Trade and Investment in the 1990s: Experts Debate Japan--U.S. Issues 9780814788714

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T R A D E A N D I N V E S T M E N T I N T HE 1 9 9 0 S

J A P A N - U . S . CENTE R D I S T I N G U I S H E D LECTUR E S E R I E S

VOL. I Trade and Investment in the 1990s: Experts Debate on Japan-US. Issues Edited b y Ryuzo Sato, Rama Ramachandran , and Myra Aronso n

TRADE AN D INVESTMEN T

IN TH E 1 9 9 0 s

Experts Debat e o n Japan-U.S. Issue s Ryuzo Sato , Ram a V . Ramachandran , AND Myra Aronso n

EDITED BY

Featuring Nobe l Laureate s Pau l A . Samuelson , Merton Miller , AN D James Tobi n AN D Jagdish Bhagwati • Willem H. Butter • Fujio Cho Stephen Figlewski • Yasushi Hamao • Masahiro Kawai Toru Kusukawa • Sadahei Kusumoto • Richard Levich Joshua Livnat • Soshichi Miyachi • Thomas Pugel Ryuzo Sato • Hiromoto Seki • Mike Synar Hiroshi Tsukamoto • Masahiro Yoda Richard Zeckhauser

T H E CENTE R FO R JAPAN-U.S . BUSINES S AN D ECONOMIC STUDIE S

Stern School of Business New York University

n 588

* N E W YOR K UNIVERSIT Y PRES S New York and London

NEW YOR K UNIVERSIT Y PRES S New Yor k an d Londo n Copyright © 199 6 b y New Yor k Universit y All rights reserve d Manufactured i n th e United State s of Americ a Library o f Congres s Cataloging-in-Publicatio n Dat a Trade an d investmen t i n the 1990 s : experts debat e on Japan-U.S. issues / edited b y Ryuz o Sato , Rama V . Ramachandran, an d Myr a Aronson . p. cm . — (Japan-U.S . Center distinguishe d lectur e serie s ; v.l) Includes index . ISBN 0-8147-0641-X (acid-fre e paper ) 1. Unite d States—Foreig n economi c relations—Japan . 2 . Japan — Foreign economi c relations—Unite d States . 3 . Unite d States — Commerce—Japan. 4 . Japan—Commerce—Unite d States . 5. Investments , Foreign—Unite d States . 6 . Investments , Foreign — Japan. I . Sato , Ryuzo . II . Ramachandran , Ram a V . III. Aronson , Myr a . IV . Series . HF1456.5.J3T73 199 6 337.52073—dc20 95.3252 5 CIP New Yor k Universit y Pres s book s ar e printed o n acid-fre e paper , and thei r bindin g material s ar e chosen fo r strengt h an d durability .

CONTENTS

Preface vi PART ON E

i Lecture s fro m Fal l 199 3

1. Bilatera l Relation s unde r Ne w Administration s in Japan an d th e U.S. (September 23 , 1993) 3 2. Trad e Negotiation s an d Agreements : A Trend toward Furthe r Liberalizatio n (October 18 , 1993 ) 4 3. Internationa l Competitivenes s i n High Technology Industrie s (Decembe r 8 , 1993 ) 7 PART TW O

3 3

Lecture s fro m Sprin g 199 4

4. Recen t Development s i n International Financia l Markets: Implication s t o Japan an d th e Unite d States (Februar y 15 , 1994) 10 5. Financia l Development s i n Europe, Japan, an d the United States : Problems an d Prospect s (April 11 , 1994) 12 6. Internationa l Investment : Th e Japan-U.S. Dimension (Apri l 20, 1994 ) 16

3

7 5

v

CONTENTS SL

AR TX

x i R EE

Sanw a Lectur e Serie s

7. Recen t Economi c an d Financia l Trend s Affect ing Japan an d th e United State s (Marc h 8 , 1993 ) 19 1 8. Recen t Economi c Trends an d Japan-U.S. Relations unde r th e Clinto n Administratio n (March 8 , 1994 ) 24 3 Speaker Profile s 27 Index 28

VI

5 7

PREFACE

As th e firs t university-base d institut e t o addres s th e wid e spectrum o f issue s facin g Japan , th e Unite d States , an d their tradin g partners , th e Cente r fo r Japan-U.S . Busines s and Economi c Studie s has , fro m it s inception , sponsore d programs t o promot e dialogu e betwee n busines s leader s and academic s o n pertinent issues . One of our forum s ha s been a series of panel discussion s moderated b y Professo r Rober t Kaves h an d featurin g No bel Laureat e Pau l A . Samuelson , Long-Ter m Credi t Ban k of Japa n Visitin g Professo r o f Politica l Economy . Joinin g in th e discussio n ar e busines s leader s fro m Japa n an d faculty member s fro m th e Ster n School . I n addition , ever y March th e Sanw a Monograp h Selectio n Committe e meet s to awar d a researc h gran t fo r a monograp h o n interna tional financial markets . Th e Committe e consist s o f tw o Nobel laureates , Merto n Mille r an d Jame s Tobin , an d Professors Akiyosh i Horiuchi , Ryuz o Sato , Marti Subrah manyam, an d Richar d Zeckhauser . Afte r th e meetin g th e Committee participate s i n a n ope n pane l discussio n i n which the y ar e joine d b y th e Genera l Manage r o f th e Sanwa Bank , New York . Our panel s have become very popular, an d ar e attende d vii

PREFACE

regularly b y students , faculty , an d busines s leader s fro m the New Yor k area . There have been repeated request s fo r transcripts bot h fro m thos e wh o attende d th e discussion s and thos e wh o coul d not . I n response, we ar e delighte d t o provide thi s boo k a s th e firs t volum e i n a serie s t o b e published b y Ne w Yor k Universit y Press . W e hop e yo u will find i t both enlightenin g an d entertaining . RAMA

viii

v . RAMACHANDRAN , Associat e Directo r The Cente r fo r Japan-U.S. Business an d Economic Studie s

P A R T ON E

Lectures fro m Fall 199 3

CHAPTER 1

Bilateral Relation s unde r New Administrations i n Japa n and the U.S. September 23, 1993

3

I N T R O D U C T O R Y REMARK S A s Directo r o f th e Cente r fo r Japan-U.S . Business an d Economi c Studie s I woul d lik e t o identif y my Associat e Director , Professo r Ramachandran , an d m y Assistant Director , Myr a Aronson , an d als o t o tak e a fe w minutes t o introduc e ou r Cente r an d ou r ne w Dean . The Cente r i s one o f th e firs t university-base d organiza tions i n th e worl d t o focu s o n understandin g th e entir e spectrum o f busines s an d economi c relationship s betwee n Japan an d th e United States . This is accomplished throug h research, teaching , publications , conferences , an d othe r activities. I cam e t o Ne w Yor k Universit y fro m Brow n eight year s ag o t o becom e th e firs t Directo r o f th e Center , and I a m prou d t o sa y i t i s no w recognize d a s th e mos t active an d th e mos t successfu l o f it s kind . W e hav e pro grams in al l business disciplines , ranging fro m accounting , economics, finance, an d informatio n science s to marketin g and statistics . RYUZO SATO :

For our NE C project o n technology an d competitio n w e hold annua l conference s i n Toky o an d Ne w York . Sinc e 1986 Professo r Pau l A . Samuelso n ha s hel d th e Chai r a s Visiting Professor o f Political Economy fo r th e Long-Ter m Credit Ban k o f Japan' s projec t o n U.S.-Japa n relations . The Sanw a Ban k projec t relate s t o internationa l financial markets, an d w e giv e a Sanw a Awar d ever y yea r fo r th e 5

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best monograp h i n thi s field. Ou r TK C (TK C Nationa l Federation o f Publi c Accountants ) researc h projec t con cerns economics , accounting, an d dat a processing , an d w e also sponso r a comparativ e analysi s o f healt h economic s in Japan an d th e Unite d States . I heard Presiden t Clinto n speaking abou t healt h refor m las t night . W e ar e ahea d o f him b y tw o o r thre e years . We hav e hel d conference s an d conducted severa l researc h project s o n thi s subject . We als o edit an academi c journal entitle d Japan and the World Economy publishe d b y Nort h Holland , fo r whic h we ge t submission s an d subscription s fro m al l ove r th e world. I n additio n t o sponsorin g research , w e hav e trie d to mak e th e researc h result s availabl e t o th e publi c b y holding conferences , pane l discussion s lik e the on e we ar e having today , an d als o publi c lectures . W e hav e man y publications, mos t o f whic h ar e publishe d b y Cambridg e University Press . Through th e first eigh t year s o f th e Cente r w e ha d th e support an d guidanc e o f Dr . Richar d R . West , forme r Dean o f th e Ster n Schoo l o f Business . We ar e gratefu l fo r his leadership , an d wis h hi m a ver y productiv e sabbatica l year. W e ar e fortunat e t o hav e foun d someon e a s distin guished a s Dr . Georg e Dal y t o tak e ove r th e hel m a s w e begin ou r fal l semester . A Whit e Hous e economist , hi s former deanshi p i n Iow a wa s note d fo r th e developmen t of bot h fiscal an d intellectua l capital . He i s also very com mitted t o th e kin d o f outreac h fo r whic h w e ar e presen t today. 6

BILATERAL RELATIONS UNDER NEW ADMINISTRATIONS

I' m delighte d t o welcome yo u to a confer ence devote d t o th e dissectio n o f a problem . I t i s highl y appropriate tha t i t occu r i n thi s classroom , whic h s o resembles an operating room . I wa s commentin g t o ou r panelist s befor e w e cam e down her e abou t a contribution tha t on e of them, Profes sor Bhagwati , mad e t o the Wall Street Journal recently . In it, h e describe d a kin d o f divorc e fro m realit y tha t fre quently occur s i n dialogues o f a political sort , particularl y when the y concer n publi c policy, because no sensible politician, i t seems , ca n affor d t o discus s an y proposa l tha t could possibl y caus e damag e t o anyon e eithe r directl y o r indirectly. I was struck b y thi s phenomeno n a s I listene d to Presiden t Clinto n las t nigh t talkin g abou t th e variou s good result s tha t woul d com e fro m hi s healt h car e plan , reluctant t o suggest tha t ther e were an y people who might in fact b e harmed b y it. The trut h i s tha t i n th e busines s worl d an d in th e rea l world w e canno t affor d suc h luxuries . Th e United State s cannot, fo r example , continu e t o blam e othe r countrie s for our own inadequate saving s rate. This is not something that i n the long ter m i s going t o serv e u s well eithe r i n a public o r i n a privat e sense . W e nee d hardheade d an d frank approache s t o th e difficul t problem s tha t confron t us, an d fo r tha t reaso n I a m particularl y please d tha t our schoo l ca n sponso r th e kin d o f dialogu e w e hop e t o present today , on e tha t wil l b e bot h realisti c an d illumi nating. GEORGE DALY :

7

BILATERAL RELATION S UNDE R NE W ADMINISTRATION S

W e wer e reminiscin g earlie r abou t a panel appearanc e b y Pat Choate, an outspoken write r and critic who appeared t o have ver y littl e t o say until h e was literally force d t o disgorg e som e material . I mentio n thi s in par t becaus e Professo r Bhagwat i wa s quote d i n th e latest Business Week a s undermining som e of Pat Choate's statements, criticizin g a boo k tha t Pa t Choate coauthore d with Ros s Perot . I n an y event, w e are here toda y t o con tinue the discussion o n Japan-U.S. problems. Our theme is Bilateral Relation s unde r Ne w Administration s i n Japa n and th e United States . When a married coupl e get s into a n argument an d then the argumen t i s settled, the y rais e glasses and toast t o new beginnings. I n a sens e that' s wha t we'r e talkin g abou t today. Presiden t Clinto n ha s bee n i n offic e th e first 10 0 days, the n th e first 20 0 day s (enamore d b y statistics , we count). I n Japan w e have th e new administration o f Mr . Hosokawa. I recently receive d a publication fro m th e Metropolitan Museu m o f Art describing som e panels the Museum ha d obtained. Thes e panel s ha d originally bee n i n a building tha t th e Hosokawa famil y buil t in the year 1606. So w e hav e thi s ancien t traditio n i n Japan , an d i n th e United State s w e have Bil l Clinto n fro m Hope , Arkansas . It's a n interesting cros s section . You loo k around . Yo u see recessions i n Japan, ye s real recessions, reporting negativ e figures for growth i n domestic product. I n the United State s it seems almos t ever y day that w e open ou r newspapers ther e i s talk o f 4,000 work ers laid off, 9,00 0 worker s lai d off. I n truth th e number of ROBERT KAVESH :

8

BILATERAL RELATION S UNDE R NE W ADMINISTRATION S

people workin g continue s t o ris e bu t stil l we'r e worried , and i n Japan they'r e worrie d too . Arthur Schlesinger , tw o days ag o i n th e Wall Street Journal, wrot e abou t th e futil ity o f forecasting . Th e inevitabl e neve r happens . I t i s al ways the unexpected, a s he quoted Lor d Keynes . He didn' t quote Pau l Valery , wh o sai d "th e futur e isn' t wha t i t use d to be." We worry, an d sometime s we turn t o angr y words . Just anothe r momen t o f introduction . I returned tw o o r three day s ag o fro m a tri p t o Scandinavia , a lan d o f gla ciers, snow , an d man y white , blond e people . I was wit h a group o f Americans , mos t o f the m a bit olde r tha n mysel f (and I hav e bee n a t thi s schoo l fo r 3 6 years) . Man y o f them wer e Worl d Wa r I I veterans . Durin g ou r tri p w e would frequentl y pas s group s o f Japanes e tourists , an d inevitably I would hear , "The y ar e the one s who stol e ou r jobs. They're th e ones who stol e our jobs. " I was not ther e to fl y th e fla g o f th e Unite d State s o r o f Japan , an d I remonstrated wit h the m a bit, saying, "Yo u know , it' s no t quite tha t simple. " Bu t th e languag e frequentl y deterio rated int o nam e callin g an d th e like , no t i n an y outwar d way, bu t alway s thi s sor t o f grumbling , ra h ra h rah . Thi s in th e mids t o f th e glacier s an d fjord s o f Norway . S o w e have thi s problem : Bilatera l relation s unde r ne w adminis trations i n Japan an d th e United States . Our keynot e speake r i s Professo r Bhagwati , a n autho r who write s faste r tha n mos t o f u s ca n read . H e ha s had , and continue s t o have , a distinguishe d career . I ca n sa y nothing agains t him , excep t tha t I wis h h e wer e no t in volved a t Columbi a University . 9

JAGDISH BHAGWAT I As Prim e Ministe r Hosokaw a an d Presiden t Clinto n pre pare t o mee t i n Ne w Yor k o n Monday , m y though t goe s back t o anothe r meeting , i n Washington , betwee n Presi dent Clinto n an d the n Prim e Ministe r Miyazawa . A s I looked a t th e tw o o f the m standin g togethe r o n th e law n of the White House, this diminutive Japanese Prime Minister an d ou r giganti c an d genia l Presiden t Clinton , i t oc curred t o m e tha t obviousl y i t wa s goin g t o b e ver y diffi cult fo r th e two side s to se e eye to eye . On th e othe r hand , it was equally obvious that the situation coul d not possibl y degenerate int o a n eyebal l t o eyebal l confrontation . I find i t ver y har d t o understan d wher e th e dialogu e i s at th e moment . I t remind s m e o f th e jok e wher e someon e says tha t tw o peopl e ar e no t o n speakin g terms , t o whic h the ripost e i s made : "That' s no t true . Just th e othe r da y I heard the m shoutin g a t eac h other! " I t i s importan t t o understand th e dialogu e goin g o n betwee n th e tw o sides , which is really quite tense, but I won't g o into that becaus e everybody i s familia r wit h th e facts . I t ha s com e t o a stage i n whic h I believ e ou r administratio n need s t o b e rethinking th e whole issue , and s o should th e Japanese. I'm afrai d tha t Japa n polic y i s th e onl y are a o f foreig n trade i n whic h th e Clinto n administratio n show s absolut e clarity o f purpose . I see mor e ambivalenc e wit h regar d t o other matter s o f trad e policy . I was pleased , fo r example , 10

BILATERAL RELATION S UNDE R NE W ADMINISTRATION S

when I hear d Presiden t Clinto n spea k eloquentl y abou t suspending al l our fear s abou t NAFTA, touting the virtue s of fre e trad e an d s o on. Then he went on to say with equa l eloquence tha t w e ha d signe d al l thes e supplementar y agreements o n labo r an d environmenta l standard s t o rais e the cos t o f productio n i n Mexico . Wit h on e han d h e wa s praising th e virtue s o f fre e trade , an d wit h th e othe r h e was buyin g int o th e sam e fear s a s Ros s Pero t (althoug h not t o th e sam e degree) . H e wa s basicall y sayin g tha t th e Mexicans shoul d rais e minimu m wage s an d s o forth , o r else w e coul d no t hav e NAFTA . Thi s attitud e fundamen tally flie s i n th e fac e o f fre e trade . Yo u reall y don' t wan t to have to sa y to othe r countries , poor countries , that the y have t o becom e ou r clone s i n term s o f industria l costs . Surely h e coul d hav e discusse d othe r rationale s fo r offi cially sellin g th e supplementa l agreement s othe r tha n tha t otherwise w e woul d hav e "unfair " trade . Thi s acceptanc e and advocac y o f th e "unfair " trad e rational e certainl y undercuts th e very basi s o f fre e trade . So i n m y judgmen t ther e i s som e ambivalenc e i n th e President's thinkin g abou t trad e issue s suc h a s NAFTA . But no t o n Japan . O n Japa n th e administratio n ha s reached complete , unambiguous , nonambivalen t clarity . I believe the policy is clearly wrong, an d I will argue to that . Fear has become a dominant questio n in trade today. Wit h poor countries , the fea r i s that b y trading freel y wit h the m we will lose our wage s o r ou r jobs . With Japan, th e fea r i s different. Th e genera l fea r i s tha t someho w w e ar e no t going to b e able to compete successfull y wit h Japan. Asso ll

BILATERAL RELATION S UNDE R NE W ADMINISTRATION S

dated wit h thi s fea r i s the widesprea d vie w tha t th e Japa nese ar e wicke d i n som e way . The y ar e doin g somethin g we can' t figure out . I n short , the y someho w "cheat " i n trade t o ge t ahea d a s well a s they do . The fea r concernin g Japa n i s differen t then . I thin k i t arises partly fro m wha t I have called the Diminished Gian t Syndrome, fuele d b y th e economi c ris e o f Japa n an d th e Pacific nations . Thi s fea r i s fundamenta l t o ou r problem s with Japan, an d overlays the issues. Particularly i n relatio n to marke t acces s problems, the Clinto n administratio n ha s clearly move d towar d wantin g quic k results , rathe r tha n saying, "Look , let' s ge t t o th e fundamental s o n this . Let' s see if ther e ar e an y regulations , etc. , which ar e preventin g market access . Coul d the y shif t perhap s t o anothe r se t o f policies where their socia l an d othe r objective s ar e fulfille d but with les s disruption o f our marke t access? " Take retai l distribution a s a n example . Coul d the y subsidiz e th e small-scale sector while allowing large-scale stores to ope n up, instea d o f simpl y stoppin g th e fre e expansio n o f larg e stores i n Japan ? Th e developmen t o f large-scal e store s would eas e th e wa y t o marke t acces s fo r foreig n busi nesses. A t th e sam e time , subsidiz e you r mom-and-po p stores. Surel y tha t i s a bette r situatio n fro m ou r stand point. These ar e th e kind s o f thing s w e shoul d b e discussing , rather tha n lookin g fo r specifi c commitment s o n ho w many store s will be opened u p an d when. But the adminis tration ha s basicall y move d awa y fro m th e discussio n o f institutional an d polic y measure s aime d a t improvin g ou r 12

BILATERAL RELATION S UNDE R NE W ADMINISTRATION S

market acces s in Japan, whic h migh t ope n th e way fo r th e Japanese o n thei r sid e t o as k u s ho w t o eas e thei r acces s problems i n ou r markets . We go for "results. " We as k fo r import targets , quantitativ e targets . Economist s cal l thi s managed trade . Managed trad e jus t isn' t th e wa y w e wan t t o g o i n m y opinion. I' m no t speakin g now a s a theologian. U.S . Trade Representative Micke y Kantor , a shrew d negotiator , onc e made a celebrate d remar k sayin g h e wa s intereste d i n "results" an d no t i n "theology. " No w I don' t thin k h e meant b y theolog y th e takin g o f a degre e fro m divinit y school. I thin k h e mean t havin g a coheren t analytica l framework, whic h unfortunatel y w e professor s ten d t o inflict o n ourselve s when thinkin g about these issues. Onc e we com e u p wit h th e propositio n tha t w e wan t t o g o fo r quantitative target s becaus e w e reall y don' t kno w wh y Japan i s no t importing , w e ru n int o difficulties . W e wan t to bypas s al l of tha t an d jus t com e ou t wit h "results " tha t would b e close t o wha t "true " marke t competitio n woul d yield. I n reality , however , thes e result s mea n tha t som e bureaucrat, som e politician , som e complainan t i n you r own industry , come s u p wit h som e number s an d says , "This i s th e legitimat e marke t share. " Thi s make s littl e sense. Yo u wouldn' t le t you r student s decid e wha t grade s they shoul d get , n o matte r ho w strongl y the y ma y fee l about havin g bee n undergraded . Economics i s no t tha t kin d o f precis e science . Econo metrics ha s no t gotte n t o a stat e wher e yo u ca n reall y forecast wit h an y kin d o f plausibilit y wha t a "true " mar 13

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ket shar e woul d be . The on e lesso n i n th e postwa r perio d is tha t an y countr y tha t trie s t o pla n tha t o r thin k tha t way become s impoverished. What i s really needed is to se t up a n appropriat e framewor k o f policie s an d rules . In m y opinion th e administration , becaus e o f it s panic o n Japan , is movin g exactl y i n th e wron g direction . Impor t target s must mea n tha t th e Japanese governmen t woul d ge t heav ily involved. The y coul d achiev e these target s b y carteliza tion an d command—b y first agreein g t o targets , and the n getting the industry t o allocat e thos e targets amon g differ ent firms for fulfillment . Similar t o voluntar y expor t restraint s (VERs ) ther e ar e what I hav e calle d voluntar y impor t expansion s (VIEs) , that is , manage d trad e o n th e impor t side , jus t a s VER s are manage d trad e o n th e expor t side . I f yo u loo k a t th e history o f th e VER s the y starte d ou t i n specifi c sectors , judicially chose n an d originall y considere d temporary . B y now the y hav e becom e a systemi c proble m worldwide , and we'r e tryin g t o ge t ri d o f them . VIE s pos e th e sam e risk. The y ar e als o spreading . The y starte d wit h semicon ductors unde r th e Republica n administrations , an d som e people no w wan t t o exten d the m t o auto s an d aut o parts , and a variet y o f othe r sectors . Fre d Bergste n want s the m on twelv e differen t sectors . The E U is saying that i f we d o this the y wil l follo w suit , becaus e the y expec t tha t VIE s imposed a t U.S . deman d wil l lea d t o a diversio n o f trad e from the m t o u s becaus e th e Japanese wil l see k t o accom modate u s and politic s wil l determine imports . If yo u think , bot h i n term s o f historica l experienc e an d 14

BILATERAL RELATION S UNDE R NE W ADMINISTRATION S

in term s o f th e politic s o f th e wa y thes e target s woul d be set , o f th e consequenc e fo r Japan , whic h i s abou t t o deregulate, o f gettin g the m t o reregulat e o r t o effectivel y use cartels in order t o achiev e these targets, you coul d los e sleep i f yo u wer e a fre e trade r an d believe d i n rules-base d trade. Thi s i s th e wa y th e Frenc h think . I hav e travele d with Arthu r Dunca l (forme r Directo r Genera l o f GATT) . The Frenc h don' t reall y stud y Professo r Samuelso n an d then me, in that order , on international trade . They believ e more i n organize d fre e trade , manage d trade , an d s o on . Well, that' s wha t ha s com e t o Washingto n now , becaus e that's th e way the y thin k no w abou t Japan . So much fo r wha t w e shoul d no t do . Le t m e now com e to wha t w e shoul d do . We d o hav e legitimat e complaints , legitimate meanin g politically articulate . Severa l industrie s say w e can' t sel l i n thi s market . W e nee d a proces s b y which w e ca n handl e thes e complaints , an d i t ha s t o b e a symmetric an d impartia l process . Article 2 3 o f th e GATT , for example , say s yo u ca n brin g u p complaints . I f yo u say, "Look , I can' t sel l pachink o parlor s o r computer s i n Japan," the n yo u ca n g o u p befor e a judicia l panel . I' m not sayin g they'r e goin g t o b e ver y wel l informed : there' s very littl e jurisprudenc e o n this . Bu t jurisprudenc e wil l develop. Judge s ar e neve r deterre d fro m pronouncin g o n things fo r lac k o f existin g jurisprudence . Wha t yo u hav e there i s an impartia l process . If we sa y the Japanese aren' t buying ou r aut o part s becaus e they'v e go t a keirets u sup plier relationship , the y likewis e ca n tak e IB M t o cour t saying "IB M i s makin g it s ow n chips ; i t i s no t buyin g 15

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from Hitachi. " Fro m a formal , economi c poin t o f view , a supplie r relationshi p i s th e sam e thin g a s a verticall y integrated proces s i n economi c theor y models . Th e tw o are identical. It's only a legal difference . What w e reall y nee d i s process . "It' s th e process , stu pid," i f I migh t borro w m y phrasin g fro m th e Clinto n campaign. Japan coul d b e pushed aroun d i n m y judgmen t because i t neede d t o b e pushe d aroun d i n th e earl y day s when th e countr y wa s closed . I t wa s als o economicall y and politically weak in those days. Today Japan i s a super power economically , an d canno t b e treate d a s i f w e ca n simply impos e thing s o n i t b y fiat an d withou t regar d t o the impartialit y an d symmetr y o f trad e disput e proce dures. Th e proces s b y whic h w e dea l wit h problem s be tween u s ha s t o b e symmetric , ha s t o b e impartial . Japa n must indee d respon d t o ou r complaints , becaus e they'r e real complaints an d no administratio n ca n afford t o ignor e them. Bu t w e mus t g o throug h fai r an d symmetri c pro cesses. The surplu s reductio n targe t fo r Japa n i s equall y prob lematic a s a policy , an d I'l l conclud e m y remark s o n tha t issue. I d o thin k i t i s vali d t o argu e tha t ther e i s a defi ciency o f aggregat e deman d i n th e world today . Ther e ar e also som e underlyin g structura l problems , bu t mor e tha n that righ t now , ther e i s a deficiency o f aggregat e demand . In th e Unite d States , a s doubtles s yo u know , th e 1980 s left u s wit h a hig h debt-GN P ratio . We'v e go t a current account budge t defici t a s well . Ou r capacit y t o us e fiscal policy t o d o anythin g t o ad d t o th e worl d deman d i s 16

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simply handicapped . Presiden t Clinton' s first budge t illus trated thi s proble m well . Th e E U ha s th e sam e problem . The Japanes e ar e i n a positio n t o b e abl e t o spen d more , because the y don' t hav e thes e tw o handicaps . The y fol lowed fiscal prudence durin g th e 1980s . We shoul d therefor e urg e th e Japanese t o increas e fiscal spending. Thi s i s no t t o condem n thei r surplus , becaus e the surplu s i s no t i n itsel f a ba d thing . A surplu s ca n i n fact mea n supplyin g savings to the rest of the world, wher e there i s so muc h shortag e o f saving s everywher e now—t o India, th e ol d USSR , th e Middl e East , fo r example . Be cause o f ou r spendin g propensities , however , w e ar e no t in a position t o suppl y saving s t o anyone . Why shoul d w e then condem n th e Japanes e surplus , whic h i s i n fac t a wonderful gif t t o th e savings-hungr y world ? Bu t we don' t want t o say , "Look , you hav e the capacity i n the short ru n to reflat e th e worl d economy , t o becom e th e locomotive , so pleas e exercis e som e leadershi p an d spen d more. " W e don't wan t t o thin k an d tal k i n term s o f th e surplus , because th e externa l surplu s i s simpl y neithe r her e no r there i n itself . A s soo n a s w e focu s o n that , w e giv e cur rency t o Gephard t an d other s wh o mistakenl y argu e tha t the surplu s mean s Japa n i s closed . That , o f course , i s a fallacy. Ther e ar e marvelous quote s o n thes e matters fro m the Congres s an d no w fro m th e Clinto n administratio n for ou r student s t o analyze , not condemn . Such thinkin g i s wrong . Th e targetin g o f th e surplu s i s wrong fo r reason s o f principle . Yo u ca n targe t fiscal pol icy, monetar y policy , bu t no t th e consequences , becaus e 17

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you coul d expan d an d stil l no t hav e th e sam e impac t o n the surplus . Moreove r yo u don' t kno w wha t th e exac t effect wil l be , eve n i f yo u thin k i t wil l reduc e th e surplus . If Prim e Ministe r Hosokaw a agree s t o target s o n externa l surplus reductio n an d i t doesn' t happen , eve n i f he' s don e all the things lik e expansive fisca l policy , Gephard t wil l b e at hi m again . Hosokaw a woul d b e a foo l t o sig n u p fo r such a targe t i n m y opinion , sinc e i t woul d creat e mor e problems dow n th e road . Everythin g w e ar e doin g o n th e Japan trad e issu e i s wrong , fundamentall y wrong . Th e Japanese hav e t o exercis e leadershi p b y actin g a s th e world's locomotive . Eve n if they do , it's not goin g to hav e a bi g effect, bu t a t leas t it can help . My agend a fo r th e tim e bein g the n woul d b e fo r th e Japanese t o continu e resolutel y sayin g n o t o target s o n both trad e an d o n surplu s reduction . I thin k the y hav e been sayin g no , bu t I suspec t tha t th e Japanes e n o i s frequently understoo d a s a Japanese yes. I hope it' s a clea r and resoundin g n o thi s time . A t th e sam e tim e ther e should b e a yes , a clea r resoundin g yes , on shiftin g actio n to th e GATT , o n makin g a lot o f concession s i n a recipro cal framewor k a t th e GATT . Ther e shoul d b e a ye s t o taking a substantiall y augmente d fiscal an d monetar y expansion t o hel p bot h th e worl d econom y an d them selves, fo r the y woul d b e beneficiarie s a s well . I thin k that's wher e w e wan t t o pu t th e ne w agenda . I f w e d o that, w e ar e strengthenin g multilateralism . W e woul d i n fact reflat e th e worl d economy , an d multilaterall y strengthen al l th e goo d values . I t woul d mea n havin g a 18

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symmetrical relationshi p betwee n th e tw o parties . Yo u can't pus h Japa n aroun d i n m y judgment. It' s ridiculous . Because it' s s o obvious , however , I' m no t sur e i t wil l be done .

Ou r next speake r i s Hiroshi Tsukamoto , the first o f ou r tw o Japanes e representatives . Currentl y President of the JETRO Compan y i n New York, he comes to u s wit h 2 4 years ' affiliatio n wit h Japan' s Ministr y o f International Trad e an d Industry (MITI) . ROBERT KAVESH :

19

HIROSHI TSUKAMOT O Professor Bhagwat i sai d tha t Prim e Ministe r Miyazaw a and Presiden t Clinto n ha d a difficul t tim e makin g eye-to eye contact . Bu t whe n ou r Prim e Ministe r Hosokaw a meets wit h Presiden t Clinto n i n Ne w Yor k i n th e fal l o f 1993 I think bot h o f the m wil l find i t easie r t o hav e eye to-eye contact , becaus e Mr . Hosokaw a i s a bi t talle r tha n average. I als o thin k h e wil l com e her e representin g ne w perspectives fo r Japan , an d I believ e th e tw o leader s ca n deepen thei r mutua l understandin g o n thi s occasion . Many peopl e i n th e U.S . toda y lik e t o hea r th e wor d "change." Lik e Dea n Daly , I wa s als o ver y intereste d i n President Clinton' s messag e yesterda y o n th e reformatio n of healt h care . Suc h refor m i s clearl y a difficul t thin g t o accomplish. A politician alway s ha s t o us e a sof t wor d t o cover reality , an d th e tru e realit y i s never easy . I see man y good sign s pointing to chang e in the U.S. today, an d I also would lik e to elaborat e o n som e of th e change s i n Japan . First I would lik e to quot e Sakaiy a Taichi , who i s a very famous columnis t a s well a s a forme r MIT I official . H e i s a ver y shar p analys t o f th e curren t prospect s fo r Japan' s economy. Taich i argue s tha t chang e i n Japa n i s realize d very slowly . Nevertheless , compan y people—busines s people—can chang e mor e quickl y tha n most . Base d upo n experience, busines s peopl e see m t o tak e five year s t o implement changes . Politician s tak e te n year s t o brin g 20

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about change , an d bureaucrat s tak e fifteen. Sinc e I com e from MIT I myself , I really shoul d understan d th e meanin g of hi s message : An y organization , i f i t i s well established , is ver y difficul t t o change . Bu t I thin k tha t Japa n i s no w coming t o a turning point . Professor Samuelso n too k par t i n a symposiu m severa l years ag o i n Japan i n which th e concluding remark s t o hi s Japanese audienc e concerne d hi s expectations fo r Japan i n the nineties. He sai d h e expected som e kind o f coexistenc e between ruthles s efficienc y an d humanity , althoug h thi s would b e a difficult thin g to promote. We Japanese under stand th e importance o f hi s message . In MITI , althoug h i t i s ver y difficul t t o predic t th e fu ture, ever y decad e w e launc h a n "Industria l Vision. " I n the seventie s an d eightie s w e wer e promotin g knowledg e intensification, bu t ou r ke y words fo r a vision o f th e nine ties hav e t o d o wit h creatin g huma n valu e i n th e globa l age. Wh y d o w e urg e th e importanc e o f creatin g huma n value? Onc e w e though t concentratio n o n accumulatin g wealth wa s enough , an d durin g th e catch-u p perio d o f our econom y w e too k th e accumulatio n o f wealt h ver y seriously indeed . Bu t no w tha t Japa n i s relativel y rich , the importan t priorit y ha s becom e he r rol e i n th e globa l environment. Mor e effort s mus t b e mad e t o wor k towar d global welfar e an d security . A t th e sam e time , w e see k a more balance d wa y o f lif e fo r th e Japanese people . This i s the messag e fro m MIT I concernin g ou r visio n fo r th e nineties. This i s no t a n eas y targe t t o pursue . Th e olde r genera 21

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tion stil l perceive s ou r peopl e a s th e inhabitant s o f a ver y tiny islan d wit h ver y limite d resources . Unde r thes e cir cumstances, har d wor k i s the onl y wa y t o promot e Japan . But I belon g t o a younge r generation , no t s o fa r fro m President Clinton's . Befor e I came her e I was th e Directo r of th e Polic y Plannin g Offic e a t MITI . I wa s responsibl e for long-ter m industria l polic y strategy . M y generatio n i s thinking i n ne w ways , an d w e believ e tha t th e single minded accumulatio n o f wealt h i s no t a goo d thing . W e believe in the importance o f economi c balance . This is not t o exemp t ourselve s fro m th e severe criticis m we have sustaine d fro m foreig n countries . It is in ou r ow n best interes t t o mov e i n thi s direction . Th e futur e o f an y country lie s i n th e creativit y o f it s people, an d i n orde r t o enhance tha t kin d o f creativit y i t is better fo r th e econom y to functio n i n a more balance d way . Although thi s kind of strategic chang e i s ver y difficul t t o accomplish , ou r ne w Japanese leader s ar e tryin g t o promot e i t o n a meaningfu l level—we ar e talkin g abou t somethin g mor e substantia l than th e concep t o f a "kinde r an d gentle r nation. " I don' t hav e enoug h tim e t o elaborat e o n al l th e kind s of change s tha t ar e occurrin g i n Japan . I d o believ e tha t the Hosokaw a administration' s ne w thinking , combine d with ou r ampl y seasone d economi c tradition , wil l force u s to chang e th e structure s b y whic h w e operate . Japanes e industry wil l increas e oversea s production , fo r instance , because o f th e appreciatio n o f th e yen . Pric e competitio n in th e Japanes e marke t wil l becom e eve r mor e fierce i n the fac e o f ou r depresse d economy . Man y consumer s ar e 22

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already placin g mor e emphasi s tha n befor e o n the price of goods. Deregulation wil l accelerat e marke t competitio n a s well. Deep innovation s wil l be sought t o accomplish thes e changes. Eve n wit h al l of this , Sakaiy a Taich i remind s u s that chang e i s a rea l struggle , an d i t wil l tak e time . Bu t please understand tha t we are going to change.

