets , th e level s o f $ 2 9 1 . 7 billio n an d $ 2 9 3 . 2 billio n wer e

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reached fo r 1 9 8 8 an d 1 9 8 9 , respectively. I n the en d o f 1 9 8 9 , the externa l net asset s outstandin g amounte d t o $ 1 , 7 7 1 . 0 billion , makin g J a p a n th e greatest credito r i n th e internationa l community.

2

Economic cooperatio n embrace s divers e contents , includin g th e fos tering o f huma n resource s an d technologica l assistanc e amon g it s prior ity items . Bu t ODA s an d th e recyclin g o f fund s t o developin g countrie s play ke y role s amon g variou s form s o f capita l export s t o developin g countries. I n term s o f value , ODA s an d recyclin g o f fund s ar e greate r i n comparison t o othe r form s o f economi c cooperation . Whe n on e contem plates th e task s fo r J a p a n i n th e 1 9 9 0 s , w h e n i t wil l b e a majo r capita l exporter an d dono r o f economi c assistance , on e see s tha t i t i s essentia l to pu t form s o f capita l export s i n order . For th e purpos e o f continuou s capita l export s i n th e mediu m an d long terms , maintainin g th e curren t accoun t balanc e i n surplu s become s a precondition . Th e curren t accoun t surplu s unde r th e headin g o f do mestic econom y refer s to th e exten t t o whic h th e leve l o f nationa l saving s surpasses tha t o f domesti c investments . Th e curren t accoun t surplu s i n the mid-1980 s eve n outperforme d th e nomina l rat e o f GNP , whic h w a s 4 . 5 percent . Thi s rati o sharpl y decline d i n subsequen t year s t o b e abou t 1 percen t a t present . A s mentione d earlier , Japanes e capita l export s registered th e ne t valu e o f $ 8 7 . 9 billio n i n 1 9 8 9 , exceedin g b y fa r th e level o f th e curren t accoun t surplus . Financial resource s o f capita l export s b y economi c unit s ca n b e roughly divide d int o t w o categories . First , th e publi c secto r constitute s official developmen t assistanc e and , second , th e recyclin g o f fund s con stitutes a for m o f publi c fun d includin g expor t credi t i n deferre d pay ment. O n enterin g th e secon d hal f o f th e 1 9 8 0 s , Japanes e ODA s indi cated a hig h growt h o f 6 - 8 percent . I n particular , defense-relate d expenses an d socia l welfare—relate d expenses eac h recorde d th e highes t growth ever . I n term s o f value , ¥ 7 3 3 . 9 billio n w a s represente d b y OD A in th e F Y 1 9 8 9 budget . I n th e draf t budge t fo r F Y 1 9 9 0 , th e shar e of OD A indee d amounte d t o ¥ 7 8 4 . 5 billion , reachin g th e leve l o f ap proximately $50—$6 0 billio n (whe n converte d o n th e basi s o f $ 1 / ¥ 1 5 0 exchang e rate , thi s amount s t o $ 5 2 . 3 billion) . I n additio n t o this progra m fo r ODA , ther e i s a recyclin g o f fund s pla n i n th e amoun t of $ 3 0 billio n i n th e aggregate , whic h w a s launche d i n 1 9 8 6 . Thi s plan t o channe l fund s int o developin g countrie s an d th e OD A progra m overlap. Clos e t o $ 1 0 billio n i s i n th e for m o f OO F (Othe r Officia l

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Flows), an d OO F an d OD A i n th e aggregat e amoun t o f $ 1 0 billio n o r more pe r annu m flow s ou t o f J a p a n t o developin g countries . I n 1 9 8 9 , this progra m w a s extende d t o 1 9 9 2 , an d th e tota l amoun t w a s als o raised t o $ 6 5 billion . Another sourc e o f fund s i s comprise d o f capita l export s fro m th e private sector , whic h includ e securitie s investment , privat e loans , an d direct foreig n investment . I t i s distinc t fro m capita l export s fro m th e public sector , wherei n allocatio n o f financia l resource s i s decide d i n accordance wit h polic y measures . Apar t fro m ODA s an d th e recyclin g of funds , whic h ar e independen t o f th e marke t mechanis m i n thei r allocation, thi s sourc e o f fundin g fro m th e privat e secto r i s allocate d through a filte r o f th e marke t mechanism , o r profitability . Sinc e thi s typ e of flo w i s characterize d b y th e fac t tha t i t i s base d o n th e marke t mechanism, however , th e allocatio n o f fund s ma y lea n t o w a r d specifie d economies o r regions . Fo r example , i n th e cas e o f securitie s investment , it i s virtuall y limite d t o industrialize d countrie s du e t o th e fac t tha t securities market s i n man y o f th e developin g countrie s ar e no t ye t ade quately develope d fo r suc h a purpose . Privat e loan s an d direc t foreig n investment als o ten d t o concentrat e o n thos e countrie s wher e economi c growth an d developmen t indicat e favorabl e performanc e an d th e inter national balanc e o f payment s s h o w s n o sign s o f uncertainty . I n th e cas e of J a p a n , privat e loan s i n th e 1 9 7 0 s ha d represente d a primar y for m o f capital expor t mad e b y th e privat e sector . A t th e beginnin g o f th e 1 9 8 0 s , however, a s th e accumulate d deb t proble m o f Lati n America n countrie s surfaced an d g r e w eve n w o r s e , the shar e o f privat e loans diminished . O n the othe r hand , direc t foreig n investmen t fro m J a p a n sinc e th e earl y 1 9 8 0 s ha s bee n postin g a

substantia l increas e annually . Th e tota l

amount o f direc t foreig n investmen t i n F Y 1 9 8 8 climbe d t o $ 4 7 . 3 billio n and i n F Y 1 9 8 9 t o $ 6 7 . 5 billion , accordin g t o th e statistic s prepare d b y the Ministr y o f Finance . I n compariso n t o th e year s o f th e 1 9 7 0 s , direc t foreign investmen t fro m J a p a n t o industrialize d countrie s increase d dra matically, whil e th e weigh t o f Japanes e investmen t i n developin g coun tries decreased . In th e 1 9 7 0 s , nearl y 5 0 percen t o f Japan' s direc t foreig n investment w a s directe d t o developin g countries , bu t th e statistic s fo r F Y 1 9 8 9 sho w tha t th e shar e dwindle d t o approximatel y 2 0 percent . Japanese foreig n direc t investmen t fo r develope d countrie s i s concen trated mostl y i n th e nonmanufacturin g sectors , suc h a s banking , secu rity, an d rea l estate . O n th e contrary , Japanes e direc t investmen t fo r

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developing countrie s i s concentrate d i n th e manufacturin g industry . Fur thermore, Japanes e direc t foreig n investmen t fo r developin g region s i s also concentrate d i n Asia , especiall y i n Asia n NIE s an d A S E A N coun tries. Sinc e th e en d o f th e 1 9 8 0 s man y Japanes e manufacturer s hav e started t o establis h "a n internationa l syste m o f production " i n th e Eas t and Southeas t Asia n econom y (includin g th e coasta l regio n o f China) . These Japanes e direc t investment s fo r Asi a ar e strongl y interdependent , with th e expansio n o f manufacture d good s bein g trade d i n term s o f intraregional trade , intrafirm trade , intraindustry trade , and s o on . Thus , in spit e o f a declin e i n th e shar e of Japanes e direc t investment allocation , Asian countrie s ca n continu e t o benefi t a s th e hos t economies . The conten t o f economi c cooperatio n consist s o f variou s particulars. ODA, whic h i s a mai n ite m o f publi c funds , ha s multipl e formulas , such a s project-base d assistance , technologica l cooperation , trainin g o f personnel, an d eve n commodit y loan s an d non-project-base d assistance, to mentio n some . Furthermore , a s on e ca n se e i n recycling-of-fund s programs, medium-incom e countrie s i n th e developin g w o r l d , w h o ar e faced wit h a n accumulate d deb t problem , ma y als o b e considere d fo r significant economi c an d financial support . The salien t featur e o f suc h a typ e o f cooperatio n i s aimed , i n larg e part, a t alleviatin g difficultie s i n thei r internationa l balanc e o f payments ; in principle , unite d fund s ar e applie d i n thi s case . I n addition , anothe r key featur e o f thi s typ e o f financial cooperatio n i s tha t i n mos t case s i t falls int o th e categor y of non-project-base d assistance. In recen t years , amon g th e form s o f economi c cooperation , private sector—initiated direc t foreig n investmen t i s bein g highlighted . A s men tioned earlier , th e privat e sector' s direc t foreig n investmen t i s naturall y based o n th e profitabilit y o f th e project . I t ma y no t b e full y consisten t with economi c cooperatio n i n thi s respect . Yet , th e flow o f fund s fro m the privat e sector to developin g countrie s i s receivin g mor e attentio n du e to it s effec t o n employment , expor t promotion , technologica l transfer , and th e solvin g o f accumulate d deb t problems , amon g othe r things . I n this context , mobilizatio n o f direc t foreig n investmen t le d b y th e privat e sector i s beginnin g t o receiv e greate r emphasis . At an y rate , i n orde r t o promot e th e flow o f thi s typ e o f assistanc e t o developing countries , i t i s necessar y to alleviat e countr y ris k an d t o buil d up economi c system s o n th e par t o f recipients , amon g othe r things . Th e reason fo r th e lesse r flow o f privat e direc t foreig n investmen t t o thir d

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w o r l d debto r countrie s an d LDC s i s tha t th e risk s involved ar e consider ably higher . Consequently , th e government s o f th e investo r an d recipien t countries alik e mus t endeavo r t o improv e th e investmen t climat e an d t o abate th e risk s of investment . When viewe d i n term s o f it s relationshi p wit h capita l exports , eco nomic cooperatio n i s increasingl y rendere d i n diversifie d form s unde r the headin g o f capita l exports , bu t i n mos t cases , i t combine s a numbe r of thes e forms . H o w e v e r , i t i s a fac t tha t economi c cooperatio n reflect s the economi c situatio n o r internationa l relation s o f th e recipien t devel oping country . I n othe r w o r d s , wit h a countr y w h o s e econom y indicate s a relativel y l o w per-capit a incom e leve l (belo w $ 5 0 0 ) , OD A comprise s the majo r par t o f economi c cooperatio n sinc e i n thes e countrie s th e construction o f a n economi c infrastructur e i s bein g give n th e firs t pri ority. When i t come s t o middle-incom e countries , no t onl y OD A bu t als o private direc t foreig n investmen t represent s a mor e importan t part , i n many cases . M o s t accumulated-debt-burdene d countrie s ar e medium income countrie s wit h a per-capit a incom e leve l o f ove r $ 1 , 0 0 0 . The y are no t s o suite d t o qualif y a s recipients o f ODA ; therefor e i t i s ofte n th e case tha t th e recyclin g o f fund s fro m J a p a n constitute s th e mos t im portant par t o f economi c cooperation . On th e othe r hand , ther e ar e als o countrie s suc h a s th e Asia n NIEs , w h o ar e no longe r i n nee d o f OD A bu t ar e more concerne d wit h techno logical transfe r fro m J a p a n a s a matte r o f futur e interest . Fallin g outsid e of capita l export s an d th e abovementione d cooperatio n i n th e are a o f human resources , etc. , provisio n o f a Generalize d Syste m o f Preferenc e (GSP) represent s another importan t for m o f economi c cooperatio n clas sified unde r th e subjec t o f trade . Bu t Asia n NIE s ar e alread y "graduat ing" fro m thi s schem e and , i n fact , th e Unite d State s ha s alread y ceased to exten d GS P to th e Asia n NIEs .

2. Criticis m o f J a p a n e s e Economi c Cooperatio n Up unti l th e m i d - 1 9 8 0 s , Japan' s economi c cooperatio n receive d hars h criticism, whic h mainl y focuse d o n th e followin g issues : 1. th e leve l o f fund s fo r economi c cooperatio n w a s inadequate; 2. th e qualit y o f economi c cooperatio n w a s not sufficientl y high ;

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3. assistanc e w a s mainl y bilatera l an d ver y rarel y multilateral; an d 4. economi c cooperatio n concentrate s o n specifi c regions . When on e studie s Japan' s performanc e i n economi c cooperatio n u p to th e middl e o f th e 1 9 8 0 s , suc h criticis m appear s valid. Nevertheless , i t should b e pointe d ou t tha t considerabl e improvement s hav e bee n mad e in thes e proble m area s sinc e th e m i d - 1 9 8 0 s , an d continu e t o b e made . In ligh t o f th e present , th e followin g observation s ca n b e mad e wit h respect t o thes e fou r issues . Regardin g the leve l o f economi c cooperatio n funds, Japan' s OD A i n 1 9 8 9 i s considere d t o hav e reache d the to p o f th e list o f OD A b y th e industria l countrie s o f th e w o r l d , i n term s o f absolut e value o n a disbursemen t basis . Whe n compare d t o th e nomina l GN P fo r 1 9 8 8 , Japanes e OD A accounte d fo r 0.3 2 percent , whic h w a s surpasse d only b y th e 0. 8 percen t achieve d b y Scandinavia n countries . But , i n comparison t o th e 0 . 3 9 percen t o f Wes t German y an d th e 0.3 2 percen t of th e Unite d Kingdom , J a p a n ma y b e sai d t o hav e achieve d a simila r level o f performanc e i n ODA . Th e Unite d State s indicate d a shar e o f ODA o f 0 . 2 1 percent , whic h w a s substantiall y belo w th e Japanes e share . In th e cas e o f J a p a n , improvemen t i n term s o f absolut e valu e ha s bee n made t o a greate r exten t tha n i n term s o f relativ e proportion s o f OD A in th e tota l GNP . Incidentally , Japan' s OD A embrace s t w o elements . One i s tha t OD A i s grante d a significantl y hig h priorit y amon g th e disbursement item s i n th e governmen t budget . Thi s w a s especiall y tru e in th e latte r hal f o f th e 1 9 8 0 s . Th e othe r elemen t w a s tha t th e ye n appreciated agains t th e U.S . dolla r durin g thi s period . Thi s tren d i n th e yen's exchang e rat e wit h respec t t o th e dolla r naturall y serve d t o pus h up th e leve l o f Japan' s ODA , whic h w a s denominate d i n dollars . I n othe r w o r d s , on e shoul d no t forge t tha t th e yen' s clim b cause d th e expansio n of OD A denominate d i n dollar s fa r mor e tha n i t mad e th e yen-base d ODA increase . The criticis m tha t th e qualit y o f Japanes e economi c cooperatio n i s not hig h remain s formidabl e eve n now . Fo r example , th e centra l pilla r of Japan' s economi c cooperatio n consist s o f credit s amon g OD A constit uents. I n fact , credit s represen t approximatel y 5 0 percen t o f th e tota l ODA i n th e cas e o f J a p a n , whil e i n Grea t Britai n o r Sweden , grant s represent 1 0 0 percen t o f thei r respectiv e OD A components . I n th e United State s an d Wes t Germany , th e share s of grant s in OD A represen t 8 0 t o 9 0 percent . I n thi s respect , on e canno t sa y tha t Japan' s shar e o f

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grants i n OD A i s adequat e a t present , compare d wit h othe r industria l countries. A s fo r othe r item s unde r ODA , th e portio n o f untie d aid , fo r example, show s a highe r percentag e tha n tha t o f othe r industrialize d countries. Currentl y Japan' s rat e o f untie d ai d i s abov e 7 0 percent , which exceed s b y fa r the 5 0 percen t leve l o f th e Unite d State s an d th e 3 0 percent leve l o f Italy . It ha s bee n pointe d ou t i n pas t year s tha t th e weigh t o f bilatera l assistance i s greate r tha n tha t o f multilatera l assistance , o r OD A ex tended t o internationa l institutions , i n th e cas e o f J a p a n . I n th e cas e o f the Unite d States , the rati o o f OD A directe d t o internationa l institution s to th e tota l OD A i s 3 3 percent . Th e rati o fo r Franc e i s 1 8 percent , an d West Germany' s i s 3 3 percen t whil e Japan' s i s 3 0 percent . (Al l o f th e above ar e 1 9 8 8 figures.) Thi s mean s tha t Japan' s performanc e i s no t exceptionally low . Recently , J a p a n ha s mad e remarkabl e advancement s in capita l subscriptio n t o th e Worl d Bank , an d i n contributio n t o th e IMF J a p a n i s n o w secon d onl y t o th e Unite d State s as a donor . Finally, i t ha s bee n a subjec t o f criticis m tha t Japanes e economi c cooperation concentrate s o n specifi c regions . I t may b e argued , however, that afte r Worl d W a r II , Japan ha d begu n t o mak e reparation s fo r w a r damages t o Asia n countries , an d thi s i s w h y Asia' s shar e o f Japanes e ODA i s extremel y high . A s a matte r o f fact , i n th e categor y o f bilatera l ODA, 9 8 percen t o f th e tota l w a s channele d int o Asia n countrie s i n 1 9 7 0 , bu t i n 1 9 8 7 , Asi a represente d only 6 5 percen t o f th e overal l ODA . Such a shif t ma y b e considere d drastic . As I hav e delineate d s o far , economi c cooperatio n b y J a p a n , whic h is mainl y comprise d o f ODA , ha s steadil y progressed , wit h variou s improvements, sinc e th e middl e o f th e 1 9 8 0 s , i n spit e o f th e numbe r o f problems tha t hav e bee n pointe d out . I n fact , som e o f th e problem s hav e been successfull y overcom e ove r th e years . Y e t on e note s als o tha t a s diversification an d expansio n o f economi c cooperatio n i n term s o f fun d amounts progressed , variou s ne w problem s bega n t o emerge . Thi s i s related t o Japan' s ne w rol e i n th e are a o f economi c cooperation , an d i s linked als o wit h it s domesti c structure . 3 . Economi c Cooperatio n Polic y an d Proble m A r e a s of D o m e s t i c S t r u c t u r e Economic cooperatio n polic y ha s shifte d i n lin e wit h Japan' s economi c growth an d rol e i n th e internationa l community . Initially , Japanes e eco -

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nomic cooperatio n commence d wit h th e extensio n o f p o s t w a r repara tions fo r w a r damages . I n thi s respect , i t w a s destine d primaril y fo r Asian countries . Thi s basi c stanc e ha d bee n maintaine d throughou t th e 1 9 6 0 s an d 1 9 7 0 s i n conformit y wit h th e nation' s foreig n policy , whic h attached greate r importanc e t o Asia n countries . Moreover, economi c cooperatio n i n thos e day s w as aime d a t buildin g up th e economi c infrastructur e o f th e recipien t countries , whic h fre quently involve d Japanes e exports , amon g othe r things . I n thi s context , one migh t sa y tha t economi c cooperatio n b y J a p a n i n it s earlie r stage s w a s founde d o n economi c motives . Th e first oi l crisi s (1973 ) i n th e 1 9 7 0 s ha d a dramati c impac t o n thi s stanc e t o w a r d economic coopera tion. Th e oi l crisi s induce d J a p a n t o includ e par t o f th e oil-exportin g countries i n th e Middl e Eas t a s recipient s o f it s economi c cooperation . Clearly, thi s w a s du e t o th e polic y decisio n b y Japanes e authoritie s t o place stron g emphasi s o n securin g natura l resources , a salien t politica l factor. Securing natura l resources , naturally , i s a n economi c facto r a s well , but th e fac t remain s tha t politica l implication s prompte d thi s priorit y policy measure . In fact, thi s w a s the ver y first time tha t economi c cooper ation base d on politica l factors/internationa l relation s w a s implemented . One ma y describ e thi s economi c cooperatio n a s somethin g ver y close t o "strategic assistance. " Bu t t o cal l i t "strategi c assistance " outrigh t i s w r o n g , fo r thi s mov e lacke d a n aggressiv e and self-directe d policy . I t ca n be sai d tha t th e mov e w a s mad e i n respons e t o th e oil-exportin g policie s of th e Middl e Eas t countries a t tha t time . Looking back , on e see s tha t a s J a p a n cam e t o registe r large surpluses in th e curren t accoun t balanc e i n th e 1 9 8 0 s — t h a t i s t o say , a s J a p a n became exporte r o f capita l an d th e scal e o f it s econom y sharpl y ex p a n d e d — t h e Unite d State s moved fro m a broa d current account balanc e to a hug e deficit , whic h pose d th e questio n o f J a p a n takin g o n th e rol e of capita l exporte r in it s turn . Against thi s background , Japan's economi c cooperatio n ha d t o see k a n e w direction . Thi s n e w rol e ha d th e implicatio n tha t a s th e Unite d States, w h o ha d acte d a s a leade r i n th e internationa l economi c syste m in th e p o s t w a r era, declined i n weigh t an d position , J a p a n , togethe r wit h West Germany , w a s oblige d t o assum e th e responsibilit y o f maintainin g and developin g th e internationa l economi c system . Th e M a e k a w a Re port w a s prepare d with th e ai m o f identifyin g Japan' s rol e an d task s i n the internationa l communit y fro m a n immediat e o r short-ter m perspec-