I n th e Prologu e t o Heave n i n Goethe' s Faust, i t i s writte n tha t " a goo d ma n throug h obscur e aspirations ha s stil l a notio n o f th e on e tru e way. " In a sense w e ar e her e toda y lookin g for , i f no t th e on e tru e way, then severa l tru e ways . It is my pleasure to introduc e Ryuzo Sato , wh o is no t onl y th e Directo r o f ou r Cente r but Professo r o f Economics her e at the Stern Schoo l an d a wonderful colleague . ROBERT KAVESH :

23

R Y U Z O SAT O 1993 wa s a yea r o f grea t politica l chang e i n bot h Japa n and th e Unite d States . Bil l Clinto n replace d Georg e Bus h in th e Whit e House , an d Morihir o Hosokaw a becam e Prime Ministe r o f Japan. Muc h ha s bee n mad e o f th e fac t that thi s i s th e firs t Democrati c administratio n i n twelv e years, Clinto n i s th e younges t Presiden t sinc e Joh n Ken nedy, an d Hosokaw a i s the first non-LD P (Libera l Demo cratic Party ) Prim e Ministe r i n 3 8 years . Bu t mor e im portant tha n thes e superficia l change s i s th e chang e i n values the y represent . A n understandin g o f thes e value s i s likely t o b e crucial t o understandin g th e personality o f th e Clinton administration , an d ma y als o offe r insight s tha t will hel p u s predic t th e futur e directio n o f U.S.-Japanes e relations. Several year s ag o whe n reporter s aske d Crow n Princ e Naruhito t o describ e th e qualitie s h e wa s lookin g fo r i n a future wife , h e replied , " I wan t t o marr y someon e wh o has th e sam e sens e o f value s tha t I have. " Althoug h th e concept o f values is taken very seriously i n both th e Unite d States an d Europe , i t ha s attracte d littl e publi c attentio n in Japa n unti l recently . Eve n th e expressio n tha t mean s "values" i n Japanese i s not ver y old . I f w e thin k abou t it , however, frictions ar e bound t o arise in any relationship — be it a marriage or a relationship betwee n tw o countries — if th e tw o partner s hav e majo r difference s i n priorities , 24

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in th e thing s tha t eac h sid e consider s importan t i n thei r lives. I f partner s don' t shar e simila r values , they wil l hav e to spen d enormou s amount s o f energ y reachin g a n agreement. Bill Clinto n i s th e first Presiden t o f th e Unite d State s t o be born afte r Worl d War II , and his administration reflect s the value s o f th e baby-boo m generation . Ho w ca n thi s be expecte d t o affec t U.S.-Japanes e relations ? First , thi s administration wil l no t b e boun d b y ideolog y o r labels , but wil l b e results-oriented . Thi s wil l mea n a toughe r policy towar d process-oriente d Japan . Japa n wil l b e tol d to sho w results , no t t o tr y t o ge t b y wit h explanation s or excuses . Furthermore, th e participatio n o f wome n i n publi c af fairs wil l b e greate r tha n ever . Barbar a Bus h wa s famou s for bein g a good wif e i n th e traditiona l sens e of th e word , devoted t o playin g a supportiv e bu t clearl y subordinat e role t o he r husband . Hillar y Rodha m Clinto n project s th e image o f th e moder n caree r woma n wit h abilitie s an d values o f he r own , capabl e o f carvin g ou t a positio n fo r herself independen t o f he r husband' s statu s or occupation . In th e sam e sense , th e fac t tha t caree r woma n Masak o Owada wil l on e da y becom e Empres s migh t provid e th e rest o f th e worl d wit h som e ne w insigh t int o Japan . Th e Japanese sens e o f value s ma y no t b e quit e s o differen t a s some people have tended t o believe . Although I hav e use d th e expressio n " a chang e i n val ues" t o describ e th e ne w administration , tha t doe s no t mean tha t everythin g ha s change d overnight . Life , liberty , 25

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and th e pursuit o f happiness, the fundamental concept s o n which th e Unite d State s wa s founded , remai n a constan t source o f America n value s despit e th e transfe r o f power . Still, th e weigh t give n t o eac h o f thes e huma n right s i n a give n administratio n reflect s th e politica l philosophy , conservative o r liberal , o f th e Presiden t i n power . I f th e Bush administratio n coul d b e defined i n terms of Hamilto nian elitism , President Clinton' s politica l shadin g migh t b e called Jeffersonia n populism . Thi s libera l spiri t reveal s it self i n policie s tha t sho w greate r toleranc e towar d peopl e of color , women , th e sociall y disadvantaged , an d homo sexuals. Another aspec t o f U.S . polic y tha t i s centra l t o ou r current discussio n o f U.S.-Japanes e relation s i s th e vie w that bega n t o emerg e i n th e lat e 1980 s o f economi c strength a s a nationa l securit y issue . Th e fac t tha t Presi dent Clinto n ha s se t u p a new cabinet-leve l Nationa l Eco nomic Counci l o n th e mode l o f th e alread y existin g Na tional Securit y Counci l i s a clea r sig n tha t h e intend s t o treat economi c polic y o n th e sam e footin g a s militar y strategy. Becaus e Clinto n believe s tha t America' s futur e depends o n a revitalizatio n o f th e U.S . economy , hi s ad ministration wil l approac h th e issu e o f strengthenin g an d raising America's internationa l competitivenes s a s the economic equivalent o f war . Three month s hav e passe d sinc e powe r change d hand s in Japa n fo r th e firs t tim e i n thirty-eigh t years , an d a new rulin g coalitio n forme d a new governmen t heade d b y Prime Ministe r Morihir o Hosokawa . Wheneve r I say tha t 26

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I first cam e t o th e Unite d State s a s a graduat e studen t i n 1957, th e respons e I ge t fro m mos t peopl e is : "That' s a long tim e ago. " Bu t th e Libera l Democrati c Party' s one party rul e i n Japa n bega n eve n longe r ag o tha n that , i n 1955. Durin g tha t lon g perio d o f time , on e governmen t succeeded anothe r a s eac h factio n o f th e part y too k it s turn i n th e sea t o f power . Bu t for th e Japanese people , th e expression " a chang e i n government " onl y mean t tha t another grou p o f ol d me n i n mornin g suit s woul d mee t the Empero r an d hav e thei r picture s taken . The y wer e resigned t o th e fact tha t nothin g els e would change . The present chang e of governmen t ha s therefore create d a grea t dea l o f excitement . A first-tim e Die t membe r ha s become th e Prim e Minister ; a woman ha s bee n appointe d Speaker o f th e Hous e fo r th e first tim e i n Japan's history ; and th e cabinet , wit h th e sol e exception o f th e Minister o f Foreign Affairs , consist s entirel y o f newcomer s wh o hav e never hel d cabine t post s before . Wha t i s perhap s mos t significant abou t th e presen t chang e i s that i t ha s arouse d the interest o f the Japanese people in their government an d raised thei r expectations . I t ha s als o mad e som e Japanes e politicians an d bureaucrat s ver y nervous . Members o f th e Libera l Democrati c Party , wh o no w find themselve s i n th e opposition , tal k abou t th e fragilit y of th e ne w rulin g coalition ; bu t popula r suppor t fo r th e new governmen t exceed s 7 0 percent , th e highes t i n post war history. By comparison, Prim e Minister Takeshita ha d a popularit y ratin g o f 5 percen t an d Miyazawa' s wa s 9 percent a t th e en d o f thei r term s o f office . Th e 7 0 percen t 27

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approval rat e i s a clea r indicatio n o f ho w hig h popula r hopes ar e for change . Among th e task s facin g th e ne w government , th e mos t important ar e politica l refor m an d policie s t o stimulat e Japan's flaggin g econom y an d reduc e it s ever-expandin g trade surplus . Fo r thi s audienc e th e issu e o f politica l re form i n Japan , I suspect , i s a purel y domesti c problem . With thi s i n mind , I wil l focu s m y remark s o n Japan' s economic stimulu s policies , particularl y deregulatio n an d the trade surplu s problem , bot h o f which hav e a profoun d impact o n th e relationshi p betwee n th e Unite d State s an d Japan. U.S.-Japan relation s ca n b e thought o f a s having entere d a ne w stag e thi s pas t summer , whe n th e exchang e rat e approached th e 10 0 yen to the dollar level. Although ther e is much tal k abou t th e 10 0 ye n barrier , soone r o r late r it , too, wil l b e broke n i f th e trad e surplu s continue s t o rise . This mean s tha t Japanes e businessmen , jus t lik e Japanes e politicians, are being forced t o mak e fundamenta l change s whether the y lik e it or not . Metaphorically speaking , th e stron g ye n an d Japan' s trade surplu s ar e relate d t o on e anothe r i n muc h th e sam e way a s cholesterol i s to hig h bloo d pressure . An abnorma l buildup o f th e trad e surplu s cause s th e ye n exchang e rat e to rise . I n th e economy , jus t a s i n th e huma n body , an y imbalance immediatel y set s of f a warnin g signal . Wha t has pushed th e value o f th e yen u p t o it s present height s i s the obstinat e assertio n withi n Japan tha t th e trade surplu s is goo d fo r Japa n an d th e worl d econom y a s well . Thi s 28

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argument, advocate d mostl y b y economist s i n th e Japa nese ministries , ha s temporaril y bee n silence d a s the trad e surplus ha s brough t Japan' s econom y t o a stat e o f nea r paralysis. But the policy error s committed i n its name hav e been seriou s ones . Until recentl y Japanes e governmen t spokesmen , espe cially thos e i n th e Ministr y o f Financ e an d th e Ministry o f International Trad e an d Industry , use d t o clai m tha t a n enormous trad e surplu s wa s a healthy phenomenon . Hav ing a trad e surplu s wa s natura l fo r a n economi c super power, the y believed , citin g countrie s tha t ha d dominate d the worl d econom y i n th e pas t suc h a s th e Britis h Empir e before Worl d War I I or th e United State s during its golde n age afte r th e war . Th e pitfal l i n thi s argumen t i s tha t i t ignores th e fac t tha t th e America n marke t i n it s heyda y was ope n an d ver y competitive . In a marke t fre e o f an y artificia l manipulation , a trad e surplus ma y i n fac t b e a sig n o f comparativ e advantage . Moreover, becaus e th e U.S.-le d economi c syste m afte r World Wa r I I operate d unde r a fixed exchang e rat e unti l the middl e o f th e 1970s , currenc y value s wer e no t drive n up t o extrem e level s in countries wit h a trade surplus . It is ridiculous t o appl y thes e specia l circumstance s t o present day Japa n a s justificatio n fo r runnin g u p a trad e surplus . It has als o bee n argue d tha t becaus e Japan's trad e surplu s is invested i n other countrie s an d enriche s the global econ omy in this form, i t should b e thought o f as Japan's contri bution a s a n economi c superpowe r t o internationa l soci ety. Give n th e presen t upwar d tren d o f th e yen , however , 29

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no Japanese investo r woul d seriousl y conside r buyin g for eign bond s an d securities . In an y even t there is no point i n trying to track dow n th e culprit responsible fo r th e curren t recession, whic h ha s resulte d fro m th e stron g yen . Wha t both th e Japanes e governmen t an d th e Japanes e busines s world shoul d b e searchin g fo r instea d ar e way s t o wor k out effectiv e measure s tha t ca n dea l wit h thes e ne w real ities. The presen t recessio n ha s le d t o a declin e i n imports , which i n tur n ha s le d t o a n increas e i n th e trad e surplus . This chai n o f event s i s no t merel y th e resul t o f a busines s cycle. I t ha s bee n cause d b y th e unhealth y stat e o f th e Japanese economy . The Hosokawa governmen t diagnose d the situatio n correctl y whe n i t recognize d thi s fac t an d included deregulatio n a s par t o f it s economi c stimulu s plans. Th e stron g yen , o f course , applie s th e brake s t o Japan's expor t initiative . Th e questio n i s whether interna l demand ca n b e expande d enoug h t o mak e u p th e differ ence. Ther e ha s bee n muc h tal k recentl y abou t generatin g internal deman d fro m th e privat e sector , bu t i n orde r t o do s o resolut e effort s mus t first b e mad e t o eas e regula tions an d pas s th e benefit s o f th e stron g ye n o n t o th e consumer. Le t me give you a few concret e examples . 1. Althoug h Japan' s expensiv e ric e ha s com e unde r at tack worldwide, the high cost of cosmetics is a surprisingl y well-kept secret . Th e reaso n Japanes e toiletrie s ar e s o costly, i t i s commonl y acknowledged , i s tha t retai l price s set b y maker s o f consume r good s ar e particularly bindin g in the cosmetic s area . O n July 2 8 th e nationa l newspaper s 30

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reported tha t Kawachiya , a discoun t chain , filed a com plaint wit h th e Monopol y Commissio n chargin g tha t i t had bee n unfairl y suspende d fro m doin g busines s a s a n outlet affiliate d wit h Shiseid o an d Kanebo , Japan' s tw o leading maker s o f brand-nam e cosmetics , an d ha d bee n subject t o restriction s o n deliver y i n violatio n o f th e Anti trust Act . 2. An y Japanes e wh o travel s t o th e Unite d State s o r t o Europe i s awar e o f th e astonishin g variet y o f locall y brewed beers . German y i s said t o hav e a s many brand s o f beer a s there ar e valleys to bre w the m in . The sam e i s tru e in America . Th e famil y o f a colleagu e a t m y universit y runs a restaurant i n the western Unite d States . The restau rant enjoy s a goo d reputation , an d h e proudl y tol d m e that hi s famil y ha d recentl y begu n t o bre w bee r i n it s cellar. I n Japan, however , suc h privat e brewin g o f bee r i s not permitted . Rober t Samuelso n touche d o n som e o f Ja pan's nontarif f barrier s i n a colum n i n th e June 2 1 , 199 3 edition o f Newsweek. A s a concret e example , Samuelso n cites bee r importe d a t a cost , say , o f ¥100 . Thoug h th e official tarif f i s onl y ¥ 2 , someho w th e pric e i s increase d by th e invisibl e tarif f o f ¥14 3 s o tha t th e bee r cost s ¥24 3 when i t finally appear s o n th e market . Wha t ha s particu larly stirre d u p th e U.S . side is that thi s study was don e b y two Japanes e economists , Professor s Yok o Sazanam i an d Shujiro Urata , fo r th e Washington-base d Institut e fo r In ternational Economics . 3. Th e Japanes e syste m o f ca r inspection s (Shaken-sys tem) ha s frequentl y bee n pointe d t o a s prett y strange . 31

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Once a ca r i s thre e year s ol d i t mus t underg o inspectio n every tw o years . Afte r te n year s annua l inspection s ar e required. Th e cost of these inspections (rangin g from $80 0 to $1,500 ) i s muc h highe r tha n th e cos t o f a safet y chec k in th e Unite d States . Eve n thoug h Japa n pride s itsel f o n making th e bes t an d safes t car s i n th e world , i t demand s that al l ca r owner s i n Japa n submi t t o thes e periodi c in spections. Clearl y ther e is a contradiction a t work here . Although ther e ar e n o tariff s o n foreig n cars , the y ar e far mor e expensiv e i n Japa n tha n i n Europe . I wa s tol d this i s because o f th e high prices se t by the manufacturers , who tak e advantag e o f th e fac t tha t high-price d good s sel l well in Japan. The poor Japanese consume r i s treated wit h contempt eve n b y foreig n manufacturers . I n short , th e Japanese consume r i s made a foo l o f b y foreig n manufac turers an d Japanese official s alike , and end s up livin g wit h the highest prices in the world . 4. Although no t a government regulation , authorizatio n must b e obtained fo r a cab drive r t o pic k u p passengers i n front o f a railroad station ; otherwis e the cab driver canno t do so—eve n whe n ther e i s a lon g lin e o f peopl e waitin g for taxis . Th e ground s o n whic h thi s authorizatio n i s granted ar e fa r fro m clear . Th e decisio n i s mad e behin d closed doors , an d th e righ t t o pic k u p passenger s a t rail way station s i s conferre d o n tax i driver s i n muc h th e same wa y a s th e righ t t o bi d o n publi c work s project s i s conferred o n contractors . Th e peopl e wh o ar e inconve nienced b y thi s syste m ar e th e poo r commuters , wh o se e the empt y cab s righ t befor e thei r eye s yet ar e no t allowe d 32

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to ge t int o them . Eve n a partia l attemp t t o eas e thes e strange regulation s an d cozy agreement s tha t protec t pro ducers an d supplier s a t th e expens e o f consumer s wil l make th e live s o f th e Japanes e peopl e fa r mor e com fortable. Examples o f unnecessar y regulation s suc h a s thos e I have jus t cite d abound . Creatin g fro m withi n a n entrepreneurial spiri t tha t energeticall y promote s fre e competitio n and a n open marke t an d brings abou t a n improvement i n the wa y Japan doe s busines s wil l lea d t o economic recov ery an d to a reduction i n Japan's trad e surplus . The recession i n Japan righ t no w is very serious , an d prospects fo r the immediat e futur e see m quit e murky . A t last th e Ban k of Japa n announce d a cu t in th e officia l discoun t rat e t o 1.75 percent, th e lowest i n Japan's histor y (compare d t o 3 percent i n the U.S. and 6 percent i n Germany) . Deregula tion an d macroeconomic polic y ar e the two indispensabl e elements i n an y attemp t t o expan d th e econom y an d thereby reduc e the trade surplus .

Georg e Stigler , who won the Nobel Priz e in Economic Scienc e (someho w economi c scienc e doe s not flow trippingl y fro m th e tongue) , wrot e a n articl e year s ago calle d "Competitio n Yes , But." I n i t h e catalogue d all th e claim s an d demand s tha t peopl e hav e fo r specia l treatment, whic h i s of course part o f our discussion today . In introducin g Pau l A . Samuelson I am reall y sharin g my own history , m y own youth, m y own maturing. Paul , was ROBERT KAVESH :

33

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"The Interactio n o f th e Acceleratio n Principl e an d th e Multiplier" you r firs t publishe d piece ? I t wasn't . Bu t I remember readin g tha t an d wrestlin g wit h wha t I though t was its arcane mathematics. Littl e did I know wha t wa s i n store ove r th e year s i n term s o f economi c science . I n an y event I giv e yo u Professo r Samuelson , th e Economis t o f the Twentiet h Century , an d a s fa r a s I' m concerne d th e Nineteenth, Eighteenth , an d Seventeent h Centurie s a s well. The Great Man. The Nobel Laureate, and first American eve r to receiv e it in Economics .

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PAUL A . S A M U E L S O N I hav e a litera l mind . Whe n I se e th e titl e fo r today' s discussion, namel y "Bilatera l Relation s unde r Ne w Ad ministrations i n Japan an d th e U.S.," th e word "bilateral " reminds m e o f th e economi c theor y o f th e balanc e o f payments. Economists, you see , are just like Pavlov's dogs : Ring a bell and th e conditioned do g salivates. Say the righ t word an d th e conditione d economis t begin s t o babbl e about elasticitie s o f suppl y an d demand . Presidents an d Prim e Minister s ar e no t lik e that . The y go whol e hour s no t thinkin g abou t economics . Fortu nately, Jagdis h Bhagwat i wear s bifoca l glasses , s o t o speak. H e ca n tak e th e telescopi c vie w o f politic s an d history; an d yet , whe n th e proble m present s itself , h e ca n juggle J-shape d curve s an d Marshall-Lerne r condition s with th e bes t o f us . Ryuz o Sato , whe n h e i s no t winnin g Japanese Pulitze r prize s fo r perceptiv e book s o n ou r tw o societies, slug s awa y a t th e mathematica l economic s o f conservation law s and technologica l change . Having Hiro shi Tsukamoto her e i s indeed a bonus : I t is like gettin g a n account o f biblica l Genesi s fro m on e o f th e angel s wh o was i n on th e Creation . Now dow n t o business . I n 1992 , whe n th e Germa n and Japanes e locomotive s wer e idlin g i n th e station , th e American macroeconomi c locomotiv e wa s propellin g U.S. GDP forwar d a t a 3. 8 percen t annua l rat e while , a t th e 35

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same time , helpin g suppor t th e worl d economy . A s Wil l Rogers said , "N o goo d dee d goe s unpunished. " Wer e w e rewarded t o hav e Europ e an d Asi a joi n u s i n 199 3 b y also engineerin g expansionar y progress ? No t a t all . Th e bilateral defici t betwee n Americ a an d Japa n ha s reache d new peaks . Whateve r th e intention s o f Presiden t Willia m Clinton an d th e new Prim e Minister Morihir o Hosokawa , de fact o th e wea k Japa n GD P i s erodin g U.S . export s t o Japan a t th e sam e tim e tha t ou r degre e o f recover y i s pushing upwar d wha t w e import fro m Japan . Goo d inten tions an d loft y sentiment s canno t hea d of f increasin g fric tions ahead . No wonde r th e dolla r depreciates . Lynchin g a few spec ulators wil l no t solv e th e problem . Arm y surgeon s kno w that Go d an d Darwi n rel y o n maggot s t o clea n ou t th e wounds o f battle . No t ver y edifying , bu t that' s th e wa y things are . Speculator s ar e th e maggot s tha t Go d an d Darwin rel y o n t o clea n u p disequilibria . A n Invisibl e Hand, s o t o speak , lead s the m t o accomplis h wha t i s n o part o f thei r intention . Let' s no t g o overboar d praisin g those worms . Thank s t o th e vanit y o f governments , an d their plentifu l endowmen t o f stupidity— I mea n especiall y French governments!—the speculator s o n balance get well rewarded fo r thei r efforts . ( I lik e t o quot e tha t sag e o f Omaha, Warre n Buffet , th e richest man i n the world, wh o started ou t wit h a n MB A fro m th e Columbi a Busines s School. I n on e o f hi s memorabl e Berkshire-Hathawa y an nual reports , Buffe t observed : "I f yo u ar e i n a strang e poker gam e an d withi n hal f a n hou r yo u haven' t locate d 36

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who i s th e patsy—yo u are. " Government s ar e lik e th e Bourbons: The y lear n nothing , an d the y forge t nothing . They g o decade s no t recognizin g wh o th e patsie s ar e i n the game o f internationa l finance. ) For almos t 4 0 year s now , th e harmon y o f Japan-U.S . political relation s ha s bee n straine d b y th e irritan t o f a continuing an d growin g bilatera l payment s deficit . O f course, economist s neve r conside r bilatera l balanc e a s th e desideratum o f policy . I f Japa n wer e i n defici t wit h thir d parties wh o wer e i n equivalen t defici t wit h us , that woul d be an eve n mor e efficien t geographica l divisio n o f labor . Overall current balanc e is itself no proper goa l of policy . When Americ a befor e 191 4 wa s growin g th e wa y Kore a was growing in the 1970s , it was optimal an d not aberran t for th e developing society to be importing productive capi tal good s an d payin g fo r the m b y IOU s o r othe r form s o f capital contracts . Som e chroni c pattern s o f multilatera l current imbalanc e ar e signs of healthy equilibriu m an d no t of pathology o r predation . Indeed, w e kno w fro m th e Ohlin-Keyne s literatur e o n the transfer proble m tha t a sizeable Japanese surplus coul d be recycled b y prudent investin g in American assets , to th e benefit o f bot h regions ; an d tha t thi s coul d conceivabl y transpire unde r unchange d commodit y term s o f trad e an d without an y dolla r depreciatio n relativ e t o th e yen . Yes , many thing s promise d b y th e Toot h Fair y ca n tur n ou t to b e true : Dollar s unde r pillow s an d gian t molar s sur e to come . Japan ha s com e t o adulthood . I ofte n sa y tha t th e ad 37

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vantages o f bein g grow n u p shoul d no t b e exaggerated ; that ther e ar e only tw o a s far a s I can observe . As an adul t you ca n alway s pla y wit h ne w tenni s balls ; an d yo u don' t have to finis h what' s o n you r plate . There's no t muc h else . Seriously though , fo r Japa n t o b e a n adul t i s t o hav e th e power o f consent , whic h mean s als o th e powe r o f dissen t and refusal . Ther e wa s nothin g wrong with th e titl e of th e book, The Japan That Can Say No (Shintar o Ishihar a and Aki o Morita , Simo n an d Schuster , 1991) . Wha t wa s defective wer e th e issue s an d argument s i n th e book' s pages abou t wha t Japan shoul d tur n toug h on . On e o f th e privileges o f bein g a n adul t i s tha t yo u hav e th e righ t t o act childlike . Bu t doe s a n adult , o n reflection , reall y wan t to b e self-destructive ? Some Japanes e opinio n leader s say , a t leas t amon g themselves: "I f American s privatel y sav e muc h les s tha n the Japanese , an d unde r Reaganomic s publicl y dissav e enormously, the n economi c la w an d basi c arithmeti c dic tate tha t th e high-consumptio n regio n mus t hav e a ne t capital defici t an d th e higher-savin g regio n mus t hav e a net capita l surplus . So, what i s all the bellyachin g about? " True enough , an d I wa s on e o f th e first t o stres s ho w macro la w mus t wor k out . Belligeren t Americans , a t leas t in private , similarl y sometime s say : "S o lon g a s Japanes e investors wil l spontaneousl y wan t t o recycl e tha t surplu s by buying up American skyscrapers , golf courses , and eve n Brooklyn Bridges—the n ther e nee d b e n o uncomfortabl e appreciation o f th e ye n t o challeng e an d ve x Japanes e 38

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producers. So , what i s al l th e bellyachin g abou t whe n th e dollar floats dow n fro m 26 0 t o 10 4 ye n t o th e dolla r because Japanese investor s behav e otherwise? " One countr y canno t dictat e t o anothe r wha t it s folk ways an d more s mus t be . If Japanese wan t t o save , who i s to sa y the m nay ? I f Japanese trul y prefe r thei r ow n kind s of production, wh o ha s the right to tell them how t o spen d their legall y earne d incomes ? I f everywher e technolog y were appropriat e fo r deregulate d laissez-faire , the n chang ing Schumpeteria n knowledg e an d dynami c preferenc e al terations coul d stil l certainl y har m an d benefi t differen t regions differentl y bot h i n qualit y an d quantity . I f al l gov ernments ha d lon g sinc e subscribe d i n ful l measur e t o GATT's pures t o f fre e trade , on e coul d imagin e a n inter national orde r i n whic h n o sovereignt y wa s accorde d th e right t o complai n o r as k fo r interference s t o redres s th e fortuitous los s of previous advantage . We d o no t liv e i n suc h a world. N o on e come s int o th e Court of World Opinio n wit h clean hands on issues of fre e trade. D e fact o an d d e jure , w e liv e i n a n interdependen t community o f mixe d economies . America n resource s ar e depended o n t o hel p protec t th e securit y o f Europ e an d Asia. So long a s a potential activisti c macroeconomic pro gram b y th e Ban k o f Japa n an d th e Ministr y o f Financ e can hav e helpfu l effect s o n Japa n an d a t th e sam e tim e have significan t externa l effect s o n America , i t i s rathe r natural tha t ou r leader s an d citizenr y shoul d pontificat e against passiv e an d belate d action s b y thes e Japanes e 39

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agencies. Whil e th e Japanes e politica l syste m manifestl y has th e righ t t o shru g of f suc h externa l preaching s an d criticism, th e questio n w e mus t eac h as k o f ou r adul t selves i s this : D o w e wan t t o stan d o n ou r right s t o d o whatever w e wish , whe n experienc e an d reaso n sugges t that doin g s o i s likel y i n th e en d t o b e self-destructiv e a t home an d needlessl y harmfu l abroad ? Th e grown-u p Ja pan tha t ca n sa y no , I a m arguing , shoul d b e th e cann y and friendl y Japa n tha t ca n ofte n sa y yes , an d no t infre quently sa y maybe . Germany an d Japa n ar e ofte n brackete d togethe r i n criticism a t no t pullin g thei r macroeconomi c weight . I have n o sentimenta l sympath y fo r th e Bundesbank , bu t I think suc h bracketin g i s unfair t o Germany . Afte r reunifi cation o f Eas t an d West , German y doe s have som e specia l problems tha t stagnatin g Franc e an d Japa n d o no t have . M3 doe s gro w fas t i n Germany . Suppl y shock s fro m th e Eastern zon e d o involv e inflatio n fear s tha t ar e no t neces sarily paranoid . S o Germany' s slownes s t o reduc e interes t rates an d sav e th e Europea n Currenc y Unio n i s under standable, even if perhaps no t forgivable . But Japan' s foll y i s self-inflicted . Th e ne w hea d o f th e Bank o f Japan , apparently , doe s no t kno w hi s trade . Th e bureaucrats fro m Toky o Universit y La w Schoo l neve r di d know economics , an d the y have autonomousl y adhere d t o fiscal austerit y afte r i t cease d t o b e desirable . Th e ol d LDP kne w preciou s littl e abou t economics . Alas , the ne w Coalition ha s s o fa r show n littl e bette r sense , eithe r i n deed o r i n utterance . I hop e NY U economist s ca n d o a 40

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good tur n fo r Japa n i n th e futur e b y persuadin g a chang e in opinion , jus t a s MI T economist s di d Franc e a favo r when ou r lette r t o th e Financial Times helpe d destro y th e pegged E C parties tha t wer e asphyxiatin g France , Britain , Italy, an d Spain .

41

CHAPTER 2

Trade Negotiations an d Agreements: A Trend towar d Further Liberalizatio n October 18, 1993

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I N T R O D U C T O R Y REMARK S Ther e ar e few topic s o f mor e importanc e in today' s economi c worl d tha n internationa l trade , trad e negotiations, an d trad e agreements . It' s a wonderfu l tim e to teac h microeconomics , becaus e th e fron t pag e o f th e newspaper i s filled wit h al l kind s o f trad e issues—an d other page s o f th e newspape r ar e a s well. We ar e fortunat e toda y t o hav e a ver y distinguishe d panel wit h u s t o discus s Trad e Negotiation s an d Agreements: Th e Tren d towar d Furthe r Liberalization . Congressman Mik e Syna r wil l giv e a view fro m Washing ton o f NAFT A an d it s implication s fo r th e res t o f th e world; Soshich i Miyachi , a TV commentato r fro m Toky o and chie f commentato r o n th e Worl d Busines s Satellit e Program there , wil l follow . Ou r nex t speake r wil l b e Am bassador Seki , the Consu l Genera l o f Japan i n New York , and finally ou r colleagu e Professo r Pau l A. Samuelson wil l sum i t al l u p an d war n u s abou t som e things . H e sai d before tha t i t wa s goin g t o b e a littl e bi t o f Cassandr a today.

ROBERT KAVESH :

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MIKE SYNA R This i s a grea t opportunit y fo r me , an d I wan t t o than k New Yor k Universit y an d Ster n fo r invitin g me to be here. Let me tell you a little bit about myself. I'm a United State s Congressman fro m Oklahoma . I a m fro m Muskogee , Oklahoma. Yes , you'v e finally me t one : A n Oki e fro m Muskogee. My backgroun d i s that I went to the University o f Okla homa, wher e I was a tripl e majo r i n accounting , econom ics, an d finance. I the n wen t t o Northwester n University , where I go t m y master s i n management . I spent a yea r i n Edinburgh, Scotlan d doin g post-graduat e wor k i n eco nomics a t Edinburg h University , an d the n I came bac k t o the Universit y o f Oklahom a an d di d m y la w degre e i n ta x specialty. I remember th e words o f m y father a s I came of f the platform a t graduation. H e grabbed m y hand an d said , "Son, you'r e th e mos t over-educate d ranche r I'v e eve r met." (M y famil y i s a fourt h generatio n ranchin g famil y from th e Stat e of Oklahoma. ) I wen t t o Congres s a t th e rip e ol d ag e o f 27 . I' m no w 42, i n m y eight h term . M y distric t i s a rura l are a aroun d Tulsa, Oklahoma , an d it s majo r product s obviousl y ar e agricultural product s an d energ y itself . Sinc e goin g t o Washington I'v e tried t o focu s m y career on issues that ar e not onl y vita l t o Oklahoma , suc h a s agricultur e an d en ergy, bu t als o a littl e bi t mor e globa l i n nature : th e issue s 46

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of environment , a s wel l a s th e futur e economi c statu s o f our countr y i n thi s worl d tha t i s changin g s o quickl y around us . I gav e yo u tha t littl e backgroun d becaus e I'v e com e t o a conclusio n a s a congressma n fro m a stat e that' s no t necessarily alway s bee n i n play whe n w e talk abou t trade . The conclusio n i s tha t fre e trad e i s goo d fo r ou r country , and fre e trad e i s good fo r al l countries. That i s why it is so vital a s w e loo k a t th e numbe r o f agreement s tha t ar e going t o b e considere d i n th e nex t coupl e o f month s tha t we remember tha t fre e trad e i s a winner fo r everyone . I've als o com e t o th e conclusio n tha t th e NAFT A agreement tha t i s before Congres s no w i s a winner fo r th e United States , a winne r fo r Mexic o an d Canada , an d a winner fo r th e world . A s i s ofte n th e case , however , w e have problem s sellin g thes e trad e agreement s becaus e to o often w e lose the opportunity t o have a debate based upo n the facts . NAFT A an d futur e trad e agreement s wil l b e heavily lade n wit h politic s an d fear . A s a result , w e wil l find that th e issues of protectionis m an d lac k o f liberaliza tion wil l continu e t o plagu e u s a s w e si t dow n a t table s seeking bilatera l an d multilatera l type s o f agreement s t o try to wor k thes e things out . Understanding what' s behin d th e fear, politics , and pro tectionism i s ver y important . Th e politica l scen e i s prett y concise. Th e Republican s wh o negotiate d th e NAFT A agreement o f year s pas t ar e uncomfortabl e wit h Bil l Clin ton, no t onl y o n thi s issu e bu t o n othe r issues , an d fee l very littl e obligatio n t o champio n th e agreemen t the y es 47

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sentially created . The fac t i s that th e Republicans ar e lead erless now, an d fo r al l practical purposes, I say as a Democrat, brain dead . They have relied upon Ros s Perot as their head unti l furthe r notice , an d s o Ros s an d hi s loos e facts are dictatin g man y o f th e margina l Republica n theorie s on this . Democrats, o n th e othe r hand , wh o di d no t negotiat e the deal , fee l som e obligatio n i n a ne w internationa l set ting t o b e th e champion s o f fre e trade . Ye t they'r e bein g asked t o marry u p with a group o f businesse s an d busines s interests wit h whic h the y ha d ver y little , i f any , relation ship durin g th e decad e o f th e eighties . I n fac t they'r e ver y uncomfortable wit h thei r ne w partners, given the fac t tha t they ar e no w havin g t o tak e o n bas e constituencie s tha t have historicall y bee n th e backbon e o f th e Democrati c Party, namel y organize d labo r an d workin g me n an d women. Th e fea r behin d no t onl y NAFTA bu t othe r trad e agreements reall y center s o n thes e workin g me n an d women o f the countries tha t will be affected . In ou r ow n country , wit h respec t t o NAFTA , wha t we're finding i s tha t we'r e no t reall y debatin g th e issu e o f the impac t o f NAFT A o n labor . We'r e reall y debatin g th e consequences o f wha t ha s bee n fo r fifteen t o twent y year s a stead y changin g o f th e workplac e i n th e Unite d States . Men an d wome n i n th e wor k force , bot h organize d an d unorganized, find themselve s fo r th e first tim e havin g a t least som e contro l ove r th e future , thei r ow n futur e a s they se e it . Th e eightie s t o the m wa s a decad e wher e paper chasin g took precedenc e ove r manufacturing, wher e 48

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corporations becam e insensitiv e t o jo b layoffs , wher e col lective bargainin g agreement s revolve d aroun d cuttin g back o n benefit s suc h a s healt h care , an d wher e jo b secu rity becam e th e drivin g forc e behin d mos t negotiations . Lay o n to p o f tha t thi s ne w decad e an d th e ne w agreements, an d workin g me n an d wome n fea r tha t NAFTA i s jus t anothe r ston e throw n a t them , o r anothe r brick tha t they'r e goin g t o hav e t o carry . I find mysel f trying t o tal k t o workin g me n an d wome n i n m y distric t and throughou t th e countr y o n th e issu e o f NAFTA , an d very rarely is it the issue of NAFTA a t stake. The real fear s are a consequenc e o f everythin g tha t happene d t o labo r during th e decad e o f th e eighties . Now sellin g NAFTA o r sellin g any fre e trad e agreemen t is in m y estimatio n a majo r marketin g job . We have t o g o around th e channel s tha t w e woul d normall y use , whic h are statistical an d factual , t o dea l man y times directly wit h peoples' emotions . I migh t ad d t o ou r Japanes e friend s that som e o f thes e recommendation s I' m makin g fo r m y own countryme n coul d b e use d i n Japa n a s well . I n m y travels there I have foun d tha t th e fears tha t Japanese Die t members hav e wit h respec t t o dealin g wit h thei r constitu encies closel y paralle l thos e i n our ow n country . First o f al l w e hav e t o convinc e workin g me n an d women i n th e Unite d State s an d othe r countrie s tha t ar e affected b y trad e agreement s tha t the y ar e goo d fo r the m in th e lon g run , no t onl y fo r themselve s bu t fo r thei r children. I don't thin k yo u ca n d o i t through numbers . A s you've see n o n T V her e i n Ne w York , bot h side s hav e a n 49

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unlimited advertisin g budget , an d eac h i s claimin g tha t 700,000 job s wil l b e create d o r 700,00 0 job s wil l b e lost , and somewher e i n the middl e is the truth . I wa s i n Mawki , Oklahoma , a tow n abou t twenty-fiv e miles sout h o f Tulsa , las t year , an d I wa s goin g throug h Ball Glass , whic h i s headquartere d i n Indiana . I t employ s about 70 0 peopl e t o mak e th e jar s an d glasswar e use d throughout th e marketin g o f Kraf t products . Befor e m y eyes som e tin y littl e jar s mad e thei r wa y dow n th e assem bly line . The y looke d lik e Ke n an d Barbi e Miracl e Whi p mayonnaise jars . Really smal l jars . When w e got to th e bac k o f the factory an d were sittin g in th e coffe e roo m I aske d on e o f th e labo r stewards , "What wa s tha t goin g dow n th e assembl y line? " H e said , "Those wer e miniatur e Miracl e Whi p mayonnais e jars. " "Where ar e the y going? " I asked. "They'r e goin g t o Mex ico." I said, " I wa s tol d tha t i f NAFTA passed , on e o f th e first industrie s tha t woul d reall y fee l th e impac t woul d b e the glas s industry. " "Well , I don' t kno w abou t that, " h e said, "bu t w e kno w w e hav e $3 0 millio n wort h o f con tracts ove r th e nex t te n year s righ t her e i n thi s plant. Thi s is going to mean ver y good employmen t fo r ou r workers. " I aske d wh y th e jar s ar e s o small , an d h e said , "Well , there ar e tw o separat e reasons . First , fo r th e Mexica n market al l the y ca n affor d i s tha t siz e o f Miracl e Whip ; and second , sinc e refrigeratio n i s no t commo n i n Mexic o it has to b e a one-time use item." I thought t o myself that' s the kin d o f innovation , th e kin d o f spirit , th e kin d o f things that hav e made America a commanding presenc e i n 50

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the worl d market . I t ha s t o b e repeate d ove r an d ove r again, s o tha t America n worker s ca n hav e confidenc e tha t if th e rule s ar e fai r an d leve l w e ca n compet e an d wi n a s many battle s a s we'll los e in this trade war . So the first thin g is selling labor o n th e idea, an d I thin k the bes t wa y t o d o i t i s t o us e examples . Fo r instance , there ar e many rancher s i n my state of Oklahom a wh o ar e absolutely convince d tha t i f we sig n a NAFTA agreement , the Mexican s wil l floo d th e marke t wit h cattl e an d there fore cattl e price s wil l b e force d down . I f on e ha s eve r traveled t o Mexico, if one has ever looked a t the terrain o f Mexico, on e has t o ask , a s I have, where they ar e going t o put al l thos e cattle . The y don' t hav e th e capacit y o n thei r land t o d o it . Suc h fea r ca n b e alleviate d the n b y a simpl e description o f th e situatio n fo r ou r cattleme n usin g anec dotal information . The secon d wa y t o sel l fre e trad e agreement s fo r coun tries like the United State s and other s is by recognizing th e benefits. NAFTA , fo r example , show s u s somethin g tha t we coul d preac h al l ove r th e world . Th e NAFT A agreement i s th e firs t internationa l trad e agreemen t tha t includes environmenta l controls . Tha t benefi t alon e wil l set precedent s obligin g al l treatie s tha t ar e bein g negoti ated presentl y o r i n th e futur e t o includ e environmenta l concerns of the planet. That's important, becaus e it creates a constituenc y fo r thes e treatie s tha t yo u wouldn' t natu rally have. Trying to emphasiz e the environmental benefit s can help countrie s brin g thei r constituencie s around . When thos e wh o hav e oppose d NAFT A i n m y ow n 51

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district, an d le t m e assur e yo u that' s abou t 7 0 percent , finally ge t down t o th e hub o f th e debate , it comes t o this . I look acros s the table to them an d I say, "Describ e fo r m e what happen s i f w e don' t sig n it . Doe s th e environmen t get better ? Ar e ther e an y rule s o n healt h an d safety ? I s there an y tyin g o f wage s t o productivity ? Ar e ther e an y markets developed ? O r d o we give unilateral tarif f contro l back ove r t o th e Mexican s an d th e Canadian s an d ou r trading partner s t o a poin t wher e w e coul d literall y b e crushed? Ar e w e willing , i f w e don' t sig n NAFTA , t o literally tur n ove r probably th e second-larges t marke t out side o f Chin a t o th e Japanes e an d th e German s an d th e French an d other s wh o ar e alread y ther e an d prepare d t o take advantag e o f it? " These are questions that I think ca n really tak e th e oppositio n an d as k the m fo r th e burde n o f proof t o sho w th e consequence s o f no t movin g i n tha t di rection. Another thin g I thin k i t i s importan t t o understan d i s something I learne d i n Japa n las t Augus t a t a conferenc e on "Globa l Legislature s o n a Balanced Environment. " To gether wit h a numbe r o f othe r member s o f Congres s an d the Unite d State s Senate , I me t wit h Japanese , Russian , and Europea n parliamentarians—an d cam e awa y con vinced tha t i n th e cas e o f NAFTA , i f i t fail s i t wil l ver y likely se t domino s i n motio n whic h coul d mak e national ism an d protectionis m th e orde r o f th e da y aroun d th e world. Th e Unite d State s i s th e larges t marke t an d th e largest tradin g partner . I f w e can' t ge t ou r ow n hous e i n order, i f w e can' t convinc e ou r ow n peopl e o f th e merit s 52

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of thi s fre e trad e agreement , the n w e wil l hav e les s lever age o n th e framewor k agreement , o n GATT , o n ever y agreement w e ar e presentl y negotiating , bot h multilatera l and bilateral . I thin k w e ca n sel l NAFT A a s a necessar y basis fo r th e futur e o f al l th e othe r trad e agreement s w e have. Let m e conclud e m y remark s wit h a prediction . A s history ha s shown , mos t agreement s an d mos t treatie s tha t we've ha d t o dea l wit h i n th e Unite d State s star t wa y behind. Thos e o f yo u wh o ar e ol d enoug h t o remembe r the Panam a Cana l Treat y kno w tha t ther e wa s a 3 t o 1 opposition i n th e Unite d State s upo n it s introduction , an d it barel y passe d a t th e end . Tha t seem s to b e the cas e no w with NAFT A an d th e othe r trad e agreement s tha t ar e being negotiated . W e starte d wa y behind . I think tha t th e opposition t o NAFT A peake d abou t thre e weeks ago , an d we hav e steadil y mad e progres s i n a numbe r o f area s i n moving member s o f th e House o f Representative s fro m n o to undecided , an d som e fro m undecide d int o th e ye s cat egory. We ar e schedule d t o vot e on NAFT A o n th e floor o f th e House o f Representative s o n Novembe r 17 , 1993 , an d i f it passes th e Hous e the n o n Novembe r 1 8 i t will go to th e Senate. I don' t thin k it' s goin g t o pas s b y mor e tha n five votes. I t wil l requir e Republican s t o overwhelmingl y support it , an d Democrat s wh o presentl y ar e not support ing it to put u p som e number s tha t would represen t nearl y half th e caucus o f th e Democratic party. I also predict tha t what happen s o n Novembe r 1 7 an d 1 8 wil l hav e long 53

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term implications on a variety of fronts, whethe r JapaneseUnited State s relationships , GATT , o r anythin g else . I n less tha n a mont h then , i n fac t a mont h t o th e day , we as Americans , an d w e wh o vie w thes e worl d trad e agreements a s important part s o f the future o f the world , will hav e a prett y goo d blueprin t o f wha t th e futur e o f trade protectionis m an d liberalization i s all about .

Nort h Americ a i s not th e onl y plac e i n the worl d wher e move s towar d trad e liberalizatio n an d market opening s ar e occurring . Japa n i s another . We'r e fortunate toda y t o hav e Soshich i Miyachi , a majo r T V commentator i n Japan, a n expert i n macroeconomics an d international economi c policy , an d th e autho r o f nin e books. H e i s goin g t o spea k o n deregulatio n an d marke t opening in the Japanese economy . ROBERT KAVESH :

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SOSHICHI MIYACH I My topi c fo r toda y ha s t o d o wit h th e ne w Japanes e administration, th e firs t i n thirty-eigh t year s tha t i s no t LDP (Libera l Democrati c Party) . Specificall y I would lik e to touc h upo n deregulation , on e o f th e foca l point s o f th e new administration . I feel tha t th e issu e o f deregulatio n i n Japan ha s important implication s fo r th e world economy . Mike Syna r wil l probabl y agre e wit h m e tha t i n th e United State s a lot o f peopl e star t thei r presentation s wit h a joke . I was thinkin g abou t a jok e tha t I could begi n m y presentation with , bu t I couldn't com e up with anything . I feel ther e i s some fairl y dar k humor , however , inheren t i n the strang e an d comple x regulator y syste m tha t Japanes e bureaucrats hav e create d i n our country . As a n ombudsma n fo r th e Japanes e governmen t a t th e Office o f Trade an d Investment , I have served fo r si x years on a special grievance resolutio n group . Our functio n i s to resolve complaint s fro m foreigner s wh o hav e ru n int o regulatory problem s tryin g t o sel l their product s i n Japan . It i s clea r tha t w e hav e t o mak e som e ne w law s i n ou r country, an d b y sharin g a fe w o f m y personal experience s with ou r curren t restriction s I hop e t o giv e yo u a bette r understanding o f what i t is we ar e trying t o change . A Belgia n wallpape r compan y cam e t o u s wit h a com plaint concernin g Japanese safet y standards . The Japanes e standards ar e base d upo n a tes t i n whic h th e wallpape r i s 55

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set o n fire an d th e amoun t o f smok e generate d b y th e fire is observed . Belgia n safet y standard s ar e base d upo n th e EU code . The y se t fire t o a piec e o f wallpape r an d the y look a t ho w fas t i t burns. Although th e wallpaper i n ques tion ha d me t th e Europea n standards , th e Belgia n com pany wa s prohibite d fro m sellin g thei r produc t i n Japa n because the y ha d no t submitte d i t t o th e Japanes e safet y test. Sinc e th e Japanes e tes t prett y muc h follow s th e line s of "wher e there' s smok e there' s fire" w e felt th e Europea n test wa s equivalent , an d w e recommende d tha t th e Minis try o f Construction , whic h ha s jurisdictio n ove r thi s regu lation, shoul d permi t th e product t o b e imported . The Ministr y o f Constructio n referre d u s t o th e Civi l Inspection Association , whic h i s directl y responsibl e fo r performing th e safet y tests . When w e contacte d i t w e dis covered th e tru e natur e o f th e problem . Th e Associatio n was i n essenc e a grou p o f insider s fro m Japanes e industr y backed b y th e Ministr y o f Construction , an d anyon e wh o wanted t o becom e a membe r fro m th e outsid e ha d t o pa y exorbitant fees . I t wa s extremel y difficul t i n fac t fo r a n outside compan y t o becom e a membe r o f th e associatio n or eve n t o ge t it s product s tested . S o thes e regulation s basically hindere d privat e initiative , an d a t th e sam e tim e served t o protect a Japanese domesti c industry . Another exampl e o f th e wa y ou r regulator y syste m works relate s t o Japanes e supermarkets . The y sel l food , prepared food , tha t yo u ca n bu y an d tak e hom e with you . If, however , th e preparation o f that foo d wa s don e outsid e the supermarket , eac h an d ever y on e o f th e specifi c kitch 56

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ens i n whic h th e foo d wa s prepare d woul d hav e t o b e authorized separately . Yo u als o nee d a separat e licens e t o sell mil k products . This , I believe, i s simpl y overinterven tion o n th e part o f th e Japanese bureaucracy . It shoul d b e note d a t thi s poin t tha t Japanese industria l policies hav e certainl y no t affecte d al l industrie s i n th e same way . Whe n w e conside r th e protectio n o f domesti c industry i n Japa n som e characteristic s see m t o recu r re peatedly, bu t a t th e sam e tim e strikin g difference s ca n b e seen whe n eac h industr y i s considere d individually . Th e auto industry , fo r instance , i s somewha t o f a n exceptio n to th e rul e i n Japan . Fo r on e thin g n o law s hav e bee n specifically drafte d pertainin g t o th e Japanese aut o indus try, althoug h hig h tariff s d o protec t th e Japanes e marke t to a certain extent . Japanese aut o maker s hav e historicall y competed fiercely i n an d amon g themselves , bu t whe n necessary the y hav e als o bee n abl e t o cooperat e wit h eac h other. Th e Japanese electronic s industr y an d th e assembl y industry i n general , o n th e othe r hand , appea r t o hav e benefited considerabl y b y th e multitud e o f regulation s which specificall y gover n thei r operations . The Hosokawa administratio n i s trying to place deregu lation a t th e to p o f th e lis t o f prioritie s fo r economi c policy, an d I personally hop e an d pra y tha t thi s wil l pro ceed. I f i t does , I believ e i t wil l contribut e greatl y t o th e changes tha t ar e occurrin g throughou t th e Japanese econ omy an d th e Japanes e marke t mechanism . A t th e sam e time, however , I hav e som e doubts . Th e Japanes e econ omy i s ver y wea k a t th e moment . T o b e mor e specific , i n 57

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1992 th e Japanese econom y gre w i n real term s a t a rate of 0.8 percent . I f w e tak e nationa l incom e int o account , w e may actually b e looking at a negative growth rate . Deregulation, eve n i f i t i s pursued , i s no t goin g t o giv e Japanes e industry th e capabilit y t o absor b th e kind s o f cost s tha t are goin g t o b e require d t o adjus t successfull y t o th e fluc tuations i n our economy . Compared wit h th e las t quarte r o f fiscal 199 3 (Octobe r to December) , rea l growt h rate s wil l probabl y b e abou t 0.3 percen t fro m Januar y t o March o f 1994 . If those levels are achieve d ther e wil l b e zer o growt h i n th e Japanes e marketplace, whic h mean s tha t ther e ha s t o hav e bee n negative growt h before . W e hav e starte d lookin g ahea d t o fiscal 1994 , an d righ t no w th e estimate s ar e somewher e along the line s of 1 percent. Eve n leve l growth i s based o n a sudde n recovery , o r a n assumptio n o f sudde n recovery , in the latte r hal f o f fiscal 1994 . According t o m y recollection , durin g hi s first adminis tration Presiden t Reaga n conducte d ver y large-scale dereg ulation. At the same time, however, h e introduced a majo r reduction i n taxes . H e stimulate d persona l consumptio n in thi s wa y i n orde r t o stimulat e th e America n econom y as a whole . I t wa s th e reductio n i n taxe s togethe r wit h deregulation tha t brough t abou t th e boo m i n th e Reaga n years, I believe . I n lookin g onl y a t deregulation , withou t the ta x refor m component , th e Hosokaw a administratio n is settin g asid e th e mos t importan t aspec t o f Ronal d Reagan's strategy . I a m concerne d therefor e abou t resis 58

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tance withi n th e Japanes e econom y towar d th e propose d deregulation. In an y consideratio n o f deregulation , i t i s importan t t o have som e perspectiv e o n th e bureaucrac y tha t cam e u p with al l thes e regulation s i n th e first place . Afte r Worl d War I I Japan neede d t o strengthe n it s internationa l com petitiveness. Developin g apac e wit h th e genera l growt h o f the Japanes e economy , th e bureaucrac y naturall y intro duced industria l policie s wit h tha t purpos e i n mind . In tended t o presen t a barrie r t o an y ne w entr y int o th e marketplace, th e regulation s tende d t o b e oligopolisti c b y their ver y nature . In effec t a n "iro n triangle " wa s forge d o f politics , bu reaucracy, an d business , fortifie d b y th e varie d successio n of law s an d regulation s tha t wer e promulgate d throug h the postwar years . The regulatory polic y that develope d a s a resul t o f thes e laws , however , ha s create d obstacle s fo r Japanese privat e industr y a s ofte n a s i t ha s serve d t o pro tect tha t industry . Th e questio n o f ho w t o dismantl e th e triangle i s a majo r proble m no w i n Japa n an d lie s a t th e heart o f th e political debate . One wa y t o brin g abou t th e result s w e see k woul d involve changin g the very structure s b y which governmen t and industr y i n Japa n relat e t o eac h other . Japanes e bu reaucrats ofte n provid e basi c administrativ e guidanc e t o industries, and w e will need t o revis e our domesti c laws t o change or eliminat e thi s practice. The Bush administratio n pointed ou t th e need t o establis h som e kind o f dialogu e t o 59

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begin t o accomplis h this , an d suc h a dialogu e ha s i n fac t begun wit h th e Structura l Impedimen t Initiative s (SII) . As a resul t o f th e SI I talks, severa l Japanese law s have i n fac t already bee n revised . Our antimonopol y act , fo r instance , ha s bee n calle d th e least enforce d la w i n th e world , an d tightenin g i t u p ha s been one of the priorities of the Hosokawa administration . I believ e tha t i n th e shor t ru n th e administratio n wil l b e unsuccessful i n thi s goal , simpl y becaus e ther e wa s suc h a lack o f enforcemen t i n th e past . However , penaltie s hav e been increase d an d th e Japanes e commercia l cod e itsel f has been strengthene d t o more closely resemble the American code . A s th e Bus h administratio n di d befor e him , although hi s method s an d styl e ar e different , I believ e President Clinto n wil l continu e t o attemp t t o influence th e direction o f Japanes e industria l polic y b y pushin g fo r th e revision o f mor e domesti c laws in the future .

Ambassado r Hiromot o Seki , Consu l General o f Japa n i n Ne w York , ha s bee n a diploma t fo r most o f hi s career . I n thi s capacit y h e has ha d a chance t o see a great dea l o f the world, an d he' s going to spea k t o u s next abou t Japanese polic y makin g i n general .

ROBERT KAVESH :

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H I R O M O T O SEK I The subjec t o f today' s discussion , "Trad e Negotiation s and Agreements : A Trend towar d Furthe r Liberalization, " is very pertinent t o th e event s o f th e day . I believe that th e negotiations an d agreement s bein g worke d ou t no w t o liberalize trad e wil l ultimatel y enabl e al l th e partie s in volved t o enjo y th e benefit s o f economi c interchang e o n a global scale . The Urugua y Roun d o f th e GAT T i s on e o f th e mos t important o f th e curren t negotiation s relatin g t o globa l trade. Japan, wit h th e cooperatio n o f it s tradin g partners , is workin g har d fo r it s successfu l conclusion . Thi s pas t July, th e participant s a t th e Toky o Summit—Canada , th e European Union , th e Unite d States , an d Japan—issue d a joint statemen t reaffirmin g thei r determinatio n t o buil d a free trad e syste m an d t o conclud e th e Urugua y Roun d b y the en d o f thi s year. The statemen t calle d fo r th e complet e elimination o f tariff s o n a n extensiv e lis t o f product s tha t included pharmaceuticals , constructio n equipment , medi cal equipment , furniture , far m equipment , an d spirits . I believe tha t thi s kin d o f agreemen t wil l significantl y pro mote th e successfu l conclusio n o f th e Urugua y Round . At th e sam e tim e a s th e Toky o Summit , bu t separately , President Clinto n an d the n Prim e Ministe r Miyazaw a were announcing th e framework fo r a new economic part nership betwee n Japa n an d th e Unite d States . Their meet 61

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ing reflecte d a seriou s commitmen t b y bot h countrie s t o ironing out problems in their trade relationship. They hav e provided a structur e fo r ongoin g consultations , includin g biannual meeting s o f th e head s o f th e governments , wit h the goa l o f substantiall y increasin g acces s an d sale s o f competitive foreig n good s an d service s i n bot h countrie s through marke t openin g an d othe r economi c measures ; increasing investment ; promotin g internationa l competi tiveness; and enhancin g bilatera l economi c cooperation . Under th e term s o f thi s agreement , Japa n wil l activel y pursue th e objective s o f promotin g stron g an d substantia l demand, an d increasin g marke t acces s t o competitiv e for eign good s an d services . Japan intend s t o achiev e a highl y significant decreas e i n it s curren t accoun t surplu s an d t o promote a significan t increas e i n globa l import s o f good s and services , including , o f course , thos e fro m th e Unite d States. The Unite d State s i n tur n wil l pursu e th e objectiv e of substantiall y reducin g it s budge t defici t b y promotin g domestic saving s an d strengthenin g it s internationa l com petitiveness. Although th e framewor k doe s mentio n set s o f objectiv e trade criteria , i t wa s no t intende d t o includ e numerica l targets. Settin g numerica l target s i s a ba d ide a fo r man y reasons. Fo r on e thin g i t i s base d upo n a fals e premise , because th e Japanes e governmen t coul d no t contro l th e activities o f Japanes e companie s eve n i f w e wante d i t to . Second, b y settin g numerica l target s on e i s trying t o man age trade. Why woul d anyon e want t o encourage this kin d of governmen t contro l ove r economi c activities ? Third , 62

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numerical target s woul d hur t rathe r tha n suppor t Ameri can competitiveness . I f yo u guarante e a shar e o f th e mar ket t o America n companies , i t mean s certai n companie s will b e selectivel y rewarde d whethe r the y produc e high quality product s o r not . Thi s i s clearl y no t i n America' s best interest . I believ e th e mos t importan t argumen t agains t numeri cal targets , however , wa s th e on e lai d ou t i n a n ope n letter i n 199 3 t o Presiden t Clinto n an d Prim e Ministe r Hosokawa b y ove r 3 0 leadin g economists , includin g fou r Nobel Laureates . On e o f them , Professo r Pau l A . Sam uelson, i s wit h u s o n thi s pane l today . Thes e eminen t economists al l believ e tha t numerica l target s woul d har m Japan-U.S. trad e relation s an d th e entir e worl d tradin g system. A mor e positiv e effor t t o reduc e Japan' s trad e surplu s was th e announcemen t b y th e Hosokaw a administratio n on Septembe r 16 , 1993 , jus t on e mont h ago , o f it s thir d economic packag e t o b e unveile d i n th e pas t thirtee n months. I t i s a substantia l effor t t o rekindl e th e economy . Calling fo r ove r ¥ 6 trillio n i n governmen t spending , th e plan include s wid e sweepin g measure s t o deregulat e th e economy. Th e 9 4 item s o f deregulatio n wil l hav e a direc t impact o n th e expansio n o f domesti c deman d an d th e promotion o f imports , an d shoul d thereb y hel p Japan ful fill it s obligatio n t o th e balanc e o f trade . A s Miyach i warned earlier , th e effort s fo r deregulatio n i n Japan , al though a ste p i n th e righ t direction , ma y encounte r oppo sition. I certainly hope , a s a consume r mysel f i n Japanes e 63

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society, tha t th e effort s fo r deregulatio n wil l prevai l ove r any bureaucrati c o r othe r oppositio n tha t ma y exis t i n Japan an d wil l hav e a ver y seriou s impac t upo n th e func tioning of th e Japanese economy . The ne w administratio n o f Prim e Ministe r Hosokaw a has pledge d t o brin g abou t political , economic , an d ad ministrative reform . Hi s propose d economi c measure s show definit e progres s i n th e righ t direction . Th e mos t recent committe e appointe d t o com e u p wit h a pla n fo r economic refor m wil l releas e a repor t i n th e nea r futur e outlining furthe r step s t o b e taken . Th e en d resul t shoul d be a more open syste m that i s beneficial t o consumers, an d a mor e positive contribution b y Japan overal l to the worl d trading system . It migh t b e har d t o imagin e jus t ho w seriou s Japan' s current recessio n is , an d wh y thes e reform s ar e s o neces sary. Let me give you som e examples : During th e pas t thre e year s Japan's stoc k marke t fel l a t one tim e ove r 6 0 percent . Despit e slowl y recovery , i t i s still onl y a t 5 6 percen t o f it s highes t level . The residentia l real estat e marke t plummete d 5 0 percen t i n tw o years ; industrial productio n droppe d ove r 8 percent i n on e year ; and corporat e bankruptc y ha s triple d sinc e 1990 . I t i s estimated tha t roughl y 7 t o 8 trillio n dollars ' wort h o f asset values , a figure abou t 2 0 t o 3 0 percen t large r tha n the U.S . annua l GNP , ha s bee n eliminate d b y thes e de clines. As a result, the recession ha s had a direct impact o n the volume o f Japanese imports . American export s t o Japa n increase d annuall y b y 1 3 64

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percent fro m 1985 , th e yea r o f th e Plaz a Accord , unti l 1991—the larges t increas e i n foreig n export s tha t th e United State s has ever experienced wit h an y country. Onl y in 199 2 di d the y recor d a modes t decreas e (0. 8 percent) . Coupled wit h America' s impor t growt h o f 6. 2 percent , reflecting th e beginning o f economi c recovery i n this coun try, th e trad e imbalanc e widened . Japan' s recessio n there fore ha s ha d a clea r impac t o n th e trad e balance . Prim e Minister Hosokawa' s economi c package , throug h expan sion an d deregulation , take s sur e step s i n th e directio n of recovery . I'd lik e t o mak e a n importan t poin t abou t America' s trade defici t wit h Japan . Th e number s ca n b e somewha t misleading. Fo r example , measure d i n dolla r term s w e se e an increase in the trade imbalanc e durin g the second quar ter o f 199 2 a s compare d t o th e secon d quarte r o f 1993 . However, whe n measure d i n ye n ther e i s a decreas e i n trade imbalanc e whe n comparin g thes e two periods . Japanese globa l export s hav e alread y starte d t o declin e i n ye n terms in recent months . I t is crucial t o stud y thes e facts . NAFTA i s currentl y th e mos t talke d abou t issu e i n th e United States . Sinc e NAFT A ha s alread y becom e on e o f the mos t controversia l domesti c issue s i n America n poli tics, however , I am hesitan t t o expres s m y persona l view s on it . I only hop e tha t NAFT A advocate s wil l no t overl y emphasize th e merit s o f creatin g a n exclusiv e tradin g block fo r th e Nort h America n Continent . A t th e sam e time I hope it s opponent s wil l no t giv e an overl y distorte d view o f possibl e industria l dislocatio n b y NAFTA , a s i f 65

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any fre e internationa l trad e woul d b e bound t o har m th e American economy . I feel tha t th e United State s should pay greater attentio n to th e Asia Pacifi c region . I n 199 1 the Asia Pacifi c regio n accounted fo r 51 percent of world GNP , twice the percentage fo r th e European Union . A s President Clinto n sai d in a recen t speec h a t Wased a Universit y i n Tokyo , ove r 4 0 percent o f America n trad e i s currentl y wit h thi s region . Last yea r ove r 2. 3 millio n America n job s wer e create d a s a resul t of the $120 billion exporte d t o Asia. In November 1993 , Seattle will host a n important even t in Asi a Pacifi c history . W e will witnes s no t only th e Fift h Annual Ministry Meeting , but the first heads of state meeting o f th e Asi a Pacifi c Economi c Corporation , o r APEC . This i s a foru m fo r Asia n an d Pacifi c countrie s t o brin g their mind s togethe r t o formulate regiona l cooperatio n s o as t o furthe r accelerat e thi s dynami c region' s economy . I hope APE C will be able to utilize this epoch-making occa sion t o promot e trad e expansio n withi n ou r region , bu t even more importantly t o encourage globa l trading expan sion an d economi c integration . I certainl y hop e tha t thi s historic even t wil l remin d Americ a o f th e ever-increasin g potential o f th e Asia Pacifi c regio n fo r th e United States , which i s after al l one of th e leading nation s o f th e globa l community.

I give yo u our final speake r fo r the day, Professor Pau l A . Samuelson . Whe n I wa s a studen t i n ROBERT KAVESH :

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college I learned m y economic s fro m th e fourt h editio n o f Professor Samuelson' s textboo k o n economics , and I think he tol d u s thi s mornin g th e fifteenth editio n i s abou t t o come out . I t mus t b e on e o f th e grea t best-seller s o f al l time.

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PAUL A . S A M U E L S O N President Clinto n bega n 199 3 wit h ba d luc k i n th e real m of internationa l economics . America' s balanc e o f pay ments defici t ha s bee n gettin g wors e rathe r tha n better . This i s a seriou s blo w t o hi s politica l popularity , an d a potential threa t t o his reelection i n 1996 . An importan t reaso n tha t Candidat e Clinto n defeate d George Bus h wa s hi s promise t o th e voter s t o creat e goo d new job s t o replac e thos e bein g los t a t IBM , Genera l Motors, Procto r & Gamble , an d everywher e amon g larg e and smal l American corporations . S o where have the goo d jobs gone ? Advance d technolog y ha s no t bee n los t o n thi s continent. Thos e goo d job s ca n b e sai d t o hav e largel y gone abroa d wher e the y ca n b e performe d b y lower-pai d labor working with footloose knowledg e and equipment — first to th e EU, then late r t o the Pacific Basin . American export s t o Lati n Americ a bega n th e yea r strong. We have bee n runnin g a sizable surplus wit h Mex ico, fo r example . Th e ne w Clinto n tea m ha d hope d tha t the Japanese an d Germa n locomotive s woul d com e t o lif e and joi n i n wit h ou r recover y effort , thereb y improvin g our export s t o the m too . The economist s o n th e Clinto n tea m are , fo r th e mos t part, advocate s o f fre e trade . A t th e Counci l o f Economi c Advisers I hav e i n min d i n qualifie d degre e Laur a Tyso n and i n les s qualifie d degre e Ala n Blinde r an d Josep h Stig 68

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litz; an d a t th e Treasur y an d i n th e Whit e House , econo mists suc h a s Undersecretar y Lawrenc e Summer s an d Dr . David Cutler . Surel y the y mus t b e ver y disappointe d tha t Europe an d Japa n remai n i n th e doldrums . Whe n unem ployment grow s i n those countrie s an d spendabl e income s stagnate, thei r citizenr y cu t dow n o n import s fro m America. N o wonde r Japan' s bilatera l balanc e o f trad e with Americ a reache s ne w recor d levels . And thi s happen s despite depreciatio n o f th e dolla r relativ e t o th e yen , i n a vicious cumulativ e downwar d spira l whos e en d i s no t ye t in sight . Politically, thi s i s storin g u p troubl e fo r Japan . Troubl e may als o spil l ove r fo r Korea , Taiwan , Singapore , Hon g Kong, an d als o fo r th e Europea n Union . American s o n Main Stree t ar e turnin g impatient . I n Congres s thos e o f both politica l partie s ar e bein g tempted i n the directio n o f protectionism. I se e a dange r tha t th e Presiden t himsel f may revert bac k towar d th e foreigner-bashing h e had bee n recently talke d ou t o f b y hi s economi c advisers . Mr. Clin ton ma y eve n lose the congressional vot e on ratificatio n o f the NAFT A fre e trad e treat y betwee n th e U.S. , Mexico , and Canada . Eve n America' s signin g of f o n th e Urugua y Round o f GAT T multilateralis m ca n stil l b e sai d t o b e problematic. This mean s tha t th e pro-protectionis m adviser s wh o were s o importan t i n th e earl y Clinto n presidentia l cam paign—Robert Reich , Secretar y o f Labor ; Ro n Brown , Secretary o f Commerce ; Ir a Magaziner ; an d alway s t o b e suspected Wall Street investment banker s such as Treasury 69

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Deputy Secretar y Roge r Altma n an d Whit e Hous e Na tional Economi c Counci l Chairma n Rober t Rubens—ma y revert bac k towar d a get-tougher economi c policy . I shal l no t b e surprise d i f w e begi n t o hea r eve n mor e about manage d trade . I f i t become s popula r t o giv e Japan an ultimatu m t o accep t mor e America n export s whil e ex porting les s themselves t o America , wh y sto p wit h Japan ? Why no t a ne w shoppin g lis t wit h specifi c request s ad dressed towar d Kore a an d th e othe r Smal l Dragons ? Wh y not toug h tal k an d threat s directe d towar d Spain , Italy , and Europ e generally ? Not al l th e developin g countrie s ar e equall y vulnerabl e to political pressures. Chile, Brazil, Argentina, an d Mexic o are no t i n th e sam e boa t wit h China . Whe n Chin a unde r "market socialism " grow s a t 1 2 percent pe r year, muc h o f its energ y come s fro m chea p export s t o America . Th e shoes I wear , th e clothin g o n m y back , m y inexpensiv e radio an d ne w tenni s racke t increasingl y bea r th e labe l "Made i n China. " Th e China-U.S . trade surplu s is soaring up towar d Japan-U.S . magnitude . Tha t make s Chin a vul nerable i n a way tha t Mexic o i s not . There i s a mora l i n thi s fo r Sout h Korea . Just a s Japa n has bee n learnin g th e har d wa y tha t i n he r ow n self interest sh e ough t no t continu e t o rel y principall y o n ex port-led growth , th e E C countrie s woul d b e wel l advise d to us e th e freedom s gaine d afte r th e breakdow n o f th e pegged exchang e rat e syste m t o initiat e monetar y an d fis cal stimulus measures . I doubt tha t Presiden t Clinto n wil l scor e great successe s 70

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in his export drives . All the more reason t o fear tha t futur e policy wil l b e tempte d t o vee r i n th e directio n o f wha t comes politicall y easy—namel y ne w initiative s t o clam p down o n import s int o th e United States . People abroa d shoul d b e prayin g tha t America' s recov ery wil l tur n mor e vigorous . Experienc e durin g th e post 1982 year s o f Reaga n an d Bus h showe d tha t wha t kep t political protectionis m i n chec k wa s America n prosperit y at home . Ne w jobs , eve n i f man y o f the m wer e no t high paying manufacturin g jobs , too k th e edg e of f America n voter discontent , reducin g th e pressure s o n congressiona l legislators t o agitat e fo r protectionism . Ross Perot , th e populis t multibillionaire , wa s kep t ou t of offic e i n th e 199 2 electio n campaign . H e di d no t suc ceed i n gettin g a pluralit y o f th e votes . Perot , however , remains i n activ e politics . H e conduct s publi c meetings . He spends his own mone y to buy television time to presen t criticisms o f Presiden t Clinton' s proposals . I hav e a frien d wh o i s a Texa s millionair e an d a frien d of Ross Perot's. When Pero t announced fo r th e Presidency , my frien d sai d t o him : "Ross , wh y don' t yo u ge t th e bes t economist i n th e worl d fo r you r adviser? " "Wh o woul d that be , Tom? " " I mea n Pau l Samuelson. " "Samuelson ? Isn't tha t th e gu y wh o believe s i n th e la w o f comparativ e advantage? That' s jus t a theor y i n m y book. " I tol d m y friend To m Marsh , "Nex t tim e don' t sen d m e th e business." Perot i s a protectionist throug h an d through . H e claim s that fre e trad e wit h Mexic o wil l kil l of f a millio n Ameri 71

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can jobs . I f electe d t o th e Presidency , h e ca n b e expecte d to tur n hostil e t o competitio n fro m abroad . I f th e goin g gets roug h fo r Willia m Clinton , i n self-defens e h e migh t himself b e force d int o a protectionis t direction , eve n i f that i s not i n America' s long-ru n self-interest . I hope I am wrong i n this fear .

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CHAPTER 3

International Competitivenes s In High-Technology Industrie s December 8, 1993

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I N T R O D U C T O R Y REMARK S The y use d t o sa y abou t Frenc h general s that the y wer e expert s i n fighting war s tha t ha d take n place earlier , whic h i s i n par t wh y th e Frenc h hav e rarel y won ove r th e las t 12 5 years . Today's topi c relate s bot h t o academia an d t o th e industria l world . I picke d u p th e latest cop y o f Newsweek an d her e i s thi s hug e article , "Japan Incorporated : Res t in Peace." It contains a detaile d introduction t o th e topi c (th e Nikke i rollercoaster) , alon g with littl e section s dealin g wit h wha t migh t b e calle d ma jor new s item s o f th e pas t decad e o r so . Here, i n 1985 , is Lee Iacocca saying , "It' s no t Russi a that' s layin g wast e t o my business , it' s Japan , ou r friend. " A littl e late r on , i n 1988, "U.S . law maker s bas h Toshib a radio s wit h sledge hammers afte r i t i s learned tha t th e compan y sol d subma rine technolog y t o th e Sovie t Union. " Fro m earl y 199 2 comes on e o f th e mos t famou s picture s we'v e experience d or see n o f Presiden t Bush , treatin g Prim e Ministe r Miya zawa t o a hot meal . ROBERT KAVESH :

The articl e discusse s th e curren t difficultie s i n Japan , and we'v e al l rea d abou t them . Dow n an d dow n an d down. Japan' s shar e o f th e U.S . ca r marke t plunges . Th e pendulum swing s bac k an d forth . A propos today' s topic , Japan i s losing her lea d i n high technology . In an y event , ou r topi c i s "Internationa l Competitive ness i n High-Technolog y Industries. " Ou r first speake r i s 75

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Sadahei Kusumoto , Chairma n o f Minolt a Corporation . Before th e meetin g w e ha d a cha t abou t livin g i n th e United State s an d matter s o f that sort . I told hi m tha t I am the prou d owne r o f a Minolta camera , whic h enable s me , a klut z wit h thing s lik e that , t o tak e excellen t pictures . Following Mr . Kusumot o i s Thomas Pugel , a colleague o f mine an d Chairma n o f th e Departmen t o f Internationa l Business her e a t th e school . Lastly , Pau l A . Samuelson : Friend o f th e University, Long-Ter m Credi t Bank o f Japa n Visiting Professo r o f Politica l Econom y fo r severa l year s and th e firs t America n Nobe l Laureat e i n Economics . We'll se e what happens .

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SADAHEI KUSUMOT O I woul d first lik e t o tal k specificall y abou t Minolta , an d then t o addres s mor e genera l trend s withi n th e Japanes e electronics industry . Mos t peopl e know Minolt a a s a camera company . Yes , w e spen d almos t 8 0 percen t o f ou r advertising budge t o n camer a products , because it's a con sumer product . Peopl e kno w Minolt a a s a camer a com pany. Bu t a t thi s momen t onl y 3 0 percen t o f ou r revenu e comes fro m camer a products . The othe r 7 0 percent come s from busines s equipment , mostl y cop y machines , facsim iles, document imag e systems, and lase r printers. This par t of ou r busines s ha s bee n growin g b y 1 0 t o 1 5 percen t every year, eve n ove r th e last three difficul t years . At th e sam e time , however , th e camer a busines s i s shrinking; electronic s i s beginning t o tak e ove r ou r indus try. Peopl e wh o wer e i n Ne w Yor k i n th e 1950 s o r earl y 1960s ma y remembe r th e displa y window s o f camer a stores divide d 5 0 percen t fo r stil l cameras an d anothe r 5 0 percent fo r movi e cameras . The y ha d movi e camera s b y Keystone, Bel l an d Howell , Dejur , an d s o man y others . But yo u won' t find an y mor e movi e cameras . They'v e been completel y displace d b y video . Th e sam e thin g ma y happen soo n i n th e res t o f th e camer a industry , whic h i s why Eastman/Koda k i s trying t o ge t into th e compac t dis c business. We know w e have to g o in this direction a s well, 77

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for th e stil l camer a ma y ver y wel l g o th e wa y o f th e eigh t millimeter movi e camera . Accordingly, abou t eightee n month s ag o ther e wa s a n announcement b y Eastman/Kodak , Canon , Minolta , Ni kon, an d Fuj i Fil m tha t w e ar e al l goin g t o chang e ou r format i n th e nea r future . (Becaus e o f antitrus t laws , w e had t o mak e thi s announcemen t fa r i n advance. ) Th e ne w format fall s somewher e betwee n conventiona l an d elec tronic photography. Usin g existing film, the new magazin e is designe d t o hoo k u p easil y wit h a televisio n an d a converter s o you wil l b e abl e t o se e the imag e bot h o n T V and i n printed format . That' s th e way we're going . So electronic s i s goin g t o pla y a ver y importan t par t i n our camer a business , an d o f cours e i n th e busines s equip ment field electronic s i s alread y a majo r par t o f ou r busi ness. Whe n yo u ope n a copie r o r facsimil e machine , yo u will find tha t 9 9 percen t o f th e part s wer e mad e b y othe r electronics companies . W e alway s jok e abou t it . We'r e selling a Minolt a cop y machine , bu t actuall y we'r e sellin g parts fro m Toshiba , Hitachi , Sanyo , an d Sharp . W e jus t put the m togethe r an d stam p o n th e Minolta name . We'r e the bigges t custome r fo r othe r electronic s companies . Over the past twenty year s Japanese companie s di d very well i n stand-alon e consume r electronics , fro m tap e re corders t o television s an d finally camcorders . But this success i s fadin g out . W e ar e hearin g mor e an d mor e abou t multifunctional products . Vide o computers , facsimiles , and telephone s ca n no w b e united i n one product workin g 78

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smoothly togethe r lik e a n orchestra , an d u p unti l no w Japan ha s no t bee n prepare d t o dea l wit h thi s multimedi a trend. The worl d o f multimedi a wa s introduce d i n 198 9 a t a convention sponsore d b y Bill Gates of Microsoft a t Maku hari i n Tokyo. It was a sensation fo r th e electronics indus try, including the business equipment industry . This multi media conventio n ha s becom e on e o f th e bigges t event s o f its kind i n Japan, becaus e everybody know s this is the wa y the electronic s industry , o r eve n th e busines s equipmen t industry, i s going to en d up . When I originally drafte d thi s speec h I spent tw o page s on th e rol e o f th e Japanes e government , becaus e thes e multifunctional device s can neve r succee d in Japan a s long as we hav e s o man y restrictiv e law s an d regulations . Ou r industries ar e controlle d bot h b y MITI , th e Ministr y o f International Trad e an d Industry , an d b y th e Posta l an d Telecommunications Bureau . These two bureau s neve r ge t along. The y fight eac h othe r fo r a shar e o f th e business . I was plannin g t o explai n wha t kin d o f obstacle s w e fac e before w e ca n embar k o n th e ne w superhighwa y o f multi media. Then , o n Decembe r 3 , just five days ago , the pow erful Posta l an d Telecommunication s Burea u announce d they ar e going to chang e tha t rout e completely . Up to now an y foreign company , specificall y an y American company , coul d inves t i n n o mor e tha n 2 0 percen t o f Japanese cabl e TV corporations . Accordin g t o thei r recen t statement, however , th e Posta l an d Telecommunication s 79

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Bureau i s going t o abando n thi s 2 0 percen t limit . I n othe r words, anyon e intereste d i n gettin g int o th e Japanes e multimedia busines s ca n d o so . Thi s i s a ver y unusua l step fo r th e Japanes e governmen t t o take . A s yo u know , the Japanes e governmen t i s ver y protectiv e o f ou r indus tries. The Unite d State s i s fa r ahea d i n th e multimedi a busi ness. I f yo u g o t o Tokyo , yo u ca n liste n t o onl y thre e channels o f F M radio . Fro m twent y t o a hundre d radi o stations ca n exis t i n on e place, but becaus e o f regulations , sometimes politicall y motivated , yo u ca n onl y ge t thre e channels. Cabl e televisio n i s almos t non-existen t a t thi s moment i n Japan . Whe n th e ne w multifunctiona l devic e becomes th e mainstrea m o f th e electronic s industr y Japa n is goin g t o b e lef t wa y behind , an d ou r governmen t ha s finally begu n t o realiz e ho w muc h hel p w e ar e goin g t o need fro m America . Hence , the loosening o f regulations . Of cours e we have another problem i n Japan quit e apar t from governmen t regulation : Keiretsu , o r group-oriente d business. After th e war, th e Japanese banks played a majo r role in rebuilding an d i n fact reshapin g industry . At a time when everyon e neede d mone y desperatel y th e bank s len t heavily—but onl y t o manufacturers , wh o coul d us e thei r factories a s collateral . Unabl e t o borro w fro m th e banks , retail dealer s an d distributor s turne d t o thei r manufactur ers fo r financing. Companie s lik e Mitsubishi , Mitsui , an d Fuji bega n t o for m powerfu l group s forge d togethe r b y strong loyalt y fro m th e dealer s an d distributors , wh o 80

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could not , afte r all , hav e survive d withou t thei r help . These loyalties continue to the present day. It is no wonde r that a n America n compan y woul d find i t difficult t o brea k into the Japanese marketplace , where most dealer s ar e still pledged t o on e o f th e majo r manufacturin g groups . Eve n within th e border s o f Japa n itsel f thes e group s compet e fiercely wit h eac h other , ofte n makin g i t difficul t eve n for Japanes e companie s t o d o busines s withi n anothe r group's territory . Minolta i s located i n Osaka , an d w e d o ver y wel l ther e with al l our products. Ou r cameras , purchased b y individ ual consumers , d o wel l anywher e the y ar e sold . Whe n w e try t o sel l ou r cop y machine s outsid e o f Osaka , however , we run int o problems. We rely on companies, not consum ers, to purchas e ou r busines s equipment—an d yo u ca n b e sure tha t thes e companie s ar e goin g t o belon g t o som e kind o f keirets u (o r group) . S o unles s w e hav e stron g friends i n Tokyo , w e ar e goin g t o encounte r difficult y selling our products there . You ma y b e familia r wit h anothe r are a dominate d b y this phenomeno n o f keiretsu , th e Japanes e aut o industry . From assembly line to parts suppliers each group function s as a forc e unt o itself , unified , strong , an d highl y competi tive. Thi s wa y o f operatin g i s a fa r cr y fro m th e kin d o f cooperation an d interdependenc e require d b y a compute r company t o work togethe r wit h divers e electronics or eve n camera companies . Sometime s th e wall s betwee n th e keiretsu ca n ben d th e cor e corporation s themselves , an d I 81

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think Japanes e industr y i s goin g t o fac e thi s proble m i n the very near future . Clearly Japa n dominate d th e electronic s industr y ove r the past 2 0 years . But a s far a s I can see , the United State s has picke d u p th e lea d fo r a t leas t th e nex t decade . Ho w fast Japan ca n catc h u p remain s a big question .