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tive. Concret e change s i n polic y hav e emerge d i n th e are a o f economi c cooperation sinc e th e m i d - 1 9 8 0 s . S o far , improvement s hav e bee n see n in th e fou r proble m area s mentione d earlier . In regar d t o deploymen t o f "active strategi c assistance, " on e observe s tha t a rathe r "low-keye d strategic aid, " o r "passiv e strategi c aid, " seem s t o hav e ha d a stronge r hand. The basi c reason for Japan's approac h to economi c cooperatio n bein g one o f "passiv e strategi c aid " i s tha t althoug h th e amoun t o f fund s increased sharpl y an d th e patter n o f economi c cooperatio n becam e ex tremely diverse , provisio n o f necessar y arrangement s suc h a s effectiv e coordination and/o r divisio n o f labo r amon g concerne d governmen t agencies w a s largel y delayed . I n fact , to o man y governmen t agencie s ar e involved wit h economi c cooperatio n i n J a p a n ; mos t o f the m ar e in som e w a y o r anothe r concerne d wit h it . Specifically , fou r governmen t agencie s (Ministry o f Finance , Ministr y o f Foreig n Affairs , Ministr y o f Interna tional Trad e an d Industry , an d th e Economi c Plannin g Agency ) ar e i n charge o f thi s area . OD A i s implemente d a s a resul t o f consultatio n among thes e fou r governmen t ministries , whic h i s a domesti c facto r making economi c cooperatio n eve n mor e complicate d t o undertake . Also, i n a broade r context , th e actin g bod y tha t i s assigne d t o th e extension o f economi c cooperatio n i s comprise d o f severa l governmen t financial institution s (e.g. , th e Oversea s Economi c Cooperatio n Funds , the Export-Impor t Ban k o f J a p a n , th e Internationa l Cooperatio n Agency) tha t ar e staffe d wit h a limite d numbe r o f officer s assigne d wit h the actua l service . Th e fac t tha t thi s tas k i s divide d amon g severa l government agencie s make s th e syste m al l th e mor e complex . Presum ably, ther e ar e overlappin g investment s an d doubl e investment s i n som e cases. I t should b e pointe d ou t als o tha t fo r th e pas t fe w years , economi c cooperation ha s bee n give n hig h priorit y i n fiscal expenditure , s o tha t every governmen t ministr y an d agenc y i s eagerl y competin g wit h eac h other t o appropriat e i t i n th e budget . I n othe r w o r d s , mor e tha n eve r economic cooperatio n tend s t o b e use d a s an instrumen t t o secur e budget allocation. A simila r tendenc y ca n b e see n o n th e politica l front , wher e the concep t o f "clans " has appeare d with regar d t o governmen t policies . For example , a "clan " intereste d i n economi c cooperatio n i s beginnin g to tak e shape , makin g it s appearanc e a s a n "economi c cooperatio n interest group. " The Japanes e peopl e ar e becoming increasingl y intereste d in economi c

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cooperation, give n it s ris e i n term s o f amoun t o f fund s sinc e th e en d o f the 1 9 8 0 s . A s compare d t o previou s years , th e medi a hav e take n u p thi s issue o n man y occasions . Nevertheless , economi c cooperatio n i s quit e complicated wit h respec t t o it s constituents , an d it s basi c concept , among othe r things , i s beyon d th e comprehensio n o f ordinar y people. I n any event , ther e ar e countles s blac k boxe s defyin g th e transparenc y i n the real m of economi c cooperatio n policy , an d i t i s certai n that problem s will continu e t o aris e one afte r another .

4 . D i r e c t I n v e s t m e n t : It s R o l e a n d It s P r o b l e m s Japanese direc t investmen t i s focuse d upo n a s a mean s o f economi c cooperation. Thi s manne r o f thinkin g existe d historically , bu t recentl y i t has bee n give n mor e emphasi s a s bein g instrumenta l i n promotin g eco nomic developmen t i n developin g countries . Direct investmen t include s capital , productio n technology , an d man agement k n o w - h o w i n on e singl e package , t o b e transferre d t o th e recipient country . A s a result , gradin g u p o f productio n technolog y and managemen t k n o w - h o w , includin g marketin g amon g othe r things , expansion o f employment , improvemen t o f internationa l balanc e o f pay ments, etc. , ar e expecte d t o materializ e i n th e recipien t country . Thi s i s the reaso n w h y direc t investmen t i s emphasize d a s a n instrumen t o f economic cooperation . H o w e v e r , sinc e direc t investmen t b y th e privat e sector ca n b e realize d onl y a s a resul t o f th e privat e sector' s decisio n making, i t require s profitabilit y a s a prerequisit e fo r extension . I n thi s context, private-sector-initiate d direc t investmen t doe s no t a l w a y s con form t o th e philosoph y o f economi c cooperation . Furthermore, th e fac t tha t privat e direc t foreig n investmen t set s via bility a s it s preconditio n mean s tha t th e relationship s amon g markets , quality o f labo r (margina l productivit y o f labor) , an d w a g e s mus t b e erected withi n a certai n framework of relations . A s a consequence, direc t foreign investmen t come s t o b e concentrate d i n a particular country. Fo r example, unles s ther e i s basi c politica l an d socia l stabilit y o n th e par t o f the hos t country , private-sector-initiate d direc t investmen t wil l no t b e introduced. I n othe r w o r d s , amon g th e mean s o f economi c cooperation , direct foreig n investmen t ma y b e utilize d wit h a limite d numbe r o f countries. Economi c cooperatio n i s directe d t o economie s suc h a s th e

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Asian NIE s o r A S E A N countries , wher e performanc e i n th e are a o f economic developmen t i s see n a s relativel y favorable. In vie w o f suc h conditionalities , th e dono r countr y mus t thoroughl y examine th e rol e o f privat e direc t foreig n investmen t an d it s effect s o n the recipien t country . I n thi s regard , effect s o n employmen t an d othe r effects ar e relativel y clear , whil e th e rol e an d effec t o f technologica l transfer ar e not readil y visible. Developin g countrie s plac e thei r expecta tions mos t eagerl y on th e effect s o f technologica l transfer . H o w e v e r , th e technological transfe r tha t i s currentl y provide d involve s variou s problems. In ligh t o f th e presen t stat e o f affairs , th e problem s tha t see m t o require closes t attentio n ar e (1 ) generalizatio n o f sophisticate d technol ogy i n industria l countries ; an d (2 ) th e progres s of networkin g o f inter national specialization . The ga p betwee n th e leve l o f technolog y i n industria l countrie s an d that i n developin g countrie s i s widening . Eve n i f effort s w e r e mad e b y industrial countrie s t o fill tha t g a p , this w o u l d no t b e immediatel y possi ble. Tha t i s t o say , the industrialize d countries ' leve l o f technolog y i s to o far advanced , s o tha t eve n i f technolog y w e r e transferre d to developin g countries, du e t o it s capital-intensiv e natur e an d it s sophistication , it s industrially relate d impac t ove r thei r domesti c economie s w o u l d b e w e a k . Th e progres s o f internationa l specializatio n i n th e networ k o f technological transfe r ha s th e followin g implications : whe n privat e di rect foreig n investmen t i s expande d i n th e contex t o f th e nationa l econ omy o f th e recipient , th e productio n o f a specifi c are a o f industr y be comes specialized . I n othe r w o r d s , technologica l transfe r fo r th e production syste m i n it s entirety—tha t is , th e production/managemen t system, includin g managemen t k n o w - h o w — i s a n enormou s task . Also , the progres s of internationa l specializatio n a s the networ k o f technologi cal transfe r might eve n serv e a s a n obstacle . In thi s manner , variou s reservations exist fo r th e utilizatio n o f privat e direct foreig n investmen t a s a vehicl e o f economi c cooperation . Bu t i t i s only natura l fo r differen t method s o f economi c cooperatio n t o b e mor e effective i n differen t countrie s i n variou s developmenta l stages . I t i s also a fac t tha t private-sector-initiate d direc t investmen t perform s a significant rol e i n th e recipien t country , i n man y instances . I n suc h cases , the hos t countr y shoul d mak e necessar y adjustment s s o a s t o avoi d investment conflict s wit h th e dono r countr y a s muc h a s possible , o r

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should desig n th e kin d o f channelin g o f fund s tha t wil l preven t the m from arising . T o tak e th e exampl e o f th e recen t increas e o f Japan' s import o f manufacture d products , J a p an tend s t o impor t fro m particular countries (suc h a s A S E A N countries) , an d thi s give s ris e t o a seriou s shortfall i n infrastructur e in othe r developin g countries . I n thi s instance , extending economi c cooperatio n t o provid e th e countr y wit h th e bottle neck infrastructur e will certainl y b e effectiv e i n resolvin g th e issue . Sinc e the destinatio n (region ) fo r direc t foreig n investmen t le d b y th e privat e sector i s basicall y decide d throug h consideratio n o f relation s betwee n profits an d risks , th e recipien t countr y i s wel l advise d t o tak e som e policy step s (whic h coul d b e preferentia l measures ) t o alleviat e th e po tential risk s t o th e investor s t o promot e investment . Suc h polic y mea sures wil l brin g fort h result s simila r t o subsidies , an d ar e likely t o distor t the recipient' s marke t mechanism. A t an y rate , i t appear s that th e rol e o f private direc t foreig n investmen t i n th e are a o f economi c cooperatio n remains onl y supplementary .

5 . E c o n o m i c a n d Industria l C o o p e r a t i o n fo r Easter n Europe an d Russi a The dramati c moves t o w a r d democratization an d change s i n th e politica l regimes tha t s w e p t Easter n Europ e i n 1 9 8 9 presente d a n importan t question t o Japan' s economi c cooperation . Easter n Europea n countrie s naturally nee d investmen t fund s fo r reconstructio n o f thei r economies ; and th e portio n tha t exceed s domesti c saving s mus t b e procure d fro m abroad, throug h th e vehicle s o f assistance , public an d privat e loans, an d direct foreig n investment , amon g others . Th e Japanes e governmen t i s trying t o activel y respon d t o suc h essentia l request s fro m Easter n Eu rope. Already , i t ha s committe d it s financial cooperatio n t o Hungar y and Poland , an d decide d t o mak e a capita l subscriptio n t o th e Europea n Bank fo r Reconstructio n an d Development . Thi s wil l b e i n th e amoun t of clos e t o $ 2 billio n a s a relie f packag e fo r Easter n Europe , accordin g to th e officia l announcement . Suc h economi c an d financial cooperatio n may b e considere d extremel y promp t i n compariso n t o pas t processin g of Japanes e polic y measure s fo r economi c cooperation . I t i s als o dis tinctly noteworth y wit h respec t t o politica l factor s an d internationa l relations. I n th e privat e secto r also , industria l cooperatio n base d o n direct investmen t an d th e transfe r o f technolog y i s underway , an d pri -

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marily wil l mad e availabl e t o Hungary , Czechoslovakia , an d Poland . I n Hungary, fo r example , actua l project s ar e beginnin g t o b e launched . These move s b y Japanes e corporation s ar e a t th e sam e tim e becomin g a cause o f concer n an d warines s on th e par t of Wester n Europe. Neverthe less, i t i s no t likel y tha t Japanes e corporation s wil l mak e large-scal e direct foreig n investment s i n th e shor t ter m t o Easter n Europea n coun tries. Tha t i s becaus e politica l an d socia l stabilit y an d th e rebuildin g o f various systems , whic h constitut e precondition s fo r direc t investment , are no t ye t i n orde r i n th e region . Thes e ar e ye t t o come . Ther e ma y b e lags t o varyin g degrees, depending upo n th e individua l countr y involved , but direc t investmen t i n Eas t Europ e wil l probabl y b e looke d a t i n th e medium an d lon g terms . In th e cas e o f Russia , o n th e ground s o f politica l consideration s ther e has bee n n o significan t progres s in Japan-Sovie t economic an d industria l cooperation. Th e issu e o f th e fou r Norther n Island s wil l hav e a n im portant bearin g o n thi s front . Ther e shoul d b e n o progres s made i n th e area o f cooperatio n unles s i t i s precede d b y progres s with th e Norther n Islands issue . I n an y event , solvin g th e politica l issue s betwee n J a p an an d Russia mus t com e first, befor e economi c an d industria l cooperatio n between th e t w o countrie s s h o w s an y sig n o f movin g forward . H o w e v e r , Russia i s i n th e middl e o f confusio n an d difficulties . Th e countr y ha s registered negativ e economi c growt h an d i s endurin g extrem e hardships . On th e othe r hand , i n th e contex t o f suppl y o f natura l resources , amon g other things , th e Sovie t econom y an d th e Japanes e econom y coul d b e i n a complementar y relationshi p i n th e lon g term . I t coul d b e sai d that , i n the lon g run , bot h countrie s hav e economi c reason s t o for m cooperativ e economic an d industria l relations . I n th e even t tha t variou s politica l issues betwee n J a p a n an d th e Sovie t Unio n ar e resolved , government based financial cooperatio n wil l b e mos t urgen t i n th e shor t run , a s i s the cas e i n Easter n Europea n countries . Whe n thi s happen s i t wil l als o be importan t t o incorporat e Russi a int o a n internationa l economi c sys tem. On e migh t sa y tha t thi s i s on e o f th e precondition s fo r th e improve ment o f Japan-Russi a relations . 6. Economi c Cooperatio n wit h Chin a Starting wit h th e authorizatio n o f th e Firs t Y en Loa n t o Chin a i n 1 9 8 0 , Japan mad e availabl e t o th e People' s Republi c o f Chin a gratuitou s an d

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nongratuitous contracts , technologica l transfers , private-sector-le d financial cooperation , an d direc t foreig n investment , unde r th e headin g o f economic cooperation . Under th e ope n doo r polic y i n Chin a sinc e 1 9 7 8 , Japanese economi c and financial cooperatio n wit h Chin a ha s bee n implemente d mainl y through th e provisio n o f a n economi c infrastructur e an d th e develop ment o f natura l resources for export . In th e meantime , Chin a aggressivel y liberalize d it s econom y afte r 1 9 7 8 an d achieve d hig h economi c g r o w t h an d trad e expansion. Then , i n the latte r hal f o f th e 1 9 8 0 s , variou s problem s bega n t o emerge , amon g which inflatio n w a s a seriou s caus e fo r anxiety . Afte r 1 9 8 8 , economi c adjustment polic y step s w e r e take n i n 1 9 8 9 , an d th e Tiananme n Squar e Incident brok e out . Eve r since , J a p a n ha s suspende d authorizatio n o f yen credit s t o China . I n fact , n o sign s o f progres s are see n i n th e are a o f official financial cooperatio n t o tha t country . A simila r stanc e i s take n by countrie s i n th e West , a s well a s b y internationa l financial institution s such a s th e IBRD . From 1 9 9 0 t o 1 9 9 1 , th e Japanes e governmen t examine d thi s matte r and decide d t o reope n Japanes e OD A an d financial cooperatio n wit h China fro m th e poin t o f vie w o f "avertin g the isolatio n o f China. " At present , economi c cooperatio n wit h Chin a ha s develope d int o a highly politica l consideration . I n th e mediu m t o lon g term , th e overal l picture ma y b e different . Currently , however , Chin a i s a countr y tha t embraces th e world' s larges t population , wit h a per-capit a incom e o f approximately $ 4 0 0 . Ther e i s a n enormou s regiona l ga p betwee n th e coastal region , wher e economic liberalizatio n i s advance d and th e inhab itants ar e relativel y wel l off , an d th e economicall y underdevelope d in land region . I t i s a countr y burdene d wit h variou s difficulties . Y e t , geographically i t i s clos e t o J a p a n , an d needles s t o say , Chin a i s a n important countr y fo r J a p a n . I n th e mediu m an d lon g term , therefore , Japan shoul d procee d wit h economi c cooperatio n i n complianc e wit h the principl e o f "extendin g indirec t suppor t fo r th e self-relian t effort s o f developing countries. " Give n tha t th e Chines e econom y s h o w s diversi fied faces , economi c cooperatio n ough t t o combin e variou s form s o f assistance t o satisf y it s needs . Fo r example , privat e direct foreig n invest ment wil l presumabl y hav e a greate r rol e t o pla y i n th e coasta l regio n which i s th e cente r o f liberalize d economi c polic y measures . Also , i t i s considered tha t i n man y case s OD A i s relativel y bette r suite d t o th e

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investment climat e o f th e coasta l region . I n addition , ther e wil l b e futur e needs fo r economi c cooperatio n o n environmenta l projects . In an y event , China i s face d wit h al l sort s o f worrie s in th e shor t term , whic h presen t hurdles t o economi c cooperation . I n th e mediu m an d lon g term , Chin a will definitel y requir e it i n varyin g forms an d i n a fairl y sizeabl e amount .

7. R e c y c l i n g o f F u n d s t o T h i r d W o r l d D e b t o r s The crise s tha t occurre d i n th e earl y 1 9 8 0 s i n th e internationa l balanc e of payment s o f medium-incom e countries , particularl y thos e o f Lati n American countries , deteriorate d further despit e th e effort s o f industria l and debto r countries . I n th e latte r hal f o f th e 1 9 8 0 s , onc e again , th e accumulated deb t proble m ha d t o b e cope d wit h b y th e us e o f drasti c measures, includin g reductio n o f outstandin g principa l an d interes t rates. Th e situatio n urgentl y require s ne w developments . Sinc e 1 9 8 7 , J a p a n ha s bee n makin g commitment s t o financial cooperatio n wit h thes e countries. Thi s recyclin g o f fund s w a s first decide d upo n b y th e Naka sone administratio n an d w a s implemente d mor e i n collaboratio n wit h the Unite d State s than o n th e initiativ e o f Japa n itself . I n thi s context , i t w a s clearl y tinge d wit h politica l an d internationa l relation s concerns , though i t w a s economi c financial cooperation . Suc h commitmen t ha s other importan t implication s tha n jus t tha t o f collaboratio n wit h th e United States . Fo r example , preservatio n o f th e internationa l monetar y system ca n b e cited . Nevertheless , thi s als o entail s a number o f problems . Repayment o f pas t loan s b y privat e financial institutions , includin g re payment o f principa l an d paymen t o f interest , i s als o mad e possibl e through financial cooperation . I n othe r w o r d s , suc h a cas e coul d b e interpreted a s shiftin g th e obligation s o f accumulated-debt-ridde n coun tries fro m th e privat e secto r t o th e publi c sector . I n addition , financial cooperation o f thi s natur e i s mainl y directe d t o w a r d supportin g th e international balanc e o f payment s o n a nonprojec t basis . For this reason , financial cooperatio n b y th e Worl d Ban k an d th e IM F i s conditiona l o n certain prerequisites , suc h a s adoptio n o f macroeconomi c policie s t o restore th e econom y an d modificatio n o f relate d policies includin g mone tary, trade , industrial , an d privatizatio n policies . J a p a n als o wil l pu t forth term s an d condition s tha t approximat e thos e o f th e IM F o r IBRD . In fact , Japa n ha s no t quote d it s o w n term s an d condition s fo r credi t extension a s yet . Th e majo r reaso n fo r thi s i s tha t th e shortag e o f

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staff, amon g othe r things , prevent s th e domesti c syste m fro m bein g full y equipped. Thi s i s anothe r proble m are a tha t need s t o b e addresse d in th e future. A s oppose d t o th e typ e o f economi c cooperatio n extende d i n th e past, whic h centere d aroun d a give n project , financial cooperatio n t o third w o r l d debto r countrie s ma y involv e man y aspect s tha t ar e no t readily comprehensible . Especially , i t i s difficul t t o asses s h o w th e eco nomic cooperatio n progra m has progressed , and t o w h a t exten t it s goal s can b e achieved . M o s t o f th e dat a currentl y i n us e i s kep t confidential , and tha t i s w h y a substantia l par t o f i t i s know n a s bein g i n a "blac k box." Hopefully , i n th e future , a publi c recor d wil l b e kep t regardin g h o w financial cooperatio n o f thi s typ e w a s prepare d beforehand, h o w i t w a s implemented , and , i n th e process , w h a t kin d o f rol e w a s playe d b y the Japanes e governmen t financial institution s involved .

8. T h e N e e d fo r Nationa l Consensu s Presumably, Japan' s commitmen t t o economi c an d financial cooperatio n in th e 1 9 9 0 s wil l continu e t o operat e a t th e highes t leve l i n th e w o r l d . I n 1 9 8 9 , th e consumptio n ta x introduce d b y th e governmen t arouse d heated debat e acros s the country . Eve n thoug h i t fall s shor t o f 1 percen t of GNP , Japanes e economi c an d financial cooperatio n stil l constitute s a vast su m o f money . Sinc e abou t 1 9 8 9 , increasin g interes t i n thi s subjec t has begu n t o b e show n b y th e people . Th e medi a hav e take n i t u p a s a topic o f discussion , an d gradually , related materials have bee n published . It i s ofte n foun d tha t economi c an d financial cooperatio n involve s com plicated issue s tha t ar e difficult fo r th e peopl e t o full y understand . H o w ever, becaus e o f th e shar p increas e i n th e amoun t o f suc h cooperation , i t seems natura l tha t th e actua l stat e o f affair s an d problem s hav e bee n highlighted. Unles s mor e adequat e understandin g of , an d suppor t for , this are a o f cooperatio n ca n b e obtaine d fro m th e Japanes e peopl e i n general, J a p a n wil l b e unabl e t o pla y a n activ e rol e i n th e internationa l community. I n short , i n th e 1 9 9 0 s , solicitin g nationa l consensu s o n thi s issue wil l becom e essential . The constituent s o f nationa l consensu s ma y b e a s follows : 1. i t i s necessar y t o agre e o n th e basi c philosoph y o f economi c an d financial cooperatio n (internationa l relation s an d politica l element s should b e take n int o accoun t t o a greate r extent) ;

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2. i t i s necessar y to agre e o n th e expansio n o f fund s an d relate d institu tions aime d a t economi c an d financia l cooperatio n (thi s refer s mainl y to domesti c institutions) ; 3. i t i s necessar y t o agre e o n th e metho d o f allocatio n o f fund s fo r thi s purpose ("allocation " i n thi s cas e refer s t o allocatio n b y regio n an d by countr y a s well a s b y are a an d b y target) ; 4. a s t o assessin g th e effec t o f cooperation , th e peopl e shoul d b e abl e t o k n o w th e result s o f tha t assessment ; 5. overall , "transparency " of economi c an d financia l cooperatio n mus t be enhanced ; an d 6. agreemen t o n th e importanc e o f economi c an d financia l cooperatio n is necessary. As th e people' s interes t i n cooperatio n heightens , voice s o f criticis m may als o arise . Som e o f thes e voice s ar e appropriate , constructive , an d positive, whil e som e other s ar e clearl y derive d fro m misunderstanding . The Japanes e governmen t an d relate d institutions ough t t o accep t thos e voices tha t nee d t o b e accepte d bu t counte r othe r voice s tha t mus t definitely b e countered . I t i s onl y afte r goin g throug h thi s basi c proces s that nationa l consensu s o r understandin g ca n b e gained .

9 . P o l i c y Prioritie s fo r Specifi c E c o n o m i c a n d Financial Cooperatio n Policy prioritie s ma y b e classifie d int o t w o categories : those tha t mus t b e coped wit h i n th e shor t ter m an d thos e tha t shoul d b e tackle d i n th e medium an d lon g terms . Ther e i s on e othe r typ e o f classificatio n tha t w e can distinguish : polic y prioritie s concernin g method s o f cooperation — in othe r w o r d s , specification s o r particulars of cooperation—a s oppose d to polic y prioritie s concernin g Japan' s domesti c structur e a s i t i s in volved i n extendin g cooperation . As fo r th e latter , i t shoul d b e note d tha t i n som e case s cooperatio n under thi s headin g need s t o b e enhance d a s a "grant " whereas in othe r cases i t ough t t o b e processe d in th e for m o f "untied " aid . Fo r example , it ha s alread y bee n pointe d ou t tha t mobilizatio n o f ai d i n a n "untied " form i s substantiall y utilize d b y othe r industria l countries . Unde r th e heading o f "LD C untied " aid , however , join t ventur e companie s involv ing Japanes e investor s an d th e hos t country' s entrepreneur s hav e a n

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increasingly large r shar e o f th e tota l procurement . Y e t , these bein g join t venture companies , th e hos t countr y sid e naturall y ha s th e majorit y share i n th e ownershi p o f thes e d e fact o loca l companies . Fo r this reason , the hos t sid e ofte n hold s a grudg e agains t th e investo r side , an d suc h a form o f cooperatio n canno t b e considere d "untied " i n substance . I n view o f th e circumstances , i t i s necessar y t o tak e a mor e positiv e stanc e in extendin g economi c cooperatio n tha t i s "untied " i n substanc e a s well. There ar e als o som e seriou s problem s tha t ar e beginning t o b e see n i n the are a o f technologica l cooperation . I t i s sai d that , i n regar d t o thi s area, th e kin d o f technologica l cooperatio n tha t ca n b e mad e availabl e to developin g countrie s i s fas t disappearin g fro m J a p a n , s o tha t i n th e near future , technologica l transfe r may becom e a n are a i n whic h interna tional cooperatio n i s n o longe r possible . Tha t i s t o say , J a p an ha s move d to suc h a sophisticate d leve l o f technolog y overal l tha t i t n o longe r wil l have an y stoc k o f technolog y tha t developin g countrie s actuall y require. In thi s context , i t i s essentia l fo r J a p a n t o procee d wit h coordinatio n with th e developin g w o r l d an d th e Asia n NIEs , amon g othe r countries , in th e area s o f economi c cooperatio n an d technologica l transfer . Wha t this point s t o i s tha t J a p a n alon e ma y no t b e abl e t o accommodat e th e needs o f th e developin g w o r l d i n thes e areas . Suc h a possibilit y i s arisin g from th e chang e i n Japan' s stoc k o f technology . On th e othe r hand , buildin g u p Japan' s domesti c structur e poses th e greatest tas k i n th e real m o f economi c an d financial cooperation . Espe cially i n suc h area s a s analyzing an d reviewin g the effect s o f cooperation , both huma n resource s an d capita l ar e lacking . Thi s applie s t o bot h macroeconomic an d microeconomi c analyses . I n addition , continuatio n of th e complicate d domesti c structur e concerned wit h cooperatio n pose s difficulties. I t will b e necessar y to se t u p a ne w system , including restruc turing th e existin g governmen t financial

institution s (implementin

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body), whic h utiliz e a smal l numbe r o f staf f a s muc h a s possible . A t present, som e o f th e conten t o f w o r k overlaps , bein g carrie d ou t b y a number o f implementin g bodie s i n man y cases . Another poin t t o b e note d i s tha t i n th e 1 9 9 0 s utilizatio n o f th e private secto r will b e a n importan t task . Utilizatio n o f thi s privat e sector may appea r contradictory t o th e ple a fo r untyin g th e aid . Consequently , concerned partie s shoul d b e carefu l i n thei r us e o f th e privat e secto r t o ensure tha t n o contradictio n i n suc h regar d wil l arise . Tha t i s t o say , taking int o accoun t th e shortag e of huma n resource s in th e publi c secto r

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and th e drainin g a w a y o f th e kin d o f technolog y fro m J a p a n tha t devel oping countrie s need , J a p a n ough t t o enhanc e it s utilizatio n o f skille d laborers w h o ar e advance d i n ag e a s wel l a s cooperatio n wit h th e pri vate sector . In closing , w e mus t remin d ourselve s o f thre e aspect s o f Japan' s economic an d financial cooperatio n i n connectio n wit h it s rol e i n th e international communit y i n th e 1 9 9 0 s . Th e first aspec t concern s th e w o r l d a s a whol e an d i s relate d t o th e G A T T an d th e internationa l monetary regime . Th e secon d aspec t i s relate d t o regiona l cooperation . W e shoul d b e carefu l i n extendin g economi c an d financial cooperatio n so tha t th e abov e t w o question s d o no t mutuall y contradic t eac h other . In thi s context , muc h wil l depen d o n w h a t rol e J a p a n wil l assum e i n th e international aren a i n th e 1 9 9 0 s i n th e are a o f economi c an d financial cooperation. Thi s wil l b e th e basi c visio n o n whic h drafting , planning , and implementin g policie s addressin g the abov e wil l b e based . The thir d aspec t i s th e possibilit y o f J a p a n a s a mode l o f th e develop ment experience . Sinc e th e 1 9 7 0 s , w e hav e ha d som e successfu l storie s of economi c developmen t i n Asia . Ther e ar e severa l factor s i n commo n between Japanese developmen t experience s an d th e recen t success storie s in Asia , som e o f whic h wil l appl y t o othe r developin g countrie s suc h a s Latin America n an d Eas t Europea n countrie s a s wel l a s th e USSR . Thi s makes i t mor e importan t tha t w e initiate , o n ou r o w n , intensiv e researc h on an d stud y o f th e Japanes e economi c developmen t experience , i n ligh t of futur e economi c an d financial cooperatio n fo r developin g countries . Finally, I w o u l d lik e t o poin t ou t tha t i n th e 1 9 9 0 s J a p a n shoul d pursue a "Japanes e w a y o f economi c an d financial cooperation. " Th e new Japanes e w a y shoul d tak e int o accoun t t w o point s a t least . Thes e are (1 ) offerin g informatio n o n ou r pas t experience s an d o n Japanes e economic developmen t (includin g th e pas t economi c developmen t expe riences o f othe r Asia n countries ) an d (2 ) adoptin g clea r criteria based o n human right s an d social , political , an d militar y elements . The Japanes e experienc e o f long-ter m economi c developmen t sinc e the Meij i Restoratio n an d afte r Worl d W a r II , an d som e othe r Asia n success experiences , ar e unlik e man y Wester n economies ' developmen t and g r o w t h experience s wit h regar d t o severa l points, suc h a s manne r o f working th e marke t price , formatio n o f th e market , th e relationshi p between busines s an d government , priorit y sector s i n th e proces s o f economic development , an d s o on . T o evolv e a ne w Japanes e styl e o f

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economic an d financia l cooperatio n i n th e 1 9 9 0 s , w e shoul d intensivel y allocate mor e huma n resource s t o thi s fiel d an d shoul d mobiliz e stron g multilateral cooperatio n amon g group s suc h a s the academi c communit y (joint w o r k betwee n economists , politica l scientists , an d scholar s o f international relations) , th e busines s community , an d th e publi c sector . The Japanes e w ay wil l hav e t o b e differen t fro m th e existin g metho d used b y th e Unite d States , the Unite d Kingdom , France , and Scandinavia . The basi c requirement s wil l hav e t o tak e int o accoun t peacekeeping , arms reduction , huma n rights , a cleare r politica l element , an d a reflec tion o f Japanes e development experiences . Sinc e th e Gul f W a r , th e LD P (Liberal Democrati c party ) o f J a p a n ha s starte d t o discus s seriousl y Japan's ne w strategi c aid , whic h take s int o accoun t peacekeeping , arm s reduction, an d democratizatio n i n hos t countries . Thi s issu e wil l b e on e of th e mos t importan t problem s tha t man y Japanes e should conside r i n the 1 9 9 0 s .

Notes 1. World Debt Tables 1990, Worl d Bank, 1991. 2. Balance of Payments Monthly, Ban k of Japan , Apri l 1992 .

References Development Assistanc e Committe e (DAC) . Development Cooperation: 1990 Report. Paris : OECD , 1991 . Ministry o f Foreig n Affair s o f Japan . Japan's Official Development Assistance: 1990 Annual Report. Tokyo , 1990 . Ministry o f Internationa l Trad e an d Industr y o f Japan . Present Situation and Issues in Economic Cooperation, 1989. Tokyo , 1990 . Orr, Rober t M . The Emergence of Japan's Foreign Aid Power. Ne w York : Columbia Universit y Press , 1990 . Shafiqul, Islam , ed. Yen for Development: Japanese Foreign Aid and the Politics of Burden Sharing. Ne w York : Counci l o n Foreig n Relations, 1991 . Yasutomo, Dennis T. The Manner of Giving: Strategic Aid and Japanese Foreign Policy. Lexington , Mass. : Heath, 1986 .

6. Japan' s Internationa l Agenda : Structural Adjustment s Heizo Takenaka

Since th e releas e o f th e M a e k a w a Report i n 1 9 8 6 , th e ter m "structural adjustment" ha s becom e a ke y phras e i n discussion s o f issue s an d poli cies regardin g the Japanes e economy . Ther e shoul d b e n o nee d t o men tion th e importanc e o f promotin g th e internationa l harmonizatio n o f macroeconomic policie s i n amelioratin g externa l imbalance s amon g th e leading industria l nations , particularl y betwee n J a p a n an d th e Unite d States. Furthermore , awarenes s has bee n growin g amon g Japanes e an d foreign polic y analyst s o f th e nee d fo r structura l changes t o th e societie s and economie s o f J a p a n an d th e Unite d States . Thi s awarenes s ha s strengthened amon g mainstrea m analyst s and policymaker s a s thos e fe w w h o stres s tha t J a p a n i s uniquel y differen t fro m Europ e an d th e Unite d States hav e gaine d visibilit y i n recen t years . As economi c globalizatio n progresses , it i s bot h necessar y an d vitall y important tha t Japan' s societ y an d econom y develo p a structur e tha t i s compatible wit h thos e o f othe r nations . M a n y als o hop e thi s proces s wil l improve th e economi c well-bein g o f Japanes e citizens . Furthermore , since al l leadin g industria l nation s nee d t o undertak e economi c struc tural adjustment s base d o n internationa l harmonization , i t wil l b e bene ficial fo r J a p a n t o assum e a leadershi p rol e i n thi s process . Fo r thes e 164

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reasons, Japan' s basi c suppor t fo r structura l adjustment s ha s bee n clearly eviden t amon g government , industry , an d consumers . Nevertheless, man y problem s ar e still associate d wit h economi c struc tural adjustments . Wha t exactl y d o structura l adjustment s consis t o f ? Are thei r effect s majo r o r minor ? Wha t practica l governmen t polic y measures ar e required ? Based o n thes e questions , thi s pape r wil l clarif y w h a t meanin g structura l adjustment s hol d fo r th e Japanes e econom y and wil l discus s a n agend a fo r achievin g thes e adjustments . First, Japan' s nee d fo r economi c structura l adjustment s an d th e im portance o f diminishin g th e sprea d between domesti c an d foreig n price s will b e examined . Next , thre e area s wher e chang e i s needed—land , distribution markets , and th e competitivenes s o f Japanes e m a r k e t s — w i l l be analyzed . Finally , th e nee d fo r basi c socia l an d economi c refor m i n realizing suitabl e structura l adjustments wil l b e emphasized .

1 . T h e N e e d fo r S t r u c t u r a l A d j u s t m e n t s The w o r l d econom y experience d unprecedente d change s i n th e latte r half o f th e 1 9 8 0 s . Financia l service s an d suc h factor s o f productio n a s capital an d labo r bega n t o mov e easil y acros s nationa l borders . Th e activities o f corporation s an d consumer s bega n t o encompas s th e entir e globe. A s a resul t o f economi c "globalization, " smal l difference s i n national economi c policie s an d economi c system s coul d trigge r sudde n and substantia l cross-borde r shift s i n produc t flow s an d i n factor s o f production. Thi s ha s th e potentia l o f destabilizin g w o r l d markets . "Black M o n d a y , " o r th e stoc k marke t collaps e o f Octobe r 1 9 8 7 , brought int o shar p relie f th e degre e t o whic h interdependenc e governe d the w o r l d an d coul d shak e markets . Another majo r developmen t w a s th e Plaz a Accor d o f 1 9 8 5 , whic h sparked th e yen' s considerabl e appreciatio n agains t th e dollar . Thi s di d not, however , initiall y resul t i n a substantia l declin e o f Japan' s curren t account surplus . Fo r thi s an d othe r reasons , som e i n th e Unite d State s have declare d tha t Japan' s socia l an d economi c syste m i s uniqu e an d have criticize d J a p a n o n thi s basis . Th e debat e o n thi s amon g specialist s continues, bu t whateve r it s outcome , th e nee d fo r J a p a n t o undertak e economic structura l adjustment s i n orde r t o bette r harmoniz e wit h th e w o r l d ha s becom e widel y accepted . Th e ambiguou s meanin g o f "struc -

1 6 6 Heizo

Takenaka

tural adjustments, " nevertheless , ha s hampere d constructiv e debat e an d policy actions . "Structural adjustment " i s quit e a convenien t phrase . Economist s commonly identif y a s structura l thos e feature s tha t remai n unchange d for lon g period s o f time . Som e therefor e labe l al l change s t o long-ter m phenomena a s structura l changes . Ther e are , o n th e othe r hand , thos e that hol d tha t structura l chang e i s impossibl e sinc e "structure " by defi nition refer s t o unchangin g phenomena . Therefore , providin g a prope r definition fo r "structura l adjustment " i s difficult . Fro m th e perspectiv e of th e economi c discipline , on e canno t immediatel y conclud e tha t struc tural change s o r structura l adjustment s hav e take n plac e whe n change s to economi c variable s brin g abou t a chang e i n economi c structure . Fo r example, suppos e tha t Japan' s shar e o f manufacture d import s i n tota l import volum e rise s a s a resul t o f th e yen' s appreciation . An y econom y has th e propensit y fo r manufacture d import s t o ris e b y a certai n percent age whe n th e nationa l currenc y strengthens . Therefore , w h e n import s increase a s th e ye n appreciates , this chang e i s no t necessaril y a structural adjustment bu t ma y b e jus t a norma l economi c adjustment . H o w e v e r , should som e facto r caus e th e ver y propensit y t o impor t t o ris e an d consequently chang e th e amoun t o f import s b y mor e o r les s tha n th e usual, thi s ca n b e labele d a s a structura l adjustment . Thus, structura l adjustment s ca n b e define d a s change s t o th e struc tural parameter s tha t ar e buil t int o th e economy . Thes e change s ofte n depend o n alteration s i n socia l an d economi c phenomena . Fo r example , systemic change s i n impor t procedures , change s t o th e mean s b y whic h foreign currenc y rat e fluctuation s ar e manifested i n domesti c prices , an d variations o f deman d functio n configuration s arisin g fro m change s i n consumer value s w o u l d mar k th e occurrenc e o f structura l adjustment.

1

Reflecting th e comple x natur e o f th e difficultie s associate d wit h struc tural adjustmen t issues , mos t o f th e leadin g industria l nation s hav e bee n reluctant t o promot e structura l adjustmen t o f thei r economies . J a p a n i s the onl y natio n t o hav e announce d a clea r pla n o f action , a s represente d by th e M a e k a w a R e p o r t .

2

Structural adjustmen t play s a n importan t rol e fo r Japan' s govern ment, industry , an d consumers . First , i t i s recognize d tha t structura l adjustments wil l hel p enormousl y i n amelioratin g externa l imbalance s among leadin g industria l nations , particularl y betwee n J a p a n an d th e United States . A simulatio n analysi s o f a globa l economi c m o d e l indi 3

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Table 6. 1 Simulatin g Polic y Changes : Divergence s fro m th e Bas e Lin e Japan (A) Rate of GNP Growth (Average 1991-1995) Case I 0. Case II 3.