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T H O M A S PUGE L I would lik e t o follo w u p o n Kusumotosan' s remarks . H e has focuse d rathe r noticeabl y o n electronics , an d o n wha t I woul d conside r t o b e th e systems-product s en d o f th e industry. I' d lik e t o shif t no w t o th e component s end , th e various littl e thing s tha t h e sai d wen t int o tha t produc t that eventuall y ha d a Minolt a nam e stampe d o n it . Spe cifically I' d lik e t o tal k abou t th e semiconducto r industry , an industr y tha t I'v e bee n researchin g i n on e wa y o r an other fo r wel l ove r a decade now . Semiconductors ar e clearl y a ke y technolog y produc t with pervasiv e application s int o al l sort s o f things—con sumer products, industrial products, and defense products . It's a n industr y tha t exhibit s very rapi d growt h i n terms of its sale s volume . Fo r instance , i n 199 2 worldwid e sale s of semiconductors ros e b y abou t 2 0 percent , an d the y ar e expected t o ris e agai n thi s yea r b y abou t 2 0 percent . That's a littl e bi t abov e bu t prett y clos e t o th e long-ter m trend fo r th e industry— a ver y rapid-growth , fast-movin g industry. Let's loo k bac k t o th e earl y 1980 s an d revie w som e comments yo u hav e alread y heard . Ther e were substantia l concerns abou t th e futur e o f th e U.S . industry. U.S . firms' share o f th e world' s merchan t semiconducto r marke t wa s falling fro m abou t 6 0 percen t t o abou t 4 0 percen t i n th e space o f si x years , roughl y 198 0 t o 1986 . Japanese firms' 83

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share o f worldwid e semiconducto r sale s was risin g almos t in step , 3 0 percen t u p t o abou t 4 6 percent . Thu s th e Japanese industr y a s a whol e becam e th e singl e larges t national industr y i n that sector . Japanese firms' gain s wer e mainly i n memory-integrate d circuits , an d especiall y i n a produc t know n a s DRAM s (Dynami c Rando m Acces s Memory). Lookin g a t i t fro m a nationa l level , th e U.S . share o f th e Japanes e marke t ha d remaine d rathe r stead y at wha t U.S . firms considere d t o b e a n unfortunatel y an d unacceptably lo w leve l o f abou t 1 0 percent fro m th e earl y 1970s, well into th e mid-1980s . That le d t o som e substantia l trad e friction . U.S . firms complained i n th e mid-1980 s tha t Japanes e firms wer e dumping bot h DRAM s an d anothe r memor y product , EPROMS (Erasabl e Programmabl e Rea d Onl y Memory) . The U.S. firms charged an d sued on the basis that Japanes e firms were infringing o n various patented U.S . technology. U.S. firms complaine d t o ou r governmen t tha t ther e wer e obstacles t o accessin g th e Japanes e marke t base d les s o n formal barrier s fro m th e past , whic h ha d essentiall y al l been remove d b y th e mi d seventies , tha n o n th e variou s trading, dealing , an d supplier/buye r relationship s jus t de scribed b y Kusumoto—the keiretsu . As th e U.S . firms pu t it , a marke t structur e existe d tha t was conduciv e t o reciproca l dealin g an d tha t effectivel y excluded outsiders , includin g outsider s fro m elsewher e i n Japan. Ther e wa s allege d pressur e t o bu y Japanese , an d the governmen t certainl y supporte d variou s kind s o f re search an d developmen t projects , cooperativ e project s 84

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within Japan . Th e U.S . firms als o allege d tha t Japanes e firms wer e engagin g i n "capacity-expansio n races, " race s based o n tryin g t o gai n large r marke t shares . O f cours e that's a zero-su m game , a ver y dangerou s gam e t o tr y t o play i f everyone' s playin g th e sam e way . I t led t o periodi c overcapacity, an d a tendency fo r Japanes e firms t o engag e in the dumpin g tha t w e mentioned earlier . Japanese firms dispute d al l thes e charges , claimin g mis interpretation b y the Americans o f various aspects of Japanese business . Ou t o f al l o f thi s conflict , however , cam e a 1986 agreemen t i n whic h th e Japanes e governmen t com mitted t o encouragin g th e purchas e o f foreig n semicon ductors i n Japan . Althoug h no t par t o f th e forma l agreement a t thi s point, ther e was eve n a side letter wher e the Japanese governmen t acknowledge d th e notion o f a 20 percent shar e b y 199 1 fo r foreig n semiconductors , some what mor e tha n doublin g th e shar e tha t existe d i n 1986 . That agreemen t als o pu t i n plac e a cost-pric e monitorin g system fo r Japanese exports . In 198 7 th e U.S . governmen t impose d sanctions , 10 0 percent tariff s o n a variet y o f non-semiconducto r prod ucts, base d o n th e failur e o f th e Japanes e governmen t t o prevent dumpin g ou t o f Japan , an d th e failur e o f th e Japanese governmen t t o enhanc e marke t acces s int o Ja pan. Th e dumpin g sanction s wer e remove d late r tha t yea r when th e dumpin g ended , drive n mainl y b y strong marke t growth. Als o i n 198 7 U.S . industry forme d a consortiu m known a s Sematech , whic h receive d hal f o f it s funding , about $10 0 millio n a year, fro m th e U.S. government, an d 85

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half fro m th e privat e consortiu m members . Th e goa l wa s to develo p state-of-the-ar t productio n techniques . When th e 198 6 semiconducto r agreemen t expire d i n 1991, i t was renewe d fo r anothe r five years. This tim e th e goal o f a 2 0 percen t foreig n shar e o f th e Japanese marke t was formall y include d i n the agreement , t o be achieved b y the end o f 1992 . Thereafter a gradual an d steady improve ment i n marke t acces s wa s suppose d t o tak e place . Als o included i n tha t agreemen t wa s continue d monitorin g o f export prices . A s part o f th e process , th e remainin g sanc tions fro m 198 7 were lifted . What w e se e as we mov e into the present i s an immens e number o f privat e decision s mad e an d action s take n b y firms i n th e Unite d States , a s wel l a s a variet y o f action s taken b y th e U.S . government; intriguingly , thes e govern mental action s were instituted durin g the Reaga n adminis tration. This is Reagan's industria l polic y at work. Equall y intriguing fro m m y poin t o f view , thes e variou s action s seem t o hav e bee n reasonabl y effective , wit h bette r result s in fac t tha n I woul d hav e eve r expected . Governmen t policies di d no t see m t o hur t things , an d i n man y way s seem to hav e contribute d t o what no w look s to be really a quite good performanc e b y U.S. industry. U.S . firms' shar e of th e worl d marke t continue d t o fal l t o 3 7 percen t i n 1989 bu t the n bega n risin g back , an d w e ar e now a t mor e than 4 0 percent . W e hav e ha d i n fac t a four-yea r upwar d trend i n th e U.S . shar e o f th e worl d marke t fo r semicon ductors, whil e Japanes e firms' share s hav e falle n fro m about 5 0 percent t o abou t 4 3 percent . 86

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Foreign share s o f th e Japanese marke t wer e 8. 6 percen t in the third quarte r o f 1986 , when th e first agreemen t wa s signed. The y hi t a leve l o f 1 4 t o 1 6 percen t durin g 199 1 and mos t o f 1992 . Then , remarkably , an d t o th e surpris e of almos t everyone , th e foreig n firms' shar e o f th e Japa nese market hit 20.2 percent in the fourth quarte r o f 1992 . Some o f tha t ris e wa s du e t o last-ditc h effort s b y th e Japanese firms. I wa s somewha t disheartene d actuall y t o see tha t Kusumoto' s lis t o f th e ingredient s i n Minolta' s products di d no t includ e an y mentio n o f component s b y Texas Instrument s o r Intel . Perhap s i t wa s jus t a n over sight. A t an y rate , Japanes e purchase s o f foreign , mainl y U.S., semiconductor s i n tha t fourt h quarte r ros e b y 8 per cent, eve n a s overal l marke t sale s withi n Japa n wer e de clining. Pu t tha t togethe r an d you'v e go t a 20. 2 percen t market share . For th e first hal f o f 1993 , th e foreig n marke t shar e continues t o ru n betwee n 1 9 an d 2 0 percent . Thi s doesn' t seem t o b e jus t a one-quarte r fluke . Somethin g ha s hap pened here , an d I thin k arguabl y thi s woul d no t hav e happened withou t tha t 198 6 agreemen t i n place . U.S . firms' share s migh t hav e rise n anyway , bu t no t b y thi s much. A n agreemen t abou t semiconductor s appear s t o have succeede d i n alterin g som e deepl y entrenche d behav ior connecte d t o th e buyer/supplie r relationshi p i n Japan. Related t o thi s scenari o i s concer n i n th e Unite d State s about ou r firms' productio n o f th e equipmen t tha t make s semiconductors: chip-makin g equipment . Th e U.S . shar e of th e worl d marke t fo r chip-makin g equipmen t ha s als o 87

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recently bee n rising , an d it' s bac k u p abov e 4 0 percent . Industry source s her e generally credi t Sematech wit h som e of that advance . Sematech sound s like a project t o produc e semiconductors, bu t it' s reall y a project involve d i n tryin g to enhanc e th e capabilitie s i n producin g productio n tech nology. Tha t mainl y mean s proces s machines , substantia l support bein g offere d t o U.S . production o f th e chip-mak ing equipment . That' s par t o f th e picture . Th e othe r par t of the picture is clearly private decision s by U.S. firms, and right no w the y loo k t o hav e pulle d of f th e questio n o f product positionin g extremel y well . U.S. firms generally hav e not returne d t o the productio n of memory-integrate d circuits , however . Th e DRAM s es pecially are not somethin g that have pulled U.S. firms back into production . I n tha t sens e yo u migh t judg e th e 198 6 agreement t o b e somethin g o f a failure , despit e th e con trols o n dumping . Arguably , however , no t producin g memory-integrated circuit s wa s a ver y wis e decision . Al though hig h i n volume , memory-integrate d circuit s ar e often lo w o r n o o r negativ e margi n products . The y ar e commodity products , intensel y competitiv e i n nature . I n fact Japanese firms ar e probably payin g a price for empha sizing the m i n term s o f no t gettin g th e kin d o f payoff s from thei r semiconducto r investmen t tha t the y migh t hav e expected. On e reaso n fo r thi s wa s a t leas t moderatel y predictable eve n b y th e mi d eighties . An y countr y that' s going t o g o int o advance d integrate d circuit s i s goin g t o follow th e same path tha t the Japanese used. They're goin g 88

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to pus h int o thos e memor y ICs . Mos t notably , Korea n firms have bee n doin g just that . Korean firms hav e gaine d 2 5 percen t o f th e worl d mar ket fo r DRAMs . Japanese shar e i s now dow n t o abou t 55 percent. Ho w di d th e Korean s d o it ? Th e formul a sound s familiar: A lo w pric e strategy , subsid y b y governmen t loans an d governmen t researc h project s fo r basi c produc tion technologies , wit h licensin g o f technolog y wher e nec essary fro m foreig n firms. Tha t competitiv e thrus t b y th e Koreans i s hitting th e Japanese firms hea d o n i n a produc t area wher e th e Japanes e ha d bee n th e dominan t players . Yet the overal l shar e o f Korea n firms i n th e world marke t is onl y 4 percent . Outsid e o f DRAM s the y ar e mino r players, an d the y hav e no t ha d muc h effec t o n th e genera l U.S. semiconductor business . History repeat s itsel f ye t again . A smal l U.S . firm, Mi cron, whic h i s focuse d o n DRA M production , filed a dumping sui t agains t th e Korea n firms lat e las t year . Th e Korean firms wer e foun d guilt y o f dumping , althoug h th e punitive dutie s impose d b y th e Commerc e Departmen t were relativel y small . Potentiall y the y coul d hav e bee n astronomical. On e firm wa s hi t with preliminar y dumpin g duties o f 8 7 percent , whic h woul d hav e effectivel y shu t them ou t o f th e U.S . market . I n th e final determination , however, th e dutie s wer e lowered . Som e firms wer e hi t with dumpin g dutie s o f les s tha n 1 percent, whic h i s triv ial, hardly enoug h t o eve n influenc e behavior ; other s wer e hit a s high a s 11V 2 percent. 89

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This outcom e ha s helpe d Micron . I t help s th e Japanes e firms, whic h ar e goin g t o fee l a littl e les s pric e pressur e from th e Korea n competition . I t harms, at least a little, all of th e othe r U.S . firms tha t ar e attemptin g t o us e thes e products. A s I hav e argue d fo r a lon g time , applyin g dumping law s t o thi s industr y i s a n extremel y dicey busi ness. First of all , it is difficult t o measure whether dumpin g actually exist s i n an y meaningfu l sense . Furthermore , po tential losse s t o use r industrie s ar e fa r mor e likel y tha n any gain s t o U.S . producers . I n thi s cas e onl y on e smal l U.S. produce r seem s likel y t o hav e benefite d i n an y rea l way. Texa s Instrument s i s als o i n thi s marke t area , a s i s Motorola, bu t the y ar e basicall y producin g i n Japan . So wha t ar e th e U.S . firms doing ? Well , a s the y move d into th e mid-1980 s the y becam e ver y successfu l i n high value, high-margin, innovation-drive n produc t areas . Thi s was basicall y th e resul t o f privat e decisio n makin g an d strategy a t it s best . U.S . firms now emphasiz e application specific integrate d circuits , an d the y hav e bee n fairl y suc cessful a t holding their ow n i n that marke t despit e compe tition fro m th e Japanese. Where the U.S. firms clearly shin e is in microprocessors . If yo u wante d t o b e i n a produc t are a righ t now , you' d want t o b e i n Intel' s business . Inte l i s no w th e world' s largest semiconducto r produce r a s o f 1992 . Ninet y per cent o f th e world' s PC s us e Inte l microprocessors . It' s a nice business, highly profitable . Manufacturin g cost s fo r a 486 chi p ru n les s tha n $30.00 . Th e chi p sell s fo r abou t $300.00. Tha t i s a recen t comparison . Intel' s after-ta x 90

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profit margi n o n sale s las t yea r wa s 2 6 percent . Th e othe r major microprocesso r producer s i n th e worl d marke t ar e basically America n a s well , Motorol a bein g th e othe r no table on e i n supplying , amon g othe r things , the Apple lin e of PCs . A reversa l o f sort s i s flas h memory , a n importan t ne w memory-integrated circuit . Toshib a invente d it , bu t Inte l dominates th e market—8 5 percen t Intel . Toshib a i s scrambling t o tr y t o catc h up , having ignore d th e produc t area an d focuse d o n othe r things . U.S. firms ar e als o guarding an d exploitin g thei r propri etary technolog y mor e carefull y tha n before . The y se e where thei r strengt h lies , an d the y hav e becom e mor e aggressive. Intel's approach i s to refuse t o license anybody , and t o su e anybod y wh o think s they'r e goin g t o tr y t o horn i n o n thei r microprocesso r business . Texa s Instru ments use s a somewha t differen t approach , licensin g it s patents t o obtai n substantia l royalties . A large part o f TI' s profits com e fro m thi s paten t royalt y income . Thes e tw o different strategie s ar e probably appropriat e t o each of th e individual firms, give n their othe r circumstances . What w e se e her e i s a rathe r surprisin g succes s story . U.S. firm shar e o f th e worl d marke t ha s certainl y stabi lized, perhap s it' s eve n o n th e u p tick . Mor e important , U.S. firms ar e positione d int o wha t appear s t o b e th e better part s o f th e market—th e bette r parts , th e mor e innovative parts , th e part s wit h highe r margins , mor e profits. Mainly I thin k tha t i s th e resul t o f privat e decisio n 91

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making, privat e action s b y U.S . firms, includin g som e ke y strategic decisions . Intriguingly , however , ther e i s als o a role her e fo r U.S . governmen t policy . U.S . policie s hav e had som e positiv e impac t t o b e sure , althoug h provin g that woul d b e extremel y difficult . W e woul d hav e t o d o a sort o f counterfactua l removin g o f al l those policies, and I doubt w e reall y hav e th e economi c tool s t o pul l tha t off . But a remarkable piece of Reagan-instituted industria l pol icy actuall y seem s t o hav e ha d som e positiv e impac t o n the industry , especiall y i n th e are a o f marke t acces s int o Japan i n th e are a o f semiconducto r equipmen t manufac turing. Ther e ar e stil l som e majo r challenge s her e fo r al l involved, an d I don' t wan t t o cal l th e gam e over . I don' t want t o declar e Japan t o b e "RIP. " I think tha t woul d b e confusing a cycl e with a cyclica l movement , an d I hesitate to d o that . This i s an industr y wit h rapidl y risin g developmen t an d facilities costs , a major challeng e t o everyon e i n the indus try. A ne w state-of-th e ar t integrate d circui t productio n facility cost s abou t $ 1 billio n fo r on e factory . Develop ment cost s fo r a ne w generatio n o f a product , separat e from th e facilities , als o ru n abou t $ 1 billion . Hug e invest ments ar e goin g t o b e neede d here . On e majo r privat e response i s the increasin g us e o f alliances , includin g som e major internationa l ones . Usin g th e tria d approach , a n IBM/Toshiba/Siemens allianc e wa s announce d i n th e las t year o r s o fo r th e purpos e o f developin g 256 M DRAMs . We're talkin g abou t 10,00 0 page s o f type d tex t containe d in on e littl e chip . Currentl y th e 4 M i s mainstream , whil e 92

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the 16 M chi p i s i n production . S o they'r e lookin g tw o generations ahead , assumin g a n increas e b y a facto r o f four. I have tried t o giv e some specific example s o f th e notio n that i n man y way s th e rac e fo r technolog y i s becomin g a lot mor e interestin g an d competitive . U.S . efforts see m t o be payin g of f wit h som e reasonabl e result s bot h fro m government polic y an d fro m th e private sector .

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PAUL A . S A M U E L S O N Economic theor y doe s no t clai m tha t a health y econom y can b e "competitive " i n al l good s an d services . Accordin g to the principles of comparative advantage , a region ough t to b e noncompetitive i n good s it ought t o import—just a s it wil l b e competitiv e i n th e good s i t wil l succee d i n ex porting. A crud e vie w woul d b e this : Hal f a nation' s good s i t competitively exports ; hal f i t wil l import , becaus e domes tic resources an d know-ho w ar e not favorabl e o r advanta geous fo r producin g thos e item s i n compariso n wit h tech nology an d endowment s abroad . Hal f an d hal f make s fo r balance, with n o trad e surplu s o r trad e deficit . Act I: Keeping the Balance in Balance Since everythin g i s always i n flux , wha t keep s th e balanc e in balance ? Equilibriu m i s suppose d t o b e maintaine d b y the marke t mechanism . I f certai n land s an d skill s can' t find marke t deman d fo r thei r services , their pric e get s bi d down i n the auction market . At the right price they ge t th e work the y seek . Thi s proces s o f flexibl e clearin g o f th e market is expedited internationall y b y automatic deprecia tion of the floating dolla r relativ e to the appreciating Japanese ye n whe n technologica l progres s abroa d i s catchin g up i n sector s wher e previousl y Yanke e ingenuit y wa s tri 94

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umphant. Whe n th e dolla r pric e o f th e yen become s right , the trade balanc e will re-attain balance . Three cheer s fo r th e floatin g exchange-rat e system . I n 1925 Britai n foolishl y returne d t o th e gol d standar d a t the 191 3 prewa r parity . Sh e wa s foolis h becaus e i n th e intervening doze n year s her pric e leve l and wag e rate s ha d risen mor e tha n ha d America's . Beginnin g ane w wit h a n overvalued Britis h pound , ver y man y U.K . industries wer e no longe r cos t competitiv e i n th e year s leadin g u p t o th e Great Depression . Chroni c unemploymen t prevailed . Whatever th e merits of th e orthodox economist' s prescrip tion that b y lowering wage rates full employmen t coul d b e restored i n the U.K., d e facto cost s tended t o b e sticky . Notice tha t thu s fa r m y accoun t ha s sai d nothin g abou t improving managemen t t o achiev e competitiveness . I t ha s said naugh t abou t tariffs , quotas , an d unleve l playin g fields. I t ha s take n n o notic e o f th e fac t tha t U.S . societ y now has curtailed it s rate of saving, absolutely an d relativ e to savin g rate s abroad . I t ha s gratuitousl y pretende d tha t capital movement s ar e suppose d t o ne t ou t t o zer o i n international equilibriu m rathe r tha n systematicall y ad justing themselve s t o differentia l rate s o f regiona l thrift iness. Has m y profundity bee n a t th e expense o f you r unease ? Does dee p analysi s tel l u s a t th e en d o f th e da y tha t th e chronic bilatera l payment s defici t betwee n th e U.S . an d Japan i s n o sig n o f patholog y a t al l bu t rathe r i s com pletely i n accordanc e wit h economi c law ? I f thi s wer e th e complete verdict, then muc h o f th e diplomatic skirmishin g 95

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that goe s o n betwee n Presiden t Clinto n an d Micke y Kan tor o n th e on e hand , an d th e Japanese negotiator s o n th e other hand , woul d b e onl y th e minue t o f a n elaborat e charade. A bi t lik e wrestlin g o n TV , mor e a balle t tha n a genuine grudg e fight. I f onl y fo r microeconomi c reasons , matters ar e no t tha t clear-cut . Ther e ar e importan t inter ferences wit h fre e trad e betwee n ou r tw o nations—mor e perhaps o n th e Japanese tha n o n ou r side—whic h nee d t o be addressed an d reduce d t o ou r mutua l advantages . The n bilateral deficit s ma y irreducibl y remain , bu t the y wil l b e intrinsic t o th e situatio n rathe r tha n sign s o f misbehavio r by either society . Act II: Why Japan Owes the World a Recovery Effort Now I shift gear s an d tur n fro m Ac t I to Ac t II . I need t o elucidate how an d why Japan's curren t mishandling of he r recession act s t o mak e he r unfairl y competitiv e an d t o undermine America n competitiveness . Thi s topi c ha s nothing t o d o wit h whethe r Japan' s managemen t styl e i s or wa s effective , o r wit h whethe r America n schoolkid s spend to o muc h tim e with thei r face s mesmerize d befor e a TV scree n an d to o littl e tim e wit h thei r nose s i n a mathe matical calculu s book . Japan's slum p i s self-prolonged. I t is essentially du e t o a C performance b y the Ban k o f Japan, a D performance b y the Ministry o f Finance, an E performance b y the Cabinet , Diet, an d ne w Prim e Minister , an d a n F grad e recor d earned b y th e Japanes e electorat e itself . O f cours e I a m 96

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talking a s a n economic s professo r an d no t a philosopher . For al l I kno w ever y membe r o f th e Die t i s a kin d an d thoughtful famil y person , wit h a fin e aestheti c interes t i n the art s o f paper folding . Japan ha s copiou s internationa l reserve s t o provid e needed elbowroom . Japan's publi c debt compared t o GD P is th e leas t constrainin g o f an y majo r power . Inflatio n i n Japan i s n o proble m a t all , no w o r afte r remedia l activ isms. B y not effectuatin g domesti c stimulus , Japan i s rely ing o n export-le d stimulus . Thereb y sh e penalize s th e American locomotiv e fo r bein g th e firs t t o hel p dra g th e world ou t o f th e curren t recession . This i s no t right . Le t m e illustrat e b y somethin g I learned fro m Professo r Sato , whic h ha s confirme d wha t I had expecte d o n a prior i ground s a s bein g abou t t o happen. Honda build s car s in America; build s them mayb e mor e cheaply her e than there , now tha t th e dollar ha s fallen an d the ye n ha s appreciated . Bu t Hond a i n Japa n i s pledge d to giv e stead y employmen t withou t layoffs . Sh e pay s he r workers eve n if there is no profitable wor k fo r the m t o do . Since th e tru e margina l cost s o f producin g a t hom e ar e zero, eve n thoug h ful l fixed cost s ar e colossal , i t i s smar t for Hond a t o la y of f th e chea p America n worker s an d bring th e job s bac k home . Th e longtim e "hollowin g ou t of Japan" begin s t o g o into revers e a s a second-best adap tation t o th e recession . "Smart " yo u say ? "A n ac t o f eco nomic aggression, " I say . Thi s i s th e kin d o f thin g tha t invites Japan-bashing an d ba d feeling . 97

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In an y case , i t i s al l s o avoidable . I f interna l Japanes e stimulus restore s genuin e hig h employmen t i n Japan, no t only wil l th e long-neglecte d infrastructur e b e improved , but i n additio n equalit y wil l b e restore d fo r Japanes e cor porations betwee n th e wag e the y pa y domesti c worker s and th e sellabl e produc t produce d b y them . Th e "hol lowing out" proces s will be resumed, to Japan's long-ter m advantage, precisely a s in the case of othe r nations . Act III: High Technology a la Schumpeter Again, I shif t gear s abruptl y an d conclud e wit h som e ob servations abou t hig h technology . Conside r a leading For tune 50 0 America n corporatio n bac k i n th e day s whe n ours wa s prett y muc h a close d economy . Dupon t wil l d o as a n exampl e o f a chemica l giant , o r G E a s a high-tec h producer o f innovativ e electrica l products . These bi g boys pay hig h wages. They provid e expensiv e fringe benefit s fo r thei r workers . They hav e to, in order t o successfully kee p ou t th e unions . Bein g highl y profitabl e and committe d t o the high overhead o f a n elaborat e struc ture o f plan t an d equipment , the y woul d b e very vulnera ble to an y lasting strike or work stoppage . "Life fo r them, " m y ol d Harvar d teache r Jose f Schum peter woul d say , "i s dangerous . The y ar e anythin g bu t Absolute Monarchs . Lik e Quee n Victori a an d unlik e Henry VIII , a constitutional monarc h 'reign s a s long as h e doesn't rule. ' The vicious, competitive marketplace ask s of everybody: 'Wha t hav e yo u don e fo r m e recently? ' " (A s 98

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an aside , let m e sa y tha t th e Schumpete r I first knew bac k in 193 5 a t Harvar d di d no t see m t o believ e tha t thes e temporary celebrities—cal l the m And y Warhols , i f yo u wish—would hav e permanen t lastin g power . Fo r Schum peter, capitalis m i s a hotel . It s luxur y suite s ar e alway s occupied, bu t eve r b y differen t tenants . Th e Kin g i s dead ! Long liv e th e King ! Durin g th e las t 1 5 year s o f Schum peter's lif e I believ e h e change d hi s min d abou t dynami c oligopolies, becomin g mor e persuade d tha t b y scientifi c method the y coul d lear n th e magic of perpetual youth . I' m not sur e which Schumpete r wa s right. ) Back t o wor k afte r th e digression . I n an y case , uneas y rests th e hea d o f th e high-tec h leader . Yo u ma y develo p a great ne w electri c ligh t bulb . Fin e fo r you . Produc e i t exquisitely i n you r high-ren t factories . Charg e a hig h markup, knowin g tha t you r produc t i s i n temporar y mo nopoly scarcity . But th e stor y doe s no t en d there . I f n o ne w innovation s continue t o occur , soo n effectiv e knowledg e wil l sprea d and a nonunion sho p wil l b e abl e to ru n of f assembly-lin e electric bulb s almos t a s goo d a s your s an d leav e you r market hig h an d dry . Yes , Dupon t ca n produc e an d sel l standard sulfuri c aci d a t low-margi n prices . But never ca n it stay a t the to p o f th e Fortune 50 0 b y the likes of that . A new Nylo n mus t b e followed b y a new Orio n o r Duc o ca r paint i f i t i s t o hol d it s marke t share . Tha t i s th e fat e o f the lea d bicycl e racer . I t i s h e wh o mus t brea k th e win d for th e eage r followers . The y ca n coas t o n hi s airflow . N o coasting fo r him . 99

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Remember thi s whe n you r tall y show s tha t Boein g stil l has comparativ e advantag e i n aircraf t production , eve n though al l o f Eastman' s camera s ar e no w bein g produce d in Indonesi a o r Tijuana . Tomorro w Nagoy a wil l b e th e hot spo t fo r je t airfoi l desig n i f somewher e i n Americ a there canno t b e foun d resource s t o plo w th e frontie r o f scientific researc h an d managerial-engineerin g practice . The col d wa r wa s a terribl e thing . Bu t on e o f it s spin offs wa s th e B-52 bomber , whic h provide d somethin g o f a free rid e fo r th e developmen t o f th e 40 7 an d it s progen y of commercia l je t models . Predictabilit y abou t th e ne w and unknow n i s irreducibly hazardous . The trends o f hig h productivity wil l therefor e alway s b e mor e uncertai n tha n those o f routin e mas s productions . If tim e wer e no t s o scarc e I coul d hop e t o speculat e about wh y Japa n ma y hav e a specia l motiv e t o subsidiz e high-tech research , eve n beyon d finding ne w law s o f sci ence and technology. Maybe its oligopolistic structure mo tivates spendin g a millio n an d a hal f ye n i n orde r t o har vest a millio n ye n wort h o f usefu l knowledge ? I f so , th e Japanese consumin g publi c wil l no t b e th e primar y bene ficiaries.

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CHAPTER 4

Recent Development s i n International Financia l Markets: Implications t o Japan and the United State s February 15, 1994

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I N T R O D U C T O R Y REMARK S We have a timely program. Today's New York Times carrie s th e headline : "U.S . Takin g Actio n against Japanes e i n On e Trad e Case. " Then , underneat h the fold , a n economic s articl e b y Pete r Passell : "Bi g Trad e Deficit wit h Japan: Som e Think It' s No Problem. " Bu t just a few day s ago we saw President Clinto n an d Prime Minister Hosokaw a o f Japa n standin g nex t t o eac h other , al most defiantly—mayb e that' s to o stron g a term—saying , "This shal l no t pas s o r stand. " S o w e ar e embroile d i n controversies, bu t controversie s ar e th e war p an d woo f o f what reall y goe s on . Today' s them e i s "Recen t Develop ments i n Internationa l Financia l Markets : Implication s t o Japan an d th e United States. " Our thre e panelist s wil l spea k fairl y briefl y o n topic s that ar e relate d bu t no t exactl y synchronized . Le t m e se t the stage , becaus e thi s i s importan t material . I t i s filled with rhetoric , an d oftentime s behin d th e rhetori c ther e really isn' t tha t muc h i n th e wa y o f substance . Bu t peopl e have role s t o play , an d thes e role s frequentl y ar e muc h more tha n simpl e economi c roles . An d tha t get s u s int o the topic . We hav e Stephe n Figlewski , Professo r o f Financ e a t th e Stern Schoo l an d a widel y publishe d scholar . H e i s th e editor o f th e Journal of Derivatives. An d Steve , pra y fo r derivatives. Bu t we'l l hea r mor e abou t tha t perhap s late r ROBERT KAVESH :

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on. Als o widel y publishe d i s ou r secon d speaker , Yasush i Hamao, a Professo r a t Columbi a University . H e wa s edu cated a t Toky o Universit y an d a t Yale . Third i s Professo r Paul A . Samuelson , i n m y opinio n an d i n th e opinio n o f many peopl e i n thi s field o f economics , th e Economis t fo r the Twentieth Century .

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STEPHEN FIGLEWSK I I'd lik e to than k th e Japan-U.S. Center an d Professo r Sat o for invitin g m e t o spea k t o yo u thi s morning . Th e topic , "Recent Development s i n Internationa l Financia l Mar kets," lend s itsel f t o th e kin d o f presentatio n tha t I don' t often make . Whe n peopl e com e t o publi c discussion s lik e this, typicall y wha t the y reall y wan t t o kno w ar e thing s like: "Whic h wa y ar e financial market s goin g t o go? " "Where ar e th e bes t profi t opportunitie s goin g t o tur n u p in the near future? " S o in thinking abou t what I was goin g to sa y t o yo u thi s morning , I decided t o tr y an d giv e yo u my predictions o n thes e matters . I quickl y realize d ho w har d i t i s t o mak e justifiabl e forecasts o f suc h things . I n attemptin g t o com e u p wit h a set of intelligen t predictions fo r thi s talk I discovered onc e again ho w man y importan t thing s ther e ar e tha t I don' t really fee l I have an y specia l informatio n abou t that' s no t widely availabl e t o everybody . Where ar e short-ter m interes t rate s goin g t o go ? I n th e last tw o week s we'v e see n a majo r mov e b y th e Federa l Reserve. I t was actuall y a smal l mov e i n term s o f percent age change . The y increase d th e targe t rat e fo r th e Federa l funds rat e b y a quarte r o f a percent , bu t i t ha d quit e a n impact o n th e market. The question a t this point is , what's going t o happe n next ? Ar e w e goin g t o g o alon g fo r a 107

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while wit h n o furthe r increas e i n interes t rates ? O r i s thi s just the first ste p in a long, sharp rise in interest rates, bac k perhaps t o th e level s o f th e 1980s ? Wher e ar e shor t inter est rates goin g to go ? Where ar e long-ter m interes t rate s goin g t o go ? I n th e last yea r an d a half , th e yiel d o n th e long-ter m Treasur y bond i n the U.S. dropped fro m abou t 7V 2 percent to unde r 6 percen t an d the n bounce d bac k u p t o wher e i t i s righ t now, aroun d 6. 4 percent . I s this a good time or a bad tim e to b e buying bonds ? Whic h wa y i s the bon d marke t goin g to go ? Which wa y i s the stoc k marke t goin g to go? 199 3 was a pretty goo d yea r fo r stocks . As the lon g bond s wer e goin g up i n value , s o wa s th e stoc k marke t an d thi s ha s contin ued i n thi s year . W e ar e flirtin g wit h a DO W o f 4,000 . I t may wel l happe n i n th e nex t fe w weeks . O r ar e w e a t th e peak, headin g dow n towar d lowe r level s i n th e stoc k market? What investmen t strategie s ar e goin g t o tur n ou t t o b e hot thi s year ? Shoul d w e b e buyin g smal l stocks ? Shoul d we b e buyin g cyclica l stocks ? Especiall y i n vie w o f recen t developments i n Washington, wha t i s the Japan-U.S. trad e balance goin g t o do ? A ke y par t o f th e whol e puzzle , what's th e exchang e rat e o n th e ye n goin g t o do ? Finally , what's th e Japanese stoc k marke t goin g to do ? These ar e al l question s tha t everybod y woul d lov e t o know th e answer s to , and I wish I could give you forecast s that woul d contai n a whol e lo t o f informatio n tha t wouldn't b e widel y availabl e t o othe r people . Bu t o f 108

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course i f I coul d d o tha t I' d probabl y b e ou t managin g portfolios o f billion s o f dollar s rathe r tha n teaching . So wha t ca n I sa y abou t thes e topic s tha t everybod y wants t o kno w th e answe r to ? Sinc e wha t I do i s teach , I began t o thin k abou t wha t I woul d tel l a n MB A clas s about thes e questions . I decided t o star t wit h som e o f th e fundamental principle s tha t w e teac h t o MBAs , an d se e how w e ca n appl y thes e idea s t o th e question s tha t I just raised . One o f th e most important thing s that I try to get acros s in th e classroo m i s that freel y operatin g financial market s are informationall y efficient , o r a t leas t ver y clos e t o it , which implies that th e price you se e in the market contain s a grea t dea l of information . It' s the result o f a whole lot of intelligent peopl e al l trying t o trad e an d tak e advantag e o f information tha t the y ma y have , s o tha t th e marke t end s up pricin g securitie s base d o n th e combine d informatio n of a lot o f intelligen t people . What woul d w e say to a n MB A clas s abou t som e o f th e specific question s tha t I raised ? Well , short-ter m nomina l interest rate s ar e se t b y th e Federa l Reserve . Wher e ar e short-term rate s goin g to g o this year? Inherently , we hav e to forecas t wha t th e Federa l Reserv e i s going t o do . Long term interes t rate s ar e largel y determine d b y expectation s about wha t th e short-ter m rat e i s goin g t o do . S o we ca n look a t combinin g thes e thre e first ideas : W e ca n loo k a t long-term interes t rate s i n th e marke t an d ge t som e ide a about wha t th e marke t i s predictin g short-ter m interes t rates ar e going to b e doing in the near future . 109

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What abou t th e stoc k market ? On e stron g principl e w e believe i s tha t th e equilibriu m rat e o f retur n o n a risk y asset lik e stoc k shoul d b e equa l t o th e riskles s rat e o f interest plu s som e appropriat e ris k premium . W e wil l us e that principl e t o sa y somethin g abou t wha t th e marke t thinks th e stoc k marke t i s going to do . Another bi g principle tha t crop s u p tim e an d agai n i s tha t diversificatio n a s an investmen t strateg y pay s off . It' s a wa y o f reducin g risk withou t necessaril y reducin g return . Finally , t o sa y something abou t th e trad e balance , a basi c principl e i s that th e balanc e o f payment s i s a n accountin g identity . The balanc e o f payment s mus t balance . Let's se e ho w thos e thing s ca n lea d u s t o som e answer s to th e question s tha t I raised . First , wha t abou t short term interes t rates ? B y the expectation s theor y o f th e ter m structure o f interest , today' s interes t rat e fo r a two-yea r instrument impound s today' s rat e fo r a one-yea r instru ment an d wha t th e marke t think s one-yea r instrument s will b e yieldin g a yea r fro m now . S o th e compounde d return ove r tw o year s fo r buyin g a two-yea r instrumen t should b e on e plu s th e rat e yo u ge t i n th e first yea r time s one plus th e rate th e market expect s you'll b e able to get a year fro m now . Right no w i f yo u loo k i n th e newspape r a t one-yea r Treasury zer o coupo n bond s o r Treasur y strips , a one year instrumen t i s yieldin g 3.9 6 percen t an d a two-yea r instrument i s yieldin g 4.5 1 percent . W e ca n solv e an d figure ou t wha t th e marke t mus t expec t th e one-yea r rat e 110

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to b e a year fro m no w fro m th e pricing of two-year instru ments a t 4.5 1 percent . Th e answer , accordin g t o thi s the ory anyway , is the market thinks that the short-term inter est rate (th e one-yea r rate ) a year fro m no w i s going t o b e a littl e bit abov e 5 percent . What ca n w e sa y abou t lon g bonds ? Th e expectation s theory o f th e term structur e als o says that al l fixed incom e instruments shoul d b e price d s o tha t the y yiel d th e sam e amount o r ar e expecte d t o yiel d th e sam e amoun t ove r a given perio d o f time . S o th e lon g bon d i s price d no w s o that i t i s expecte d t o ear n th e one-yea r rat e ove r th e nex t year. Well , th e one-yea r rat e i s 3.9 6 percent , a s w e jus t saw. Let's see what tha t mean s fo r what' s goin g to happe n to th e 3 0 yea r Treasury . Th e 3 0 yea r Treasury , th e "on the-run" Treasur y righ t now , i s the 6V 4 percent coupo n o f August 2023 , whic h wa s price d i n th e marke t las t Frida y at 97 28/32 with a yield to maturit y o f 6.4 1 percent. Ownin g this bond , ove r thi s nex t yea r you'r e goin g t o ge t $6.2 6 per $10 0 fac e valu e i n coupo n interest . S o th e coupo n yield i s ove r 6 percent . Tota l yiel d though , i n orde r t o match th e one-year shor t rate , has to be only 3.96 percent . That mean s th e marke t mus t b e forecastin g tha t thi s bond i s going to go down i n price, so the yield to maturit y on i t i s goin g t o g o up . W e ca n solv e throug h thi s an d figure ou t that , i n orde r fo r thi s bon d t o hav e a total yiel d of 3.9 6 percen t ove r the year, th e market i s forecasting th e price i s going to g o dow n t o 95.44 , a little bit under 9 5 V2. At tha t pric e a year fro m no w tha t bon d wil l hav e a yiel d ill