4 5

Japan (B) Ratio of Trade Balance to GNP (1995)

U.SA. (A)

U.S.A. (B)

Asian NIEs (A)

Asian NIEs (B)

-0.6 -1.9

0 0.2

1.1 1.7

0.7 2.5

-0.1 0

Source: H . Takenaka , Nichibei Masatsu no Keizaigaku (Economic s o n U.S.-Japa n Frictions) , Tokyo: Niho n Keizai Shimbun , 1991 .

cates tha t divergenc e o f Japanes e an d U.S . macroeconomi c policie s (i.e. , the g r o w t h o f U.S . budge t deficit s an d Japan' s austerit y efforts ) w a s th e principal facto r i n th e expansio n o f th e U.S . trad e defici t betwee n 1 9 8 0 and 1 9 8 5 , accountin g fo r 6 0 percen t o f th e trad e deficit s th e Unite d States accumulate d durin g tha t time . Th e remainin g 4 0 percen t de pended o n th e increasin g incom e elasticit y o f U.S . impor t demand , re flecting th e declinin g saving s rat e an d variou s othe r structura l factors . Furthermore, onl y 3 2 percen t o f Japan' s externa l surpluse s o f th e sam e period w e r e explaine d b y change s i n macroeconomi c policies . Th e re mainder likel y depende d o n variou s structura l change s suc h a s change s in saving s an d investmen t behavior . Thi s therefor e suggest s th e nee d fo r both harmonizatio n o f macroeconomi c policie s (i.e. , reductio n o f th e U.S. budge t defici t an d expansio n o f Japan' s domesti c demand ) an d structural adjustment s t o mak e significan t improvement s t o th e externa l imbalances o f J a p a n an d th e Unite d States . A mor e recen t simulatio n analysi s suggest s tha t carryin g ou t struc tural adjustment s throug h th e 1 9 9 0 s wil l b e indispensabl e i n ameliorat ing externa l imbalance s an d i n ensurin g th e stabl e managemen t o f th e w o r l d economy . Tabl e 6. 1 indicate s th e outcom e o f simulatio n o f usin g a smal l mode l o f th e globa l econom y t o determin e th e result s o f macro economic polic y coordinatio n amon g J a p a n , th e Unite d States , an d Eu rope (Cas e 1 ) an d th e result s o f th e additio n o f structura l adjustments t o macroeconomic polic y coordinatio n (Cas e 2 ) (th e figures represen t th e difference betwee n eac h cas e an d th e baselin e situatio n o f takin g n o policy actio n a t all) . Cas e 1 assume s tha t th e Unite d State s lower s

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government expenditur e growt h b y 1 percen t fro m th e baselin e an d tha t J a p a n an d othe r OEC D nation s lif t thei r governmen t expenditur e growth b y 1 percent . Cas e 2 presume s that , i n additio n t o th e macroeco nomic policie s o f Cas e 1 , structura l change s t o th e Japanes e econom y push consume r price s d o w n an d tha t existin g difference s i n domesti c and foreig n price s ar e abou t halve d i n five years . I n othe r w o r d s , Cas e 2 assumes tha t a declin e i n th e leve l o f domesti c price s wil l increas e th e purchasing p o w e r o f Japanes e consumer s an d boos t th e expansio n o f domestic demand . Tabl e 6. 1 make s clea r that th e combinatio n o f macro economic polic y coordinatio n an d structura l adjustments , a s i n Cas e 2 , has a fa r greate r effec t tha n th e Cas e 1 situatio n i n promotin g domesti c and foreig n economi c g r o w t h an d i n improvin g externa l imbalances . Particularly noteworth y i s Cas e 2' s efficac y i n bolsterin g th e growt h o f the Asia n NIEs. Domestically , ther e ar e many w h o believ e tha t structural adjustments ar e a n effectiv e mean s fo r respondin g t o th e criticis m tha t J a p a n i s uniquel y different , bu t w h o fea r adjustment s w o u l d b e ineffec tual i n promotin g economi c growt h o r improvin g externa l imbalances . Table 6. 1 nevertheles s s h o w s tha t structura l adjustment s w o u l d hav e a sizable economi c effect , bot h domesticall y an d internationally . Wha t must b e stresse d a t thi s poin t i s th e importanc e o f economi c structura l adjustments no t onl y fo r J a p a n bu t fo r al l leadin g industria l nations . Fo r example, th e amelioratio n o f externa l imbalance s o n a globa l scal e wil l only begi n t o tak e plac e w h e n J a p a n bolster s domesti c deman d throug h structural adjustment s and , complementarily , th e Unite d State s carrie s out suc h structura l change s a s liftin g it s private-secto r savings rat e an d strengthening th e suppl y sid e o f it s economy . A secon d reaso n w h y structura l adjustments ar e importan t fo r J a p a n lies i n th e fac t tha t man y o f th e anticipate d specifi c change s wil l hel p improve th e economi c well-bein g o f Japanes e citizen s ove r th e mediu m and lon g term . Fo r thi s reason , policie s an d issue s discusse d i n th e M a e k a w a Repor t an d othe r document s ough t t o b e pursued , regardless of thei r effectivenes s i n amelioratin g externa l economi c relations , sinc e they suppor t th e genera l goa l o f economi c policy , th e realizatio n o f comfortable live s fo r citizens . A numbe r o f factors , suc h a s th e shorten ing o f workin g hours , th e furthe r liberalizatio n o f imports , th e contro l of rea l estat e prices , o r th e streamin g o f th e distributio n system , wil l al l contribute t o th e improvemen t o f th e nationa l economy . Consequently , despite th e vaguenes s associate d wit h th e concep t o f structura l adjust -

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merits, i t represent s a n importan t prescriptio n fo r dealin g wit h bot h domestic an d externa l polic y issues . Thi s prospec t ha s alread y attracted considerable interes t i n J a p a n an d it s importanc e wil l onl y increas e i n the 1 9 9 0 s . With economi c interdependenc e markedl y increasing , th e stabl e man agement o f th e globa l econom y wil l requir e th e internationa l coordina tion o f structura l adjustmen t policie s a s wel l a s th e coordinatio n o f macroeconomic policies . Discussion s concernin g th e coordinatio n o f macroeconomic policie s hav e take n plac e repeatedl y a t economi c sum mits an d a t th e Grou p o f Fiv e an d Grou p o f Seve n meeting s o f finance ministers an d centra l bankers . Thes e discussion s hav e engendere d a certain amoun t o f success . Moreover , multilatera l surveillanc e o f na tional economi c policie s an d economi c performanc e ha s occurre d sinc e the Toky o Summi t o f 1 9 8 6 , whic h ha s strengthene d th e framewor k fo r international coordination . A s fa r a s economi c structura l adjustment s are concerned , on e ca n poin t t o th e recen t conclusio n o f th e bilatera l Structural Impediment s Initiativ e discussion s betwee n J a p a n an d th e United States . A s ha s bee n state d above , th e coordinatio n o f macroeco nomic policie s wil l onl y b e effectiv e w h e n i t take s plac e i n tande m wit h economic structura l adjustments . Japan' s economi c structura l adjust ments, first elaborate d i n th e M a e k a w a Report , hav e bee n conceive d within suc h a globa l framework .

2 . D o m e s t i c a n d F o r e i g n Pric e Difference s Adjustments t o economi c structure s ca n tak e plac e i n a variet y o f w a y s , and i t i s extremel y difficul t t o develo p unifor m indicator s t o revea l th e existence o f individua l problem s an d thei r relativ e size . H o w e v e r , th e spread i n price s betwee n domesti c Japanes e market s an d foreig n mar kets, o r difference s i n domesti c an d foreig n prices , ca n b e viewe d a s th e expression o f a variet y o f structura l problems . I f internationa l transac tions tak e plac e withou t exposur e t o structura l barrier s an d i f domesti c markets ar e withou t structura l distortion , domesti c pric e level s shoul d mirror internationa l levels . An effectiv e mean s o f comparin g domesti c an d foreig n price s i s foun d by weighin g purchasin g pric e parit y agains t curren t foreig n exchang e rates. Tabl e 6. 2 compare s Japan' s pric e level s wit h othe r nation s base d

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Table 6. 2 OEC D Purchasin g P o w e r Parit y an d Japan' s Pric e Leve l (1989) (A) P.P.P. (B) U.S.A. 196. W.Germany 84. France 26. U.K. 314.

0 6 7 0

Exchange Rate (A)

1(B) Japanese Price Level*

0 14 4 11 6 12 0 13

2 5 4 9

138. 73. 21. 226.

* Price level o f a particular country = 10 0 Source: Economi c Plannin g Agency , Bukka Repoto 90 (Pric e Repor t 90) , Tokyo : Economi c Plan ning Agency, 1990 .

on HO E figures fo r th e purchasin g pric e parit y o f consume r goods . Th e table reveal s that Japanes e price s ar e t wo time s tha t o f th e Unite d State s and 1. 2 t o 1. 4 time s tha t o f majo r Europea n nations . Japan's Economi c Plannin g Agenc y ha s als o mad e a n internationa l comparison o f price s fo r individua l products . Th e agenc y too k fou r hundred o f th e mos t importan t product s constitutin g th e consume r pric e index an d compare d thei r price s i n T o k y o , N e w Y o r k , an d Hambur g i n November 1 9 8 8 (usin g th e exchang e rate s of tha t tim e t o conver t prices) . It reporte d tha t price s i n T o k y o exceede d thos e i n N e w Y o r k an d Hamburg b y 1.1 6 an d 1.2 0 times , respectivel y (Economi c Plannin g Agency [1990]) . Whil e th e outcome s o f thes e t w o studie s diverg e slightly, on e canno t den y tha t Japanes e pric e level s surpas s internationa l levels b y a significan t margin . Several problems , nevertheless , ar e associate d wit h th e internationa l comparison o f prices . First , there i s th e possibilit y tha t foreig n exchang e rates deviat e fro m appropriat e level s whe n comparison s ar e made . Fo r example, eve n i f survey s disclos e tha t Japanes e price s eclips e thos e i n the Unite d States , thi s coul d merel y b e th e resul t o f th e ye n bein g over valued agains t th e dollar . Second , difference s coul d exis t i n th e composi tion o f good s purchase d by Japanese an d foreig n c o n s u m e r s — a proble m that i s par t o f al l pric e comparisons . Third , difference s i n pric e level s among nation s d o no t necessaril y mea n tha t structura l distortion s exist . The economi c theor y o f price s state s tha t simila r corporation s manufac turing analogou s good s wil l se t price s hig h i n countrie s wit h lo w pric e elasticity o f deman d an d wil l se t price s lo w i n countrie s wit h hig h price elasticity . Thi s behavio r i s th e rationa l outcom e o f seekin g t o maximize profits .

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Despite th e problem s tha t ar e associate d wit h th e internationa l com parison o f prices , i t i s significan t tha t Japan' s pric e level s surpas s thos e of Europ e an d th e Unite d State s by 2 0 t o 4 0 percent . Japan's rea l incom e w o u l d therefor e ris e b y 2 0 t o 4 0 percen t i f domesti c price s droppe d t o international levels . (Man y hav e pointe d ou t th e nee d t o distinguis h between merchandis e trad e good s an d nonmerchandis e trad e good s i n regard t o th e sprea d between domesti c an d foreig n prices . Such differen tiation i s theoreticall y proper. ) The sprea d between domesti c an d foreig n prices i s sai d t o b e larg e fo r nonmerchandis e trad e good s an d smal l fo r merchandise trad e goods . I f tha t i s th e case , w h y Japan' s nonmerchan dise trad e good s ar e s o expensiv e an d w h y th e sprea d in price s betwee n Japan's merchandis e trad e and nonmerchandis e trad e account i s s o w i d e relative t o othe r nation s ar e questions tha t deman d read y answers . What factor s accoun t fo r Japan' s hig h pric e levels? While i t i s difficul t to poin t t o a single , clea r factor, five basi c reason s ca n b e cited . First, certai n productio n inpu t price s ar e high i n J a p a n . Fo r example , real estat e price s an d rent s ar e high , reflectin g Japan' s smal l geographi c size; an d oi l an d othe r energ y input price s ar e high sinc e th e natio n lack s many natura l resources. These factor s wil l no t b e eas y t o surmount . Second, som e hav e argue d tha t Japan' s distributio n syste m i s ineffi cient, curbin g competition . Th e validit y o f thi s argumen t wil l b e dis cussed later . Third, th e price s o f som e importe d product s ar e highe r domesticall y than overseas . This i s particularl y conspicuou s fo r agricultura l products under stric t import regulations . Fourth, th e price s o f som e Japanes e export s ar e highe r domesticall y than overseas . Cameras, televisions, an d film ar e frequentl y cite d exam ples. I t is no t clear , however, h ow importan t thi s i s overall . Fifth, som e internationa l service s (e.g. , internationa l ai r fares ) ar e higher w h e n originatin g i n J a p a n tha n whe n originatin g overseas . Thi s particular sprea d between Japanese an d foreig n price s remain s large . Of th e five factor s jus t cited , Japanes e expert s d o no t agre e on whic h is th e mos t importan t o r o n th e exten t t o whic h eac h facto r account s fo r the sprea d i n domesti c an d foreig n prices . On e thing , nevertheless , i s certain. Thes e difference s i n domesti c an d foreig n price s ca n b e viewe d as a lis t o f problem s tha t point s t o th e existenc e o f distortion s o f on e form o r anothe r withi n Japan' s economy . B y eliminatin g th e sprea d i n domestic an d foreig n price s o r b y correctin g th e socia l distortion s tha t

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cause them , Japanes e consumer s wil l b e abl e mor e full y t o enjo y th e results o f thei r nationa l economi c development .

3 . Individua l Issue s The structura l adjustment s Japan' s econom y i s experiencin g reflec t a range o f issues . Si x issue s w e r e raise d a t th e Structura l Impediment s Initiative (SII ) talk s betwee n th e Japanes e an d U.S . governments : (1 ) savings an d investmen t patterns , (2 ) lan d usage , (3 ) distribution , (4 ) exclusionary busines s practices , (5 ) keiretsu o r affiliat e relationships , and (6 ) th e pric e mechanism . O f these , (1 ) i s a n issu e o f macroeconomi c policy, an d (6 ) ca n b e considere d th e consolidatio n o f al l othe r structural problems. Furthermore , (4 ) an d (5 ) bot h concer n th e overal l competi tiveness o f Japan' s markets . I will consequentl y examin e t w o mor e perti nent issues : lan d problem s an d distributio n markets , an d th e issu e o f competitiveness o f Japanes e markets , offering possibl e prescriptions .

Land Problems Rocketing lan d price s hav e bee n a n ongoin g proble m confrontin g th e Japanese econom y sinc e th e conclusio n o f Worl d W a r II . Althoug h Japan's consume r pric e inde x ha s rise n som e fivefold i n th e las t thirt y years, lan d price s i n si x larg e citie s (residentia l areas ) hav e spurte d 1 5 5 fold o n th e average . Rea l estat e price s climbe d unusuall y rapidl y i n th e 1 9 7 0 s an d 1 9 8 0 s . A s a result , i t becam e al l bu t impossibl e fo r ordinar y Japanese citizen s t o purchas e new homes . Currently , the pric e o f a hom e corresponds t o 7. 5 time s th e annua l averag e incom e o f a Japanese perso n (Tokyo area) . Thi s surpasse s by a wide margi n th e comparabl e figures o f 3 . 4 , 4 . 4 , an d 4 . 6 times , respectively , fo r th e Unite d States , Great Britain, and Wes t German y (Rea l Estat e Economi c Institut e survey) . Further more, swellin g rea l estat e value s hav e widene d th e incom e ga p betwee n those w h o o w n propert y an d thos e w h o d o not , raisin g concer n abou t this gap' s potentia l t o dampe n th e wil l t o w o r k ove r th e lon g term . Th e value o f rea l estat e o w n e d b y individua l household s appreciate d 3 6 . 0 trillion ye n betwee n 1 9 8 6 an d 1 9 8 8 . Suc h colossa l capita l gains , full y matching th e siz e o f Japan' s GNP , fel l int o th e lap s o f onl y thos e citizens wit h rea l estat e holdings , approximatel y 6 0 percen t o f Japan' s population. Th e resul t w a s a n enormou s ga p i n asse t incom e betwee n

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property holder s an d th e remainin g 4 0 percen t withou t an y clai m t o property. Surging rea l estat e price s als o affec t Japan' s saving s an d investmen t balance. Risin g rea l estat e value s hav e significantl y reduce d the effectiv e outlays o f publi c w o r k s spending. Th e Nationa l Lan d Agency's National Land Us e Whit e Pape r fo r 1 9 8 8 report s tha t 9 9 percen t o f th e tota l outlays fo r majo r roa d project s i n Tokyo' s Minat o an d Chiyod a w a r d s w a s spen t o n lan d acquisitions . Rocketin g lan d price s ca n therefor e b e perceived a s reducin g publi c capita l formatio n whe n measure d b y J apan's nationa l accounts . O n th e othe r hand , th e rea l estat e proble m ha s contributed t o exces s privat e saving s throug h t w o route s an d ha s be come a facto r bolsterin g Japan' s curren t accoun t surplus . First , i t ha s raised th e targe t amoun t fo r th e purchas e o f a hom e tha t i s place d i n savings, thereb y contributin g t o th e considerabl e siz e o f househol d sav ings. Previou s analysi s ha s confirme d tha t one-hal f t o two-third s o f Japanese househol d saving s ar e se t asid e fo r th e purpos e o f acquirin g a home. Second , th e rea l estat e proble m ha s als o pu t a brak e o n housin g investment ove r th e mediu m an d lon g terms . Housin g investmen t ac counted fo r 7 percen t o f Japan' s GN P i n th e 1 9 7 0 s , a figure tha t droppe d to abou t 5 percen t i n th e 1 9 8 0 s . (Nevertheless , th e ascen t o f rea l estat e and othe r asse t value s ha s booste d th e consumptio n expenditure s o f asset holder s throug h th e so-calle d wealt h effec t an d ha s helpe d t o diminish Japan's curren t account surplus. ) Although Japan' s smal l geographi c siz e i s frequentl y cite d a s a reaso n for th e nation' s hig h rea l estat e prices , this i s no t a n acceptabl e explana tion. Th e proble m i s tha t rea l estat e i s hel d no t a s a mean s o f productio n but fo r speculativ e purposes , meanin g tha t propert y i s no t pu t t o effec tive use . A s a n example , a Nationa l Lan d Agenc y (1988 ) estimat e indi cates tha t eve n thoug h th e averag e lega l buildin g capacit y rati o (tota l floor are a t o sit e area ) i n Tokyo' s twenty-thre e w a r d s cam e t o 2 4 2 percent a s o f 1 9 8 6 , th e actua l buildin g capacit y rati o w a s onl y 9 5 percent. I f propert y holdings w e r e pu t t o us e u p t o th e maximu m permit ted buildin g capacit y ratio , th e resultin g floo r spac e w o u l d b e sufficien t to hous e th e tota l populatio n o f Tokyo' s twenty-thre e w a r ds (8. 4 millio n people) a s wel l a s al l commuter s an d thei r familie s (5. 4 million) . An immediat e facto r i n Japan' s surgin g rea l estat e value s i s th e ex tremely limite d suppl y o f land , despit e th e existenc e o f stron g deman d for privat e home s an d offic e space . Th e are a o f lan d tha t i s actuall y

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traded annuall y doe s no t eve n com e t o 1 percen t o f Japan' s rea l estat e stock, a situatio n tha t i s distortin g th e formatio n o f rea l estat e prices . Yukio Noguch i ha s demonstrate d tha t th e marke t pric e o f Japan' s rea l estate equal s t w o t o thre e time s it s theoretica l v a l u e . (Th e theoretica l 4

value i s determine d b y takin g al l futur e expecte d ren t incom e an d dis counting suc h incom e t o it s presen t value. ) Propert y taxes mus t therefor e be raise d a s wel l a s capita l gain s taxe s o n propert y transfer s i n orde r t o expand th e suppl y o f rea l estate . Th e Japanes e government , however , has substantiall y reduce d th e taxabl e assesse d value s o f rea l estat e t o lessen th e propert y taxe s pai d b y individual s an d ha s lifte d th e capita l gains ta x o n propert y transfer s t o thwar t rea l estat e speculation . Cur rently, th e effectiv e ta x rat e o n rea l estat e ha s falle n t o 0 . 1 9 percen t an d the maximu m capita l gain s ta x o n propert y transfer s (includin g loca l taxes) ha s rise n t o 8 5 . 2 percent . M a n y economist s agre e o n th e desirabilit y o f liftin g propert y taxe s and lowerin g capita l gain s taxe s o n propert y transfer s t o ensur e tha t th e market function s properl y i n establishin g rea l estate prices. Nevertheless , previous analyses , thoug h fe w i n number , sugges t tha t th e effectivenes s of suc h a polic y wil l likel y depen d o n increasin g curren t propert y taxe s from te n t o fift y times , perhap s eve n higher . Suc h a chang e wil l no t find ready politica l acceptance . A 1 9 8 8 publi c opinio n surve y conducte d b y the prim e minister' s offic e reveal s tha t 4 2 percen t o f Japanes e citizen s w o u l d lik e t o se e propert y taxe s reduce d an d onl y 4 percen t believ e tha t they shoul d b e raised . Sinc e 6 2 percen t o f Japan' s tota l housin g stoc k consists o f owner-occupie d houses , a majorit y o f Japanes e citizens real ize capita l gain s w h e n rea l estat e value s climb . Thi s situatio n impede s the implementatio n o f effectiv e lan d policy . A majo r revisio n o f Japan' s ta x system , heade d b y a significan t in crease i n propert y taxes , ca n offe r a w a y ou t o f th e rea l estat e impasse . In thi s process , i t wil l b e als o b e necessar y t o implemen t th e followin g policies i n a comprehensiv e manner . • Revis e th e Lan d an d Hous e Ren t L a w , which currentl y favor s renters , and thereb y promot e th e efficien t us e o f rea l estate . • Eas e regulations regardin g building capacit y ratios . • Dispers e an d transfe r variou s capita l cit y function s (includin g th e pos sibility o f relocatin g th e capital ) t o cur b th e growt h o f deman d fo r rea l estate i n th e greate r T o k yo region .

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As a first ste p t o w a r d implementin g th e abov e measures , far m land s in urbanizin g district s shoul d b e taxe d a t th e sam e rat e a s residentia l property, a n actio n tha t ha s lon g bee n unde r consideration .

The Distribution Market Japan's distributio n syste m i s complicate d an d har d t o understand , cre ating a barrie r fo r foreig n corporation s wishin g t o participat e i n th e domestic market . M a n y conten d tha t th e syste m keep s retai l price s hig h and thereb y dampen s domesti c demand . H o w doe s Japan' s distributio n market compar e wit h thos e o f foreig n nations ? Th e OECD' s Economic Survey: Japan 1987/88

s h o w s tha t th e densit y o f retai l an d wholesal e

outlets (rati o o f store s t o a give n numbe r o f population ) i s highe r i n Japan tha n i n othe r majo r HO E nation s an d tha t th e channel s o f distri bution hav e man y mor e tiers . In Distribution System

and Business Practices in

Japan, a

publicatio n

of th e Economi c Plannin g Agency' s Economic Researc h Institute ( 1 9 8 9 ) , w e se e tha t Japan' s distributio n syste m i s characterize d a s havin g a greater numbe r o f smalle r retai l store s an d additiona l tier s o f wholesal ers whe n compare d wit h othe r nations . Eve n so , th e publicatio n main tains tha t ther e i s economi c justificatio n fo r this . Th e greate r numbe r o f smaller-sized retai l store s i s a reflectio n o f consumer s w h o deman d fres h food, sho p frequentl y fo r smal l quantitie s becaus e o f a shortag e o f storage spac e a t home , an d expec t speed y deliver y an d after-sal e service. The hig h cos t o f inventor y als o abet s th e curren t retai l structure . Fur thermore, Japan' s multitiere d wholesal e syste m arise s ou t o f it s retai l structure o f larg e number s o f smal l outlets . Sinc e ther e i s a limi t t o h o w many busines s relation s on e wholesale r ca n maintain , othe r wholesaler s come i n betwee n t o consolidat e transactio n unit s an d t o reduc e th e siz e of busines s networks . Accordin g t o th e publication , thi s syste m lower s the cost s fo r bot h manufacturer s an d retailer s o f placin g an d receivin g orders. The Economi c Researc h Institut e ha s estimate d th e margi n rat e fo r the domesti c multitiere d wholesal e syste m a s a whol e an d ha s compare d that rat e wit h equivalen t figures fro m othe r nation s t o determin e th e overall efficienc y o f Japan' s distributio n margin . I t came t o 5 7 . 6 percent , somewhat highe r tha n th e Unite d States ' 4 9 .7 percent , bu t full y compa rable t o th e figures o f othe r majo r industria l nation s (Wes t Germany ,

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5 8 . 9 percent ; Grea t Britain, 5 5 .6 percent ; an d France , 5 5 .3 percent) . Th e inventory turnove r o f Japan' s distributio n syste m a s a whol e s h o w e d n o less efficienc y tha n tha t o f th e Unite d State s an d othe r majo r industria l nations. Several point s ca n b e raise d regardin g the Economi c Researc h Insti tute study . First , if Japan' s distributio n marke t i s a s efficien t a s thos e o f other nations , h o w doe s on e explai n th e sprea d in domesti c an d foreig n prices? Second , Japanes e consumer s ma y no t actuall y prefe r a dens e distribution o f smal l retai l store s becaus e o f thei r concer n fo r service , since th e existenc e o f th e restrictiv e Large-Scal e Retai l Stor e L a w ma y suppress consumers ' desir e fo r larg e retail store s an d l o w prices . The Large-Scal e Retai l Stor e L a w consequentl y cam e u p fo r discus sion a t th e SI I talks . Th e l a w endeavor s t o protec t smalle r retailer s b y regulating th e establishmen t o f supermarket s and departmen t stores wit h retail floor spac e o f five hundre d squar e meter s o r mor e an d create s a forum (know n a s th e Shochokyo ) throug h whic h thos e seekin g t o buil d large retai l store s mus t obtai n th e consen t o f neighborhoo d retailer s before construction . Japan' s regulation s ar e stricter than thos e i n Franc e and Wes t Germany , wher e simila r l a w s regulat e retai l store s wit h floor space totalin g on e thousan d squar e meter s o r more . Th e OEC D Eco nomic Surve y argue s tha t Japan' s la w i s als o applie d t o midsiz e retai l stores. The heightenin g o f domesti c an d foreig n criticis m o f th e retai l stor e law prompte d th e Japanes e governmen t t o agre e in th e repor t of th e SI I talks t o appl y th e curren t l a w mor e appropriatel y by limitin g th e perio d for considerin g th e establishmen t o f ne w store s t o a minimu m o f on e and a hal f year s fro m th e tim e busines s plan s ar e announced . Another proble m tha t i s frequentl y cite d regardin g Japan's distribu tion marke t i s th e establishmen t o f distributio n "affiliates " throug h exclusive agen t contracts . Th e OEC D Economi c Surve y state s tha t th e exclusive agen t contrac t allow s a n importe r o r manufacture r t o limi t supply an d thereb y realiz e monopol y profits . Th e publicatio n give s thi s system a s on e o f th e reason s fo r th e hig h margin s impose d o n majo r consumer good s i n J a p a n , suc h a s fo r automobiles . Th e developmen t o f affiliate tie s wit h distributio n agent s i s frequentl y initiate d b y Japanes e manufacturers. Thi s make s i t mor e difficul t fo r foreig n corporation s t o participate i n Japan' s market s unles s the y undertak e th e costl y proces s of buildin g thei r o w n exclusiv e agen t networks.

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One ca n hardl y clai m tha t adequat e and conclusiv e researc h has take n place regardin g Japan' s distributio n system . Rationalizin g th e syste m will tak e som e time . I n th e meantime , i t wil l b e essentia l t o implemen t policies, suc h a s the refor m o f th e Large-Scal e Retai l Stor e L a w, that wil l create visibl e results . Th e basi c goa l shoul d b e a syste m tha t reflect s market force s rathe r than governmen t regulation .

The Competitiveness of

Japan's Markets

Domestic industria l structure s mus t adjus t smoothl y t o change s i n for eign exchang e rate s i n orde r fo r a stronge r ye n an d w e a k e r dolla r t o quickly diminis h Japanese an d U.S . externa l imbalances . I n othe r w o r d s , it i s essentia l fo r labo r an d capita l t o promptl y mov e fro m trade - t o nontrade-goods industrie s i n th e natio n w h o s e currenc y ha s appreciate d and fo r domesti c deman d t o quickl y shif t fro m trad e to nontrad e goods . This wil l w o r k rapidl y t o tur n curren t account surplu s d o w n . Th e ke y t o expeditious structura l transformatio n i s th e degre e t o whic h resources , such a s labo r an d capital , ar e mobil e i n th e marke t an d th e degre e o f competitiveness i n th e marke t fo r productio n goods . Kosai an d other s (1988 ) hav e compare d th e spee d b y whic h suc h factors a s relativ e prices , employment , an d investmen t adjus t betwee n the trade-good s an d nontrade-good s sector s i n respons e t o foreig n ex change rat e fluctuations i n J a p a n an d th e Unite d States . While industria l adjustments occu r relativel y quickl y i n th e Unite d States , th e proces s i s not entirel y smoot h i n J a p a n . Factor s cite d a s causin g thi s differenc e were th e highe r cos t o f labo r mobilit y amon g industria l sector s (i.e. , th e income los s incurre d w h e n transferrin g job s unde r a lifetim e employ ment system) , th e existenc e o f sector s wher e adjustmen t i s difficult , an d the lac k o f competitio n i n domesti c markets . Are Japanes e market s reall y les s competitiv e tha n U.S . markets ? Although i t i s n o simpl e matte r t o establis h a measur e o f marke t competi tiveness, pas t researc h o n Japanes e an d U.S . marke t concentratio n sug gests tha t i t i s stil l to o earl y to reac h a definit e conclusion . Lawrence (1989 ) offer s a n interestin g measur e of incomplet e markets . He argue s tha t th e greate r th e uncompetitivenes s o f a nationa l market , the greate r th e likelihoo d tha t corporation s wil l gai n fro m makin g for eign direc t investments . Fro m thi s perspective , h e conclude s tha t th e larger th e proportio n o f intrafir m trad e i n it s overal l trade , th e les s

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competitive tha t nationa l marke t is . H e the n note s tha t 4 9 percen t o f U.S. export s t o Europ e an d 4 2 percen t o f U.S . import s fro m Europ e consist o f intrafir m trade . Correspondin g figures fo r U.S . export s t o an d imports fro m J a p a n com e t o 7 2 an d 7 5 percent , respectively . O f this , 5 8 and 6 6 percent , respectively , consis t o f intrafir m trad e wher e th e paren t company i s a Japanes e firm. Thes e ar e extremel y hig h figures whe n compared t o U.S . an d Europea n trade. Furthermore, on e mus t not e tha t mos t direc t investment s concer n downstream integration , wherei n a manufacturin g concer n establishe s marketing arm s overseas . Thi s tendenc y i s confirme d i n dat a regardin g intrafirm trad e betwee n th e Unite d State s an d Europe . I n additio n t o downstream integration , Japanes e an d U.S . intrafir m trad e als o occur s in a substantia l numbe r o f case s o f upstrea m integration , wherei n a manufacturing firm set s u p foreig n companie s fro m whic h t o impor t r a w material s an d semifinishe d goods . Thi s differ s markedl y fro m th e normative pattern , underscorin g th e fac t tha t i t i s cheape r t o bu y r a w materials o r t o produc e inpu t material s outsid e o f rathe r than i n Japan . Lawrence use d suc h dat a t o argu e th e incomplet e natur e o f Japan' s markets. O n th e othe r hand , o f th e tota l volum e o f U.S . export s t o J a p a n , th e shar e o f export s tha t U.S . subsidiarie s shi p t o thei r Japanes e parent companie s ha s decline d dramaticall y sinc e 1 9 8 5 . Lawrenc e con siders thi s proo f tha t Japanes e market s ar e adjusting well t o th e stronge r yen. What sort s o f policie s shoul d b e establishe d t o increas e competitio n with Japan' s domesti c markets ? Kosai an d other s hav e propose d market opening measures , th e easin g o f regulations , an d th e promotio n o f do mestic direc t investments . The y furthe r emphasiz e th e importanc e o f ensuring tha t th e benefit s o f a n appreciatin g currenc y permeat e th e entire economy . The easin g o f regulations , i n particular , represent s a cornerston e o f the domesti c policie s o f th e Reaga n an d Thatche r administrations , a policy are a wher e Japan' s slow-footednes s i s conspicuous . Th e OECD' s Economic Survey:

Japan 1987/88 state s i n effec t tha t regulator y reach i n

J a p a n i s broa d an d tha t heavil y regulate d industrie s accoun t fo r abou t a quarter o f th e nation' s economy . Furthermore , whil e commendin g th e recent tren d t o w a r d privatization i n Japan , th e publicatio n specifie s tha t efforts t o dismantl e regulation s hav e no t bee n a s energeti c a s thos e i n the Unite d State s an d Grea t Britain . Th e OEC D surve y examine s suc h

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sectors a s rea l estat e an d housing , distribution , transportatio n (airlines , the forme r J a p a n Nationa l Railway , an d trucking) , an d telecommunica tions a s sector s w h e r e publi c regulatio n an d interventio n hav e restraine d competition. I t conclude s tha t i t w o u l d b e appropriat e t o overhau l a number o f regulation s tha t restric t o r w e a k e n marke t force s i n th e transportation an d distributio n sectors . An d sinc e th e benefit s o f havin g more market-drive n industrie s w o u l d b e enormous , i t contend s tha t th e process o f deregulatio n mus t no t b e hindere d b y veste d interests . Although i t i s unclea r t o w h a t exten t externa l imbalance s wil l n a r r o w once th e easin g o f regulation s amplifie s marke t competitiveness , ther e i s no doub t tha t relevan t measure s wil l b e mos t effectiv e i n securin g th e structural adjustmen t o f th e Japanes e an d U.S . economie s ove r th e lon g haul.

4 . T h e N e e d fo r a N e w M a e k a w a R e p o r t The M a e k a w a Report , release d i n 1 9 8 6 b y a privat e advisor y grou p o f the forme r Prim e Ministe r Yasuhir o Nakasone , i s servin g a s a n im portant blueprin t fo r developin g policie s tha t wil l promot e structura l adjustments i n J a p a n . Furthermore , discussion s betwee n th e Japanes e 5

and U.S . government s regardin g individua l polic y i s s u e s — o r th e so called Structura l Impediment s Initiativ e (SII)—culminate d i n th e releas e of a binationa l repor t i n Jul y 1 9 9 0 . Throug h thi s process , th e t w o countries hav e agree d on concret e polic y measure s tha t J a p a n wil l adop t and o n a tim e fram e fo r thei r implementation . The M a e k a w a Repor t seek s t o chang e th e curren t socia l an d eco nomic framewor k throug h suc h step s a s easin g variou s regulation s an d reducing workin g hours . Suc h change s ar e the n t o becom e th e basi s fo r ameliorating externa l imbalance s throug h domesti c deman d expansio n and fo r improvin g th e economi c well-bein g o f Japanes e citizens . A s such , the repor t aptl y describe s th e directio n J a p a n mus t trave l i n achievin g structural adjustments . The M a e k a w a Report i s als o noteworth y i n that , howeve r vague , it i s the onl y blueprin t fo r structura l adjustment s tha t ha s emerge d fro m th e leading industria l nations . Some , however , hav e criticize d th e SI I process as revealin g th e Japanes e government' s continuin g nee d fo r foreig n pres sure befor e effectin g changes . Other s hav e reacte d strongl y agains t th e United State s in thei r belie f tha t th e SI I process represent s interference i n

1 8 0 Heizo

Takenaka

Japan's domesti c affairs . H o w e v e r , a Nihon Keizai

Shimbun

survey ,

carried ou t i n th e mids t o f th e SI I talks , indicate s tha t a majorit y o f Japanese citizen s fel t tha t th e Unite d State s w a s makin g reasonabl e demands regardin g the revisio n o f th e Large-Scal e Retai l Stor e L a w an d the refor m o f th e lan d ta x system . The SI I agreement can b e commende d as a continuatio n o f th e directio n first outline d b y th e M a e k a w a Report. Nevertheless, certai n improvement s ar e neede d wit h respec t t o th e w a y i n whic h structura l adjustment s ar e currentl y progressing . First , Japanese domesti c price s mus t b e reduce d t o internationa l level s t o eliminate th e divergenc e betwee n domesti c an d foreig n prices . Thi s i s imperative i n orde r to ensur e tha t structura l adjustments will bea r meaningful result s bot h domesticall y an d internationally . As describe d above , th e reason s fo r th e divergenc e i n domesti c an d foreign price s ar e bot h comple x an d controversial . Eve n so , a s thi s pric e gap point s t o th e existenc e o f structura l distortions, effort s t o narro w i t constitute a significan t polic y issue . J a p a n mus t establis h th e correctio n of thes e an d foreig n pric e differential s a s a medium-ter m polic y goa l an d must develo p comprehensiv e measure s t o w a rd realizing thi s goal . Specific medium-ter m target s w e re no t a part of th e M a e k a w a Report. Despite th e fac t that , b y thei r ver y nature, suc h policie s requir e a consid erable perio d o f tim e t o implement , th e SI I talk s focuse d fo r th e mos t part o n short-ter m policy issues . Thi s indicate s th e nee d t o clearl y articulate th e eliminatio n o f th e sprea d between domesti c an d foreig n price s a s a medium-ter m polic y goa l an d t o publiciz e a new structura l adjustments program consistin g o f a suitabl e long-ter m polic y schedule . I n short , J a p a n shoul d independentl y formulat e a ne w M a e k a w a Report. Despite th e widesprea d support amon g Japanes e citizen s fo r th e origi nal M a e k a w a Report , effort s t o implemen t it s guideline s provoke d strong resistanc e fro m th e bureaucrac y and group s wit h veste d interest s because th e repor t lacke d specifi c polic y measures . A s a result , th e development o f effectiv e policie s di d no t occur . On e canno t den y tha t U.S. prodding , i n th e for m o f th e Structura l Impediments Initiative , w a s needed t o promp t final implementatio n o f th e M a e k a w a Report . T o avoid suc h a situatio n i n th e future , i t i s imperativ e tha t th e ne w M a e k a w a Repor t b e develope d wit h a clea r medium-ter m polic y goal , spe cific polic y recommendations , an d a correspondin g tim e schedule . T o promot e economi c structura l adjustments i n th e 1 9 9 0 s , it i s neces sary t o conside r th e declin e i n Japan' s potentia l capacit y fo r economi c

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18

1

growth. Previou s researc h suggest s tha t t w o suppl y s h o c k s — l a b o r shortages an d highe r energ y prices—wil l reduc e Japan' s potentia l eco nomic g r o w t h rat e t o 2. 9 t o 3 . 4 percen t durin g th e first hal f o f th e 1 9 9 0 s , compare d t o 4. 3 percen t fo r th e 1 9 8 0 s . Suc h a projecte d decrease will affec t th e structura l adjustmen t proces s i n bot h positiv e an d nega tive w a y s . Generall y speaking , a s l o w d o w n i n economi c growt h in creases th e difficult y o f persuadin g group s tha t migh t b e adversel y af fected b y polic y adjustments , prolongin g Japan' s respons e t o foreig n pressure. Slowe r g r o w t h , o n th e othe r hand , wil l enhanc e th e nee d for th e efficien t distributio n o f resource s (suc h a s th e vitalizatio n o f nonefficient, protecte d sectors) , thereb y increasin g domesti c pressur e fo r the easin g o f regulations . Thi s indicate s tha t th e structura l adjustmen t process shoul d begi n t o depen d mor e o n domesti c pressur e tha n o n foreign pressur e in th e comin g years . J a p a n i s expecte d t o fac e seriou s labo r shortage s throughou t th e 1 9 9 0 s . Th e issu e o f acceptin g foreig n w o r k e r s is consequentl y beginnin g to surfac e a s a n e w topi c fo r th e structura l adjustmen t process . Japan' s working-age populatio n formerl y expande d a t a n annua l pac e o f abou t nine hundre d thousand . Demographi c changes , however , hav e reduce d this b y abou t hal f i n recen t years . Th e working-ag e populatio n i s actu ally forecas t t o sto p growin g i n th e m i d - 1 9 9 0 s an d t o shrin k i n th e latte r half o f th e d e c a d e .

6

M a n y expert s believ e th e additio n o f mor e w o m e n an d olde r w o r k e r s to th e labo r forc e wil l hel p overcom e labo r shortages . Th e Japanes e government adopt s a simila r poin t o f vie w i n rejectin g unskille d foreig n labor. Eve n so , mor e tha n on e hundre d thousan d foreig n w o r k e r s (in cluding undocumente d laborers ) ar e estimate d t o b e alread y workin g i n J a p a n , an d th e deman d i s projecte d t o climb . J a p a n ha s ha d a homoge neous labo r force , bu t th e futur e wil l requir e a n e w for m o f economi c structural adjustmen t encompassin g a broa d rang e o f issues , suc h a s management practice s an d th e maintenanc e o f socia l o r d e r .