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to maturit y o f 6.6 1 percent . S o inheren t i n today' s ter m structure i s th e forecas t tha t th e lon g rat e i s goin g t o g o up 2 0 basi s points ove r th e year . How abou t stocks ? Th e equilibriu m rat e o f retur n o n risky asset s lik e stoc k shoul d b e equa l t o th e riskles s rat e plus a n appropriat e ris k premium . Sinc e 1948 , th e mea n rate o f retur n o n th e S& P 50 0 includin g dividend s ha s been 12. 7 percent , whil e th e mea n three-mont h Treasur y bill yiel d ha s bee n 5.6 percent . Tha t mean s th e ris k pre mium fo r th e las t 4 6 year s i s 7. 1 percen t o n stocks . Let' s take today' s short-ter m rate , the 3 xk percen t w e se e in th e market o n a three-mont h bill , ad d tha t 7. 1 percen t pre mium, an d we get a fair retur n o n stock s of 10.3 5 percent . Some of tha t i s expected t o com e in the form o f dividends , and th e res t i n th e for m o f capita l gains . Righ t no w th e dividend yiel d o n th e S& P 50 0 i s abou t 2. 7 percent , s o that mean s thi s 10.3 5 percen t tota l retur n shoul d com e from 2. 7 percen t dividen d yiel d an d abou t 7.6 5 percen t price appreciation . Righ t no w th e S& P Inde x i s abou t 470. Wit h a 7.6 5 percen t increase , w e ge t th e forecas t inherent i n today's marke t o f 506 . Now befor e yo u thin k thi s i s prett y precise , I shoul d also sa y tha t th e standar d deviatio n aroun d tha t 10.3 5 percent i s abou t 1 4 percen t a year . S o i f I wer e t o pu t a one standard deviatio n confidenc e rang e around wher e th e S&P 50 0 i s goin g t o b e a yea r fro m now , you' d ge t a range fro m 43 6 t o 568 . If w e wan t 9 5 percen t confidenc e we'd bette r hav e tw o standar d deviations . I will sa y wit h a hig h degre e o f confidenc e tha t th e S& P 50 0 a year fro m 112

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now wil l b e somewher e betwee n 37 0 an d 633 . Unfortu nately, it's hard t o make really strong investment decision s on th e basis o f tha t forecast . How abou t th e ho t investmen t strategies ? Actuall y I' m more confiden t i n thi s tha n I a m i n som e o f th e othe r things I'v e said . Th e basi c principl e a t wor k her e i s tha t diversification pays . American s ar e investin g ver y heavil y in mutua l funds . They'r e lettin g institution s inves t fo r them rathe r tha n playin g th e marke t themselves . Ne t in flows i n 199 3 wer e $12 8 billio n t o mutua l funds , an d that's mor e tha n th e tota l i n 199 1 an d 199 2 combined . Total holding s i n mutual fund s ar e over $ 2 trillion . We als o se e diversification internationally . America n in vestors hav e i n th e pas t bee n ver y provincial . America n portfolios hav e n o mor e tha n abou t 5 percen t investe d i n foreign equities . Thi s i s ver y small . I n th e classroom , w e say th e appropriat e investmen t strateg y i s t o hol d th e market portfolio . I n a n internationall y integrate d financial market th e marke t portfoli o tha t i s relevan t i s th e whol e world marke t portfolio , an d American s ar e a lon g wa y from bein g investe d i n that . Bu t we'r e changing . I n th e first three quarter s o f 1993 , over $4 0 billio n wer e investe d in purchases o f foreig n equitie s b y U.S . funds. An d b y th e end o f 199 3 a tota l ove r $11 0 billio n wa s investe d i n mutual fund s tha t specializ e i n buyin g internationa l eq uities. Now w e com e t o on e o f th e har d questions , becaus e I don't conside r mysel f a n exper t o n th e Japanese econom y at all . Bu t ther e ar e som e principle s her e abou t th e fac t 113

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that the balance o f payments i s an accounting identit y tha t should affec t th e wa y w e thin k abou t what' s goin g o n right no w concernin g th e trad e question s tha t ar e o n th e table. Since a balanc e o f payment s mus t balanc e a s a matte r of accounting , a n imbalanc e i n th e capita l accoun t mus t be offset b y a n opposit e imbalanc e i n the trade balance . In other words , i f w e ar e goin g t o impor t mor e tha n w e export, the n w e have t o find people who ar e going to len d us th e mone y t o d o that . S o a balanc e o f trad e defici t wil l be offse t i n ou r overal l balanc e o f payment s b y a surplu s in the capital account—mor e mone y flowin g i n for invest ment purposes tha n i s flowing out . As lon g a s th e Unite d State s a s a natio n spend s mor e than i t produce s an d finances thi s shortfal l b y borrowin g money fro m foreigners , w e wil l b e runnin g a surplu s o n the capita l account , mor e mone y comin g i n tha n w e ar e lending overseas , an d thi s wil l mirro r a defici t o n th e current account . Therefore , w e ar e boun d t o ru n a trad e deficit a s lon g a s w e ar e borrowin g mor e fro m foreigner s than w e are lending t o them . The mirro r imag e o f thi s i s Japan. I n Japa n th e natio n consumes les s tha n i t produces , an d i t lend s mone y t o other countries . Japa n produce s good s an d doesn' t con sume the m all . The remainde r goe s fo r exports . Thes e ar e financed b y capita l flow s fro m Japa n t o th e res t o f th e world, an d a s lon g a s thi s continues , a s lon g a s th e Japa nese are mor e thrift y tha n American s ar e a s a nation, the y will run a surplus o n curren t account . 114

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All th e trad e issue s tha t we'r e makin g s o muc h nois e about righ t no w revea l ho w thi s imbalance , cause d b y the differen t saving s an d spendin g behavio r i n th e tw o countries, i s goin g t o b e worke d out . Thing s lik e openin g the Japanes e market s t o U.S . products , whil e the y ma y affect wha t good s ar e traded , ar e no t goin g t o chang e th e overall curren t accoun t defici t unti l w e en d u p i n mor e balance a s fa r a s ou r consumptio n an d productio n ar e concerned. A s w e g o forward , th e reductio n i n th e U.S . federal budge t defici t i n futur e year s an d th e increas e i n output a s ou r econom y pick s u p shoul d moderat e ou r balance o f payment s problems , bu t i t won't d o awa y wit h them all . What ar e th e Japanes e stoc k marke t an d th e exchang e rate o n th e ye n goin g t o do ? I reall y hav e a har d tim e giving yo u a goo d answe r t o thi s one . Freel y operatin g financial market s ar e informationall y efficient , bu t thes e are two area s where there' s reaso n t o doub t i f the market s are in fact goin g to b e freely operating . Governmen t inter vention ca n pus h price s awa y fro m wher e a n efficien t market woul d pu t them . Interventio n ca n wor k i n th e short ru n althoug h i t tend s t o b e extremel y costl y an d doesn't generall y wor k i n the long run . Governments ar e nevertheles s especiall y pron e t o at tempt t o manipulat e exchang e rates . W e als o hav e see n that som e Japanes e governmen t polic y seem s t o b e di rected towar d th e stoc k marke t a s well . What' s goin g t o happen i n thos e market s wil l depend , I think, a great dea l on ho w th e tw o countrie s behav e i n attemptin g t o eithe r 115

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prop u p th e stoc k marke t o r t o affec t th e exchang e rat e one way o r another . Another tren d we'v e see n i n th e las t coupl e o f year s i s more an d mor e activit y b y wha t ar e calle d hedg e funds . These ar e investmen t portfolio s ru n b y peopl e wh o ar e looking for low-risk , high-retur n strategie s to capitalize o n disequilibrium pricin g i n th e market . Georg e Soro s make s a lo t o f mone y b y bettin g agains t foreig n government s who ar e tryin g t o pro p u p thei r exchang e rat e whe n the y can't d o that ove r th e long run, an d we're seein g more an d more o f tha t i n the market . Although I starte d ou t sayin g tha t I don' t thin k I hav e any specia l information , I would lik e t o sugges t tha t jus t as w e hav e foun d ove r th e year s tha t i t i s extremel y har d for a n activ e stock picke r t o bea t th e stock market , I think it's awfull y har d fo r a n activ e economi c forecaste r t o bea t the kin d o f prediction s inheren t i n th e typ e o f analysi s I hav e jus t give n you , basin g thos e prediction s o n th e assumption tha t th e financial market s ar e efficient .

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YASUSHI H A M A O I woul d lik e t o than k Professo r Sat o an d th e Cente r fo r Japan-U.S. Busines s an d Economi c Studie s fo r havin g m e today. I will b e talkin g abou t th e Japanes e stoc k market , in comparison wit h th e U.S. market. When yo u loo k a t newspaper s t o se e ho w th e Nikke i stock averag e i s doing, you wil l notice that th e volatility i s quite high ; i t i s not unusua l t o hav e tw o o r mor e percent age point s u p o r dow n i n on e day . Recentl y thi s seem s t o be driven mostl y b y government announcement s o n polic y changes, fo r example , ho w politica l refor m i s going t o b e done, whether ther e will be a n incom e tax cut , or how th e U.S.-Japan trad e negotiatio n i s coming along . These ar e undoubtedl y importan t issue s tha t woul d shape u p th e Japanese stoc k market , bu t ar e thes e al l tha t matter? A t th e micr o level , stock price s shoul d als o reflec t the fundamental s o f firms , tha t is , how th e firms ar e doin g in their business . I am goin g to present som e evidence tha t Japanese investor s hav e paid littl e attention t o thi s matter . Instead, th e marke t seem s t o hav e bee n overwhelme d b y general euphori a durin g th e bubbl e perio d (befor e 1990 ) and b y general pessimis m afte r th e burs t o f th e bubble . This research, conducted b y Charles Hall, Trevor Harri s (two colleague s o f min e a t Columbia) , an d myself , look s at th e relation s betwee n earning s o f firm s an d thei r stoc k prices ove r a lon g tim e horizon . (Thes e findings ar e pub 117

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lished a s " A Compariso n o f Relatio n betwee n Securit y Market Prices , Returns an d Accounting Measures in Japan and th e Unite d States " i n th e Journal of International Financial Management and Accounting, Vol . 5 - 5 , 1994. ) If investor s ar e rational , ther e shoul d b e a positiv e rela tion. O f cours e th e reporte d accountin g earning s contai n errors an d possibl e manipulation . I n a one-yea r horizo n the relatio n betwee n earning s an d stoc k pric e woul d b e weak, bu t b y expandin g th e tim e horizo n t o sa y te n o r twenty years , thes e measuremen t error s ten d t o b e can celed ou t an d yo u woul d hav e a mor e significan t associ ation. Formally, we regress cross-sectionally stoc k returns ove r the observatio n perio d o n accumulate d earning s an d th e change i n earning s ove r th e sam e perio d o f time . W e choose th e observatio n perio d ("window " o f measure ment) t o b e on e year , fou r years , seve n years , an d twent y years. We look a t R 2 (correlation ) fro m thes e cross-sectio n regressions. Thi s measure s ho w muc h variatio n i n stoc k returns i s explaine d b y earnings . Th e highe r th e R 2, th e more associatio n betwee n stoc k price s an d earnings . In a one-year window , th e R 2 is very low for bot h Japa n and th e U.S . In Japan i t i s mostl y les s tha n 1 0 percent . I n the U.S . the number s ar e no t a s lo w a s i n Japan, bu t stil l you find muc h "noise. " W e als o notic e tha t i n Japa n th e association wa s particularly wea k durin g th e 1980s , whe n the "bubble " wa s forming . Whe n w e expan d th e windo w to fou r year s an d seve n years , th e R 2 get s highe r i n bot h 118

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countries. In the U.S. it gets as high a s 50 percent, while in Japan i t is still lower tha n i n the U.S.—around 1 0 percent . A very interesting observation i s that i f we look a t thos e windows endin g i n 199 0 an d 1991 , we fin d muc h highe r association i n Japan . Thi s i s tru e fo r on e year , bu t eve n more dramatic in longer windows . The bubble in the Japanese stoc k marke t burs t a t th e beginnin g o f 1990 . Ou r data ru n onl y tw o year s afte r that , bu t alread y w e appea r to captur e a change i n the relation betwee n th e stock pric e and compan y fundamentals . Yo u ma y sa y tha t ther e wa s an "anythin g goes " kin d o f attitud e durin g th e bubbl e period, whe n stoc k price s wer e runnin g u p irrespectiv e o f earnings an d othe r fundamentals . Bu t th e tren d seem s t o be revertin g afte r 1990 . Bac k t o fundamentals : Afte r th e collapse o f th e bubble , th e investor s ma y b e payin g mor e attention t o ho w th e compan y itsel f i s doing.

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PAUL A . S A M U E L S O N On th e mornin g afte r a Californi a earthquak e measurin g 6.6 o n th e Richte r scale , a lecture r o n th e tranquilit y o f nature finds i t optima l t o revis e he r tex t i n som e percepti ble degree . Thi s morning' s schedule d discussio n o f Japan U.S. financial development s ca n hardl y fai l t o tak e notic e of las t weekend' s impass e betwee n Prim e Ministe r Mori hiro Hosokaw a an d Presiden t Willia m Clinton . This morning' s newspapers—th e New York Times, th e Washington Post, an d th e Wall Street Journal (d o an y others matter?)—ar e ful l o f thi s subject . Le t m e sa y tha t speaking a s a n academi c economist , a n America n patriot , and a well-wishe r t o Japan , i n non e o f thes e role s d o I regard th e failur e o f th e tw o leader s t o reac h an y meetin g of th e mind s a s a n even t registerin g 6. 0 o n th e politica l economy Richte r scale . Still , who a m I against th e world ? Yesterday th e dolla r fel l fro m 10 8 yen to 102 , truly a "bi g one" fo r highl y leverage d trader s i n th e future s markets . The aftershock s stil l sur e t o com e ma y outweig h th e Washington even t itself. As the y say , ther e i s goo d new s an d ba d news . That' s what on e o f m y daughters-in-la w sai d t o m e recently . "Which d o yo u wan t t o hea r first?" "Giv e m e th e goo d news," I said . "Well , toda y Coope r sai d 'Mama. ' That' s the goo d news . Th e ba d new s i s tha t h e sai d i t t o th e babysitter." Th e good new s is that the Japanese people ar e 120

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understandably tire d o f bein g harangue d b y Americans . They ar e tire d o f havin g t o babbl e meaningles s phrase s o f agreement t o d o thing s tha t nobod y ha s an y expectation s will ge t done . S o fo r th e momen t Hosokaw a gain s i n popularity a t hom e fo r standin g tal l an d tellin g of f th e American Presiden t a s a mature equal . This i s a time , I suspect , whe n a boos t t o th e Japanes e ego an d moral e i s especiall y needed . Th e collaps e o f th e land an d stock-marke t boom s an d th e ensuin g seriou s recession hav e engendere d somethin g o f a failur e o f Japa nese nerve—a veritabl e self-identity crisi s based on seriou s doubts abou t th e validity o f the Japanese economi c model . An inveterate optimis t coul d g o on t o argue : The ne w Prim e Ministe r ha s bee n popula r i n th e polls , but i t ha s no t bee n a popularity yo u coul d cas h ou t a t th e bank i n effective politica l action . In effect hi s coalition ha s been on e mad e o f tissu e paper— a coalitio n unabl e t o put throug h th e drasti c macroeconomi c policie s tha t ar e desperately neede d t o ste m th e seriou s slump . I n conse quence, Japan ha s bee n essentiall y a shi p a t se a withou t a rudder an d wit h sail s chaoticall y aligne d s o a s to catc h n o winds in motion . An inveterate optimist , determine d t o find a silver linin g in every dar k cloud , coul d g o o n t o argu e i n th e followin g vein: The Washingto n deadloc k wa s i n fac t a fortuitou s tur n in th e politica l tide . I t wil l giv e Japan' s leade r th e extr a popularity an d leverag e to move finally in the decisive way that i s badly needed . Whe n nex t th e G- 7 meet , Japan wil l 121

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have contrive d a trul y expansionar y fiscal program , an d her cras h progra m o f monetar y eas e wil l hav e launche d her GD P recovery a t a 4 percent per annu m rate . Blessed b e Machiavelli , whos e Invisibl e Han d i s see n once agai n t o triumph ! I f yo u ca n believ e i n thi s ros y scenario, yo u hav e credential s t o b e a votin g membe r i n the Academy o f th e Tooth Fairy . What i s th e bad-new s versio n o f th e future ? I t goe s like this: 1. Th e Mid-Februar y disagreement s i n Washingto n are onl y a n earl y mov e i n a n ongoin g ches s game . Th e ball i s no w i n th e Japanes e court . I f a n anti-clima x o f no furthe r actio n ensues , the n a n America n reactio n must b e expected . 2. Bil l Clinto n i s already unde r criticis m fo r failin g t o follow throug h o n hi s toug h talk . Innocen t human s ar e killed i n Yugoslavia . Clinto n warn s tha t thi s is intolera ble an d tha t America n migh t wil l punis h th e wrongdo ers, bu t th e prospect s fo r th e America n peopl e o f an other Vietna m quagmir e lea d t o a Clinto n backdown . Smarting under criticis m o f his irresolution, Clinto n an d his hawkis h trad e negotiator s ca n curr y popularit y a t home by getting tough with trade sanctions. If American producers don' t achiev e X percent o f the Japanese semi conductor marke t b y th e Fourt h o f July , al l import s from Japa n i n th e electronic s categor y wil l b e levie d a n import surcharg e o f Y percent an d a quota reductio n o f 122

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Z percent . I f Fidelity , Dreyfus , an d Vanguar d ar e no t permitted t o gai n 3 5 percen t o f th e pension-manage ment busines s i n Japan b y Apri l Fool' s Day , the n note book computer s mad e in Japan ar e declared contraban d in Iowa . Yo u ca n outlin e simila r ultimatum s tha t g o into effect b y Flag Day, June 1 4 or Bastille Day, July 14 . Of cours e yo u listener s wil l understan d tha t m y tongu e is i n m y cheek . I am no t seriousl y predictin g eithe r a sof t landing i n whic h ever y prospec t please s o r th e beginnin g of a Thirty Years ' War tha t wil l lead t o the end of civiliza tion a s w e hav e know n it . I write i n th e spiri t o f Georg e Bernard Shaw , wh o said : "Neve r strik e a chil d excep t i n anger." I never mak e a jok e unles s i t serve s t o advanc e a serious point . I am 10 0 percent seriou s in saying : Expect Clinton , hi s trade representativ e Micke y Kantor , and Deput y Secretar y o f Treasur y Rober t Altma n t o reac t in som e punitiv e wa y agains t Japa n i f sh e make s n o ne w conciliatory move . Savin g o f fac e wil l deman d it . More over, action s take n unde r suc h motivation s ar e especiall y prone t o b e unwise—non-optima l fro m th e standpoin t o f both parties ' self-interest . Mind you , mos t o f u s economist s ar e unsympatheti c t o the Kantor-Altma n gambi t o f demandin g tha t Japan agre e to mee t specifi c numerica l target s o f physica l import s o r percentage share s o f market s b y agreed-upo n dates . Tha t does no t mea n w e economist s approv e o f th e myria d for 123

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mal an d informa l mechanism s tha t Japan employ s t o pro tect domesti c interests . No r doe s i t mea n tha t w e doub t that threat s ca n sometime s succee d i n movin g politica l mountains tha t ar e harmful t o everybody . Rather, i t i s a truth tha t threat s com e t o lac k credibilit y if neve r the y ar e used . I f th e natur e o f th e threat s them selves is to creat e bilatera l deadweigh t losses , then a mod e of negotiatin g tha t relie s o n suc h threat s i s liabl e t o tur n Positive-Sum trad e scenario s int o Zero-Su m o r Negative Sum scenarios . Let m e win d u p b y outlinin g briefl y wha t Japa n ough t to b e doin g no w i n he r ow n interes t an d a s a n importan t player i n th e globa l econom y an d th e communit y o f na tions. Wha t ca n goo d friend s o f Japa n legitimatel y urg e upon her ? First, we should separat e tw o problems : 1. th e GD P proble m o f curren t production , employ ment, an d income ; 2. th e balance-shee t proble m o f th e solvenc y o f th e banks an d th e need to restore their capital i n relatio n to their investment s an d liabilities . The tw o problem s are , o f course , related . Fo r example , when bank s ar e desperatel y shor t o f capita l the y wil l no t extend loan s t o potential employer s o f workers . The ne w coalitio n governmen t ha s falle n behin d o n both fronts . O n th e firs t proble m o f recessionar y GD P i t should d o thre e things : 124

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1. Th e Ban k o f Japa n shoul d b e persuade d o r coerce d into massivel y expandin g credit . Thi s wil l mea n in terest rate s definitel y belo w th e inflatio n rate . Nega tive rea l interes t rate s ar e th e pruden t targe t unti l the recessio n i s clearl y defeated . I t i s ba d scientifi c economics tha t monetar y polic y ha s alread y sho t its bolt . 2. Incom e ta x rate s shoul d b e cu t acros s th e board . A t this tim e n o promise s shoul d b e mad e abou t raisin g them agai n i n th e futur e o r offsettin g the m wit h future ne w indirect taxes . Silence is golden. 3. Cyclica l expansio n i n deficit-finance d fiscal expendi tures shoul d b e th e orde r o f th e day . Onl y afte r activist macr o program s hav e brough t bac k sus tained recover y shoul d governmen t tur n bac k to ward mor e auster e fiscal policies. What abou t th e banks ? Th e Japanes e voter s ma y thin k that th e governmen t ough t no t t o bai l ou t th e bank s fro m the mistake s tha t the y themselve s made . Bu t i t wil l b e th e Japanese peopl e wh o wil l b e mos t hur t i f th e governmen t allows a repla y i n Japa n o f th e Herber t Hoove r scenari o of 1929-33 , i n whic h thousand s o f America n bank s o n Main Stree t wer e allowe d t o fai l an d clos e thei r door s forever. Every societ y need s a viable bankin g system . B y hypocrisy o r otherwise , th e Die t an d th e bureaucrac y mus t se t up a Rescu e Corporatio n t o replenis h th e gone-foreve r assets o f th e banks . Sen d you r expert s t o Washingto n t o 125

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study ho w Presiden t Bus h an d Presiden t Clinto n hav e dealt, deal t successfully , wit h America' s bankin g crisis . We i n Americ a hav e turne d th e corner . B y 199 5 Japa n can d o so , too . Bu t no t i f sh e continue s he r 1990-9 4 macro-pattern o f drif t an d passivism .

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CHAPTER 5

Financial Development s i n Europe, Japan, an d the United States: Problems and Prospect s April 11, 1994

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I N T R O D U C T O R Y REMARK S Professo r Wille m Buite r come s t o u s from Yal e University , wher e h e ha s ha d a distinguishe d career. I t i s interesting tha t he' s th e Juan Tripp e Professo r of Internationa l Economics , becaus e thos e o f yo u wh o g o back som e year s wil l remembe r tha t Juan Tripp e wa s on e of th e founder s o f Pa n America n Airlines . I n a discussio n of internationa l economic s an d financ e it' s interestin g t o ask, "Wha t eve r happene d t o Pa n American? " Wha t eve r happened t o a lot o f companies ? Professor Richar d Levic h ha s bee n o n th e facult y a t th e Stern Schoo l fo r severa l years . He' s a Universit y o f Chi cago graduat e throug h an d through , whic h mean s h e i s a man o f stron g opinions, which he will share with us a little bit late r on . Tor u Kusukaw a i s Chairma n o f th e Fuj i Research Institut e Corporation , an d befor e th e meetin g started toda y h e an d I wer e talkin g abou t th e fac t tha t some da y al l th e fighting migh t b e ove r an d peopl e o f goodwill aroun d th e worl d coul d d o seriou s thing s lik e gardening. Tha t ma y happe n som e day . O f cours e Profes sor Samuelson , wh o ha s bee n her e fo r severa l year s an d on many , man y occasions , i s quit e simpl y th e Greates t Economist o f th e Twentieth Century .

ROBERT KAVESH :

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W I L L E M H . BUITE R Regarding Professo r Kavesh' s introduction , I hope m y in tellectual healt h i s bette r tha n th e financial healt h o f Pa n Am, which ha s bee n defunc t fo r som e time. I will focus o n some ver y broad-rangin g issues , includin g th e interna tional monetar y an d exchang e rat e regime , internationa l trade imbalances , an d th e importanc e o f no t confusin g them wit h competitivenes s problems . For th e internationa l monetar y an d exchang e rat e re gime, I thin k ther e i s no w virtuall y universa l consensus . For th e foreseeabl e futur e ther e i s no alternativ e t o a dirt y float. A float, becaus e an y attemp t t o fix ke y exchang e rates i s inconsisten t wit h th e degre e o f nationa l sover eignty remainin g amon g th e majo r industria l countrie s i n the presenc e o f th e kin d o f capita l mobilit y tha t we'v e known, tha t we'v e grow n t o kno w an d love . It has to be a dirty float, no t a clea n float, becaus e government s neve r can leav e anythin g alon e an d therefor e th e whol e notio n of a clea n float i s a construc t tha t ha s neve r foun d an y applicability. This hold s wit h th e Bi g Three—the D-mark , th e dolla r and th e yen—an d als o importantl y withi n th e Europea n Union. Th e exchang e rat e mechanis m i s dead , a t leas t fo r this century . I d o believ e tha t ther e wil l b e a Europea n Monetary Union , a Wes t Europea n Monetar y Unio n w e should cal l i t really , bu t I d o no t expec t i t unti l som e 130

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time i n th e nex t decade , th e beginnin g o f th e twenty-firs t century rathe r tha n th e en d o f th e twentiet h century . Th e reasons fo r tha t ar e too man y t o go into, but basicall y an d fundamentally a greater degre e of political sovereignty wil l have to b e transferred t o the central Europea n administra tion i f th e fixed exchang e rat e regim e centra l t o th e Euro pean Monetar y Unio n i s going t o b e credible . We learne d this in a lot of painful ways , in a way tha t has exacerbate d the Europea n recession , bu t we'v e learne d i t no w s o let' s not tr y an d resurrec t horse s tha t shoul d remai n dead . I a m i n th e unusua l positio n o f no t finding muc h t o criticize i n th e Unite d States . For onc e I think bot h mone tarily an d fiscally th e U.S . authoritie s hav e go t i t right . This I don' t thin k ha s eve r happene d before , excep t per haps whe n Pau l Samuelso n wa s advisin g th e U.S . gov ernment. For a numbe r o f years , i n fac t unti l recently , th e Fe d pursued a resolutel y expansiv e monetar y policy , lik e it s silly sisters in Europe an d t o a certain exten t in Japan. Th e Fed als o decided , wisely , ver y recently , tha t th e dange r was i f anythin g i n overheating , an d som e moderate mone tary stanc e wa s required . Th e fac t tha t th e marke t pan icked a t th e sigh t o f a quarte r o f a percen t increas e i n short-term interes t rate s i s mor e a reflectio n o n th e mar kets an d thei r almos t unlimite d capacit y a t least fo r short term frivolit y tha n o n monetar y policies . Fiscally th e Clinto n administratio n i s movin g ahea d with measure s which , give n th e kin d o f growt h we'r e seeing now, shoul d mak e th e U.S. budget position sustain 131

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able. Th e sam e canno t b e sai d o f Europ e o r Japan . Bot h Europe an d Japa n nee d stimuli . Europe , stil l t o a larg e extent i n thral l t o th e Bundesbank , i s stuc k wit h interes t rates whic h ar e wel l abov e wha t i s desirable , an d thi s could b e remedie d wit h o r withou t th e Bundesban k i f people wer e willin g t o forg o th e largel y illusionar y bene fits, especially i n th e cas e of France , of shadowin g th e stil l overly stron g D-mark . Europ e need s financial relaxation , and Japa n need s a mixtur e o f financial an d fiscal relax ation. Ver y littl e i s actuall y happenin g there , disappoint ingly, an d I think criticis m ca n b e rightl y leveled a t Japa nese macroeconomi c policy , includin g monetar y policy , not primaril y fo r trad e balanc e reasons , bu t simpl y be cause i t i s no t a polic y tha t make s sens e eve n fro m a n internal Japanese perspectiv e o f utilizatio n an d demand . Regarding m y las t point , th e quickes t wa y o f makin g i t is t o sa y tha t internationa l trad e relation s ar e i n a goo d news/bad new s phase , an d par t o f th e ba d new s i s du e t o the tendency , mos t emphaticall y presen t i n th e Clinto n administration, t o confus e macroeconomi c imbalance s with competitivenes s problems . The goo d news in interna tional trad e relation s i s the completio n i n al l bu t th e sign ing of th e Uruguay Roun d an d th e conclusion o f NAFTA . It i s t o th e credi t o f th e Clinto n administratio n tha t the y managed t o pul l thes e off . Th e ba d new s i s that ther e i s a hardening i f anythin g i n th e mor e industria l countrie s o f protectionist instincts . This I've learne d i s more true in th e U.S. than eve n i n Europ e o r Japan. I' m talkin g trends , no t levels. Th e leve l o f protectionis m i s highes t i n Japan , bu t 132

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the stronges t pressur e fo r increasin g th e leve l o f protec tionism i s undoubtedly i n the United States, which i s going through a singularly ba d phase . It i s importan t t o recogniz e tha t th e trad e surpluse s o f Japan, bot h it s overal l trad e surplu s an d it s bilatera l trad e surplus wit h th e Unite d States , ar e macroeconomi c phe nomena, no t th e reflectio n o f competitivenes s problem s and no t th e reflectio n o f protectionis t tendencie s i n eithe r country. It will be cured by macroeconomic developments , not b y change s i n competitiveness , no r b y change s i n pro tectionism. Th e Japanes e coul d introduc e unrestricte d market acces s fo r al l comer s tomorro w withou t i n an y obvious wa y changin g th e overal l trad e balance . The trad e balance , a s macroeconomist s neve r tir e o f pointing out, is the excess of national savin g over domesti c capital formation . Whil e th e Japanes e inves t impressivel y compared t o mos t o f th e othe r industria l countries , the y save eve n mor e impressively . Instea d o f criticizin g the m for that , th e res t o f worl d shoul d g o dow n o n it s knee s and b e thankfu l tha t a t leas t somebod y i s providin g th e world wit h th e capita l tha t i s needed . I jus t rea d thi s morning i n th e Financial Times tha t Lati n Americ a im ported capita l equa l t o 3. 8 percen t o f it s GD P las t year. I t has to com e from somewhere . It' s not going to come fro m here, right ? Th e Unite d State s an d mos t o f Europ e hav e lost th e savin g habi t altogether . Japa n stil l saves . It i s tru e that the present high Japanese savin g rate is partly cyclical , and I would therefor e suppor t furthe r fiscal an d monetar y measures t o increas e Japanese domesti c spending . 133

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I woul d hop e tha t th e recover y o f Japanes e domesti c demand wil l no t b e accompanie d b y a disappearanc e o f the financia l surpluses . Th e forme r Sovie t Union , South east Asia , Sout h America , Centra l America , an d Norther n Africa al l nee d larg e injection s o f investabl e funds . Thes e sorts o f surpluse s ar e bein g generate d onl y i n Japa n an d that is the place where we should hop e they remain, unles s we really believ e that th e United State s is ready a s a natio n to u p th e nationa l savin g rat e b y 4 o r 5 o r mayb e 1 0 percent o f th e GD P t o tak e ove r th e rol e th e Japanese ar e being aske d t o giv e up . Surel y not . Thi s wil l no t happen . By al l mean s tak e measures , hopefull y a t a multilatera l level, t o reduc e th e protectionis t habit s ingraine d i n th e Japanese economy . Bu t don' t attac k th e Japanes e fo r th e one succes s in thei r externa l economi c policies, their trad e surpluses.

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RICHARD LEVIC H Professor Sat o ha s give n th e pane l toda y a large canvas — Financial Development s i n Europe , Japan, an d th e Unite d States: Problem s an d Prospects—perhap s s o tha t eac h speaker wil l no t fee l constraine d an d ma y pain t ove r a s large or smal l a portion o f the canvas a s he chooses. While I migh t normall y b e expecte d t o discus s foreig n exchang e markets, thei r efficienc y o r forecasting , m y them e toda y will b e th e challeng e fo r settin g polic y i n th e financial derivatives market . By derivative s I mea n th e collectio n o f futures , for wards, options , an d swaps—securitie s tha t deriv e thei r value fro m underlyin g asset s suc h a s foreig n exchange , bonds, short-ter m interest-rat e obligations , equities , an d other asset s o f value . Derivativ e securitie s ma y exis t o n their ow n o r ma y b e imbedde d withi n othe r securities . Derivative securitie s ma y b e trade d o n centralize d ex changes—as commodit y future s hav e bee n fo r man y years, a s foreig n exchang e future s hav e sinc e th e earl y 1970s, o r a s interes t rat e future s hav e sinc e th e earl y 1980s. Centralized exchange s within th e United States an d elsewhere ar e regulated , providin g a measur e o f investo r protection an d safeguard s (such a s procedures fo r margi n requirements, clearing, and settlement ) agains t risks in on e market spillin g ove r int o othe r part s o f th e financial system. 135

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The growt h o f financial future s an d option s contract s has bee n spectacular . I n 199 3 mor e tha n on e billio n ex change-traded future s an d option s contract s trade d hand s on 6 2 exchange s aroun d th e world. 1 Th e to p contrac t i n 1993 wa s th e U.S . Treasur y Bon d future s trade d o n th e Chicago Boar d o f Trad e (CBOT ) wit h a n averag e dail y volume o f ove r 300,00 0 contracts. 2 Eac h contrac t repre sents $100,00 0 i n underlyin g governmen t securities , mak ing a n averag e da y represen t ove r $3 0 billio n i n notiona l value. The secon d mos t activel y traded contract , th e Eurodollar future s contrac t o n th e Chicag o Mercantil e Ex change (CME) , ha d a dail y tradin g volum e o f onl y 250,000 contracts. 3 Bu t with eac h Eurodollar future s con tract representin g $ 1 million , a n averag e day' s tradin g o f this singl e contrac t represent s $25 0 billio n i n notiona l value. While thes e numbers ar e large eve n t o congressme n an d professional athletes , the y ar e modes t i n compariso n t o the over-the-counte r (OTC ) marke t fo r financial deriva tives. A recen t governmen t (join t FRB/FDIC/OCC ) stud y estimated th e notiona l siz e o f banks ' exposur e i n OT C derivatives (includin g forwards , options , an d swaps ) a t $ 8 trillion i n 1992. 4 Further , th e stud y foun d tha t 9 0 percen t of th e exposur e amon g bank s wa s concentrate d i n onl y seven bank holdin g companies—makin g th e argument fo r quality ris k management i n these institutions essential , bu t also suggestin g th e eas e wit h whic h thi s highl y concen trated bankin g an d financial activit y coul d b e regulated . This i s wher e th e stor y fo r today' s topi c reall y begins . 136

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Shortly afte r Professo r Sat o aske d m e to participate i n thi s panel, I hear d a speec h b y Representativ e Ji m Leac h o f Iowa, th e senio r Republica n o n th e Hous e Bankin g Panel . Representative Leac h ha s issue d a 900-pag e stud y o n th e OTC derivative s marke t tha t recommend s a n interagenc y commission t o establis h unifor m capita l rules , account ing, disclosure , an d suitabilit y standard s fo r dealer s an d end-users o f derivatives . Th e stud y underpin s legislatio n calling fo r th e creatio n o f a new Federal Derivative s Com mission (FDC) . Representativ e Henr y Gonzalez , th e Chairman o f th e Hous e Bankin g Committee , i s puttin g forward hi s own legislatio n o n derivatives. 5 Now th e federa l government , alon g wit h regulator s i n other countries , hav e a clea r righ t t o b e concerne d abou t the ris k o f a system-wid e disturbanc e arisin g fro m th e derivatives markets , especiall y th e OT C market . Underly ing thei r concer n i s th e possibilit y tha t th e officia l safet y net ha s provide d a n implici t guarante e o f banks ' obliga tions, whic h i n tur n ha s unintentionall y subsidize d th e OTC market . Perhap s thi s implici t guarante e ha s played a role i n th e rapi d expansio n o f th e derivative s markets , which ha s expose d th e financial syste m t o greate r risk . Regulators ar e als o concerne d abou t th e qualit y o f senio r management an d th e ris k managemen t system s tha t hav e been pu t int o place. Regulators doub t thei r ow n an d man agers' abilit y t o understan d an d manag e thes e ne w com plex transactions . Othe r factors , namel y tha t derivative s help t o strengthe n th e linkage s acros s market s an d in crease th e likelihoo d o f spillovers , tha t thes e market s ap 137

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pear concentrated , an d tha t systemi c risk s ma y b e un derpriced, emphasiz e th e need fo r oversight . We gran t tha t ther e ar e reason s t o b e concerne d abou t the growt h o f thes e ne w financial marke t products . Bu t i s the cry , "I' m fro m th e federa l government , an d I' m her e to hel p you" a welcome voic e in this public policy debate ? Past U.S . regulatio n o f financial institution s ha s erre d through bot h sin s o f commissio n an d sin s o f omission , being a t time s to o lenien t an d a t time s to o strict . Th e international financial market s especiall y offe r example s of th e long-lastin g an d unintende d consequence s o f U.S . regulation. Example 1. Th e Eurocurrenc y markets , th e offshor e markets fo r short-ter m ban k deposit s an d loans , gre w u p in th e 1960 s an d 1970 s i n th e shado w o f a U.S . bankin g industry burdene d wit h Regulatio n Q interest-rat e ceiling s and Regulatio n D non-interest-bearin g reserv e require ments. Th e Eurocurrenc y marke t toda y ha s grow n t o $ 7 trillion. I n 1981 , 20 year s afte r th e birt h o f th e Eurocur rency market , th e Unite d State s surrendere d b y allowin g International Bankin g Facilitie s (IBFs ) t o handl e offshor e transactions withi n U.S . borders , bu t onl y fo r nonresi dents. Bu t wit h thi s lat e arrival , onl y 1 5 percen t o f off shore bankin g i s captured b y American-based IBFs . Example 2 . Along the same lines, the Eurobond market , the offshor e marke t fo r long-ter m borrowin g an d lending , developed i n the 1960s , an d 1970 s with th e protective ai d of U.S . regulations—th e Interes t Rat e Equalizatio n ta x 138

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(IET) an d th e Offic e o f Foreig n Direc t Investmen t (OFDI ) supervision. A s on e autho r notes : "Indeed , i t i s paradoxi cal tha t a la w whic h wa s intentionall y prejudicia l t o th e interests o f foreig n borrower s [th e IET ] ha d th e effec t o f creating th e larges t internationa l capita l marke t th e worl d has known." 6 New-issu e activit y i n th e Eurobon d marke t now regularl y outstrip s tha t i n th e U.S . marke t eve n though th e IE T an d OFD I regulation s wer e scrappe d in 1974 . Th e Unite d State s wa s eve n slowe r t o respon d to th e Eurobon d market , waitin g unti l 199 0 t o intro duce Rul e 144 a allowin g securitie s (includin g foreig n se curities) t o b e issue d t o an d trade d amon g "qualified " institutional investors , with informatio n disclosure s deter mined b y thei r ow n marke t practice s rathe r tha n SE C guidelines. Example 3 . I n equit y markets , th e U.S . ha s stil l no t responded t o worl d trends . Th e Unite d State s i s th e onl y marketplace tha t permit s acces s o n th e basi s o f nationa l treatment (i.e. , requirin g U.S . GAA P [generall y accepte d accounting principles ] statement s o f al l firms wit h ex change-traded equit y shares) , wherea s othe r countrie s allow acces s t o publi c market s o n th e basi s o f reciprocit y (permitting home-countr y GAA P statement s t o suffic e i n most cases) . The prospec t o f fres h congressiona l legislatio n a t thi s time is unsettling because s o much progress has been mad e in addressin g th e share d concern s o f regulator s an d mar ket participants. Le t me mention fou r examples . 139

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1. Federal Reserve Regulation EE The Federa l Reserv e recentl y issue d Regulatio n EE , in tended t o strengthe n th e foundatio n fo r financial nettin g contracts tha t hav e bee n develope d privatel y fo r us e i n foreign exchange , swaps , an d othe r OT C products . I n using these netting contracts , the counterparties agre e tha t they wil l pa y o r receiv e ne t amount s du e o n a serie s o f financial contract s o r paymen t orders , rathe r tha n th e gross amount s du e o n eac h obligation . To quot e a Federa l Reserve Governor : "Th e ne w regulatio n establishe s rela tively simple generic tests that will permit financial institu tions, whic h ar e actin g a s market-makers , t o ente r int o netting contract s tha t wil l b e valid unde r federa l law , eve n in th e even t o f bankruptcy." 7 Thes e nettin g contract s ar e extremely important , a s they reduc e the total ne t exposur e to abou t 1 percent o f th e gross exposur e amount . 2. Federal Reserve Fedwire Changes Delivery risk—th e chanc e tha t bankruptc y occur s be tween th e paymen t o f fund s i n on e par t o f th e worl d an d the receip t o f fund s late r i n th e da y i n anothe r par t o f th e world—is anothe r importan t systemi c risk . Lately , thi s has bee n terme d "Herstat t risk " i n recognitio n o f th e famous closur e o f th e Herstat t Ban k i n 1974 . Thi s ris k i s especially acut e i n th e cas e o f yen-dolla r contracts , wher e yen payment s ar e ofte n mad e an d settle d a s muc h a s 1 8 hours befor e dolla r contra-payment s ar e finally settled . 140

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In Februar y 199 4 th e Federa l Reserv e announce d tha t beginning i n 199 7 th e operatin g da y fo r th e Fedwir e wil l be expande d fro m th e curren t 1 0 hour s t o 1 8 hours . Spe cifically, th e Fedwir e fund s transfe r servic e wil l operat e from 12:3 0 A.M . unti l 6:3 0 P.M . Easter n time . The chang e will essentiall y eliminat e Herstat t ris k betwee n th e U.S . and Europe, and potentially eliminat e the risk between th e U.S. and Japan . 3. Multilateral Clearing and Settlement Private institution s hav e themselve s bee n responsiv e t o concerns expressed b y ex-New Yor k Federal Reserv e Ban k President Geral d Corriga n tha t dail y tradin g volum e i n foreign exchang e o f mor e than $ 1 trillion poses a systemi c risk fro m clearin g an d settlement . A new private compan y known a s Multinet— a join t ventur e betwee n Interna tional Clearin g System s Inc . ( a subsidiar y o f Option s Clearing Corporation ) an d Nort h America n Clearin g House—has develope d a syste m o f multilatera l nettin g i n foreign exchange . T o illustrat e th e powe r o f multilatera l clearing, imagin e a worl d o f 1,00 0 bank s tradin g wit h each other . A t th e en d o f eac h da y eac h ban k woul d ow e a ne t amoun t t o eac h counterparty , resultin g i n a s man y as 500,00 0 bilatera l transaction s (i n eac h currenc y o f trade). In the multilateral syste m each bank clear s with th e central institution , resultin g i n n o mor e tha n 1,00 0 trans fers betwee n eac h ban k an d th e centra l agent . Th e amounts a t ris k t o compute r failure s ar e greatl y reduce d 141

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by th e privately-owne d Multine t system . Th e syste m wil l be launche d fo r foreig n exchang e trade s i n Jul y 1995 . Multinet i s also planning t o se t up a n OT C clearin g hous e along th e sam e lines. 4. Separately Capitalized "Derivative Guarantee" Corporations Market-makers no w clearl y realiz e tha t counterpart y ris k is an invaluabl e asse t fo r participatin g i n th e OT C deriva tives markets . Majo r player s i n th e marke t hav e se t u p separate, well-capitalize d subsidiarie s (th e terminolog y i s "bankruptcy remote") . Th e primar y busines s objectiv e o f these subsidiaries is to obtain a n S&P AAA rating to prov e their creditworthiness , whil e a t th e sam e tim e holdin g a designated portio n o f th e counterpart y an d marke t risk s associated wit h it s parent' s derivative s portfolio . Readin g the busines s pla n o f on e o f thes e guarante e firms i s highl y instructive abou t th e natur e o f today' s OT C derivative s business.8 I t i s a clea r signa l o f prudenc e o n th e par t o f management tha t the y ar e willin g t o disclos e thei r ris k management system s t o a n independen t ratin g agenc y (S&P) t o obtai n a credi t ratin g tha t ma y b e revoke d o r terminated i f certain well-define d event s occur. I t is a clea r indication tha t a n "unregulated " marke t ca n actuall y b e highly discipline d throug h self-regulatio n an d th e disci pline of market force s i n a market where long-term reputa tions matter , eve n whe n ther e i s a n implie d federa l safet y net. 142

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Summary and Conclusions Regulation o f OT C derivative s securities markets is clearly important t o preven t th e spillove r effect s o f systemi c ris k and t o preclud e taxpayer s fro m pickin g u p th e bil l fro m their implici t guarante e t o larg e financial institutions . However, th e presen t an d propose d rule s fo r capita l ade quacy o f derivative s ar e to o simple . The y ar e simpl e t o implement, bu t inconsisten t wit h moder n financial eco nomics an d ho w thes e risk s ar e correlated i n practice. Th e proposed rule s canno t readil y incorporat e ne w instru ments, particularl y thos e whos e value s depen d o n ne w underlying asset s o r indexes . Th e propose d rule s woul d degrade th e marke t fo r derivative s securities , thereb y en dangering a prosperou s U.S . industry—one tha t provide s essential risk-managemen t product s fo r a growin g lis t o f firms, an d mor e importantl y on e tha t ma y easil y migrat e to a foreign shore . One wa y t o procee d tha t a t leas t on e Federa l Reserv e Board Governo r i s sympathetic t o is to allo w internal (i.e. , bank) model s t o determin e regulator y capita l require ments. 9 While this ma y soun d lik e askin g the fo x t o guar d the chicke n coop , i t woul d obviousl y respon d t o Edwar d Kane's regulator y dialectic , leap-frogging financial regula tors ont o th e sam e pag e a s th e institution s the y regulate . Moving i n thi s directio n woul d mar k a trul y innovativ e regulatory respons e t o a truly innovativ e industry .

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T O R U KUSUKAW A Professor Samuelso n ha s remarked , i f I' m no t mistaken , that economic s i s less than a science and mor e than a n art . This make s hi m fee l tha t economic s i s fascinating , an d h e carries o n wit h hi s studies . Thi s notio n o f hi s ha s encour aged m e t o com e her e a t th e reques t o f Professo r Sat o t o discuss a subjec t o n whic h I canno t possibl y clai m t o b e an expert . I wa s a studen t o f law , no t o f economics , th e sciences, o r th e arts , an d I therefore a m no t i n a positio n to spea k o f anythin g relate d t o economic s wit h theoretica l precision. I hope tha t yo u will bea r with m e for thi s disad vantage. Havin g sai d that , I fee l fre e t o g o ahea d wit h today's topic , whic h i s th e Japanes e economy , th e bubbl e of th e eighties an d th e recession o f th e nineties . Everyone i s kee n t o kno w wha t i s happenin g i n Japa n today wit h it s shiftin g politica l scenarios . Tw o day s ag o I discussed th e possibilitie s fo r th e futur e wit h a coupl e o f members o f th e Libera l Democrati c Party , an d i t appear s our politica l turmoi l ma y b e resolve d towar d th e en d o f this week . Th e curren t thinkin g i s tha t ther e ar e thre e candidates o n th e table . On e i s Hata , th e presen t Foreig n Minister; th e secon d i s Takemura , wh o i s th e Chie f Gen eral Secretar y o f th e Cabinet , an d th e third i s Watanabe, a member o f th e LDP . I f Watanab e i s nominated , comin g out o f th e Libera l Democrati c Party , h e wil l brin g som e dissidents wit h him—probabl y somewher e betwee n 6 0 144

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and 80—bu t that' s stil l a matte r fo r speculation . Some body sai d that i t may be more like 40. If he is able to carr y 70 o r more , however , thei r numbe r wil l outweig h th e presence o f th e Socialists , whic h woul d provid e a ver y stabilizing sor t o f anchor . There i s als o tal k o f a genera l electio n i f w e canno t come t o an y mor e amicabl e arrangement . Thi s woul d b e one o f th e worst possibl e scenario s fo r us . LDP politician s were know n fo r thei r secrec y an d thei r hidde n agendas . Nobody eve r kne w wha t wa s reall y happenin g behin d th e political scenes . Hosokawa an d th e coalition , o n th e othe r hand, ar e transparent , eas y t o read . Vagu e a s hi s policie s so fa r hav e been , filled wit h promise s bu t lackin g i n an y apparent substance , Hosokaw a continue s t o enjo y enor mous popularit y simpl y becaus e h e represent s suc h a dif ferent styl e o f leadershi p fro m wha t w e ha d i n th e past . He ha s brough t a whol e ne w atmospher e t o governmen t in Japan , an d w e worr y tha t a genera l electio n wil l cu t this ne w er a short . W e loo k t o ou r thre e potentia l ne w candidates then , i n the hope that th e coalition governmen t will succee d i n its path towar d stabilit y an d reform . In discussing the Japanese economy , I need to retur n fo r a momen t t o 198 5 an d th e Plaz a Accord . I t wa s afte r th e Plaza Accor d tha t th e ye n starte d t o appreciat e dramati cally a t th e ver y momen t th e econom y ha d begu n t o de cline. Fortunatel y fo r Japa n a t tha t time , ou r industrie s were abl e t o tak e ful l advantag e o f decline s i n bot h oi l and impor t prices , whic h provide d the m wit h chea p ra w materials an d chea p energ y whe n the y neede d the m most . 145

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Once the initial economic shakeu p ha d settled , it appeare d that th e ne w leve l o f th e ye n wa s goin g t o remai n stead y for a while . Th e Japanes e expor t industr y wa s abl e t o survive a t th e ne w leve l o f exchang e rat e wit h th e hel p o f windfall profit s tha t ha d accumulate d durin g th e perio d immediately precedin g th e Accord , whe n th e ye n wa s cheap an d th e U.S . government showe d benig n neglec t fo r a stronge r dollar . Given thi s buffer , i t wa s no t s o surprisin g tha t ou r industries wer e abl e t o emerg e i n du e cours e fro m th e glow o f th e yen' s shar p rise . Althoug h som e industries , especially the smaller one s with les s international competi tiveness, ende d u p i n liquidation , th e proces s wa s no t as painfu l a s w e ha d anticipate d becaus e th e asset s tha t remained wit h the m wer e stil l increasin g i n value . Thi s story i s in marked contras t t o what i s happening currentl y in th e Japanes e economy . Fo r on e thing , cheape r impor t prices ar e no t performin g thei r expecte d function , o r ar e performing i t too slowl y t o mak e a difference. Whethe r o r not this is related t o the growing share of service industrie s in th e GD P o r t o th e hig h cos t o f labor , maintenance , an d infrastructure i s not clear . To retur n t o ou r history , i n Februar y o f 198 7 th e off shore discoun t rat e wa s cu t five times , fro m 5 t o 2. 5 percent. Meanwhile , accumulate d wealt h ha d reache d a high enoug h leve l tha t peopl e wer e startin g t o loo k int o new area s of financial investin g beyond traditiona l saving s banks. Interes t rate s wer e liberalized . Th e deman d fo r 146

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money b y th e publi c secto r increased . Th e governmen t and loca l authoritie s wer e activel y borrowin g fro m th e capital marke t fo r infrastructur e cost s an d Socia l Security , while private-secto r borrowin g becam e essentiall y inac tive. Thi s wa s th e firs t tim e i n Japa n sinc e Worl d Wa r II tha t th e movemen t o f interes t rate s appeare d t o b e functioning properly , an d marke t principle s bega n t o pre vail. Many ne w financia l commoditie s wer e introduce d t o the market . So-calle d securitizatio n becam e financial , an d the capita l marke t becam e quit e animated . Stockbroker s were creatin g a climat e i n whic h investor s bough t GD P growth an d ignore d price-earning s ratio s a s hig h a s 8 0 i n their investmen t decisions . The low interest rat e remaine d fo r a very long time, an d the inciden t o f Blac k Monda y o n Wal l Stree t i n Octobe r 1987 wa s on e o f th e element s tha t cause d ou r Centra l Bank to hesitat e in raising the discount rate . Euphoria wa s created bot h i n th e financia l an d th e rea l estat e markets , and a simila r environmen t i n th e Unite d State s an d i n other countrie s aroun d th e worl d serve d t o fortif y th e Zeitgeist i n Japan, too . It ca n b e argue d no w tha t w e coul d hav e don e some thing a t tha t tim e t o preven t th e situatio n fro m reachin g the extreme s tha t i t did . Nobod y bu t th e Economist i n London gav e warnin g signal s agains t thi s genera l eupho ria. Th e Ban k o f Japa n increase d th e discoun t rat e i n May 198 9 t o 3.2 5 percent , bu t the n Ministe r o f Financ e Ryutaro Hashimot o intervene d an d prevente d it . The n a 147

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change of governorshi p o f th e Bank o f Japan too k plac e in December o f 1989 , enablin g th e Ban k t o increas e th e rat e on thei r ow n initiative . The officia l discoun t rat e wa s increase d five time s fro m 3.25 t o 6 percent durin g Ma y 198 9 t o Augus t 1990 , in a n attempt t o tackl e th e apparen t overheatin g o f th e econ omy. I n th e meantim e th e privat e sector' s investmen t i n production facilitie s wa s ver y buoyan t durin g thi s period , with a n 8. 6 percen t increas e i n 1987 , 16. 8 percen t i n 1988, 14. 3 percen t i n 1989 , an d 11. 4 percen t i n 1990 . These figures reflec t th e slo w effect s o f th e chang e i n dis count rate s unde r th e hig h liquidit y situatio n o f th e mar ket. Moreover, warning s i n the latter par t o f 198 9 di d no t influence th e investmen t decision s o f th e Ban k o f Japa n in 1990 . Under thes e circumstances , th e market s experience d fo r the first tim e a liberalization fortifie d b y the abundanc e o f money. The y wen t o n t o pla y a go-g o game . Th e master s of th e gam e wer e ambitiou s youn g peopl e wh o ha d n o concept o f th e market' s cycle s o f up s an d downs . Th e prudence an d th e cautio n o f th e olde r generatio n wa s ignored. Thi s aggressiv e capita l investmen t wa s supporte d and facilitate d b y th e ne w mone y create d i n th e buoyan t capital marke t a t a ver y lo w cost . Ou r youn g investor s believed that the average growth rat e of 5 percent achieve d over a four-yea r perio d reflecte d tru e potentialit y fo r growth i n th e future , an d mad e thei r investmen t decision s based o n thi s expectation . True growt h potentia l mus t hav e alread y bee n dow n t o 148

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around 3 percent b y this time, but buoye d b y their eupho ria n o on e wa s seein g clearly . Ou r presen t overcapacit y situation wa s create d i n thi s way, an d i t has take n a lot of time an d effor t t o remedy . I t i s no w commonl y acknowl edged tha t th e pea k o f thi s economi c boo m wa s reache d around Apri l 1991 . Thereafte r th e econom y starte d t o decline, finally reachin g th e leve l o f th e presen t recession . During thi s perio d oi l price s increase d a s a n effec t o f th e Gulf War , a n additiona l blo w t o th e declinin g economy . The Centra l Ban k finally bega n reducin g th e discoun t rat e in Jul y 199 1 an d continue d unti l Septembe r 199 3 whe n the rat e cam e dow n t o 1.7 5 percent , th e lowes t i n th e Bank's history . Ultimatel y the y wer e criticize d fo r bein g too slo w to act . Now th e recessio n ha s laste d fo r almos t thre e years . GDP growt h fo r th e 199 3 fiscal yea r wa s estimate d t o b e around 0 . Thi s year' s growt h i s estimate d a t abou t 0. 7 t o 1 percen t b y th e majorit y o f th e economi c researc h insti tutes i n Japan . Th e government' s estimat e i s 2. 4 percent , but thi s woul d b e almos t impossibl e withou t som e ex tremely aggressiv e governmen t measures . In th e pas t tw o year s th e governmen t ha s trie d fou r times t o stimulat e th e economy , i n a n aggregat e amoun t of $43 0 billion . Thi s figure include s publi c investmen t o f $160 billion , an d a ta x cu t o f $5 3 billion . However , thi s did no t produc e th e expecte d effect . On e reaso n i s tha t stock adjustmen t fo r equipmen t investmen t too k a n unex pectedly lon g time , an d anothe r i s that th e highe r ye n ha s inhibited a n upwar d move . 149

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The fiscal stimul i mobilize d durin g thi s perio d wer e larger tha n thos e a t th e tim e o f th e Plaz a Accord . Pre viously, th e aggregat e amoun t wa s 1 3 trillio n yen , whic h included publi c investmen t o f 7. 5 trillio n ye n an d a ta x cut o f 1. 0 trillio n yen . Publi c investmen t growt h rat e o n a GDP o r GD E basi s wa s 9. 3 percen t i n 1987 , compare d with 16. 7 percen t i n 199 2 an d 14. 4 percen t i n 1993 . I f you includ e th e surplu s i n th e Socia l Securit y account , Japan's fiscal balanc e wa s no t s o inadequat e i n th e past . Recently, however , th e OEC D forecas t a defici t o f 2. 4 percent in Japan's GD P in 1995 , including the Social Security surplus . Th e recen t har d lin e o f th e Ministr y o f Fi nance ma y b e based o n thi s o r a similar forecast . During thes e up s an d down s o f th e economy , th e bank ing industr y ha s encountere d man y ne w phenomena . Se curitization o r dis-intermediatio n cause d corporat e client s to leav e th e bank s an d loo k towar d th e capita l markets . Banks ha d t o find ne w customer s i f the y wante d t o main tain a n adequat e leve l o f credits , an d the y turne d t o th e new, growin g are a o f rea l estat e financing. Du e t o th e increasing valu e o f rea l estate , th e valu e o f collatera l in creased a s wel l whil e th e battl e wa s i n progress . Hence , both bank s an d nonbankin g institution s foun d tha t mor e credit coul d b e extende d o n th e basi s o f suc h increase d value o f collateral . The y bega n t o exten d credi t aggres sively fo r 10 0 percen t collatera l value , thinkin g tha t rea l estate prices would g o up indefinitely . This o f cours e turne d ou t t o b e mer e myth . Som e com 150

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mercial building s i n ou r larg e citie s ar e 3 0 percen t lowe r in valu e no w tha n a t th e pea k o f th e bubble , an d loan s were caught b y this decline in the value of collateral. Mos t of th e nonperforming asset s of the banks ar e in real estate , and th e viabilit y o f som e o f th e nonbankin g institution s will als o depen d o n ho w the y cop e wit h thei r rea l estat e loans. The bank s hav e just close d thei r book s o n th e 199 3 fiscal year, an d th e figures ar e no t ye t available . T o wha t extent disclosure s wil l b e mad e i s als o no t ye t known . Current speculatio n b y th e bankin g industr y i s that i t wil l take thre e o r fou r year s fo r th e majo r bank s t o clea r u p these problem loans . Based o n thi s hindsight , man y thing s ca n b e said . Th e surge i n asse t valu e wa s i n fac t on e sor t o f inflation , and shoul d hav e bee n treate d a s such . Th e BI S (Ban k of Internationa l Settlement ) rul e o f capita l adequac y wa s handled ver y badly i n Japan. We should no t have include d the unrealize d gai n o n th e securitie s portfoli o a s Tie r Two capital . Productio n capacit y shoul d hav e bee n cur tailed i n proportio n t o th e capacit y create d i n oversea s subsidiaries. At presen t th e issue s o f th e trad e surplus , th e two tier pric e mechanis m betwee n tradabl e an d nontradabl e goods, governmen t regulations , th e iro n triangl e amon g politicians, bureaucrats , an d industries , an d th e volatilit y of th e ye n rat e ar e al l o n th e table . It will b e necessary fo r us, the Japanese, t o cultivat e a very stron g political wil l t o cope with thes e problems. The old , very pragmatic, politi 151

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cal idea l o f "catc h u p an d surpas s th e West " i s obsolete , and w e nee d a ne w on e close r t o th e everyda y lif e o f th e Japanese people . I f w e ar e t o succeed , w e ar e goin g t o need t o focu s o n increasin g th e genera l standar d o f livin g and providin g comfor t fo r th e age d i n this agin g society .

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PAUL A . S A M U E L S O N Earlier thi s yea r I attende d a Californi a conferenc e o n international finance . Al l the usua l suspecte d expert s wer e there, an d i f Rober t Triffi n wer e no t dea d he' d hav e bee n there, too . There wa s on e surprise , though . Ri p Va n Win kle, bear d an d all , turne d u p a t th e firs t session . "Wha t are yo u doin g here? " Chairma n Randal l Hinslo w asked . "I'm her e t o giv e the long view," Ri p replied . Well, that i s my function o n thi s panel. I am her e to give the long view, and I hav e th e worr y wrinkle s t o prov e m y competence . By th e lon g vie w I don' t jus t mea n th e lon g vie w bac k i n history. I once heard a wise man say : "Th e futur e i s longer than th e present. " I ca n to p that , an d remembe r wher e yo u hear d i t first: "The futur e i s eve n longe r tha n th e lon g past. " Ther e i s only on e histor y behin d us , bu t ther e ar e man y historie s ahead. Thos e wh o don' t kno w histor y ar e condemne d t o repeat it . S o sai d Georg e Santayana . Whe n I quote d thi s to Harvard' s Cran e Brinton , h e retorted : "Yes , an d thos e of u s wh o kno w histor y ar e condemne d t o repea t i t wit h them." Concretely, righ t no w i n 1994 , Europ e an d Asi a nee d economic stimulu s whil e Americ a need s t o worr y abou t overacceleration o f ou r cyclica l recovery . I lik e that . I t i s not tha t uniformit y an d consensu s i s boring . I coul d liv e with tha t an d lov e i t i f wha t th e whol e worl d face d i n 153

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common wa s brisk growth a t full employmen t with virtua l price stabilit y an d a n erodin g awa y o f economi c inequal ity. I t i s a commo n worl d patter n o f instabilit y tha t on e must fear . World Wa r I I was th e watershed . Befor e 1939 , the Na tional Burea u o f Economi c Recor d use d t o measur e prett y much th e sam e busines s cycl e al l ove r th e world . Th e Kredit Anstal t Ban k faile d i n Austria , an d no t five mile s away fro m her e Manufacturer s Hanove r Ban k close d it s doors an d se t off a n avalanch e o f 10,00 0 bankrup t Ameri can banks . So i t use d t o g o mos t o f th e time . Befor e 180 0 Britai n began t o pas s throug h cycle s of goo d an d ba d times . Eac h decade brough t it s bubble s o f speculation , panic , an d main-street busines s distress . A s th e industria l revolutio n spread—first t o Franc e an d th e Lo w Countries , the n t o North America , an d eventuall y t o Germany—th e annal s of busines s cycle s trac e a commo n internationa l pulse . O f course, amplitude s varie d an d ther e wer e th e inevitabl e regional lead s an d lags . Certainly th e adoptio n o f a universa l gol d standar d en forced a lock ste p o n Argentina , Poland , an d Manchester , England. Eve n today , whe n yo u loo k a t th e Europea n Currency Union , yo u se e ho w hig h unemploymen t i s i n France, Spain , Belgium , an d othe r currencie s recentl y pegged t o the Germa n mark . By contrast wit h th e prewa r epoch , sinc e 194 6 Americ a has repeatedl y gon e throug h it s ow n extr a busines s cycle s while th e Pacifi c Basi n an d th e Commo n Marke t hav e 154

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experienced thei r ow n up s an d downs . Why d o I like tha t better? I t i s bette r becaus e strengt h i n America n whe n Europe i s weak work s t o moderat e th e averag e variabilit y in bot h places . Th e La w o f Larg e Numbe r act s t o mak e four independen t region s hav e onl y twic e th e tota l vari ability o f an y one—where , b y contrast , fou r perfectl y correlated unit s will together hav e four-fol d tota l variabil ity an d n o halvin g o f per-countr y volatility . Let's b e concrete . I n mid-198 2 Pau l Volcker a t th e Fed eral Reserv e fired u p th e America n locomotiv e b y well calculated ris k takin g i n the for m o f credi t expansion . Th e German an d Japanes e locomotive s wer e a t dea d center . Almost a t onc e th e Wal l Stree t bon d an d stoc k market s felt th e kis s o f Princ e Volcker' s stimulus . Th e warmt h spread t o Mai n Stree t i n Peori a an d Gary , Indiana . An d with smal l dela y Nagoy a an d DiijSeldor f share d i n th e American expansion . Eve n th e domesti c locomotive s o f policy chimed in as the Bundesbank an d the Bank of Japa n were reassured b y favorable balance s o f trade . That's history . I expecte d i t woul d mayb e repea t itsel f in 199 1 when Ala n Greenspa n a t the Fe d was nagge d int o reducing U.S . short-ter m interes t rates . Well , I a m stil l waiting fo r th e Japanese authoritie s t o ge t their macr o ac t together s o a s t o brin g a n en d t o thei r quit e unnecessar y prolonged domesti c slump . Maybe th e difficul t reunificatio n o f German y create s some genuin e hesitancie s ther e concernin g a ful l cour t press agains t recession . Bu t wh y shoul d Franc e an d Bel gium an d Spai n condem n themselve s t o double-digi t un 155

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employment jus t becaus e German y fear s sh e ha s unifica tion complications ? I as k why ? Yo u kno w why . That' s wha t th e Rule s o f the Game under th e so-called Treaty o f Maastricht dictate . Central banker s i n London , Stockholm , Ne w York , an d Frankfurt wer e saddle d b y th e mischievou s Mus e o f His tory wit h th e gol d standard . Lik e Pavlovia n canarie s wh o beg t o b e locke d bac k i n thei r cages , moder n savant s o f finance hav e put dunc e cap s on their ow n head s and aske d to b e chaine d togethe r i n th e lockste p o f a pegged-cur rency-parity schemata . W e ca n leav e t o th e give-and-tak e of discussio n th e next step s in world macr o programming . Although a s a n economis t I lack th e laboratory tha t m y chemist colleague s a t MI T possess , economi c histor y ha s its impis h way s s o tha t lif e i s neve r dul l an d alway s ther e are ne w lesson s t o lear n an d ol d one s t o unlearn . B y th e caprice o f ho w th e dic e roll , rea l growt h i n U.S . GD P turned stron g si x month s ago . N o morta l economis t pre dicted that . N o one ? Almos t n o one . Franc o Modiglian i was a n exception . Bu t Franc o i s mor e o r les s immorta l anyway. I canno t believ e tha t ou r luc k mus t condem n Europ e and Japa n t o imitat e an y ne w credi t tightnes s here . Bu t I have learne d no t t o b e a cockeyed optimist . I t is not tha t I learned t o b e a disma l economis t whe n I attaine d m y Ph.D. degre e a t Harvard . Rathe r i t is the cas e that I try t o be a realist. To a fault, I hate t o b e caught wrong .

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PANEL D I S C U S S I O N I have a question/comment fo r Rich ard Levich , which i s that an y regulatio n o f th e derivative s market woul d hav e t o b e a t a global, no t a national level . The marke t i s completely footloose . I t could b e anywhere . And wit h th e Internet , i t ca n b e everywhere . Wha t w e ar e seeing, yo u refe r t o th e fac t severa l times , i s competition , intended o r not , betwee n nationa l government s t o attrac t the derivative s business . Thi s coul d lea d t o competitiv e weakening o f regulatio n an d woul d i n m y vie w cal l fo r something simila r t o wha t th e BI S ha s don e i n th e Base l agreements fo r ban k capita l adequac y repeate d a t a globa l level t o preven t a kin d o f nefariou s competitio n t o th e lowest commo n denominator , whic h is , I think , a rea l threat wit h thi s business . WILLEM H . BUITER :

RICHARD LEVICH : Le t m e sa y a coupl e o f thing s abou t that. On e i s tha t I fully agre e tha t regulation , t o b e effec tive, would hav e to b e implemented a t a global level . But I fear tha t som e of ou r ow n domesti c legislators ma y not b e so aware o f that. After th e 198 7 crash, ideas about tradin g halts, changin g margi n requirements , an d transactio n taxes wer e propose d fo r ou r ow n markets , eve n thoug h they migh t no t appl y t o othe r countries . Tha t scare s me , because a t leas t hal f o f th e centralize d future s marke t activity i s presently i n the United States . I take you r secon d poin t exactl y a s said, that thi s indus -

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try i s very footloose , s o that i f w e impos e regulation s tha t are costl y a s we'v e see n i n othe r example s (th e Eurocur rency marke t an d th e Eurobond marke t wer e the two tha t I mentioned), th e activit y coul d g o elsewhere very quickly . And regardin g regulation , on e o f m y theme s wa s tha t there i s plenty o f deman d fo r self-regulatio n an d fo r capi tal requirements tha t ar e sensible within th e private sector . It strike s m e tha t on e o f th e approache s take n recentl y by commercial bank s an d securitie s firms, is to try to brin g market regulator s (especiall y thos e a t th e BIS ) int o th e fold. B y teachin g regulator s wha t the y woul d teac h thei r own personnel, the kind o f regulation bank s an d securitie s firms ge t doesn' t simpl y dro p ou t o f th e sk y an d doesn' t bear an y relationshi p t o industr y practices , bu t i n fac t i s heavily influenced b y people within industr y itself . TORU KUSUKAWA : Wille m Buite r mentione d somethin g in his talk abou t a dirty float . Th e concep t was very famil iar t o me , becaus e I was on e o f th e member s contributin g to tha t dirt y float . I wa s actuall y i n Du/3eldorf , i n Wes t Germany, conductin g al l sort s o f interventions . A s Rich ard Levic h discussed , a t tha t tim e i t too k 2 4 t o 4 8 hour s for Japa n t o mak e deliveries . Bu t thi s dirt y floa t concept , well, I' m jus t wondering . Journalist s sa y nowaday s tha t some America n official s hig h u p i n Washingto n wan t t o see th e Japanes e ye n muc h stronge r an d s o on , bu t wit h that sor t o f notion , th e exchang e marke t wil l react . I t reminds m e o f Georg e Soro s doin g hi s magi c ac t wit h th e English pound , whic h h e withdre w fro m th e marke t unti l it came back t o a certain level . 158

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"Talking up " o r "talkin g down " th e exchang e rat e ca n still b e possible , especiall y fo r us . I f ther e i s an y notio n that th e ye n shoul d b e highe r o r lower , th e market s react . But i f thi s sor t o f notio n wa s mad e b y somebod y wit h direct o r indirec t authorit y t o decid e th e interventio n o f the Centra l Bank , th e marke t woul d naturall y tak e i t fo r granted tha t thi s i s a n ope n declaratio n tha t a certai n government i s no t goin g t o mak e an y interventions . Thi s creates distortio n o r overshootin g o f th e rates , as we hav e seen i n th e pas t si x month s o r so . S o I' m jus t wondering , with thi s concep t o f th e dirt y float , i f i t ma y hav e some thing t o d o wit h th e presen t situatio n i n th e exchang e market, althoug h th e exchange market itsel f mus t functio n as properly a s it can. I really wonder abou t th e integrity o f the marke t righ t now . Willem Buite r als o mentione d tha t Japa n shoul d kee p full employment . I ver y muc h doub t thi s i s possible , be cause o f th e hollowin g ou t o f ou r industrie s tha t i s takin g place a t thi s time . W e hav e thi s ver y expensiv e Japanes e yen. A lot o f productio n line s ar e movin g ou t o f th e coun try, with Southeas t Asi a an d Mainlan d Chin a bein g prim e targets fo r thes e transplants . The last time we tried such an exodus we made a seriou s mistake b y not shippin g th e products bac k t o Japan. The y were sol d i n th e place s the y wer e mad e an d i n othe r foreign countries , s o tha t w e woul d no t nee d t o mak e any adjustment s t o ou r productio n capacity . Thi s time , because o f th e ver y hig h cos t o f wage s an d infrastructure , I think th e oversea s Japanese subsidiarie s wil l b e shippin g 159

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their product s bac k t o Japan. I f that happens, it means the curtailment o f the production lin e in Japan altogether— a potential sourc e of major unemployment . Also, althoug h w e ar e seein g th e present trad e surplu s rise to 3.3 percent of GDP, it's likely to come down to, for argument's sake , 2.3 percent—down 1 percent in terms of GDP. W e are trying ver y har d t o increas e th e GDP by 1 percent, bu t i f w e hav e a trad e surplu s adjustmen t low ering the GDP then i t could b e harsh t o Japanese industry . That ma y cause som e unemploymen t a s well. PAUL A . SAMUELSON : I though t a t th e beginnin g ther e was s o much agreemen t her e tha t ther e woul d b e nothing to find to disagree with . However , I have manage d t o find some at least minor points . First, I think tha t th e conservatism o f th e Japanese bu reaucracy i s a very importan t fact . I t is not an alibi whic h passes muste r a t seminar s o f economists , bu t it i s a vali d excuse. I f Japa n i s unwillin g t o hav e a defici t an d treat s any public-secto r defici t a s a n evi l thing , i f investmen t opportunities ar e very lo w in Japan an d are going t o sta y very lo w becaus e o f pas t excessiv e investment , an d i f there's a Centra l Ban k tha t i s determine d no t t o le t the real interes t rat e g o dow n a s low as possible, i t is askin g too muc h o f a laissez-faire syste m fo r it to be able eve r to cure itself . The only wa y Japan i s going t o solve it s problem, if at all, is through th e international sector . Just a fe w week s ag o we had a conferenc e her e spon sored b y the Japan-U.S. Center , a very goo d one , on East160

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ern Europe. We learned tha t a country lik e Ukraine has 1 6 times th e stee l capacit y pe r perso n tha t th e grea t stee l producer, th e U.S. , has. This i s all bein g maintaine d lik e a Potemkin villag e productio n ou t o f printin g money . N o jury o f sensibl e economist s coul d say , "Giv e blessing s t o that." Ther e ha s t o b e a massiv e readjustmen t o f resourc e use i n th e selfis h interes t o f th e Ukrainia n peopl e fo r th e future o f thei r country . The sam e thin g I thin k i s likel y t o b e tru e o f a Japa n that ha s bee n i n a lon g Schumpeteria n phas e o f havin g technological productivit y growt h i n exces s o f tha t o f it s principal rivals , and I believe there has to b e a deploymen t of Japanes e resources , a s Schumpete r himsel f woul d hav e told you . Wha t a Japa n coul d d o twent y year s ago , a South Kore a coul d d o te n year s ago , a Malaysi a coul d d o yesterday. I don' t thin k tha t Japa n ha s gon e throug h enough o f a n identit y crisi s ye t t o hav e worke d ou t th e details o f thi s deployment . Now I believe eclecticall y tha t ther e ough t t o b e publicsector, infrastructur e buildup , spendin g (whic h wil l shoc k the bureaucrats ) alon g th e line s o f you r ow n Mayakaw a Report o f earlie r years. That would solv e part o f the problem. I think a deepenin g o f capita l i n Japan a t lowe r an d lower rea l return s ca n stil l elici t som e increas e i n capita l formation there . I thin k Japa n wil l hav e t o mov e ou t o f what ha s no w becom e routin e manufacturing , an d o f course yo u kno w that . I t was easil y don e whe n Japan wa s growing well . I t wa s calle d th e hollowin g ou t o f Japan , 161

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the outsourcing . Bu t whe n al l o f tha t i s done , i f i t stil l would b e dynami c comparativ e advantag e fo r Japa n t o b e doing th e savin g i t want s t o d o an d provid e thos e saving s to th e res t o f th e world , whic h stil l ha s a nee d fo r capita l formation, I wan t t o outlin e wha t I conside r t o b e th e most desirabl e wa y fo r tha t t o com e about , althoug h no t what I realistically thin k wil l com e about . There i s n o reaso n wh y thi s outsourcin g shoul d neces sarily be associated wit h Japanese imperialism. There is no reason wh y Japanes e corporations , whic h hav e generate d Schumpeterian temporar y profits , shoul d no t us e thos e profits t o go abroad. I don't spea k with forke d tongue . It' s the same advice I gave the Norwegian government . Instea d of spendin g o n margina l healt h an d educatio n scheme s i n Norway, I said, "Inves t abroad. " Tha t doesn' t mea n tha t we hav e t o hav e a ne w se t o f Viking s marchin g acros s the world . So fa r th e Japanes e hav e no t show n grea t comparativ e advantage i n foreig n investing . It' s tru e yo u ca n bu y thre e New Yor k skyscraper s fo r th e pric e o f on e Toky o sky scraper, bu t mostl y you'v e bee n sol d lemons , everywher e in th e country . Th e fou r grea t Japanes e brokerag e firms were a littl e bi t lik e Keyston e Kop s i n thei r investmen t behavior. Thi s al l coul d hav e bee n avoided . Goldma n Sachs would hav e handled thei r account . The efficient wa y is t o hav e i t al l en d u p wit h Vanguard . Lo w loads , lo w expenses. Le t th e impersona l capita l market , fre e o f na tionality, allocat e th e monie s abroad . Thi s als o wil l kee p 162

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Japan o n ver y friendl y term s wit h everybody . Peopl e i n Southeast Asi a wil l lov e th e Japanese, saying , "There' s n o threat her e a t all. " (I' m speakin g a little bi t unrealisticall y perhaps, I admit.) Now t o ti e up a very smal l disagreemen t wit h Professo r Buiter. H e warne d u s w e shouldn' t mistak e competitive ness fo r deficits , an d w e shouldn't . Bu t w e shoul d hav e a micro concer n tha t a natio n lik e th e Unite d States , whic h was a leade r earl y i n th e game , i s losin g it s uniquenes s a s others imitat e it . Ther e shoul d b e concer n her e fo r th e country a s a whol e no t t o los e consume r surplu s fro m international trade . This scenari o i s in the card s unde r th e strict law s o f dynami c comparativ e advantag e i f countr y after countr y acquire s ne w technica l proficienc y i n pre cisely thos e sector s o f America n activit y tha t historicall y were th e leading ones . We shoul d b e concerned enoug h t o d o somethin g abou t that. Thi s concer n coul d sho w itsel f i n subsidizin g Ca l Tech, fo r example— I won' t mentio n MIT . W e als o nee d a realisti c exchang e rate , on e tha t help s t o mak e th e bes t use o f ou r micr o aggregate d labo r markets . I don' t thin k it's goo d economic s t o sa y tha t Genera l Motors ' competi tiveness i s differen t fro m U.S . competitivenes s becaus e General Motor s ca n disappea r bu t th e U.S . can' t an d won't. We'r e no t talkin g abou t Genera l Motors ' manage ment o r Genera l Motors ' stockholders—we'r e talkin g about thei r resources , whic h previousl y wer e sprea d around th e U.S . in th e aut o industry , an d wha t thei r ne w 163

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best us e shoul d b e an d t o w h a t degre e a t a realisti c wag e level Genera l M o t o r s ca n maintai n a sustainabl e compara tive advantag e i n th e automobil e industr y here .