7

5 . B e y o n d Patterne d Pluralis m Highly develope d economie s ar e associate d wit h intricat e an d comple x p o w e r politics . Attempt s t o chang e th e socia l framework , suc h a s effort s to eas e regulation s o r t o mak e systemi c changes , canno t avoi d arousin g

1 8 2 Heizo

Takenaka

powerful force s i n opposition . Althoug h consumer s ar e large in number , they generall y find i t difficul t t o unit e aroun d specifi c economi c objec tives. Fo r man y changes , th e beneficiarie s ar e diffuse , bu t th e loser s ar e clearly recognizable , an d the y unit e i n opposin g chang e an d see k com mon politica l goals . A s a consequence , the y hav e frequentl y foun d thei r interests sacrifice d fo r thos e o f particula r protected industries . This i s tru e o f al l nations . Som e domesti c an d foreig n analyst s hav e wondered, therefore , w h y J a p a n appear s t o la g behin d othe r industria l nations i n promotin g socia l change s tha t wil l increas e th e well-bein g o f consumers, suc h a s easin g impor t regulation s an d reviewin g th e protec tion o f domesti c industries . Thi s appearance , however, i s ofte n base d o n misunderstandings. A s Japanes e governmen t policymaker s hav e stresse d over man y years , Japan' s import s market s ar e no t a s close d a s i s gener ally believed . Regulation s remai n o n th e impor t o f twenty-on e agricul tural products . Althoug h thi s surpasse s the numbe r o f simila r regulation s in th e Unite d States , i t canno t b e sai d t o b e excessiv e w h e n compare d to Europe . Nevertheless, clearly , th e overthro w o f veste d interest s tha t hav e onc e established themselve s i s particularl y difficul t i n J a p a n . Rea l estat e prices, th e distributio n market , an d Japanes e busines s practices , topic s that w e r e raise d a t th e SI I talks , hav e al l bee n th e targe t o f domesti c debate fo r man y years . Eve n so , suc h debat e ha s seldo m resulte d i n th e implementation o f effectiv e polic y measures . Researcher s o f Japanes e politics hav e frequentl y referre d t o th e socia l syste m tha t stand s behin d Japan's economi c structur e a s "patterne d pluralism. " Japan i s unquestionabl y a democrati c nation . Althoug h som e indus tries an d corporation s retai n immens e politica l p o w e r (e.g. , agricultur e and som e majo r corporate groups) , other industrie s a s well a s consumer s are extremel y w e a k . Therefore , eve n thoug h i t exists , pluralis m i s rathe r restricted i n J a p a n . Thi s ha s le d t o Japa n bein g calle d a natio n o f patterned pluralism . Currently , th e politica l decision-makin g proces s i n Japan i s dominate d b y thre e groups : busines s sector s wit h politica l muscle, thei r representative s i n th e Die t (so-calle d zoku legislators) , an d the bureaucrat s w ho overse e industry . Thes e group s see k t o maintai n a symmetry o f p o w e r an d t o protec t thei r veste d interests , a n interrelation ship tha t ha s bee n calle d a n iro n triangle . Reflectin g this , th e budgetar y process ha s fo r a considerabl e perio d o f tim e consiste d o f makin g in cremental increase s t o pas t budge t allocation s i n deferenc e t o veste d interests.

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3

Similarly, i n th e economi c spher e som e researcher s emphasiz e tha t although J a p a n i s a capitalisti c nation , patterne d pluralism distinguishe s J a p a n fro m othe r industrialize d economies . Ther e i s n o doub t tha t a sound marke t mechanis m exist s fo r transaction s involvin g mos t good s and services , an d competitio n i s extremel y intense . Consumer s ar e ex ceedingly demandin g regardin g product qualit y an d price , an d Japanes e corporations compet e vigorousl y t o suppl y market s wit h superio r prod ucts. A t th e macroeconomi c level , consumptio n an d investmen t pattern s in J a p a n respon d fa r mor e sensitivel y tha n i n Europ e an d th e Unite d States t o change s i n suc h economi c variable s a s interes t rate s an d ta x rates. H o w e v e r , fo r agricultur e an d othe r regulate d industria l sector s (e.g., som e area s o f transportatio n an d telecommunications) , th e marke t mechanism doe s no t functio n fully . I n thi s sense , pluralis m (meanin g unhampered markets ) i s functionall y patterne d i n certai n limite d area s of Japan' s economy . In orde r t o improv e thei r economi c well-being , Japanes e consumer s must remed y their nation' s patterne d pluralism an d promote appropriat e loosening o f regulation s an d systemi c reform . Nevertheless, th e existenc e of patterne d pluralis m ha s mad e i t difficul t t o defea t veste d interest s i n the politica l arena . In this contex t externa l pressure, such a s the SI I talks, has helpe d t o buttres s th e shortcoming s o f patterne d pluralism . U.S . demands tha t w e r e asserte d in th e SI I context foun d wid e suppor t amon g Japanese citizen s du e t o thei r recognitio n tha t externa l pressur e offer s an effectiv e mean s fo r surmountin g patterne d pluralism . Eve n so , i t i s inconceivable tha t externa l pressur e alon e w o u l d b e sufficien t t o pus h domestic system s an d policie s i n a desirabl e direction . J a p a n mus t hav e a built-i n mechanis m tha t allow s socia l chang e t o tak e plac e autono mously. I n othe r w o r d s , economi c structura l adjustment s mus t b e com plemented b y change s t o Japan' s socia l system . Regarding thos e issue s directl y associate d with economi c policy , thre e trigger mechanism s ca n b e suggeste d tha t wil l assis t i n th e refor m o f patterned pluralism . First, consume r group s tha t trul y represen t consume r interest s mus t be fostered . Som e majo r consumer group s currentl y exist i n J a p a n . A s o f yet, however , non e o f the m suppor t th e full-fledge d liberalizatio n o f th e import o f ric e an d othe r agricultura l products. Onl y on e o f thes e majo r consumer group s cam e ou t clearl y i n favo r o f th e 1 9 8 9 consumptio n tax, whic h man y economist s viewe d a s servin g th e interest s o f consum ers. Suc h group s mus t b e abl e t o effectivel y lobb y th e Japanes e govern -

1 8 4 Heizo

Takenaka

ment regardin g th e openin g o f domesti c market s an d mus t b e abl e t o make resolut e demand s o n foreig n corporation s tha t prefe r t o criticiz e J a p a n whil e ignorin g thei r o w n lac k o f effort . Second, ther e i s a nee d t o refor m th e politica l syste m s o tha t th e wil l of th e Japanes e peopl e i s directl y reflecte d i n th e politica l decision making process . Le d b y th e Libera l Democrati c Party , discussion s ar e currently underwa y concernin g th e refor m o f Japan' s electora l system . Reform wil l basicall y cente r aroun d th e establishmen t o f singl e represen tative electora l districts , whic h i s envisione d a s leadin g t o a syste m wherein t w o majo r politica l parties , bot h capabl e o f holdin g th e rein s o f government, compet e i n presentin g thei r policie s t o voters , a s i s th e cas e in th e Unite d State s an d Grea t Britain . Eve n so , ther e i s n o guarante e that suc h a n electora l chang e wil l brin g abou t a meaningfu l polic y formulation process . M o r e importan t i s t o mak e broadl y availabl e t o Japanese citizen s informatio n relate d t o polic y formulation , whic h i s currently th e monopol y o f th e civi l service . This shoul d als o b e accompa nied b y a chang e fro m th e curren t syste m t o on e i n whic h actua l polic y is determine d responsibl y b y th e representative s o f Japanes e citizen s i n the Diet , Japan' s legislature . A s a practica l firs t step , senior-leve l civi l service position s (e.g. , directo r genera l o f th e burea u o f eac h ministr y and above ) shoul d b e fille d b y politica l appointees . Furthermore , th e defense o f governmen t polic y i n th e Die t shoul d b e restricte d t o electe d officials. Japan' s civi l servic e syste m ha s usuall y bee n effectiv e i n achiev ing th e polic y goal s assigne d t o it . Nevertheless , change s ar e calle d fo r from th e medium - an d long-ter m perspectiv e i n orde r t o brin g abou t th e realization o f a mor e broadl y pluralisti c democrati c system . Third, th e smoot h managemen t o f a mor e broadl y pluralisti c societ y will requir e the developmen t o f a soun d "thir d sector " that i s capabl e o f providing polic y analysi s fro m a neutra l standpoint . I t i s natura l fo r groups i n suppor t o f an d i n oppositio n t o particula r polic y issue s t o clash vigorousl y wit h eac h othe r i n an y pluralisti c society . Suc h a situa tion demand s th e existenc e o f a neutra l thir d sector , independen t o f government an d industry , t o presen t polic y analysi s fro m th e perspectiv e of th e nationa l econom y an d t o clarif y polic y choices . M a n y politica l and economi c researc h center s hav e bee n establishe d i n J a p a n i n recen t years, fo r th e mos t par t b y financia l institutions . Researc h center s tha t can b e sai d t o carr y ou t polic y analysi s fro m a neutra l standpoint , however, hav e ye t t o appear .

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5

Notes 1. Ho w structura l adjustments o r structura l changes ar e understood wil l diffe r entirely accordin g t o whic h sort s o f economi c variable s an d consequen t configurations o f structura l parameter s ar e though t t o represen t th e entir e economy, o r accordin g t o th e sor t o f economi c mode l premised . A s a result , it is extremely difficul t t o giv e a proper definition of "structura l adjustments" and "structura l changes." Furthermore, discussions o f structura l adjustments are pron e t o tak e plac e withou t a necessar y focus . Eve n i f a particula r economic mode l i s premise d an d structura l adjustments—meanin g change s to structura l parameters—ar e debated, considerabl e doub t ha s bee n cast , particularly b y macroeconomi c polic y experts , a s t o whethe r governmen t policies ca n actuall y affec t structura l parameters. 2. Th e Maekaw a Report als o contain s nonstructura l adjustmen t policie s i f w e adopt the stric t definition o f "structura l adjustments" as "making change s t o structural parameters." 3. Tekenaka-Ogawa ( A Macroeconomi c Analysi s o f Externa l Imbalances ) (Tokyo: Toyo-Keizai, 1987) . 4. Yuki o Noguchi, "Lan d Problem o f Japan " (i n Japanese), i n M . Ito , K . Ueda , and H . Takenaka , eds. , Perspectives on the Japanese Economy (Tokyo : Chikumashobo, 1988) , 2 2 5 - 4 2. 5. Prim e Ministe r Yasuhir o Nakason e carrie d ou t th e privatizatio n o f Japa n National Railwa y an d Nippo n Telegrap h an d Telephon e durin g th e latte r half o f th e 1980s . Althoug h thes e measure s were not include d i n th e recom mendations o f th e Maekaw a Report, th e privatizatio n o f thes e tw o govern ment-held companie s ca n b e considered a part of economi c structural adjustment an d international harmonization . 6. "Labor-shortag e bankruptcy" i s a ne w phas e gainin g currenc y i n Japan . I t refers t o a situation wherei n sufficient deman d exist s bu t an inadequate labo r supply force s a compan y t o clos e it s doors . Labor-shortag e bankruptcies are on th e rise among companie s unabl e t o mov e abroa d to secur e workers. The y include firms i n th e constructio n industry , consume r services , an d som e o f the smalles t firms in th e manufacturin g sector . 7. Sufficien t analysi s an d debate have not take n place, even amon g labo r econo mists, regardin g th e outloo k fo r labo r suppl y an d deman d i n Japan . Th e government an d those favorin g Japanese-style management practice s strongly oppose th e acceptanc e o f foreig n labor , particularl y unskille d labor . On e likely reaso n fo r thi s oppositio n i s th e concer n tha t a n increas e o f foreig n workers wil l creat e socia l instabilit y becaus e o f Japan' s undevelope d urba n policies. However , Japan i s facin g a serious labo r shortage, most notabl y fo r unskilled labor , and this has led to some i n the business community , primaril y among smal l an d midsiz e businesses , t o appea l strongl y fo r foreig n labor . Even i f wome n an d olde r peopl e ar e actively brough t int o th e labo r market , this alon e wil l b e insufficien t t o overcom e labo r shortages . Th e tim e i s ap -

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proaching whe n th e full-fledge d acceptanc e o f foreig n worker s will becom e necessary.

References Kosai, Y. , e t al . 1988 . 2000 nen eno Sekai Keizai Tenbo (Worl d Economi c Prospect for 2000) . Tokyo: Economic Plannin g Agency . Lawrence, R . 1989 . "Ho w Ope n I s Japan?" Prepare d for th e NBER-Sponsore d Conference o n th e U.S . an d Japan: Trad e and Investment .

Contributors

Yoichi Funabash i i s th e Washingto n Burea u chief o f th e Asahi Shimbun, a leadin g Japanese daily . H e ha s covere d politics an d economic s i n J a p a n for twent y year s an d ha s bee n th e Asahi corresponden t i n Washington , D.C., an d Beijing , an d a Niema n fello w a t Harvar d University . Funa bashi w a s a n Ushib a fello w i n 1 9 8 6 an d w a s a fello w a t th e Institut e fo r International Economic s i n 1 9 8 7 . H e i s th e autho r o f severa l books , including The Theory of Economic Security ( 1 9 8 3 ) , an d The U.S.-Japan Economic

( 1 9 7 8 ) , Neibu: Inside China

Entanglement:

The

Inside Story

( 1 9 8 7 ) . Winne r o f th e Suntor y Humanitie s A w a r d o f 1 9 8 3 , h e w a s als o a w a r d e d th e 1 9 8 5 Vaughn-Ued a Prize—ofte n calle d Japan' s Pulitze r Prize—for hi s coverag e o f U . S . - J a p a n economi c friction , an d th e Y o shino Sakuz o A w a r d i n 1 9 8 8 fo r hi s boo k Managing the

Dollar: From

the Plaza to the Louvre. Takatoshi It o i s currentl y a professo r a t th e Institut e o f Economi c Re search, Hitotsubash i University , havin g bee n associat e professo r ther e from 1 9 8 8 t o 1 9 9 1 . Educate d a t Hitotsubash i University , h e continue d his studie s a t Harvar d Universit y wit h a scholarshi p fro m th e J a p a n Society fo r th e Promotio n o f Scienc e an d receive d hi s Ph.D . i n Econom ics i n 1 9 7 9 . It o the n accepte d a positio n a s associat e professo r o f eco nomics a t th e Universit y o f Minnesot a an d late r becam e a researc h fellow a t Stanfor d University , a visitin g associat e professo r a t Harvar d University's Economic s Department , an d a visiting researc h fellow a t th e 187

1 8 8 Contributors International Monetar y Fund . H e i s presentl y affiliate d wit h th e Na tional Burea u o f Economi c Research , th e America n Economi c Associa tion, an d th e Econometri c Society . It o ha s writte n extensivel y i n Englis h and Japanese , an d hi s publication s includ e Economic Analysis equilibrium: Theory

and

Empirical Analysis

(i

of

Dis-

n Japanese) , whic h w a s

a w a r d e d a t th e twenty-nint h Nikke i Economic s Boo k A w a r d i n Novem ber 1 9 8 6 . Heizo T a k e n a k a i s currentl y a n associat e professo r a t Kei o University . He w a s bor n i n 1 9 5 1 an d bega n hi s caree r a t th e J a p a n Developmen t Bank afte r graduatin g fro m Hitotsubash i University . H e w a s a visitin g scholar a t Harvar d University an d th e Universit y o f Pennsylvani a durin g the perio d 1 9 8 1 - 8 2 an d the n serve d as a senio r economis t a t th e Minis try o f Finance' s Institut e o f Fisca l an d Monetar y Polic y befor e joinin g the facult y o f Osak a University . I n 1 9 8 8 - 8 9 , he w a s a w a r d ed th e Ushib a Fellowship t o stud y a t Washington' s Institut e fo r Internationa l Econom ics befor e assumin g hi s curren t position . Hi s publication s includ e The Role of Investment for and Energy Economics

Energy Conservation: (1981

Future

Japanese Growth

) an d Japan-US. Economic

Controversy

( 1 9 8 8 ) , i n whic h h e comprehensivel y survey s economic frictio n betwee n J a p a n an d th e Unite d States . Akihiko T a n a k a i s associat e professo r o f internationa l relation s a t th e University o f T o k y o , a position h e ha s hel d sinc e 1 9 8 4 . Upon graduating from th e Universit y o f Tokyo' s facult y o f libera l art s i n 1 9 7 7 , Tanak a transferred t o th e Massachusett s Institut e o f Technolog y an d receive d his Ph.D . i n politica l scienc e i n 1 9 8 1 . Upo n returnin g t o J a p a n , h e became a researche r a t th e Researc h Institut e fo r Peac e an d Security . During 1 9 8 3 , h e w o r k e d a s a researc h assistan t a t th e Universit y o f T o k y o befor e assumin g hi s curren t positio n i n 1 9 8 4 . Tanak a w a s a n exchange schola r a t th e Ruh r Universita t Bochu m i n 1 9 8 6 . Taizo Yakushij i i s professo r o f politica l scienc e an d internationa l rela tions a t Kei o University . Unti l 1 9 9 1 , he w a s professor o f technolog y an d international relation s a t th e Graduat e Institut e o f Polic y Scienc e a t Saitama University . H e w a s educate d a t Kei o University , th e Universit y of T o k y o , an d th e Massachusett s Institut e o f Technology , wher e h e received hi s Ph.D . i n politica l science . Yakushij i studie d i n th e Unite d

Contributors 1 8

9

States a s a Fulbrigh t schola r an d For d Foundatio n fello w fro m 1 9 7 0 to 1 9 7 5 . Hi s publication s includ e Reshuffling Firms The American and hegemoni, an

Japanese Auto

Industries

d Kokyo-Seisaku. Yakushij

in

for Technology?,

Transition, Tekuno-

i i s als o coauthor , wit h J a m e s

MacNeill an d Piete r Winsemius , o f th e Trilatera l Commission' s 1 9 8 0 task forc e report , Beyond Interdependence: Economy and

The

Meshing of the World's

the Earth's Ecology.

Kazumasa I w a t a i s a professo r a t th e Universit y o f Tokyo . Upo n gradu ating fro m th e departmen t o f internationa l relation s a t th e Universit y o f T o k y o i n 1 9 7 0 , h e joine d th e Economi c Plannin g Agency . Fro m 1 9 7 2 t o 1 9 7 3 h e studie d a t th e Institut e fo r Worl d Econom y i n Kiel , attendin g the Post-Dokterande n Seminar . H e becam e administrato r o f th e Mone tary an d Fisca l Polic y Divisio n i n th e Departmen t o f Economic s an d Statistics a t th e OEC D i n 1 9 7 6 an d serve d a t tha t pos t fo r thre e years . Iwata ha s bee n a visiting fello w a t th e Australia n University, a n honore d visiting professo r a t th e Universit y o f Alberta , and a visiting professo r a t the Economi c G r o w t h Cente r o f Yal e University . Befor e becomin g a n associate professo r a t th e Universit y o f T o k y o , h e w a s senio r economis t at th e Economi c Researc h Institut e o f th e Economi c Plannin g Agency . His boo k Monetary Policy

and Banking Behavior

receive d th e Econo -

mist Priz e i n 1 9 8 1 , an d hi s recen t publication s includ e International Economics (1990

) an d "Capita l Cos t o f Busines s Investmen t i n J a p a n

and th e Unite d State s unde r T a x Reform, " i n Japan and Economy, no

the World

. 2 (1990) .

M a k o t o Sakura i ha s bee n th e director-genera l an d senio r economis t a t the Mitsu i Marin e Researc h Institut e sinc e 1 9 8 9 . H e graduate d fro m Chuo University' s departmen t o f economic s i n 1 9 6 9 an d receive d a Ph.D. i n economic s fro m th e Universit y o f T o k y o i n 1 9 7 6 . Late r tha t year, h e joine d th e Export-Impor t Ban k o f Japan . Fro m 1 9 8 0 t o 1 9 8 2 , he w a s visitin g fello w a t th e Economi c Growt h Cente r a t Yal e Univer sity. I n 1 9 8 2 , h e w a s appointe d senio r economis t o f th e Researc h Insti tute o f Oversea s Investment a t the Export-Impor t Bank o f J a p a n . A m o n g his recen t publications ar e "Nihon n o Kaiga i Chokusetsu Tosh i n o Dok o to Kette i Y o i n " (Trend s i n Japan' s Oversea s Direc t Investmen t an d It s Determinants) i n Kaigai Toshi Kenyusho-Ho

(Monthl

y Repor t o f th e

Research Institute , Export-Impor t Bank o f Japan ) an d "20-ne n w o M u -

1 9 0 Contributors kaeru A S E A N t o Kong o n o Tainich i Kankei " (ASEA N afte r Twent y Years an d It s Relation s wit h Japan ) i n Kaigai Toshi Kenkyusho-Ho. Sakurai w a s als o on e o f th e workin g pape r author s fo r "Th e Unite d States an d J a p a n : Cooperativ e Leadershi p fo r Peac e an d Globa l Prosper i t y — A Repor t b y a Committe e o f Six, " jointl y sponsore d b y th e Atlanti c Council o f th e Unite d States , the Bretto n W o o d s Committee , an d J O E .