NOTES

1. Fo r th e first time , annua l volum e o n th e 4 7 non-U.S . ex changes exceede d tha t o n th e 1 5 U.S . exchanges . Directory and Review, Futures and Options World (1994) , p. 7 . 2. Ibid. , p. 11. 3. Ibid . 4. Ibid. , p . 35 . FR B (Federa l Reserv e Board) , FDI C (Federa l Deposit Insuranc e Corporation) , OC C (Offic e o f th e Comp troller o f th e Currency) . 5. Th e OC C ha s publishe d guideline s makin g i t obligator y fo r banks t o ensur e product s ar e appropriat e fo r customers . (Ask yourself who m thi s regulation i s protecting.) 6. Frederic k G . Fisher , III , Eurobonds (London : Euromone y Publications, 1988) , p. 10 . 7. Edwar d M . Kelley , Jr. , "Development s i n th e Dolla r Pay ments System, " remark s delivere d a t th e Internationa l Sym posium o n Bankin g an d Paymen t Systems , Washington , D.C., March 10 , 1994 . 8. See , fo r example , Pariba s Derive s Garantis , a subsidiar y o f Compagnie Financier e d e Paribas , describe d i n Structured Finance (Standar d & Poor's , November 1993) , pp. 91-92 . 9. Susa n M . Phillips , "Derivative s an d Ris k Management : Challenges an d Opportunities, " Remark s a t th e Conferenc e on Financia l Markets , Federal Reserv e Bank o f Atlanta , Feb ruary 25 , 1994 .

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CHAPTER 6

International Investment : The Japan-U.S. Dimensio n April 20, 1994

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I N T R O D U C T O R Y REMARK S W e hav e severa l distinguishe d guest s i n our audienc e today . I worke d fo r a fe w year s fo r th e Harvard Economi c Researc h Project . Professo r Leontie f was m y dissertatio n adviser , an d i t i s a pleasur e t o hav e this Nobel Priz e winner her e with us . It was mor e tha n 4 0 years ago , when w e wer e young , tha t I worked wit h him . Let me also introduce Will Baumol, one of the truly distin guished economist s i n thi s country , and , i f I ma y sa y so , my ow n choic e fo r th e nex t Nobe l Prize . Lastly , I woul d like t o welcom e Michae l Schiff , wh o teache s her e a t th e Stern School—forme r Chairma n o f th e Accountin g De partment an d on e o f th e true pillars o f th e School . Our speaker s toda y includ e Fuji o Cho , Presiden t an d CEO o f Toyot a Moto r Manufacturing , U.S.A. , Inc. ; m y colleague fro m th e Ster n School , Professo r Joshu a Livnat , a widel y publishe d autho r an d curren t Chairma n o f th e Department o f Accounting ; an d finally , i n th e basebal l season an d ever y seaso n ou r cleanu p hitter , Professo r Pau l A. Samuelson . ROBERT KAVESH :

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FUJIO CH O Four years ago Toyota Moto r Manufacturin g (TMM ) wa s awarded th e J . D . Powe r to p qualit y awar d a s th e bes t quality plan t i n al l o f Nort h America . Th e nex t tw o year s TMM finished secon d an d third . Then , i n las t year' s sur vey, ou r tea m member s recapture d th e to p award . Thi s year w e hope t o wi n ou r thir d Gol d Plan t Qualit y Award . For al l o f u s a t TMM , winnin g thi s awar d i s like winnin g the Worl d Serie s o r th e NB A Championship . Whe n yo u think o f th e fac t tha t almos t al l o f ou r productio n tea m members, 10 0 percen t o f who m ar e Americans , ha d n o prior experienc e o f workin g i n a manufacturin g environ ment, le t alon e i n a n automobil e plant , thi s accomplish ment i s simply extraordinary . Just a littl e mor e backgroun d o n TMM . W e adde d en gine production , a n additiona l $30 0 millio n investment , in 1989 . Thre e year s ag o w e experience d ou r first majo r model change . I n 199 2 w e became th e world's sol e sourc e for Camr y statio n wagons , and last year TMM becam e th e sole manufacture r o f th e Camr y coupe . Toda y Kentuck y Camrys ar e exporte d t o mor e tha n twent y countrie s al l over th e world , includin g right-han d driv e model s t o Ja pan an d th e United Kingdom . TMM continue s t o grow . Jus t abou t a mont h ag o th e first Camr y seda n rolle d of f th e ne w lin e i n ou r $80 0 million expansio n plant . Whe n th e expansio n plan t 168

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reaches ful l production , ou r capacit y wil l b e 400,000 car s per year . Startin g thi s fal l we'l l b e buildin g th e Avalo n there a s well, the bran d ne w Toyota flagshi p car . This will be a hug e challeng e fo r us . It' s extremel y rar e i n ou r business t o star t a brand ne w ca r i n a brand ne w plant . V-6 engine production wil l also begin this fall in TMM' s power trai n expansio n facilities , whic h wil l b e complete d this summer . Wit h al l o f thes e expansions , Toyota' s in vestment i n Georgetown , Kentucky , ha s grow n t o mor e than $ 2 billion. Ou r tota l employmen t wil l reach 6,00 0 b y the time we reach ful l speed . Certainly Toyota' s investmen t i n Kentuck y ha s bee n a success story fro m ou r poin t o f view. However, wha t doe s this investmen t mea n t o th e loca l community , t o th e Stat e of Kentucky , an d t o th e Unite d State s a s a whole ? That' s more difficul t t o answer , bu t mayb e a fe w ke y statistic s will help . Firs t off , TM M ha s a payrol l o f $23 5 millio n annually. That alon e is significant. Mor e comprehensively , Dr. Charle s Haywoo d o f th e Universit y o f Kentuck y re cently publishe d a stud y o n ou r plant' s economi c impact . According to hi s calculation, th e direct an d indirec t effect s of TM M hav e create d som e 20,000 job s in Kentucky. Th e same stud y forecast s tha t th e numbe r o f Kentuck y job s generated b y TM M investmen t wil l gro w t o ove r 22,00 0 by 1996 , onc e ou r expansio n reache s ful l capacity . Dr . Haywood als o estimate s tha t TMM' s economi c impac t has create d mor e tha n 60,00 0 job s i n the U.S. as a whole , and tha t th e U.S. impact wil l reach 92,00 0 job s b y 1996 . Now i t hasn't al l been perfectly smoot h sailing . We have 169

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moved a bi g productio n facilit y int o a fairl y smal l town , and I worry abou t ou r impac t o n Georgetow n traffi c an d schools. Bu t w e ar e doin g everythin g w e ca n t o minimiz e any advers e impac t o n m y new home town , an d hopefull y most citizens of Georgetown woul d agree . Overall, I firmly believe Toyota's investmen t ha s bee n clearl y beneficia l fo r the community , th e Stat e o f Kentucky , an d th e Unite d States a s a whole. In additio n t o ou r economi c impact , I' d lik e t o believ e that ou r presenc e her e ha s bee n helpfu l i n anothe r way . I t is muc h mor e difficul t t o quantif y tha n economi c impact , but I think tha t Toyot a ha s anothe r contributio n t o make , in th e are a o f technolog y transfer . Sinc e technology trans fer i s sort of an overused phras e these days, let me be mor e precise. I' m reall y talkin g abou t spreadin g th e idea s o f th e Toyota Productio n System . We cal l it TPS for short . Let m e explain. Historically , th e Japanese aut o industr y took a differen t roa d i n it s developmen t fro m tha t o f th e American aut o industry , an d unti l ver y recentl y th e flo w of informatio n an d technolog y ha d alway s bee n on e way—from th e U.S . to Japan. Th e Japanese aut o industr y has learne d tremendousl y fro m th e Americans , a s wel l a s from suc h splendi d teacher s a s th e lat e Dr . Deming . A s I remember, throughou t mos t o f m y caree r a t Toyot a w e were learnin g fro m an d a t th e sam e tim e tryin g t o catc h up with America . The younge r audienc e ma y find i t har d t o believe , bu t Japan i n th e fifties an d throug h mos t o f th e sixtie s wa s a poor country . Toyota a s a company wa s no exception. W e 170

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just didn' t hav e an y mone y t o spare , yet we fel t w e ha d t o catch u p wit h th e world' s riches t natio n an d th e world' s best aut o makers . I t wa s ou t o f th e questio n t o pou r money int o R& D o r ne w state-of-the-ar t equipment . What w e did , lik e man y othe r Japanes e manufacturers , was t o tak e wha t w e had , b e i t equipmen t o r huma n resources, an d tr y t o figur e ou t th e bes t wa y t o utiliz e them t o achiev e maximu m efficiency . I n s o doin g Toyot a eventually develope d th e Toyot a Productio n System , which i s no w recognize d throughou t th e worl d a s th e "lean productio n system. " I t wa s thi s lea n productio n system tha t mad e i t possibl e fo r Japanes e aut o maker s t o eventually buil d high-qualit y vehicle s a t lo w cost . The America n aut o industr y ha s bee n a grea t teache r for th e Japanese industry . As the student, Japan learne d s o well a s to reac h th e point o f equality . I n Japanese thinkin g this is the highest complimen t t o a n excellent teacher. Thi s same philosophy tell s the student tha t h e owes his teacher s a deb t o f gratitud e i n suc h a situation . Jus t befor e I lef t Japan t o hea d th e TM M projec t I had a meetin g wit h Eij i Toyoda, the n Chairman , an d Dr . Shoich o Toyoda , the n President. The y wishe d m e luc k fo r th e succes s o f th e TMM project , an d aske d m e t o d o somethin g tha t woul d be beneficia l t o th e Unite d State s whil e I wa s workin g i n this country . As I mentioned, th e Japanes e aut o industr y i s indebte d to th e America n aut o industry , thei r teacher . Bot h Toyo das wer e tellin g m e tha t i t wa s tim e fo r u s t o repa y al l these obligations. O f cours e m y first priorit y was , and stil l 171

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is, t o star t u p TM M smoothl y an d t o mak e i t gro w int o a mature an d profitabl e automotiv e plant . Bu t whil e I hav e concentrated o n th e TM M operatio n I hav e als o alway s been o n th e lookout fo r opportunitie s t o repay ou r obliga tions to the U.S. In fact we'v e been abl e to do some of tha t through ou r day-to-da y operation . As I explained before , ou r tea m member s had almos t n o experience i n automotiv e manufacturin g whe n first hired . We ha d t o trai n the m fro m scratch . Toyot a believe s tha t the Toyot a Productio n Syste m i s th e bes t productio n sys tem w e coul d have . Naturall y w e ar e tryin g t o practic e TPS i n Kentucky , s o w e traine d ou r tea m member s i n such ke y TP S element s a s "standardize d work, " "kaizen " (continuous improvement) , "kanban " (inventor y cards) , and "lin e sto p system. " With som e modificatio n t o sui t America n culture , TP S has take n roo t i n ou r plant . I t i s stil l i n th e growin g stage t o b e sure , but I believe tha t ou r tea m member s wil l eventually reac h th e leve l o f thei r counterpart s i n ou r Japanese plants , probabl y i n five years . I consider TP S t o be th e "know-how " o r technolog y o f th e manufacturin g industry, an d th e fac t tha t ou r America n tea m member s are learnin g an d masterin g TP S means tha t ther e i s a kin d of technolog y transfe r takin g place in Kentucky . TPS als o ha s implication s fo r ou r suppliers , a s yo u might suspect . When w e bega n ou r productio n her e i n th e United States, we started ou t with a policy of Americaniza tion o f part s an d material s whereve r an d wheneve r possi ble. TMM' s loca l procuremen t starte d wit h $7 0 millio n 172

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purchased fro m 9 2 supplier s i n 1988 . Wit h muc h effor t by ou r purchasin g department , TMM' s U.S . procuremen t in 199 4 wil l reac h $ 2 billio n purchase d fro m mor e tha n 200 supplier s i n 32 states . As you ar e probably aware , Toyota's purchasin g opera tion ha s bee n somewha t differen t fro m th e "traditional " American wa y o f purchasin g part s an d material . I t too k a while fo r ou r America n supplier s t o becom e accustome d to ou r way s an d t o find tha t ou r wa y ha s meri t fo r them , too. W e probabl y g o muc h furthe r tha n mos t America n auto maker s i n ou r relationshi p wit h suppliers . For exam ple, TM M establishe d a "Technica l Suppor t Group " i n our purchasing departmen t t o support an y of our supplier s who reques t assistanc e i n improvin g thei r produc t qualit y and/or thei r productivity. Thi s group ha s been in existenc e for abou t five years. Another exampl e o f Toyota' s effor t i n "technolog y transfer," whic h expande d th e ide a o f technica l suppor t although no t directl y associate d wit h TMM , i s the Toyot a Supplier Suppor t Center , o r TSS C fo r short . I t wa s estab lished i n Lexingto n i n 199 2 wit h th e sol e purpos e o f as sisting an y America n manufacturer s wh o wer e intereste d in improving thei r manufacturing operations . Incidentally , TSSC doesn' t charg e an y fee s fo r thei r suppor t services . Without an y publicity , the y hav e receive d 14 5 request s s o far. I n th e first yea r the y helpe d 2 3 companies . Fiv e o f them completed thei r requirements an d eight more compa nies wer e added , s o TSS C i s workin g wit h 2 6 companie s this year . 173

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One TSSC-supporte d compan y report s it s productivit y rising 45 0 percent ! Thei r lea d tim e shran k t o one-fifth , and the inventory wa s reduced t o one-tenth o f what it was before workin g wit h us . Since we can' t giv e in-depth hel p to al l intereste d companies , w e ar e no w tryin g t o satisf y more people b y giving seminars o n th e Toyota Productio n System (TPS) . I understan d tha t man y o f th e Bi g Thre e plants hav e begu n t o us e th e lea n productio n syste m i n their operations . I t ma y b e th e reaso n wh y TM M get s numerous request s fro m Bi g Three companie s t o tou r ou r plant an d discus s variou s aspect s o f TPS . I n 199 3 ther e were 3 7 visit s b y Chrysler , GM , an d For d involvin g ove r 200 people . I fee l tha t acceptin g suc h visit s i s anothe r way t o repa y ou r obligations , an d w e wil l continu e t o welcome them . So fa r I'v e talke d abou t TMM' s economi c impac t an d our effor t t o repay indebtedness through technolog y trans fer. W e ca n tal k mor e abou t suc h effort s a s bein g a goo d corporate citizen , bu t sinc e m y tim e i s limite d I' d lik e t o turn no w t o a n issu e tha t ha s recentl y bee n o f dee p con cern t o us , th e constan t threa t o f governmen t trad e sanc tions. First , le t m e explain . Toyot a ha s bee n blesse d wit h tremendously friendl y treatmen t b y th e peopl e o f Ken tucky an d American s i n general . TMM' s Kentuck y tea m members ar e a grea t bunc h o f diligent , world-clas s work ers. M y neighbor s i n Georgetow n an d centra l Kentuck y have bee n kin d an d supportiv e o f m e personally , an d th e same is true fo r th e 60-plu s Japanese o n loa n fro m Toyot a Motor Corporation . 174

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What concern s me , however , ar e a serie s o f legislativ e threats an d comment s mad e b y politician s o n th e federa l level. Suc h bill s a s th e "Trad e Expansio n Ac t o f 1992, " also know n a s H.R. 5100 , an d th e federa l legislatio n enti tled th e "America n Automobil e Labelin g Act " ar e fre quently introduce d t o th e U.S . Congress , an d man y o f these bill s ten d t o discriminat e agains t companie s lik e TMM. I gues s th e inten t i s t o ge t bac k a t Japa n fo r an y perceived barrier s ther e agains t U.S . exports. But I fear th e sponsors o f thes e bill s don' t reall y conside r th e potentia l impact o n th e Kentuckian s wh o wor k a t TMM , o r fo r that matte r o n thousand s o f Americans who work a t othe r so-called transplants . For example , th e America n Automobil e Labelin g Ac t will apparentl y requir e u s t o plac e label s o n al l ne w pas senger vehicle s disclosin g suc h informatio n a s the percent age of valu e o f equipmen t tha t i s considered t o b e of U.S./ Canadian origi n fo r a ca r line . One o f m y majo r concern s is th e phras e " a ca r line. " Toyot a importe d abou t 3 0 percent of Camrys sold in the U.S. in 1993 . So the Camry' s domestic content , fo r th e ca r line, will show a much lowe r figure tha n th e rati o TM M ha s actuall y achieve d i n ou r Camry. I n effect , I' m afrai d tha t th e labe l wil l giv e a distorted impressio n tha t TM M i s only a "screwdrive r op eration." This i s quit e unfai r fo r ou r Kentuck y tea m members , who ar e workin g har d machinin g engin e parts , stampin g most o f th e majo r stampe d part s an d component s an d making plastic parts suc h a s installment panel s an d bump 175

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ers. Alon g simila r lines , Automotive News recentl y re ported tha t man y senio r member s o f th e Clinto n adminis tration "value d Big Three jobs more than transplan t jobs. " Again, I gues s th e reaso n i s the y don' t lik e Japan' s trad e practices. Bu t Kentuckian s a t TM M sa y the y deserv e bet ter tha n t o b e treated a s second-class citizens . Our America n tea m member s d o no t understan d thi s treatment fro m thei r ow n government . A s fo r myself , I wish tha t the y woul d jus t allo w u s t o concentrat e o n building high-qualit y car s t o serv e ou r America n custom ers. Afte r all , a bi g reaso n th e Bi g Thre e hav e mad e s o much progres s i s du e t o competition . A t an y rate , a s th e trade frictio n betwee n Japa n an d th e U.S . get s heate d I worry abou t bot h side s seemin g no w t o b e centerin g o n our difference s i n custom s an d busines s practices , whic h leads to eve n more criticis m o f eac h other . Certainly , ther e are differences . Afte r all , the y ar e tw o differen t cultures . These difference s nee d t o b e systematicall y an d scientifi cally analyzed . I strongl y fee l tha t bot h th e Japanes e an d the American side s need t o bas e their discussio n an d nego tiation o n fact s an d reason , rathe r tha n o n stereotype s and guesswork . Maybe ther e i s a way thos e o f yo u i n th e audienc e wh o are i n academi a coul d help . On e wa y migh t b e throug h scientific researc h int o thes e busines s practic e difference s so tha t th e argument s surroundin g the m ar e base d mor e on facts an d reason .

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JOSHUA LIVNA T I gues s th e topi c toda y i s goin g t o b e mostl y cars , s o i t would b e appropriat e t o tal k abou t internationa l miscon ceptions abou t car s b y tellin g yo u a joke tha t come s fro m my country, Israel . This i s abou t th e Israel i wh o host s hi s Texa n brother . When the y ge t u p i n th e mornin g th e Israel i brother , wh o is a farmer , take s th e Texa n ou t o f th e hous e an d says , "Do yo u se e tha t tree? " Th e Texa n says , "Yes. " "Tha t i s the boundar y o f m y farm. " Th e Texa n look s a t him , al l amazed, an d h e says, "Look . O n m y farm yo u ge t into th e car, driv e fo r thre e days , an d yo u don' t ge t t o th e en d o f it." Th e Israel i brothe r look s a t hi m pitifull y an d says , "Yeah. I ha d a ca r lik e that , too , bu t I manage d t o sel l that lemon. " I thin k peopl e hav e a lo t o f misconception s onc e the y start goin g acros s internationa l boundaries . Give n m y training a s a n accountant , wha t I would lik e t o d o i s no t talk abou t macroeconomi c effect s suc h a s th e friction s between th e U.S . an d Japan , bu t instea d tr y t o identif y how th e U.S . investor , o r fo r tha t matte r an y investor , should g o abou t makin g internationa l investments — whether i n foreig n countrie s o r i n th e securitie s o f foreig n countries. What I would lik e t o d o i s tal k abou t fre e cas h flow a s the basi s fo r investment . Thi s is from a paper I wrote wit h 177

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Ken Hackel , wh o i s a mone y manage r i n th e U.S . Usin g this principle o f fre e cas h flow , h e now manage s ove r $ 1 3 billio n wit h prett y goo d results . In term s o f th e genera l wa y tha t investment s ar e made , I think ther e ar e three distinct stages. The first i s screening. In th e U.S . ther e ar e currentl y abou t 11,00 0 stock s tha t one ca n choos e from . I onc e figured ou t tha t i f I ha d t o analyze each compan y o n m y own, it would tak e probabl y a lifetim e t o g o throug h jus t on e cycl e o f analyzin g al l these companie s adequately . S o what w e have t o d o i s cu t down th e univers e an d concentrat e o n jus t a fe w com panies. Let's sa y we scree n a large databas e tha t contain s infor mation abou t companie s an d the n limi t ourselve s t o a subset o f thos e companies, sa y a list of 5 0 stocks . We the n conduct a n in-dept h analysi s of these 50 stock s an d decid e which one s t o inves t in . This i s going t o b e the investmen t portfolio. Suppos e w e en d u p wit h a lis t o f 3 0 companie s that w e wil l ultimatel y inves t in . Th e thir d ste p i n th e investment proces s i s t o decid e abou t th e sellin g criteria : When woul d w e sell the portfolio holdings ? Why doe s i t mak e sens e t o inves t abroad ? I think ther e i s no disput e tha t foreig n economie s have their ow n busines s cycles, and busines s cycles , for goo d o r bad— I personall y think it' s good—stil l affec t th e stoc k market . B y keepin g this i n mind , th e individua l investo r i s abl e t o diversif y away th e effect s o f th e economi c cycle s i n an y on e country. 178

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We als o fin d ou t tha t foreig n equit y market s reac t dif ferently fro m domesti c markets t o news items. Let me give you a coupl e o f examples . On e o f the m I witnesse d a s a studen t a t th e Ster n School , i n it s previou s locatio n downtown. W e ha d a conferenc e o n options , I think, an d a new s ite m cam e i n that Presiden t Reaga n ha d bee n shot . No on e kne w hi s condition , an d i t too k literall y les s tha n two minute s fo r th e hal l t o empt y out . Ther e wer e tw o pay phone s i n th e lobby . Peopl e starte d biddin g o n thes e pay phones , u p t o $20 0 t o mak e a phon e cal l s o the y could execut e som e trades . As a poor Ph.D . student a t th e time I had a n urg e t o tr y t o arbitrag e b y suggesting to on e of thes e peopl e tha t the y wal k u p tw o floor s t o m y offic e and mak e a phon e cal l fo r onl y $50 , bu t tha t woul d hav e been unfair—s o I let the marke t tak e its course . Meanwhile, i n Thailand , th e electe d governmen t wa s ousted b y a militar y coup . The Tha i stoc k marke t o n tha t day wen t u p b y IV 2 percent . Jus t thin k abou t th e majo r differences i n thes e tw o countries . I n th e U.S . you hav e a major impac t jus t o n announcement s tha t th e Presiden t was shot , wit h ful l uncertaint y abou t hi s condition . I t turned ou t in fact no t to b e such a major item . In Thailan d the whol e governmen t i s abolishe d b y militar y coup , an d nobody i s affected . S o foreig n market s reac t differentl y to news . Of course , w e woul d als o lik e t o inves t internationall y because o f ris k reduction . Wha t w e se e i s tha t capita l flows extremel y fluidl y no w fro m on e countr y t o another . Years ag o internationa l transfer s o f fund s wer e a majo r 179

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endeavor. Toda y yo u d o i t electronically an d th e mone y i s transferred withi n seconds . W e als o hav e instantaneou s information transfers . Yo u g o abroad , ge t int o you r hote l room an d tur n o n CNN , an d it' s jus t lik e bein g home , right? An d yo u hav e fa x machine s tha t transmi t informa tion within second s agai n anywher e in the world. Tremen dous improvement . What problem s d o w e se e wit h foreig n investments ? First o f all , we don' t hav e standardizatio n o f information . We hav e difference s involvin g quantit y o f information , timing o f information , an d quality . A s a n accountan t I should probabl y poin t ou t tha t accountin g informatio n differs acros s countries. Each country has its own account ing rules, and th e accountin g rule s don' t agre e and ar e no t consistent wit h eac h other . Somebod y come s an d tell s you tha t it' s alway s goo d t o inves t i n low-price d earning s multiple. That ma y b e a good strateg y i n the U.S. but ma y work poorl y i n a countr y lik e Japan , where , unlik e thei r U.S. counterparts , corporation s tr y t o minimiz e thei r ac counting incom e becaus e tha t incom e i s subjec t t o taxe s and th e two coincide . We als o point ou t tha t th e flow o f informatio n changes . In som e countries , lik e th e U.S. , quarterl y informatio n is sen t ou t t o investors . I n othe r countrie s th e flow o f information t o investor s ma y b e semiannua l o r eve n an nual. We find out tha t i n Japan, fo r example , corporation s are require d t o repor t t o stockholder s onl y twic e a yea r rather tha n fou r time s a year . Th e joke—an d thi s i s onl y a professiona l joke , s o don' t tak e i t to o seriousl y o r to o 180

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literally, bu t th e jok e i s tha t i n German y i f yo u wan t t o delay you r annua l report s al l yo u hav e t o d o i s sa y tha t your accountan t wa s sic k an d yo u ca n ge t a n extensio n for a few months . We kno w tha t timelines s als o affect s th e flow o f infor mation acros s countries . I n th e U.S . you'r e require d t o publish financial report s t o stockholder s 4 5 day s afte r th e quarter's end . I n Australia , whic h i s a modern , English speaking country , you'r e require d t o file you r annua l re port withi n 12 0 day s afte r fiscal yea r end . Th e media n company i n Australi a report s t o th e stoc k authoritie s 12 7 days afte r it s fiscal year end , whic h mean s tha t mor e tha n 50 percen t o f th e Australia n companie s ar e lat e i n re porting. Timeliness , again , ma y b e important . Investor s process informatio n differently , an d o f cours e w e kno w that enforcemen t i s radically differen t acros s countries . What coul d on e d o i n orde r t o mak e som e sens e o f th e reports tha t appea r i n differen t accountin g language s us ing differen t accountin g information ? Wha t w e sugges t i s using a common yardstick : Fre e cash flow. There ar e som e technical requirements fo r suc h a yardstick. To begin with , we woul d lik e t o defin e fre e cas h flow a s al l th e cas h tha t one coul d withdra w fro m a busines s withou t affectin g it s future growth . Yo u wan t t o mak e sur e t o maintai n th e level o f growt h sale s tha t yo u currentl y experience . Any thing abov e that ca n b e taken ou t o f th e business . We hav e ou r ow n method s o f estimatin g it , bu t le t m e show yo u wha t happen s whe n yo u inves t usin g thi s mea sure o f fre e cas h flow. Tak e thre e portfolios : Firs t a port 181

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folio base d accordin g t o th e free cas h flo w concept ; the n a market index , compose d o f a n equall y weighte d averag e of al l th e companie s i n th e databas e (abou t 4,00 0 non U.S. corporations) ; an d lastly , a portfoli o adjuste d t o th e size o f th e compan y an d it s relativ e book-marke t ratio . We find tha t th e portfoli o base d o n fre e cas h flo w consis tently ha s highe r return s tha n th e othe r tw o portfolios , either th e marke t portfoli o o r th e portfolio base d o n simi lar siz e and book-to-market . We fee l ver y comfortabl e wit h thi s definition, an d thin k that i t may b e one way o f goin g beyond tryin g to compar e accounting report s tha t us e totall y differen t accountin g methods acros s countries—a commo n yardstick , commo n denominator i f yo u want , o r commo n measur e tha t yo u could us e in orde r t o scree n a large databas e an d pinpoin t companies fo r internationa l interest . We backteste d thi s strateg y fro m 198 7 onwards . It' s interesting tha t n o Japanes e firms passe d ou r screen s a s portfolio candidate s i n 198 7 o r 1988 . Th e first tim e w e started seein g som e Japanese companie s appearin g o n ou r screen was 1989—199 0 afte r th e large drop in prices in th e Japanese stoc k market , whic h i n som e sense gives us som e reassurance abou t th e process tha t w e use.

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PAUL A . S A M U E L S O N Today Americ a seem s t o b e growin g well—mayb e eve n too well . At the sam e time Japan stil l seems to b e stagnan t in overall GDP . Today America' s stoc k market , influence d b y a bon d market weakene d b y a pos t Februar y 4 mov e o f th e Fed eral Reserv e towar d tightenin g o f credit , seem s queasily t o be i n a possibl e retrea t fro m a durabl e bul l market . B y contrast, Toky o equitie s hav e behave d bette r i n th e las t year tha n th e American market . When rea l estat e price s i n Americ a wer e soarin g an d Wall Street stocks were generally rising, Japanese investor s were cheerfull y recyclin g thei r expor t surplu s towar d ou r shores. Skyscrapers , gol f courses , an d join t venture s wit h U.S. firm s wer e eagerl y embrace d b y Japanes e insuranc e companies, banks , pension funds , an d nonbanks . I t is said that afte r bein g burne d b y man y suc h investments , Japa nese mone y manager s hav e begu n t o cu t thei r losse s whil e refraining fro m throwin g ne w goo d mone y afte r bad . One suppose s tha t thi s chang e i n asse t preferences — from anima l spirit s o r rationa l recalculation—help s ex plain wh y th e dolla r continue s t o depreciat e agains t th e yen righ t i n th e fac e o f risin g nomina l an d rea l interes t rates her e a t home . O f cours e i t doe s no t hel p tha t (1 ) Japan's multilatera l surplu s continue s t o swel l i n dolla r 183

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terms; an d (2 ) he r bilatera l surplu s wit h Americ a contin ues to swel l in dollars. (On e mus t b e reminded that , a s th e yen appreciate s vis-a-vi s th e dollar , bot h o f thos e curren t balances coul d begi n t o diminis h whe n reckone d i n term s of th e yen . America n jingoist s ca n thu s sometime s accus e Japan o f contrivin g a wors e surplu s a t th e sam e tim e tha t Japanese jingoist s ca n poin t t o a worsenin g yen-reckone d surplus. Just nin e day s ago , her e a t NYU , ou r symposiu m touched o n thes e matters . A n informe d exper t fro m th e Fuji Ban k comple x explaine d why , i n abou t fou r years ' time, th e bankin g syste m i n Japan migh t b e abl e t o accu mulate enoug h earning s t o wor k of f it s ba d rea l estat e assets. Th e key , h e suggested , wa s t o us e a s a Japanese American dictionar y th e Mitsubish i Bank , th e onl y Japa nese ban k t o prepar e report s fo r America n shareholder s protected b y th e SEC . On e coul d translat e th e Mitsubish i Japanese accountin g report s int o America n term s b y com paring the m wit h th e Mitsubish i America n accountin g re ports, an d b y applyin g th e sam e ratio s t o othe r banks ' available Japanes e dat a on e coul d hop e t o estimat e thei r meaning i n standard America n accountin g terms . I foun d tha t a bi t reassuring . Actuall y I ha d feare d things migh t b e a bi t worse—whic h woul d hav e bee n ominous fo r th e futur e o f foreig n investin g an d th e insta bility o f th e floating exchange-rat e system . Th e prospec t of a dolla r tha t ha s falle n t o belo w 10 0 ye n i n pric e would b e dauntin g i f a stil l furthe r overshoo t coul d b e rationally feared . 184

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I wis h tha t th e refor m coalitio n governmen t i n Japa n had th e wil l an d th e powe r t o dismantl e o n a gran d scal e all barrier s t o trade . Tha t woul d b e a goo d thin g fo r th e vast majority o f the Japanese people. Any harm t o particu lar veste d interests—suc h a s ric e farmers—coul d b e par tially o r wholl y compensate d for , an d stil l th e natio n would b e ahead . This ple a fo r free r trad e fro m th e Japanes e sid e i s no t because I expect that suc h a reform woul d caus e America' s current defici t wit h Japa n t o evaporat e o r eve n dro p sub stantially. I d o no t believ e tha t 10 0 percen t fre e trad e would greatl y alte r th e presen t compositio n an d volum e of eithe r o f th e tw o countries ' export s an d imports . Wha t it woul d d o i s ad d t o economi c welfar e i n bot h places . And, with protection ou t of the way, noneconomists coul d see what economist s understan d t o b e the following truth : With Japa n bein g a high-savin g societ y facin g limite d in vestment opportunitie s a t home , an d wit h Americ a bein g an affluent , low-savin g societ y wit h a stil l chroni c fiscal deficit, on e mus t expec t th e norma l equilibriu m stat e t o involve a chronic Japanese surplu s o n curren t accoun t an d a chroni c American defici t o n curren t account . The worl d i s in nee d o f th e capita l formatio n tha t Japa nese thrif t ca n hel p finance. A s th e Japanes e populatio n ages, th e futur e fruit s o f asset s owne d b y Japanese corpo rations an d familie s wil l b e increasingl y neede d a t home . And al l this ca n b e effectively sustaine d unde r present-da y floating exchange-rat e mechanism s o f th e post-Bretto n Woods type . 185

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Now wha t woul d b e implie d b y a successfu l develop ment alon g the lines I have sketche d ou t above ? I wan t t o describ e tw o alternativ e scenarios . On e o f them wil l com e a s n o surpris e t o mos t observers . Th e other ma y a t firs t see m mor e novel . M y purpos e i s no t t o come ou t fo r on e o f thes e scenario s an d t o com e ou t against th e other . Actually , i t coul d b e advantageou s t o embrace a mixtur e o f bot h o f them , lettin g furthe r evolu tion determin e th e right s o f th e blendings . Ther e i s n o need t o decid e o n either/or , n o nee d t o mak e u p one' s mind a t this time fo r o r agains t either . Scenario 1 declare s tha t i f Japanese saving s ar e spread ing int o capita l formatio n i n differen t part s o f th e world , then i t ha s t o b e Japanese corporation s an d management s who d o the managing of these investments. What Japanes e militarism di d badl y i n he r prewa r imperialis m i n Chin a and Fa r Eas t Asia , no w Japanes e multinationa l corpora tions can try during peacetime to do well and in a way tha t is popular wit h th e hos t people s wh o ar e th e recipient s o f Japan-financed capita l formation . Scenario 2 divorce s th e process o f providin g investmen t funds fo r foreig n investmen t fro m th e process of managin g them. I n thi s view , saver s op t t o b e rentie r owner s o f bonds an d equities . To understan d thi s process , onl y con template th e man y hundred s o f billion s o f dollar s save d by Americans fo r thei r futur e pensions . Their mone y man agers entruste d wit h thes e fund s d o no t manag e produc tive corporation s an d d o no t tr y t o perfor m Schumpeter ian act s o f innovation . Instea d the y mak e judgment s 186

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concerning whic h venturesom e an d experience d corpora tions ar e worthy o f bein g invested in . To b e concrete , whe n I wa s a write r fo r Newsweek I wrote a famou s colum n calle d "Advic e t o a Sheik. " Hav ing Saud i Arabi a o r Kuwai t i n mind , wit h thei r vas t an d new oi l revenues , I counseled : "Inves t muc h o f you r sur plus abroa d rathe r tha n creat e a n inflatio n a t hom e a t to o fast a pac e o f attempte d development . Instea d simpl y bu y a portfoli o o f Standar d an d Poor' s 50 0 Index . Hol d i t i n Switzerland i f yo u like . N o othe r investmen t ca n b e s o liquid o n deman d an d s o well-diversified. " I was wis e beyon d m y time . Man y o f th e Kuwait i take overs i n place s lik e Spai n hav e bee n simpl e disasters . Th e skyscrapers an d gol f club s bough t i n America b y Japanes e have often bee n lemons . The record i n America o f the fou r great Japanese brokerag e firms ha s certainl y bee n nothin g to boas t of . I suggest tha t Scenario s 1 and 2 bot h deserv e reflection.