Index

ABC (atomic , biological , an d chemical ) weapons, 1 5 Advanced Researc h Project s Agency (ARPA) o f th e Departmen t o f Defense , 64 Agriculture Adjustmen t La w (U.S.) , 11 8 aid, "untied, " 1 6 0 - 6 1 aid policy , 22 . See also diplomacy , value oriented; ODA ; strategy , new; strategy, past Air Self-Defens e Force , 30 , 44 . See also Self-Defense Force s Akihito, Emperor : an d propose d visi t t o China, 1 alliances: Anglo-Japanese , 7, 18 ; U.S.-Ja pan, 7 , 8 , 34 , 42 , 4 3 "always cooperate " strategy , 13 6 "always defect " strategy , 136 , 13 7 "always protect " strategy , 13 8 Anglo-Japanese alliance , 7 , 1 8 Annual Nationa l Trad e Estimate t o Con gress (U.S.) , 12 5 anti-air aegi s system , 4 4 antidumping laws , 120 , 13 4 Antimonopoly Law , 12 1 Antitrust La w (U.S.) , 12 2 "appreciation recession, " 9 3 arms, exporter s of , 3 8 article 1 1 (o f GATT) , 12 1 article 3 5 (o f GATT) , 121 , 12 9

ASEAN countries : an d direc t investment , 147, 154 , 155 ; resilienc e of , 1 0 Asian-Pacific area , an d maintenanc e o f peace, 1 4 Asia-Pacific Economi c Cooperatio n (APEC), 19 , 132 ; an d G- 7 summits , 23 ; as policy-coordinatin g body , 23 ; an d regionalism, 2 3 "asset inflation, " 9 6 assets (U.S.) , purchas e o f (b y Japan) , 98-99 Atlantic Charter , 1 3 Atlantic Counci l (U.S.) , 13 1 Australia, an d relation s wit h Japan , 1 9 autarky, 4 0 automobiles. See cars , Japanese Axis alliance , 1 8 Baker, Jame s A. , Ill , 9 , 82 , 9 2 Bank o f Japan , 86 , 93 , 94 , 96 , 99 , 100 ; and polic y coordination , 101— 2 Basic La w of Atomi c Energy , 3 1 bilateral relationshi p (U.S.-Japan) : initia tives in , 106— 7 Black Monda y (Octobe r 1987) , 94 , 16 5 borderless economy , 13 9 "borderless" era , 75 Brazil, a s arm s exporter, 3 8 Bretton-Woods system , 9 8 Brock, William , 12 6

191

1 9 2 Index "bubble," economic , 91 , 9 3 Bush, Georg e (President , U.S.), 16 ; as chief o f LDP' s largest faction, 2 5 Bush administration : an d Urugua y Round , 125 Bush, Vannevar , 63, 6 4 Cambodia, an d UNPKO , 1 cars, Japanese : an d th e U.S . market , 65 Carter, Jimmy (President , U.S.), 6 7 Carter bonds , 9 8 CBMs (confidence-buildin g measures) , 20 "checkbook diplomacy, " 6 - 7 China (PRC) : and ai d policy, 22 ; a s arms exporter, 38 ; a s arm s supplier t o Mid dle East , 22 ; economi c cooperatio n with, 1 5 6 - 5 8 ; and forma l relation s with Japan , 10 , 14 , 15 ; and formaliza tion o f relation s wit h Korea , 20; as military threat , 43 civilian power , global, 11—13 "civilianization," o f th e internationa l com munity, 1 2 C-MOS chip , 7 0 Cold War , end of : an d defens e expendi tures, 4 5 ; and defens e revisions , 4 3 - 4 4; "hot wars " during , 10 ; and interna tional security , 35; and military capabilities, 7 7 - 7 8 ; as result of East-Wes t frontal clash , 5 1 ; and securit y policies, 28 ; and U.S . relation s wit h Asia , 1 0 COMECON, 7 3 Common Agricultur e Policy (EC) , 11 8 "company standard, " 24 "competitive alliances, " 11 3 Compton, Karl , 6 4 Conference o n Securit y and Cooperatio n of Europ e (CSCE) , 20 Constitution (1947) : and GATT , 122 ; pacific natur e of (Articl e 9), 29 ; an d security, 29 ; an d U.S . securit y treaty, 33. See also "Peac e Constitution " consumer pric e index, fivefol d rise in, 17 2 "consumer welfare, " 104 cooperative solution , stabilizing , 1 3 6 - 3 7 coordination, macroeconomic , 81—110; among th e G- 7 nations , 8 1 - 8 2 ; between th e U.S. , Japan , an d th e E.C. , 81. See also polic y coordinatio n

coordination, policy . See policy coordi nation Corn La w (Britain), 2 4 Councillor's Offic e o n Externa l Affairs, 50,51 Councillor's Offic e o n Externa l Affairs , 50, creditor status , 3, 6 "crisis management, " 7 4 current accoun t deficit , 85 , 15 1 current accoun t surplus , 105 , 145 , 151; and GNP , 83 , 8 4 Customs Tarif f Law , 121 decision-making structure , 24 Defense Agency , and procuremen t o f equipment, 4 5 Defense Council , 5 0 "defense force , standard, " 33, 3 4 "defensive defense, " 4 2 demand-and-compromise style , 1 0 3 - 4 demilitarization, an d Japan, 1 3 Democratic Socialis t party : and th e Gul f Crisis, 2 , 2 5 - 2 6 Deng Xiaoping , 2 8 Department o f Defense , 66 ; an d ARPA, 94 Diet: an d business-secto r representatives , 182; an d electora l change , 184 ; an d International Peac e Cooperation Law , 46, 4 7 - 4 8 ; an d make-u p o f bureaucracy , 50; an d rice imports , 130 ; selection o f chief cabine t secretary , 51 diplomacy, value-oriented , 1 3 - 1 6 direct investment : an d downstrea m integration, 178 ; in foreig n countries , 98 , 146-48,153-55 disarmament, U.S.-Russian , i n nort h Pacific, 4 4 "discipline device, " in polic y coordination , 87, 88 , 98 ; Gramm-Rudma n legislation , 98 distribution system , 1 7 5 - 7 7 Domestic Internationa l Corporatio n (DISC), 13 4 "dual-use" technolog y (DUT) , 6 6 dumping, 73—74 ; and antidumpin g laws , 120; "repea t dumping," 12 9 Dutch, an d trad e through Nagasaki , 7

Index 1 9 East Asia : and importanc e o f U.S.-Japan alliance, 43 ; instabilit y in , 2 8 East Asia n Economi c Group , 13 2 East Asia n Economi c Groupin g (EAEG): and Japan, 2 3 East-West conflict , 14 ; an d en d o f Col d War, 5 1 East-West relations : change s in , 3 5; con frontation in , 35 ; and ideologica l differ ences, 4 2 economic cooperatio n (Japan) : criticis m of, 1 4 8 - 5 0 ; policy an d proble m areas , 150—53; polic y prioritie s for , 160—63; and utilizatio n o f th e privat e sector, 161-62 economic "globalization, " 16 5 Economic Plannin g Agenc y (EPA) , 49, 50 , 152; an d distributio n system , 175 ; and international compariso n o f prices , 170 ; and polic y coordination , 8 8 economic policies , nee d fo r nationa l con sensus on , 1 5 9 - 6 0 Economic Researc h Institute (o f th e EPA), 175-76 economy an d politics , ga p between , 1 "economy class " politics, 1 ECU, 9 8 Edison, Thomas , 6 1 EEC, 118 ; and Japan, 8 ; lack o f simila r organization i n Asia , 9 EFTA, 11 8 Eisenhower, Dwigh t D . (President , U.S.) , 64 employment system : a s life-long, 2 4 emulation, successful , 6 9 - 7 2 "emulous power, " 58, 6 6 - 7 2 environmental problems , global , 4 1 , 4 7 "equidistant diplomacy, " 5 "equilibrium" exchang e rat e (U.S.-Japan) , 91, 9 4 Europe, Eastern : changes in , 81 ; and con version t o market-oriente d economy , 112; an d democratization , 144 , 155 ; and economi c an d industria l coopera tion for , 155-56; an d infusing o f fund s into, 10 0 Europe, Western : an d SII , 23 European Ban k fo r Reconstructio n an d Development, 15 5

3

European Currenc y Unit (ECU) , 22 , 2 3 Export Restrain t Agreement (ERA) , 11 9 Export-Import Ban k o f Japan , 15 2 export/import ratio , 7 2 exports: military , 3 1 - 3 2 . See also "Thre e Principles o n Arm s Export" Federal Counci l fo r Scienc e an d Technol ogy, 6 4 Federal Reserv e Bank, 9 3 Federal Reserv e Board, 88; an d it s Multi country Mode l (MCM) , 8 8 First Ye n Loan to Chin a (1980) , 1 5 6 - 5 7 Ford, Henry , 6 1 Foreign Exchang e Contro l Law , 122, 12 3 "foreign pressure. " See gaiatsu "Fortress Europe, " 12 7 forum o f smal l retailer s (Shochokyo) , 17 6 "four freedoms, " o f Roosevelt , 1 3 four-ministry/agency meeting , 4 9 - 5 0 France, a s arm s exporter, 38 ; an d retai l store regulations , 17 6 "free market " principles, 10 3 Free Trad e Agreement with Israe l (U.S.), 124 free trad e and investment , i n th e Pacific , 139 Free Trad e and Investmen t Agreemen t (FTIA), 2 2 - 2 3 FSX aircraft , 58, 59 , 65 , 6 9 Fukuda, Take o (P.M. , Japan), 5 , 1 0 G-2, 8 8 G-5, 9 2 G-7, 2 1 , 169 ; an d governmen t bonds , 86 ; and hig h technology , 68 ; Japan's inclu sion in , 4 ; an d Louvr e Accord, 94; an d macroeconomic coordination , 22 , 23 , 81—82; mechanis m deficienc y of , 8—9 ; and natura l threat s to security , 4 0 gaiatsu (foreig n pressure) , 8; a s scapegoat, 25 GATT (Genera l Agreemen t o n Tariff s an d Trade), 18 , 100 , 104 , 106 , 107 ; an d Atlantic Council , 131 ; and consolidatio n with Worl d Trad e Organizatio n (WTO), 132 ; an d disput e settlement , 1 2 9 - 3 0 ; an d economic cooperation , 162; Japa n admitte d to , 121 ; and Ja -

1 9 4 Index GATT (Continued) pan's trad e policy, 1 2 1 - 3 0 ; restructuring of , 1 3 4 - 3 5 ; shortcomings of , 1 1 7 - 2 1 ; an d U N charter , 13 3 GATT Ministeria l Meetin g (1982) , 12 6 GATT Urugua y Round , 111 . See also Uru guay Roun d General Electric , 57 , 6 8 General Headquarter s (GHQ) : an d Ja pan's security , 2 9 General Syste m o f Preferenc e (GSP) , 119 , 148 "Generation Theory, " 6 3 - 6 5 generational change , i n politica l leader ship, 2 6 German Re d Arm y Factio n (RAF) , 36 Germany: an d civilianization , 12 ; a s soli d nucleus fo r Europe , 10 . See also Wes t Germany global environmenta l problems , 4 1 , 4 7 global interdependence , 1 4 global marke t activity , 11 2 global mone y flow , 14 3 "global partnership, " 1 6 global quotas , 12 9 globalism, Pacific , 1 8 - 2 0 GNP: an d capita l gains , 172 ; an d curren t account surplus , 83 , 84 ; an d economi c and financial cooperation , 159 ; an d housing investment , 173 ; an d Japan' s defense budget , 3 1 ; nominal rate , 145 , 149; an d polic y coordination , 88 ; R& D share of , 71 ; an d "10-percen t nation " concept, 5 - 6 "GNPism," 5 Government Ordinanc e o n Expor t an d Im port Control , 121 , 12 2 Gramm-Rudman legislation , 9 8 Greater Eas t Asian Co-Prosperit y Sphere : bankruptcy of , 9 Ground Self-Defens e Force , 30 , 44 ; an d Mid-Term Defens e Pla n (1991-95) , 44 . See also Self-Defens e Force s Group o f Five , 169 ; an d macroeconomi c coordination, 8 2 Group o f Seve n (1975) . See G- 7 Group o f Ten , 8 3 GSP. See Generalize d Syste m o f Prefer ences

Guidelines fo r Japan-U.S . Defense Coop eration (1978) , 3 2 Gulf Crisi s (1990) , 2 - 4 ; an d politica l re form, 26 ; an d politica l restraint , 24 ; and "rent-a-cop " perception , 17 ; an d U.S. unipola r system , 1 6 - 1 7 Gulf War , an d criticis m o f Japan , 111 ; and trad e surpluses, 8 3 harmonization, institutional , 9 9 - 1 0 0 ; an d short-term governmen t securitie s marke t in Japan , 9 9 - 1 0 0 Havana Charte r for th e Internationa l Trade Organizatio n (ITO) , 13 3 HDTV (high-definitio n television) , 5 8 "hegemonic stability, " 4 2 "hegemony, soft, " 7 7 - 7 9 high technology , 6 7 - 6 9 ; an d G-7 , 68 ; an d "hybridity," 6 8 - 6 9 , 70 ; an d R&D , 68 , 112,113 high-tech industries , an d competitiveness , 112 Hoancho (Securit y Agency) , 2 9 HOE: figures (fo r purchasin g pric e parity), 170; nations , an d distribution , 17 5 House o f Councillors , an d UNPK O dis patch, 4 7 - 4 8 House o f Representatives , an d UNPK O dispatch, 4 7 - 4 8 Houston Summi t (1990) , 7 9 human rights : an d China , 15 , 2 1 ; an d France, 14 ; an d peacekeeping , 15 , an d Tiananmen incident , 15 , 157 ; an d U.S. , 14, 2 1 Hussein, Sadda m (President , Iraq) , 35 , 3 6 "hybridity," 68 , 7 0 IBM, 58 , 6 0 IBRD, 117 , 133 , 15 8 IMF, 104 , 105 , 106 , 107 , 117 , 133 , 150 , 158 immigration control , an d transnationa l ter rorism, 4 0 International Atomi c Energ y Agenc y (IAEA), 2 2 International Cooperatio n Agency , 15 2 international cultura l exchange , promo tion o f (a s proposed b y Takeshita) , 3 4 international monetar y order , 97—99

Index 1 9

5

Japan Nationa l Railway , 17 9 Japan Socialis t part y (JSP) : establishmen t of, 7 0 Japan That Can Say No, The, 6 Japan-U.S. alliance , 34 , 42 , 43 , 5 3 Japan-U.S. Treat y of Scientifi c an d Tech nological Cooperation , 6 7 Japanese Re d Army , 3 6 "J-curve effect, " 9 6

Land Agency , 9 6 Land an d Hous e Ren t Law , need t o re vise, 17 4 land (price ) problems , 1 7 2 - 7 5 Large-Scale Retai l Stor e Law , 176 , 177 , 180 Law o f Sil k Yar n Pric e Stabilization , 12 2 Law o n Expor t an d Impor t Transactions , 121, 12 2 Law o n Foreig n Exchang e an d Foreig n Trade Control , 121 , 12 2 LDCs, an d direc t investment , 148 ; an d "untied" aid , 1 6 0 - 6 1 Liberal Democrati c part y (LDP) : an d dis patch o f SDF , 4 7 - 4 8 ; establishmen t of , 70; an d th e Gul f Crisis , 2 , 3 , 2 5 - 2 6 ; and Japan' s ne w strategi c aid , 163 ; as only politica l part y capabl e o f ruling , 25; "polic y tribes " of, 25 ; an d Presiden t Bush, 25 ; an d refor m o f electora l sys tem, 184 ; an d symbiosi s wit h bureau cracy, 5 0 liberalization, tw o taboo s of , 2 3 - 2 4 life-long employmen t system , 2 4 Louvre Accord , 86 , 93 , 94 ; an d cost s an d benefits o f targe t zones, 9 4 - 9 7

Kaifu, Toshik i (P.M. , Japan), 16 , 48 , 4 9 KAL (Korea n Airlines ) flight , bombin g of , 36 Kant, Immanuel , an d vie w o f internationa l peace, 3 9 keiretsu (affiliat e corporat e relations) , 60 , 61, 62 , 67 , 75 , 17 2 Killin, Jame s R. , 6 4 Kobayashi, Kotaro , 1 1 Komeito party : an d th e Gul f Crisis , 2 , 25-26 Korea (Republi c of) : an d ai d i n th e Gul f Crisis, 2 ; an d formalizatio n o f relation s with China , 20 ; an d relation s wit h Ja pan, 14 , 1 5 - 1 6 ; an d U.S . companies , 60 Korean communit y i n Japan , 1 5 - 1 6 Korean War , 1 4 Krauthammer, Charles , 2 , 2 7 n . 1 Kuriyama, Takakazu , 6 Kuwait: invasio n of , b y Iraq , 35 , 36 , 46 , 50

Maekawa Repor t (1986) , 104 , 151 , 164 , 166, 168 , 169 ; nee d fo r a ne w one , 1 7 9 - 8 1 ; an d structura l adjustments , 1 8 0 - 8 1 . See also "structura l adjustment" magnetron (British) , 6 3 Mahathir bi n Mohame d (P.M. , Malaysia), 23, 13 2 Malaysia, acceptanc e o f Japa n a s leade r by, 2 0 "managed trade, " 112 , 11 4 Manhattan Project , 6 3 Maritime Securit y Forces , 2 9 Maritime Self-Defens e Force , 30, 44 . See also Self-Defens e Force s Market-Oriented Secto r Selectiv e (MOSS ) talks, 1 0 2 - 3 market-oriented system : transitio n o f Communist countrie s to , 13 3 markets (Japan's) : competitiveness of , 1 7 7 - 7 9 ; cultivatin g o f new , 73 ; a s no t closed t o imports , 18 2

international monetar y system , 9 7 - 1 0 0 international organizations , initiative s in , 104-6 International Peac e Cooperatio n La w (1992), 31 , 46, 4 8 International Trad e Organizatio n (ITO) , 133 intrafirm trade , 1 1 2 - 1 3 , 1 7 7 - 7 8 intraindustry trade , 1 1 3 - 1 4 Iraq: censur e of , a s beginnin g o f interna tional securit y cooperation , 42 ; invasio n of Kuwai t by , 28 , 46 , 50 ; Japan an d economic sanctio n on , 1 2 IS balance , 10 1 Ishihara, Shintaro , 6 . Se e als o Japan That Can Say No, The

1 9 6 Index Marshall Plan , fo r th e 1990s , 8 1 MFA. See Multifibe r Arrangement s MFN. See most-favore d natio n (MFN ) clause Mid-Term Defens e Plan , 4 5 Mid-Term Defens e Program , 31 Middle East , an d arm s fro m Asia , 2 2 Miki, Take o (P.M. , Japan), 3 1 - 3 2 military exports , 3 1 - 3 2 . See also "Thre e Principles o n Arm s Export " military power , a s underscore d b y Gul f War, 1 1 Ministry o f Financ e (MOF) , 82 , 86 , 100 , 1 0 1 - 2 , 103 , 146 , 152 ; an d contro l o f ODA, 4 9 Ministry o f Foreig n Affair s (MOFA) : an d ODA grants , 4 9 Ministry o f Internationa l Trad e and Indus try (MITI) , 103 , 121 , 152 ; an d ye n loans, 4 9 "misalignment" o f exchang e rate s an d trade imbalances , 8 9 - 9 3 , 9 7 M.I.T., 6 3 monetary order , international, 9 7 - 9 9 most-favored natio n (MFN ) clause , 117 , 119, 124 , 128 , 131 , 135 , 13 6 Motorola, 6 8 MTO. See Multilatera l Trad e Organi zation Multicountry Mode l (MCM) , 8 8 Multifiber Arrangement s (MFA) , 118 , 128, 129 , 138 , 15 2 multilateral fre e trad e system, 11 1 Multilateral Trad e Organizatio n (MTO) , 22, 133 , 138 , 13 9 Nakasone, Yasuhir o (P.M. , Japan), 7 , 17 9 Nakasone administration : an d recyclin g o f funds t o thir d worl d debtors , 15 8 Nakasone Cabinet : an d relaxatio n o f ex port rules , 7 4 National Aeronautic s an d Spac e Adminis tration (NASA) , 6 4 national consensus , o n economi c policies , 159-60 National Defens e Educationa l Ac t (NDEA; 1958) , 64 , 6 9 National Defens e Progra m Outline (1976) , 33-34

National Defens e Researc h Counci l (NDRC), 6 3 National Lan d Agency, 17 3 National Lan d Use Whit e Paper , 17 3 National Public Safet y Commission , 5 0 National Researc h Counci l (NRC) , 6 3 National Scienc e Foundatio n (NSF) , 6 4 NATO, 32 ; an d Japan , 8 ; lac k o f simila r organization i n Asia , 9 New Col d Wa r era, 4 3 - 4 4 New Economi c Polic y (Nixon) , 6 4 "new worl d order, " and th e Gul f Crisis , 3 new worl d trad e system (afte r Urugua y Round), 1 3 0 - 3 7 Newly Democratizin g Countrie s (NDCs) , 144 Newly Industrializin g Economic s (NIEs ) i n Asia, 14 , 161 , 168 ; an d direc t invest ment, 147 , 148 , 15 4 Nixon, Richar d M . (President , U.S.) , 6 4 "Nixon Shock, " 6 4 nonproliferation, o f sophisticate d and nu clear weapons , 5 1 , 5 3 nontrade-goods sector , 17 7 North, threa t from , 4 4 North America n Fre e Trade arrangement, 104, 10 6 North Korea : and ai d policy , 22 ; a s arms exporter, 38 ; a s arm s supplier t o Mid dle East , 22; an d bombin g a KA L airliner, 36 ; an d nuclea r threat , 28 , 43 , 44; possibl e reunificatio n wit h th e Re public o f Korea , 2 8 Northern Island s issue , 15 6 Northern Territor y issue, 20—2 1 North-South conflict , 1 4 North-South problem : an d transfe r o f wealth, 4 0 Nuclear Nonproliferatio n Treaty , 3 1 nuclear proliferation , 4 0 - 4 1 . See also non proliferation occupation army , 7 0 ODA (Officia l Developmen t Assistance) , 3, 144 , 1 4 5 - 4 6 , 148 , 1 4 9 - 5 0 , 152 ; an d China, 157—58 ; criteria for, 15 ; as deterrent t o proliferation , 53 ; an d environ mental protection , 22 ; increas e i n (a s proposed b y Takeshita) , 34 ; Kaifu' s pol -

Index 1 9 icy on , 49 ; launchin g o f (1969) , 10 ; a s reparations, for Worl d Wa r II , 15 0 OECD, 2 2 - 2 3 , 117 ; Economic Survey of Japan 1977/78, 175 , 176 , 1 7 8 - 7 9 OECD fre e trad e an d investmen t are a (OECD-FTIA), 1 3 1 - 3 2 ; an d GATT , 132 OECD nations : increas e i n governmen t ex penditures of , 16 8 Office o f Scientifi c Researc h an d Develop ment (OSRD) , 6 3 Official Developmen t Assistance . See OD A "Official Developmen t Assistanc e Char ter," 4 9 Ohira, Masayosh i (P.M. , Japan), 34 , 6 7 oil crises : an d hig h inflation , 8 9 - 9 0 ; an d ODA t o th e Middl e East , 15 1 oil shock s (1973 , 1979) : an d Nixon , 6 4 Omnibus Trad e an d Competitivenes s Ac t (U.S., 1988) , 12 4 OOF (Othe r Officia l Flows) , 1 4 5 - 4 6 Oppenheimer, Robert , 6 4 Orderly Marketin g Agreemen t (OMA) , 119 Organization fo r Economi c Cooperatio n and Development . See OEC D Organization fo r Trad e Cooperatio n (OTC), 13 3 original equipmen t manufacturin g (OEM ) exports, 11 3 Overseas Economi c Cooperatio n Funds , 152 Pacific Economi c Cooperatio n Conferenc e (PECC), 13 2 "Pacific globalism, " 1 8 - 2 0 Pacific War , 14 . See also Worl d Wa r II partnership, betwee n U.S . an d Japan , 16-18 "partnership, global, " 1 6 patterned pluralism , beyond , 181—8 4 peace, cooperatio n fo r (a s propose d b y Takeshita), 3 4 "Peace Constitution, " 6 , 13 , 14 , 2 1 Perm-5, 2 1 petroleum reserves , 3 4 Philippines: an d ai d i n th e Gul f Crisis , 2 PKO. See UNPKO Plaza Accor d (1985) , 16 5

7

Plaza Agreemen t (1985) , 7 , 82 , 84 , 86 , 9 2 - 9 3 , 97 ; an d polic y coordination , 93-94 police: an d transnationa l terrorism , 4 0 Police Reserv e Forces , 2 9 policy coordination : benefit s an d cost s of , 8 6 - 8 9 ; an d dange r o f noncoordination , 97; an d "disciplin e device, " 87 ; an d GNP, 88 ; a s "mutua l backscratching, " 8 6 - 8 7 ; afte r Plaz a Agreement , 9 3 - 9 4 ; reassessment of , 1 0 0 - 1 0 1 ; an d rol e o f Bank o f Japan , 1 0 1 - 2 ; an d targe t zones, 87 ; an d trad e imbalances , 8 3 - 8 5 "political base, " 7 7 political leadership : generationa l chang e in, 26 ; strengthenin g of , 2 6 political reform , publi c interes t in , 2 6 political restraint , a s nationa l policy , 23-26 political system , refor m of , 1 0 2 - 4 pork-barrel politics , 2 4 post-Cold Wa r era : and unilatera l de fense, 39 ; an d U.S . militar y superiority , 69 post-Cold Wa r system , 14 4 price differences , domesti c an d foreign , 169-72 "pricing t o market, " 83 , 9 6 Prime Minister' s Office , 5 0 Prime Minister' s Secretariat , 5 1 Prisoner's Dilemma , 135 , 13 7 private sector : decisio n makin g of , 153 ; and direc t investment , 153 ; fundin g from, 146 ; utilizatio n of , i n economi c cooperation, 1 6 1 - 6 2 proliferation, o f nuclea r weapons , 40—4 1 Provisional Iris h Republica n Arm y (IRA) , 37 public sector , capita l export s from , 14 6 Quadrangular Meetin g o f Trad e Minister s (1990), 133 . See also Multilatera l Trad e Organization R&D: an d GAT T restructuring , 138 ; an d intrafirm trade , 113 ; investment s for , and hig h technology , 68 , 112 , 113 ; Ja pan, a s leade r in , 138 ; an d Japanese companies, 61 ; an d Japanes e govern-

1 9 8 Index R & D (Continued) ment budget , 71 ; private expenditure s for, 71 ; an d rivalr y amon g nations , 134, 138 ; an d "symmetrica l access, " by U.S. firms , 58 ; an d U.S . federa l budget , 71 Raytheon, 6 3 Reagan, Ronal d (President , U.S.) : an d 1981 ta x cut , 9 0 Reagan administration , 82 , 90 ; an d Super GATT, 12 6 Reciprocal Trad e Agreemen t Ac t (U.S. , 1934), 12 4 reference range . See "targe t zone" Regan, Donald , 9 3 regionalism: Asian-Pacific , 1 0 - 1 1 , 139 ; Pacific, 132 ; a s "tainte d word, " 9 "rent-a-cop" perceptio n o f Gul f Crisis , 1 7 "request" principle (yosei shugi), 4 9 Research an d Development . See R& D Research an d Intelligenc e Office , 50 , 5 1 rice imports , 13 0 rice market : openin g of , 2 3 - 2 4 ; a s "sanc tuary," 2 4 Roosevelt, Frankli n D . (President , U.S.) , 13 Russia: an d curren t lac k o f militar y threat, 44 ; economi c an d industria l co operation for , 156 ; an d Norther n Is lands issue , 156 ; an d relation s wit h Ja pan, 20 . See also Norther n Territories ; Soviet Unio n Russian Federation , uncertai n futur e of , 28 Sato, Eisak u (P.M. , Japan), 3 1 Saudi Arabia , and relation s wit h Japan , 14 Savings-Investment (SI ) imbalances, 8 9 - 9 0 SDI, 6 7 sea lanes , protectio n of , 3 2 Section 30 1 (o f th e Trad e Law) , 1 2 4 - 2 5 "security, comprehensive, " 33 , 3 4 security, international : an d en d o f Col d War, 35 ; o f Japa n i n 1990s , 42-52 ; i n 1990s, 3 5 - 4 2 ; an d threat s fro m adven turous countries , 38—3 9 security, postwar , basic s of , 2 9 - 3 5 ; an d the Constitution , 2 9

Security Affair s Office , 5 1 Security Counci l (Japan) , 5 0 Security Counci l (U.N.) , 2 1 security policies : an d en d o f Col d War , 28; compare d wit h U.S. , 5 1 security treaties : wit h U.S. , 29 , 3 2 security treat y (U.S.-Japan) : preamble of , 43 Self-Defense Force s (SDF ; Jieitai): curren t composition of , 30 ; establishmen t of , 29; integratio n o f thre e branche s of , 4 4 - 4 5 ; amon g larges t militar y force s i n the world , 30 ; nee d fo r reductio n of , 44, 45 ; in 1980s , 4 3 - 4 4 ; an d presen t se curity framework , 3 4 - 3 5 ; reserv e system of , 44 ; sendin g abroa d of , 8 , 9 ; tasks of , 3 0 - 3 1 ; a s unconstitutional, 30; an d UNPKO , 1 , 3 0 - 3 1 , 45 , 46 , 47 , 48; weapon s procurabl e by , 31 . See also International Peac e Cooperatio n Law ; Self-Defense Force s Law Self-Defense Force s La w (1954) , 30 , 4 8 Sematech (semiconducto r consortium) , 6 6 Shochokyo (foru m o f smal l retailers) , 17 6 SII, 23 , 25 , 65 , 125 , 138 , 139 , 169 , 172 , 176, 1 7 9 - 8 0 , 18 3 Singapore: an d U.S . companies , 6 0 Socialist countries , a s par t o f Asia n area , 18 "soft hegemony, " 7 7 - 7 9 South Chin a sea , a s stag e o f arm s competi tion, 2 8 Soviet threat , disappearanc e of , 4 2 - 4 3 Soviet Union : a s arm s exporter , 38 ; atomic-bomb experiment s of , 64 ; changes in , 81 ; collaps e of , an d Japan' s security, 28 ; destructio n o f econom y and build-u p o f militar y of , 52 ; an d Ger man technology , 73 ; infusin g o f fund s into, 100 ; militar y build-u p i n Asi a of , 32; a s militar y power , 65 ; an d North ern Territor y issue , 2 0 - 2 1 ; threat from , 35, 43 . See also Russi a "spin-off" an d "spin-on " effects, 65-66 Sputnik: a s missile technology, 65 ; success ful launchin g of , 6 4 "Sputnik Shock, " an d th e U.S. , 6 2 "stability o f business, " 10 4 Stag Hunt , 13 7

Index 1 9 "standard defens e force, " 33 , 34 , 42 ; an d post-Cold War , 4 4 Steel Expor t Association (Japan) , an d Anti trust La w (U.S.) , 12 2 "strategic assistance, " 151 ; as "passive, " 152 strategic trad e policy, U.S . mov e toward , 123-26 strategy, ne w (Japan) , 1 1 - 2 0 ; ful l partnership an d supportiv e leadership , 1 6 - 1 8 ; global civilia n power , 1 1 - 1 3 ; multipl e value-oriented diplomacy , 1 3 - 1 6 ; Pacific globalism , 1 8 - 2 0 strategy, pas t (Japan) , 4 - 1 1 ; adaptatio n and catch-up , 5 - 6 ; concentratio n o n economic gains , 6 - 7 ; followin g th e U.S., 7 - 9 ; restrain t of regiona l strategy , 9-11 "structural adjustment, " 1 6 4 - 8 6 ; defini tion of , 166 ; an d distributio n system , 175—77; an d domesti c an d foreig n pric e differences, 1 6 9 - 7 2 ; an d lan d problems , 1 7 2 - 7 5 ; an d Maekaw a Report, 1 8 0 - 8 1 ; nee d for , 1 6 5 - 6 9 Structural Impediment s Initiative . See SII Super (Article ) 30 1 (1988) , 65 , 96 , 103 , 106 Super-GATT, 12 6 superpowers, a s less "super, " 5 7 Suzuki, Zenk o (P.M. , Japan), 5 , 3 2 Switzerland, a s neutra l country , 5 3 "symmetrical access, " by U.S . firm s t o Ja pan's R&D , 5 8 Taiwan: an d U.S . companies , 6 0 Taiwan strait , tension s over , 2 8 Takeshita, Nobor u (P.M. , Japan), 34 , 45 . See also thre e pillar s o f internationa l co operation "targe t zone," 83 , 86 , 87 , 94 , 97, 98 , 101 ; "for exchang e rates, " 94; and Louvr e Accord, 9 4 - 9 7 ; "moving, " 86, 101 ; and polic y coordination , 8 7 Tax Burea u (o f MOF) , 9 9 tax havens , 9 9 tax system , revisio n of , 1 7 4 - 7 5 "techno-bashing" o f Japan , b y th e U.S. , 58-62 "techno-containment," 59 ; i n th e 19t h century, 6 0 - 6 2

9

"techno-detente," 74—7 7 "technological foo d chain, " 62 , 72 , 7 4 technology, U.S . military , 6 2 "techno-parochialism," 5 8 "techno-revisionism, 58—5 9 "10-percent nation, " 5 - 6 territorial disputes : an d arms ; 3 5 - 3 6; an d militarization, 3 9 terrorism, 36 , 39 , 47 , 53 ; an d immigra tion control , 40 ; an d polic e forces , 40 ; resistance against , 4 1 terrorist groups : an d Libya , 37; Provi sional Iris h Republica n Arm y (IRA) , 37; Red Arm y (Japan) , 37 ; Re d Arm y Faction (RAF ; Germany), 37 ; an d Syria , 3 7 Texas Instruments , 6 8 Textile Industr y Federatio n (Japan) , 12 2 Thailand, acceptanc e o f Japa n a s leade r by, 2 0 third worl d debtors : an d direc t invest ment, 1 4 7 - 4 8 ; recyclin g o f fund s to , 158-59 three pillar s o f internationa l cooperation , 34 "Three Principle s o n Arm s Export, " 31-32 Tiananmen Squar e Incident, 15 , 157 . See also huma n rights Tokyo Roun d 119 , 120 , 121 , 12 4 Tokyo Summi t (1986) , 16 9 Toshiba, 58 , 6 5 Toyotomi Hideyoshi , 1 2 Trade Ac t (1974) , 12 4 trade barriers , 90, 12 7 trade imbalances : an d exchang e rates , 8 2 - 8 4 , 8 9 - 9 3 ; an d "J-curv e effect, " 96; an d polic y coordination , 83—8 5 trade i n services , 1 1 4 - 1 6 trade surplus : a s sourc e o f OD A funds , 104-5 trade-goods sector , 17 7 trade-related intellectua l propert y right s (TRIPs), 128 , 130 , 13 8 trade-related investmen t measure s (TRIMs), 1 2 7 - 2 8 , 129 , 130 , 13 8 Treaty o f Mutua l Cooperatio n an d Security betwee n Japa n an d th e Unite d States o f America , 32 . See also securit y treaties

2 0 0 Index TRIMs. See trade-relate d investment mea sures tripod currenc y system , 2 2 TRIPs. See trade-relate d intellectual prop erty right s Truman, Harr y S . (President , U.S.) , 13 3 "two-plus-four," 2 0

uncooperative behavior , cooperatio n by , 135-36 unfair trad e practices, 96 , 103 , 12 0 unilateral defense , 3 9 United Nations , 48 , 105 ; an d Gul f War, 21, 39 ; an d internationa l securit y sys tem, 1 2 - 1 3 ; an d Japan, 2 1 ; as regaining authority , 5 2 United Nation s Charter , 13 ; an d dispatc h of SDF , 48 ; an d GATT , 13 3 United Nation s Conferenc e o n Trad e an d Development (UNCTAD) , 11 9 United Nations Peac e Cooperatio n Bill , 5 3 United Nation s Peac e Keepin g Operation s (UNPKO), 1 , 40, 45 , 46, 48 , 5 1 ; cooperation, b y Japan, 2 1 United Nations Securit y Council : an d em bargoes, 31 ; an d Japan , 8 ; an d multina tional peacekeepin g force , 48 ; an d secu rity issues , 4 2 United States : as arm s exporter, 38 ; civil ianization of , 12 ; an d concentratio n o n military economies , 62 ; an d demand and-compromise style , 1 0 3 - 4 ; an d global interests , 19 ; an d hegemon y i n technology, 72 ; an d militar y withdrawa l from Asia , 17 ; an d mov e towar d a stra tegic trad e policy, 1 2 3 - 2 6 ; an d SII , 23; and "Sputni k Shock, " 62 . See also al l entries beginnin g wit h "U.S. " United States ' relations wit h Japan : an d economic gains , 6 - 7 ; lea d o f U.S . in , 7—9; need fo r fulle r partnershi p b y Ja pan in , 1 6 - 1 8 ; an d regionalism , 9 - 1 1 ; strains in , 3 , 1 4 United States-Canad a Fre e Trade Agreement, 10 , 12 8 United States-Mexic o Fre e Trade zone, 1 0 UNPKO. See United Nation s Peac e Keeping Operation s

Uruguay Round , 47 ; an d Bus h administra tion, 125 ; going beyond , 22 ; impor tance of , 1 2 6 - 3 0 ; nee d fo r succes s of , 1 3 7 - 3 8 ; ne w worl d trad e system after , 1 3 0 - 3 7 ; an d Pacifi c regionalism , 13 2 U.S. Congress , 98 , 118 , 124 , 125 , 12 6 U.S. Consumers ' Union , 12 2 US Memories , 6 6 U.S. securit y treaty : and th e Constitutio n (1947), 3 3 U.S.-Canada Automobil e Produc t Arrangements, 11 8 U.S.-Japan alliance , 34 , 42 , 4 3 U.S.-Japan bilatera l agreements , 104 , 106, 10 7 U.S.-Japan relations : bilatera l interdepen dence, 6 9 U.S.-Japan Scienc e an d Technolog y Coop eration Treat y (1988) , 7 5 - 7 6 U.S.-Japan securit y alliance , 1 7 - 1 8 U.S.-Mexico Reciproca l Agreemen t (1943), 11 9 U.S.-Russian disarmament , i n nort h Pa cific, 4 4 U.S.S.R. See Sovie t Unio n USTR, 12 5

VER. See Voluntar y Expor t Restrain t very-high-speed integrate d circui t (VHSIC), 6 6 Vienna Summi t (1987) , 7 Vietnam War , 14 , 3 2 Vladivostok, 2 1 Voluntary Expor t Restrain t (VER) , 119 , 129 Voluntary Impor t Expansio n (VIE) , 119-20 Voluntary Restrain t Agreemen t (VRA) , 119

Warsaw Pact , 35 ; collaps e of , 4 wealth, transfe r of: an d North-Sout h prob lem, 4 0 weapons, proliferatio n of , 37—3 8 West Germany : helpe d b y NAT O an d EEC, 9 ; an d retai l stor e regulations , 176

Index 2 0 Westinghouse, 6 8 Wilson, Woodro w (President , U.S.) , 63 "witch hunt, " of targe t country, 67 , 69 women, i n politics , 2 6 World bank , 104 , 105 , 106 , 107 , 120 , 150, 15 8 World Intellectua l Propert y Organizatio n (WIPO), 12 8

1

world trade , structural change s in , 111-17 World Trad e Organizatio n (WTO) , an d consolidation wit h GATT , 13 3 World Wa r II : change o f militar y capabili ties since , 77 ; Japan's sens e o f guil t for , 14, 19 , 150 ; lac k o f chang e i n Japan' s bureaucracy since , 5 3 yosei shugi, 4 9