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CHAPTER 7

Recent Economic an d Financial Trend s Affecting Japa n an d the United State s March 8, 1993

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I N T R O D U C T O R Y REMARK S W e ar e toda y a t th e crossroad s in bot h th e Japanese contex t an d th e U.S. context i n term s of economi c policy . Afte r a lon g perio d o f growt h bot h countries hav e bee n plunge d int o a perio d o f recession , out o f whic h th e U.S . is only recentl y emergin g an d Japa n is yet to emerge , or perhap s ha s just begun . Both countrie s ar e contemplatin g majo r revision s i n their fiscal policies , althoug h i n somewha t differen t direc tions. I n bot h countrie s ther e ar e doubt s i n man y quarter s about th e efficac y o f socia l policies . I n th e Unite d State s we've see n a lo t o f discussio n o f healt h car e issues . I n Japan ther e ha s bee n a lot o f attentio n pai d t o th e regula tion o f financial markets . W e wil l se e furthe r develop ments i n bot h countrie s I suppos e ove r th e cours e o f th e next fe w months , a s thei r ne w policie s tak e shap e an d evolve. Our first speake r i s Professo r Merto n Miller . Professo r Miller i s on e o f th e foundin g father s o f moder n financial economics an d ha s mad e contribution s t o virtuall y ever y area o f economic s an d finance. A Nobe l Laureate , h e i s the Rober t McCormic k Distinguishe d Servic e Professo r a t the University o f Chicago . MARTI SUBRAHMANYAM :

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M E R T O N MILLE R When I got th e invitatio n t o b e a lead-of f speake r talkin g about Japan-U.S . relation s unde r th e Clinto n administra tion I couldn't hel p bu t thin k o f a famous documen t i n th e Widener Librar y a t Harvar d University . It' s a n exa m pa per writte n many , man y year s ag o b y th e grea t America n humorist Rober t Benchley , an d th e exa m h e was calle d o n to writ e was , "Discus s th e Canadian-America n Fisherie s Treaty o f 187 6 fro m th e viewpoin t o f on e o f th e partici pants." H e wrot e i t from th e point o f view of th e fish, an d that's the position tha t I want t o take today. I want t o tal k about U.S.-Japa n relation s fro m th e poin t o f vie w o f th e fish, namely , th e consumer s i n bot h countries . Nobod y pays to o muc h attentio n t o them , o r a s muc h attentio n as the y should . Al l ou r emphasis , I' m afraid , i s o n th e producer's side . So le t m e first tal k abou t wha t I think thes e trad e rela tions mea n fo r U.S . consumers, an d her e I think th e Clin ton administratio n ha s bee n givin g ver y mixe d signal s s o far. That' s no t necessaril y a criticism . It' s a ne w adminis tration, afte r all , an d it' s stil l no t clea r wh o reall y speak s for i t o n matter s o f internationa l policy . Th e administra tion hasn' t gotte n dow n t o specific s yet , bu t I' m par t o f a group ver y muc h afrai d tha t thei r mott o ma y wel l b e on e that I onc e sa w o n a bumpe r sticker , whic h I'l l edi t fo r 194

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this audience . Th e bumpe r sticke r said , "Th e hel l wit h price an d quality . Bu y American! " We're soo n goin g to ge t som e tests of wher e th e admin istration stand s o n a variet y o f thes e issues . There' s thi s much discusse d matte r o f th e vans , fo r example . Ar e the y to b e considere d truck s an d pa y a 2 5 percen t tariff ? O r autos, a t 2V2 percent? Als o looming i n the backgroun d ar e threats o n th e par t o f ou r automobil e companies , o r a t least some of them, to invoke the antidumping laws. Those laws could d o a considerable amoun t o f damag e t o Ameri can consumers . Let m e ad d righ t away , however , tha t I am no t praisin g the previou s administratio n i n contras t t o th e Clinto n ad ministration. Man y anticonsume r move s o f thi s kind wer e made b y the Bush administration . Th e onl y differenc e tha t I se e i s this , an d i t ma y b e a n importan t one . Whe n th e Bush administratio n di d it , i t wa s wit h a sens e o f guil t because the y a t leas t fel t tha t the y shoul d b e strongly pro free trade . I' m no t sur e ho w dee p th e fre e trad e instinct s of th e curren t administratio n run , bu t I' m certainl y no t condemning the m ou t o f hand . I' m sayin g that i n th e nex t few month s w e will see . For th e Japanese sid e o f th e equation , I really thin k tha t things are going to b e looking up. The Clinto n administra tion, whatever it s policies may b e about lettin g imports in , is certainl y goin g t o b e pushin g ver y har d o n Japan t o ge t its barrier s dow n an d possibl y eve n t o elevat e th e yen . Although thi s wil l caus e a lo t o f screaming , i t ma y ulti 195

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mately b e goo d new s fo r Japanes e consumers . Th e mor e access an d th e easie r acces s the y hav e t o worl d commodi ties, an d t o U.S . ones i n particular , th e greate r th e benefi t to Japanese consumers . I especially want t o point ou t on e area i n which I believe the Clinto n administratio n wil l eventuall y poun d suffi ciently har d o n th e Japanese authoritie s t o ge t the m t o d o something—prohibitions o n ric e imports . I alway s teas e my Japanes e friend s abou t ho w muc h luckie r w e ar e i n America tha n the y ar e in Japan. I happen t o be a great ric e eater. I lov e rice . I no t onl y ea t Japanes e rice , whic h i s good ( I even lik e th e stick y variet y a s well a s th e regular) . It's grea t rice—bu t s o i s arbore o ric e fro m Italy , whic h you won' t find i n Japan . S o i s basmat i rice , fro m India . That's grea t stuff , too . S o i s Tha i rice . Al l thes e magnifi cent rice s from aroun d th e world, an d fo r som e reason fo r all thes e year s Japa n ha s prevente d he r ow n peopl e fro m eating them . T o m e i t make s absolutel y n o sense , an d I think w e will help the Japanese get rid of these restrictions . Now ric e i s on e o f m y hobbies . Future s market s i s another one , an d o n tha t I hope tha t th e Clinto n adminis tration wil l poun d o n th e Ministr y o f Financ e (MOF ) a bit—in fac t a lot . I n fac t I hop e the y wil l poun d MO F into th e ground . I hav e severa l complaint s abou t MO F that I wan t t o tal k about , bu t I'l l mentio n tw o wher e I think gentl e pressur e fro m abroa d ca n b e a help. We hav e first o f al l succeede d i n gettin g th e MO F t o allo w Ameri can firms t o ente r th e brokerag e industr y i n Japa n an d give som e healthy , well-neede d competitio n t o tha t close d 196

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cartel. Suc h ar e th e fact s o f lif e ove r there , however , tha t although a n America n firm coul d joi n th e Toky o Stoc k Exchange, i t stil l coul d no t ta p th e loca l Japanes e retai l market ver y well . Japanese firms, understandably , hav e a big advantag e i n th e loca l market . Bu t foreig n firms coul d at leas t tak e advantag e o f future s trading , which , a s a result o f poundin g fro m th e U.S. , MO F finally ha d t o permit. Unfortunately, i n on e o f thes e pos t hoc/a d ho c situa tions, no soone r ha d MO F allowe d U.S . firms to engag e in substantial amount s o f future s tradin g tha n th e Toky o Stock Marke t wen t int o th e tank . An d o f cours e MOF , like anybod y els e woul d unde r th e circumstances , said , "Aha! Yo u see ? W e tol d yo u thi s wa s goin g t o happe n i f we allowed future s trading. " Well , there's a simple way t o show yo u tha t th e fal l tankin g o f th e stoc k marke t i n Japan wa s no t i n fac t du e t o future s trading . Loo k a t Taiwan. Th e fal l ther e wa s ever y bi t a s prolonge d an d a s intense a s i n Japan , an d ther e wa s n o future s tradin g whatever. Futures tradin g ha d nothin g t o d o wit h th e case . Bu t MOF couldn' t see m to understand that , becaus e here wer e these America n firms makin g hug e quantitie s o f mone y while th e stoc k marke t wa s goin g down . MO F figured they someho w ha d t o b e selling ; tha t the y ha d t o b e violating th e well-know n Japanes e taboo s agains t sellin g stocks. But the y weren't . Th e arbitrag e involve d ha d the m all buyin g Japanes e share s an d sellin g futures . Wha t the y were doing , a s I'v e trie d t o explai n i n som e recen t papers , 197

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was arbitratin g commissions , no t prices . MO F ha d se t such a n artificiall y hig h leve l o f securitie s commission s that America n firms wh o ha d th e know-ho w wer e abl e t o utilize these new developments to—"hollow out " I believe is the phras e Professo r Horiuch i used—t o hollo w ou t th e Japanese stoc k marke t an d switc h th e busines s ove r int o the future s market . I think MO F understand s thi s now. But what it' s doing , and wher e I hope w e ca n exer t som e pressur e o n them , i s trying to expan d MOF' s influence , banefu l influenc e i n my opinion, no t jus t a t hom e bu t aroun d th e world . Th e Nikkei future s contrac t i s trade d i n Singapor e o n th e Si mex Exchange , an d whe n MO F pu t ou t al l kind s o f re strictive rule s i n Japa n th e busines s jus t move d e n mass e from Osak a t o Singapor e (wher e MO F pursue d them) . The Japanes e wen t t o Singapor e an d trie d t o persuad e them t o adop t Japanes e restrictions , an d no w they'r e put ting pressur e o n us , th e Chicag o Mercantil e Exchange , t o also mak e som e change s i n th e wa y w e trad e th e Nikke i Index. I hop e tha t th e pressur e tha t ou r governmen t ca n exer t on MO F wil l hel p fre e th e Japanes e capita l market s an d make the m int o moder n markets . I alway s fee l Japa n i s a twentieth-century economy , o r soo n t o b e twenty-first , with a seventeenth-centur y regulator y structure . MOF style regulatio n i s n o longe r appropriat e fo r a seriou s country, a s Japan surel y is. Let m e conclud e o n thi s note . Whethe r MO F ca n b e reformed o r not , I don't know . On e reaso n ou r regulator s 198

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don't d o som e o f th e things MO F does , like try t o suppor t market prices , i s tha t ou r regulator s kno w tha t i t won' t work. That' s ba d enough . The y als o kno w tha t i f the y tr y and i t stil l doesn' t work , they'r e goin g t o ge t blame d fo r the failures . Now MO F i s being blamed fo r th e failure s al l right, bu t what ca n yo u d o abou t i t i n Japan ? I n th e U.S. , i f th e regulators fai l the y kno w they'l l b e kicke d ou t o f office . But ther e i s n o oppositio n part y i n Japan, an d a s a resul t there ar e n o penaltie s o n MO F fo r it s conspicuou s an d embarrassing failure s i n tryin g t o suppor t th e stoc k mar ket. No w yo u aske d m e t o b e provocative . Wha t d o yo u think? MARTI SUBRAHMANYAM : Professo r Miller , a s usual , ha s been ver y forthrigh t i n hi s views. I should mentio n a cou ple o f fact s tha t ma y b e o f interest . Firs t o f all , Professo r Miller i s o n th e Boar d o f Director s o f th e Chicag o Mer cantile Exchange . Th e othe r fac t tha t ma y b e of interes t i s a curiosity , tha t on e o f th e earlies t financial future s ex changes tha t I know o f wa s i n Osak a in , I believe, the lat e eighteenth century . MERTON MILLER : Eve n earlie r tha n that : 1640 . MARTI SUBRAHMANYAM : 1640 , was it ? And i t was actu ally a marke t tha t trade d future s an d forwar d contract s on ric e warehouse receipts . S o in a sens e thi s i s not a ne w thing fo r Japan , an d perhap s th e Japanese authoritie s wil l heed Professo r Miller' s advice . MERTON MILLER : Le t m e jus t mentio n tha t I wa s i n

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Osaka durin g m y last tri p t o Japan an d I placed a wreat h of flower s o n th e sit e o f th e firs t future s exchang e i n th e hope it may revive. MARTI SUBRAHMANYAM : I turn t o the next panelist, Pro fessor Masahir o Kawai , wh o i s visitin g u s fro m Toky o University. Professo r Kawa i is a prominent Japanese econ omist, whos e researc h interest s rang e fro m th e economic s of commoditie s market s t o issue s o f macroeconomi c pol icy. He is on the faculty o f the Institute o f Socia l Science s at the University o f Tokyo .

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M A S A H I R O KAWA I Professor Mille r talke d abou t poundin g th e Japanese mar ket, puttin g pressur e o n Japan , an d h e sor t o f suggeste d that becaus e o f th e lac k o f effectiv e oppositio n partie s i n Japan, th e Unite d State s ca n pla y th e rol e o f a n effectiv e opposition party . I have t o sa y it' s ver y sa d an d unfortu nate fro m th e Japanes e viewpoin t tha t s o man y thing s have t o b e don e b y oppositio n partie s outsid e o f Japan . The situatio n ha s t o change . I believe tha t certai n thing s ar e i n fac t goin g t o change . Professor Mille r talke d abou t rice . I want t o touc h o n tha t issue a s well . I wante d t o tal k abou t macroeconomi c is sues, microeconomi c issues , an d internationa l trad e an d finance issues , but give n th e time constraint s I have mayb e I'll touc h o n jus t certai n aspect s o f macroeconomi c issue s and the n I wan t t o tal k abou t internationa l trade , th e finance aspec t particularly . Now a s everyon e knows , th e Unite d State s i s i n th e process o f gettin g ou t o f it s recession . Japan i s stil l i n th e middle o f a relativel y sever e recession , an d man y peopl e say that th e current recessio n in Japan, which i s sometimes called th e "Pos t Bubbl e Recession " o r th e "Heise i Reces sion," i s th e mos t sever e recessio n Japa n ha s face d sinc e World Wa r II . Actually, i f you tak e a look a t statistics , that's no t quit e so. Fro m th e 1970 s w e hav e ha d thre e recessions , includ 201

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ing th e curren t one . Th e mos t sever e wa s fro m 197 4 t o 1975, afte r th e pric e shock . A t tha t time , if I can giv e yo u some numbers , rea l outpu t decline d ver y fast . Fro m pea k to trough , industria l productio n decline d b y almos t 1 9 percent. Bu t thi s tim e th e declin e i s 7 percent. A t th e tim e of th e pric e shock , rea l GD P o r GN P decline d ver y clos e to 3 percent—this tim e fro m 0. 4 t o 0. 6 percent . Now i n 199 2 rea l outpu t i s still declining, an d w e don' t quite know whe n it' s goin g to stop . But given the stimulu s by the Bank o f Japan, whic h ha s reduced th e discount rat e six time s fro m 1990 , an d give n th e fiscal stimulus tha t th e Minister o f Financ e i s no w undertaking—an d th e Minis ter o f Financ e i s tryin g t o undertak e furthe r fiscal stimu lus—I don' t thin k thi s recession i s going to las t very long . Some people have called th e current recessio n structura l rather tha n cyclical , bu t I disagree . I t i s ver y cyclical . Japanese busines s firms accumulate d to o muc h capita l stock i n th e lat e 1980 s give n th e macroeconomi c environ ment. A t tha t tim e ther e wa s a sudde n surg e i n th e confi dence o f a lo t o f Japanes e firms i n busines s sector s a s fa r as th e futur e o f th e Japanes e econom y wa s concerned . They investe d a lo t i n capita l equipmen t an d th e stoc k price someho w wen t u p an d the n suddenl y starte d t o col lapse. To o muc h capita l wa s accumulated , an d to o muc h debt incurre d b y th e busines s sectors . No w th e Japanes e economy i s tryin g t o tak e car e o f tha t problem , an d afte r this stoc k adjustmen t phas e I believ e tha t th e econom y will come back . The tensions betwee n Japan an d the United State s resul t 202

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from th e opposit e direction s o f th e tw o countries ' econo mies. The U.S. economy i s growing, the Japanese econom y is stil l down , an d that' s widenin g th e trad e imbalance s between th e tw o countrie s an d i s on e o f th e source s o f economic tensio n betwee n the m now . Bu t I don' t thin k this sort o f cyclica l tensio n wil l last for a long time. Now o n microeconomi c issue s there ar e man y thing s t o be done , bu t I' m goin g t o ski p thi s part , wit h on e excep tion, which i s the need o n th e part o f the Japanese agricul tural authoritie s t o b e fir m o n thei r futur e agricultura l policy. Th e proble m wit h ric e i n Japa n i s internal , no t caused b y th e pressur e fro m abroad . Th e agricultura l sec tor i s structurall y depressed . N o youn g peopl e wan t t o continue farming . N o youn g peopl e wan t t o inheri t th e farmland fro m thei r parents . Ther e i s reall y n o futur e i n Japan i n term s o f ric e farming . Structura l change , polic y change, has to tak e place , and I think i t will. Moving t o internationa l trade , i n th e Urugua y Roun d of th e GAT T negotiation s th e rol e o f ric e fro m th e view point o f Japa n wa s no t th e mos t importan t impediment , but wa s stil l a n importan t issue—no t fo r th e Unite d States, no t fo r Thailand , no t fo r Vietnam , bu t fo r Japan . It's abou t th e future o f Japanese agriculture . Congress passe d som e year s ag o a resolutio n t o th e effect tha t Japa n doe s no t impor t eve n a grai n o f rice . That's th e officia l policy . Bu t actuall y som e grain s o f ric e are bein g imported . Lot s o f ric e i s bein g importe d i n th e form o f processe d ric e a s well , s o actuall y tha t polic y i s not bein g maintaine d anyway . Bu t still , that' s th e officia l 203

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policy. Now som e factions o f th e LDP, our Libera l Demo cratic Party , ar e suggestin g tha t Japa n shoul d ope n u p it s rice market . Som e member s fro m th e Socialis t Part y ar e now raisin g u p a soli d voic e a s well , an d consensu s i s emerging in Japan t o ope n u p th e rice market . The questio n i s no t reall y whethe r th e Japanes e ric e market shoul d b e expose d t o foreig n competition , bu t rather t o wha t exten t Japanese consumer s shoul d suppor t their ric e farmers . I believ e som e consensu s wil l b e reached, ha s t o b e reached, befor e th e curren t GAT T Uru guay roun d i s concluded . Peopl e believ e it' s goin g t o b e concluded som e time this year an d Japan ha s to move, an d it i s afte r al l i n th e bes t interes t o f Japa n t o mov e i n that direction . Japa n canno t continu e t o hav e a depresse d agricultural sector . We canno t reall y tal k abou t Japanese trad e polic y inde pendent from U.S . trade policy. Japan i s heavily dependen t on the United State s for trade , for investment , an d in man y other areas . He r choice s ar e heavil y influence d b y U.S . trade policy . I wil l summariz e m y remark s b y pointin g ou t som e options that Japan ca n take with regard to its internationa l trade o r trad e policy . Mayb e governmen t bureaucrat s an d some people ma y b e upset when Professo r Mille r say s tha t the Unite d State s wil l poun d th e Japanes e governmen t and appl y pressur e t o ope n u p th e market . Actuall y th e government ha s bee n doin g jus t that . Bu t anti-U.S . feelin g is risin g i n Japa n now , an d i t look s ver y unfortunate . A s Professor Mille r pointe d out , trad e friction s ar e no t th e 204

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frictions betwee n th e entir e natio n o f Japa n versu s th e entire natio n o f th e Unite d States . The y ar e friction s be tween a se t o f producer s i n Japa n versu s anothe r se t o f producers i n differen t countries , and consumer s hav e thei r own ver y differen t interests , differen t fro m thos e o f th e producers i n thei r ow n country . W e hav e t o understan d that. Still ther e i s a feelin g i n Japa n tha t Japa n shoul d no t depend to o muc h o n th e Unite d State s i n term s o f th e export market , bu t shoul d mov e he r weigh t mor e towar d Asia. That' s on e directio n tha t Japa n ca n take . Actuall y Malaysian Prim e Ministe r Buti r propose d th e Eas t Asia n Economic Groupin g (EAEG ) idea, and Asia is now consid ering that possibility . That's on e possibility. However, I believe first o f al l tha t if Japan' s mov e towar d Asi a i s accompanie d b y openin g the Japanes e agricultura l marke t t o Asia , tha t coul d b e a step toward free r trad e fro m th e viewpoint o f the world a s a whole . I f Japa n move s mor e towar d Asi a i n it s trad e investment an d a t th e sam e tim e maintain s a kind o f mili tary arrangemen t (th e U.S . presence) , fre e trad e ma y no t be tha t har d fro m a n economi c viewpoint . I t ma y eve n b e quite useful , jus t lik e a NAFTA agreemen t coul d b e usefu l for th e worl d a s a whole. Bu t o f cours e ther e i s a politica l concern here . It' s quit e unrealistic . I canno t spel l i t ou t now becaus e o f time . Another direction , a n opposit e direction , tha t Japa n could tak e woul d b e t o completel y integrat e Japa n wit h the econom y o f th e Unite d State s an d Nort h Americ a b y 205

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forming a U.S.-Japan Fre e Trade Agreement, o r by joining the NAFTA . No w in orde r fo r thi s t o b e viable th e Japanese economi c syste m woul d hav e t o b e equalized , t o b e level wit h tha t o f th e Unite d States , establishin g a leve l playing fiel d acros s th e Pacific . Th e Unite d State s fo r it s part woul d nee d t o accep t th e existing savings/investmen t imbalance wit h Japan , s o tha t i f larg e trad e imbalance s continued the y woul d hav e n o political consequences . But these tw o condition s see m quit e difficul t t o realize . In the short ru n then thi s path ma y also be unrealistic. The mos t realisti c pat h woul d b e t o us e a n expande d Asia Pacifi c Economi c Cooperatio n (APEC ) forum , t o include al l o f Nort h America , Japan , th e Southeas t Asia n countries, China , Australia , an d New Zealand. T o free u p trade b y usin g suc h a foru m o f loos e economi c coopera tion woul d b e the most realisti c optio n fo r Japan, an d the Japanese governmen t i s indeed pursuin g tha t option . The only proble m i s tha t i t migh t lea d t o a two-blo c worl d economy, Europ e versu s APEC . Japa n woul d benefi t a great dea l by multilateralizing he r trade relationship s wit h the res t o f th e world ; thus , APE C woul d nee d t o includ e Europe a s well. That woul d b e the most realisti c an d least costly wa y t o involv e Japa n i n liberalizin g th e interna tional tradin g system .

I wa s intereste d t o hea r you r reference t o Japan' s growin g interes t i n th e res t o f Asia . On a recent visit to Japan I heard a presentation o n China ,

MARTI SUBRAHMANYAM :

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and wa s struc k b y th e difference s i n perspectiv e betwee n Japan's vie w o f Chin a an d tha t o f th e Unite d States . Thi s is a topi c I would lik e t o com e bac k t o later . Le t m e no w turn t o th e next panelist, Professo r Jame s Tobin. Professo r Tobin, whos e nam e i s I' m sur e familia r t o al l o f you , i s a Nobel Laureate . H e i s on e o f th e stalwart s o f Keynesia n economics an d ha s influence d nationa l economi c polic y from th e day s o f th e Kenned y administratio n u p t o th e present.

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JAMES TOBI N If yo u loo k a t th e worl d econom y thes e day s I think yo u will se e tha t th e Grou p o f Seve n advance d countries — and especiall y th e Grou p o f Thre e amon g them , Japan , Germany a s th e ke y countr y i n economi c polic y fo r Eu rope, an d th e Unite d States—i s no t doin g ver y well . Th e world wasn' t doin g ver y wel l i n th e eighties . I t look s lik e the nineties ar e not turnin g into a very good decad e either . The administratio n o f th e world econom y b y this group of central banker s an d leader s hasn' t bee n ver y successfu l i n terms o f economi c growth , prosperity , an d unem ployment. It look s t o m e like Japan an d German y hav e bee n fight ing th e war s o f th e 1970 s fo r twent y year s now , wit h rather disastrou s result s fo r thei r respectiv e economies . I f you loo k a t th e unemploymen t rate s i n Wester n Europ e you se e lot s o f double-digi t rates , an d righ t no w yo u se e lots of negativ e growt h rate s fo r industria l productio n an d GDP. Japan o f cours e doesn' t hav e unemploymen t i n th e same sens e a s Europ e o r th e Unite d States . Bu t especiall y relative t o th e sustainabl e growt h rat e o f Japan , whic h I should suppos e i s 4 o r 5 percen t pe r year , the y certainl y haven't bee n doin g ver y well . I thin k a lo t o f thi s poo r performance i s linked t o th e prevalenc e o f monetaris t an d other sort s o f noninterventionis t macroeconomi c view s among th e leaders o f Japan an d Germany . 208

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The Unite d States , a s it was i n th e 1980s , is a bit ou t o f synchronization wit h th e res t o f th e G- 7 o r G-3 . That' s good fo r u s i f w e hav e a recover y whe n they'r e stil l i n recession. But of cours e the depressed conditio n o f the res t of th e worl d i s a n importan t handica p fo r Unite d State s recovery, becaus e it' s ba d fo r ou r exports , ou r trad e balance. Let m e tur n mor e specificall y t o th e Unite d State s an d the Clinton administration' s program . The Clinton admin istration ha s know n fo r a lon g time , eve n befor e th e elec tion, tha t i t face d a dilemm a between , o n th e on e hand , economic stimulu s t o restor e employmen t i n th e Unite d States an d ge t th e econom y movin g again , a short-ru n business cycl e problem , and , o n th e othe r hand , defici t reduction t o dea l with th e longer-run proble m o f th e inad equacy o f America n savin g and investment . Clinton's polic y crystallize d whe n th e administratio n got int o office . Th e advocate s withi n th e administratio n favoring first priorit y fo r defici t reductio n reall y wo n th e President's approval . Th e emphasi s o f th e progra m pre sented o n Februar y 17 , 199 3 t o th e Congres s an d th e public i s really o n a several-yea r progra m o f defici t reduc tion. Th e highe r taxe s an d expenditur e cut s propose d i n the progra m wil l hav e actuall y begu n alread y i f th e pro gram goe s throug h a s presented , i n th e sens e tha t th e proposed ta x increases—th e incom e tax increases , not th e energy ta x increases—ar e suppose d t o b e begi n retroac tively fro m th e dat e o f passag e bac k t o th e first o f thi s year. That ma y no t las t of cours e i n the actua l legislation . 209

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The earlie r ide a wa s fo r a stimulu s t o dominat e th e first coupl e o f years , t o b e followe d b y a n auster e defici t reduction package . Th e stimulu s par t ha s bee n cu t wa y back unti l it' s almos t nonexistent , apar t fro m th e invest ment ta x credi t (ITC) , however , whic h i s sur e t o b e en acted bu t whic h wil l onl y las t fo r tw o years . There won' t be any stimulu s eve n fro m tha t sourc e then afte r 1994 . So at mos t w e ar e going to ge t a deficit reductio n tha t i s less than a deficit-increasing stimulu s in the first year only , fiscal 1993 , an d that' s goin g t o b e o f a n orde r les s tha n half o f 1 percent. It' s har d t o imagin e tha t that' s goin g t o make a grea t dea l o f differenc e i n th e macroeconomi c outlook. I thin k th e upsho t o f al l thi s i s tha t th e bal l ha s bee n passed t o Ala n Greenspan , th e Chairma n o f th e Fed , an d his colleagues . I f we'r e goin g t o hav e a stron g recovery , then it' s reall y goin g t o b e u p t o hi m an d hi s polic y t o b e more activist , mor e aggressivel y expansionary , tha n th e Federal Reserv e ha s bee n accustome d t o bein g recently , especially i n the last fou r years . Fiscal policy i s going to b e leaning against the wind a s it is, so it would b e undesirabl e and certainl y unnecessar y fo r th e Federa l Reserv e t o b e leaning agains t th e win d a s wel l i n accordanc e wit h thei r ordinary practic e durin g recoveries . Let m e emphasiz e w e hav e a lon g wa y t o g o t o achiev e a complet e recovery . Th e recen t statistic s o n GN P growt h and on e month' s recen t statistic s o n employmen t growt h are promisin g signs , an d i t ma y b e tha t w e alread y hav e sufficient stimulu s an d sufficien t optimis m t o kee p th e 210

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economy goin g withou t help . Bu t w e hav e abou t eigh t million job s t o creat e t o attai n a n unemploymen t rat e o f 5V2 percent i n 1996 , th e rat e tha t w e ha d befor e th e fou r years o f growth , recession , an d stagnatio n fro m 198 9 t o the present. Eight million jobs—that als o means we would have to mak e up a gap of aroun d 5 percent betwee n wher e we ar e no w an d wha t th e gros s domesti c produc t woul d have t o b e fo r th e econom y t o produc e tha t kin d o f lowe r unemployment rate . Since th e norma l growt h o f th e econom y need s t o b e around 2V 2 percent pe r yea r jus t t o kee p th e unemploy ment rat e unchanged , t o mak e u p a shortfal l o f 5 percen t through fou r year s we'r e goin g t o hav e t o hav e growt h every year o n averag e betwee n 3 3A and 4 percent per year . Growth o f 3 percen t i s nothin g t o writ e hom e about . Growth o f 3. 8 percent , suc h a s w e ha d i n th e fourt h quarter o f 1992 , i s somethin g else . I f tha t wer e t o con tinue, i t woul d lowe r th e gap . Bu t that' s goin g t o b e against th e employment-reducin g effect s o f th e auster e deficit reductio n program , th e defens e cut s an d ta x in creases i n th e program , an d als o agains t th e downsizings , structural adjustments , an d permanen t layoff s tha t ar e being mad e b y man y America n companie s a t thi s time . Recovery i s no t i n th e bag , an d ou r fiscal polic y a s no w planned i s not goin g to d o muc h t o help . Now le t me just remin d yo u tha t thi s administratio n o n coming int o offic e inherite d fro m it s predecessor s a t leas t six reall y difficul t economi c problem s i n th e economy . One i s the recession , hig h unemployment , an d th e stagna 211

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tion o f th e econom y fo r th e las t fou r years . The secon d i s that fo r a longe r tim e tha n tha t we'v e ha d no t a cyclica l problem bu t a long-run , secula r problem , no t a deman d shortage but a too-slow rat e of growth in our productivity , in our abilit y t o produce good s an d services , mirrored i n a very disappointin g an d upsettin g wa y t o American s a s a downwar d tren d i n rea l wages , a t leas t i n take-hom e real wages . That's th e longer-run problem , t o whic h th e third prob lem, th e persisten t defici t i n th e federa l budget , i s relate d insofar a s th e remed y fo r th e secon d problem , th e slo w growth o f productivity , migh t entai l a highe r rat e o f in vestment an d saving . Fourt h i s the healt h car e cos t explo sion, whic h wil l bus t th e budge t i n th e latte r par t o f thi s decade regardles s o f wha t happen s a s a resul t o f th e pres ent defici t reductio n package . I n additio n t o th e presen t deficit reductio n pla n there' s goin g t o hav e t o b e anothe r one t o accompan y healt h car e reform . Otherwis e th e first plan wil l b e overwhelme d b y th e growin g explosio n o f Medicare an d Medicai d cost s i n th e las t par t o f thi s decade. Fifth, w e hav e th e backlo g o f neede d publi c investmen t of al l kinds—infrastructure , education , an d s o forth — that ha s buil t u p i n the last twelve years. Something ough t to b e don e abou t it . Th e defici t reductio n pla n addresse s some, thoug h no t all , o f this . I think that' s a goo d aspec t of th e plan, bu t peopl e ar e saying, "Well , if we're goin g t o try to reduce the deficit w e shouldn't us e any of the savings or ne w taxe s fo r thos e programs . The y shoul d al l b e pu t 212

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into defici t reduction. " Finally , sixt h i s the growt h o f inequality o f incom e an d wealt h durin g th e pas t twelv e years. A little somethin g i s being don e abou t i t in tax and other reform s tha t ar e being proposed . That's a bi g men u o f problem s tha t nothin g wa s don e about fo r twelv e years , an d suddenl y Clinto n i s expecte d to solv e them all . Some patience an d understanding migh t be called for . I'm no t goin g t o commen t an y furthe r a t thi s tim e o n trade policy , othe r tha n t o sa y tha t th e macroeconomi c developments overseas , especiall y i f w e hav e a recover y and th e other guy s don't , ma y exacerbate th e trade prob lem b y increasin g ou r deficit s i n trad e an d increasin g th e Japanese surplus , an d that' s probabl y a bi g danger a s fa r as protectionis t temptation s i n th e United State s ar e con cerned.

Ou r nex t speake r i s Masahir o Yoda, Genera l Manage r o f th e Ne w Yor k branc h an d Managing Directo r o f th e Sanw a Bank . Masahir o Yod a has extensiv e experienc e a s an internationa l banker , hav ing serve d th e Bank i n London, Ne w York, an d San Francisco. MARTI SUBRAHMANYAM :

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M A S A H I R O YOD A I a m ver y please d t o hav e th e opportunit y t o spea k toda y with suc h a distinguishe d grou p o f economists . I fee l lik e a differen t specie s sittin g here , an d t o avoi d a fierce argu ment late r wit h th e othe r panelist s I would first o f al l lik e to spea k briefl y abou t th e histor y an d professiona l activi ties of Japanese bank s in the United States from m y experience a s a n internationa l banke r fo r thirty-tw o years — eleven year s i n th e Unite d States , seve n i n England , an d the remainder i n Japan . Americans ar e familia r wit h Japanes e companie s lik e Honda, Toyota, an d Sony . Unfortunately, sinc e the major ity o f customer s o f Japanese bank s her e ar e large corpora tions (wit h th e exceptio n o f suc h place s a s Californi a where Japanese bank s conduc t retai l bankin g operations) , there i s littl e opportunit y fo r th e genera l publi c t o under stand th e activitie s o f thos e Japanes e bank s tha t hav e become a part o f dail y life i n the United States . I would b e happy i f m y remark s toda y presente d th e realitie s o f th e U.S.-Japan relationshi p i n it s financial-economic aspect . Later, o f course , I woul d lik e t o commen t o n th e U.S. Japan relationshi p i n th e financial communit y an d th e international situation . To begin , I will provid e a brie f revie w o f th e expansio n of Japanes e bank s int o th e U.S . economy . Th e histor y o f that expansio n cover s les s tha n fort y years , s o i t i s not a n 214

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old story . T o arriv e a t it s presen t status , tha t oversea s expansion wen t throug h fou r stages , beginnin g i n 1950 . During tha t first perio d o f tim e Japanese bank s graduall y opened offices , mostl y i n Ne w York , fo r th e purpos e o f helping Japanese tradin g companie s doin g busines s i n th e U.S. As a result , mos t o f th e busines s wa s relate d t o U.S. Japan trade , suc h a s usin g U.S . dollar s fo r foreig n ex change transactions . The secon d stag e o f expansio n bega n i n th e 1970s , when Japanes e bank s gre w rapidl y throug h th e medium and long-ter m syndicatio n loa n marke t i n Ne w Yor k an d in London . Anothe r developmen t durin g tha t perio d wa s a shift i n lending by Japanese bank s from Japanes e compa nies doin g busines s i n Americ a t o America n companies . The thir d stag e o f expansio n wa s i n th e 1980s , an d wa s a business evolutio n fo r Japanes e bank s i n th e United State s to reac h thei r ne w level . They wer e abl e t o begi n a perio d of complicate d expansio n an d busines s diversification . Fo r the financial community , i n th e mids t o f deregulation , th e 1980s wa s a tim e o f drivin g deman d fo r tota l fundin g in reactio n t o increase d mercantil e positio n an d tradin g activities. However, th e best developments o f this era wer e the swap s an d options . Japanese bank s wer e als o activel y participating i n these busines s trends . The 1990 s wil l mar k th e fourt h stag e o f busines s activ ity fo r Japanese bank s accompanyin g th e economic down turn i n the United States . Japanese banks , along with thei r American counterparts , sa w the defaults o n the credit the y had extende d fo r LBO s and rea l estate transactions durin g 215

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the perio d o f go-g o bankin g i n th e 1980s . Also , ther e were ne w managemen t issue s fo r Japanes e bank s fro m various sources . As Japanese bank s ente r th e fourt h stag e o f expansio n in th e 1990s , the y fac e a turnin g point . I'l l mentio n thre e factors fo r thi s impendin g chang e i n direction . First , th e relative competitivenes s o f th e Japanes e bank s decline d after th e burs t o f th e so-calle d bubbl e economy , mainl y because o f th e sudde n increas e i n trouble d asset s i n rea l estate lending . Thi s resulte d i n seriou s pressur e o n ban k earnings, an d ratin g agencie s bega n t o scrutiniz e Japanes e banks an d t o downgrad e thei r ratings . Althoug h mos t o f the Japanes e commercia l bank s retaine d thei r A ratings , the rating gap between Japanese banks an d their America n counterparts wa s shrinking . Second, ther e ha s bee n a strengthening o f bankin g regu lations b y the financial regulator y authorities . I n addition , the capita l requirement s b y thos e authoritie s hav e bee n strengthened recently . As you well know, the stock marke t in Japa n hi t th e botto m i n lat e 1989 , an d continue d t o hover a t tha t level . Banks wer e face d wit h a n unfavorabl e situation fo r capita l rates. Their lending activities will continue t o b e restraine d accordingly . Japanes e bank s ar e pursuing calculate d expansion , bu t i t has become difficult . That's wh y i t i s essentia l fo r u s no w t o closel y revie w our busines s strategie s an d th e organizatio n strateg y t o determine th e directio n o f futur e activitie s i n th e U.S . market. Now i t appear s tha t th e ne w governmen t i s goin g t o 216

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implement policie s tha t wil l rais e th e leve l o f competitio n while securin g th e evennes s o f al l condition s o f competi tion. However , excessiv e governmen t involvemen t an d regulation migh t jeopardiz e th e relationshi p o f coopera tion and competition betwee n th e United States and Japan . We hav e enoug h regulatio n an d contro l b y th e govern ment, a s Professo r Mille r ha s alread y mentioned . I n th e financial industry , too , excessiv e regulatio n i s becoming a problem. Source s o f fund s fo r financial institution s hav e decreased not only for Japanese banks in the United States, but als o fo r America n banks . Ther e i s a concer n tha t government involvemen t an d regulatio n wil l hinde r th e smooth flo w o f fund s t o American industry . Of cours e that doesn' t mea n tha t we are against openin g up th e Japanes e domesti c market . W e welcom e deregula tion. Unfortunately , imitatin g th e Securitie s Ac t o f 1933 , Japan create d a ver y stric t divisio n betwee n th e securitie s business an d th e commercia l bankin g business . Ther e ar e moves in the United State s currently t o lessen this division , however, an d hopefull y Japan , affecte d a s sh e i s b y atti tudes i n th e U.S . government , wil l follo w suit . W e loo k forward t o seein g th e divisio n betwee n th e securitie s busi ness an d th e commercia l bankin g busines s lowered , an d we would welcom e pressur e fro m th e United State s o n th e Japanese governmen t t o ope n o r deregulat e th e Japanes e financial market . As fa r a s th e Clinto n administratio n i s concerned , i t i s in th e proces s o f implementin g it s policies . Hopefull y th e results wil l revitaliz e th e America n domesti c economy . 217

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Japanese banker s certainl y hop e tha t th e allure of the U.S. market, on e of th e few market s i n the world tha t i s ope n and dynamic , i s no t diminished . W e woul d lik e t o hel p coordinate, i f w e can , th e relationshi p betwee n th e U.S. market an d th e Japanes e marke t i n th e financia l com munity. I hope thi s accoun t ha s contributed t o your understand ing of Japanese bank s an d finance.

Nex t i s Richar d Zeckhauser , Frank Ramse y Professo r o f Political Econom y a t the Kennedy Schoo l o f Government , Harvar d University . Profes sor Zeckhause r ha s mad e extensiv e contribution s t o th e field of economic s research . MARTI SUBRAHMANYAM :

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RICHARD ZECKHAUSE R I want t o comment briefl y o n five areas: (1 ) the people an d proclivities within th e Clinton administration ; (2 ) pattern s of Japanes e an d U.S . investment ; (3 ) politica l develop ments, particularl y i n Japan , becaus e I thin k thi s wil l in fluence Americans ' perception s o f Japan; (4 ) th e changin g military balanc e o f power , whic h I thin k wil l affec t rela tions betwee n th e tw o countries ; an d (5 ) th e world' s in dustrial landscape . To begi n wit h peopl e an d proclivities , i t i s importan t that th e Clinto n administratio n i s mor e populate d wit h lawyers tha n an y administratio n we'v e ha d recently . Th e President and Mrs. Clinton ar e both lawyers , Mickey Kan tor an d Ro n Brown , wh o ar e bot h vitall y concerne d wit h trade policy , ar e bot h lawyers ; Rober t Reich , wh o i s a powerful influenc e o n th e Presiden t i n economi c affairs , i s a lawyer . I thin k lawyer s thin k abou t problem s differentl y tha n economists do . They're mor e pragmatic, they don't have a strong ideolog y on e wa y o r another . I think the y ten d t o deal wit h cases , focusing les s on precedent s an d principle s than economist s might , an d I thin k yo u shoul d bea r thi s in mind when you try to predict what the Clinton adminis tration wil l do. I'd sugges t that i f you look bac k fou r year s from no w an d tr y t o figure ou t wha t ha s gon e on , ther e 219

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will be a less clear pattern tha n fo r man y other administra tions tha t picke d thei r battles . Economic relations betwee n Japan an d the United State s have perhap s receive d to o muc h attentio n recently , an d patterns o f investmen t tha t a t leas t contribut e t o trad e flaws hav e receive d relativel y to o littl e attention. I n Japan, 1 percen t o f domesti c sale s are made by primarily foreign owned corporations . I n th e Unite d State s tha t numbe r i s 10 percent; i n German y i t is 1 8 percent. Thes e patterns o f investment, I believe , ar e ver y significan t bot h a s a signa l and als o fo r thei r influenc e o n pattern s o f trade . Let me just giv e you on e othe r se t of statistic s abou t th e flow o f foreig n direc t investment . I n Japan fro m 198 5 t o 1989 i t totale d $40 0 millio n a year ; i n 199 0 i t wa s $ 1 billion; i n 199 1 i t wa s $ 2 pillion . I n contrast , th e flow s from Japa n wer e $1 7 billion , $2 2 billion , an d $2 0 bil lion—somewhere betwee n te n an d fort y time s greate r than th e flo w int o Japan . (Japanes e investmen t i n th e United State s was $5 1 billion , $2 9 billion , an d $1 4 billio n during thes e years. ) S o what w e se e is Japan makin g dra matic investment s oversea s an d foreig n countrie s makin g tiny investment s i n Japan. However , th e tota l U.S . foreig n investment a s of the end of 199 1 was still somewhat large r than tha t o f Japan . There's a n interestin g questio n a s t o whethe r thes e pat terns wil l b e abl e t o persis t i f Japa n change s it s ow n political landscape , a s I suspec t i t will . It' s n o secre t tha t Japan want s t o pla y a mor e significan t rol e i n worl d af fairs. Ther e ha s bee n muc h discussio n abou t Japan' s as 220

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suming a seat on th e Security Counci l i n the UN an d mor e generally playin g a majo r rol e i n security-relate d issue s throughout th e world . An y suc h effor t wil l pu t Japa n through som e ver y difficul t debates , a s I understand it . A s Japan debate s revisin g it s constitution , a s th e issu e o f political refor m become s mor e importan t i n Japa n (a s i t has i n th e Unite d States ) an d shoul d politica l partie s re align in Japan, which coul d happen i n part sinc e the Sovie t Union i s n o longe r a n externa l threat , m y gues s i s tha t America wil l ge t a somewha t riche r understandin g o f Ja pan tha n th e curren t imag e o f "th e peopl e wh o mak e Toyotas an d Hondas. " Aside fro m th e politica l arena , I se e majo r shift s oc curring globall y i n term s o f militar y influence . Th e princi pal are a wher e th e Clinto n administratio n hope s t o cu t expenditures i s the military, an d on e o f th e easiest ways t o do tha t woul d b e t o brin g ou r troop s hom e an d reduc e our defensiv e rol e abroad . I thin k we'l l b e doin g tha t i n Japan, an d t o som e exten t i n Europ e a s well . It' s muc h more acceptable , afte r all , t o clos e base s i n Japan tha n t o close the m i n Florida . Widesprea d America n troo p with drawals, however, will lead to a bit of militar y uncertaint y throughout th e worl d an d particularl y i n Asia . I believ e that Japan wil l ste p int o thi s ne w scenari o an d expan d it s military force s t o som e extent , makin g th e U.S . an d cer tainly th e Asia n countrie s uncomfortable . Meanwhil e Ja pan wil l b e observin g China , jus t nex t door—probabl y the mos t dynami c econom y i n th e worl d toda y an d a potential militar y threa t a s well. 221

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For th e pas t twent y year s I woul d sa y th e U.S.-Japa n relationship ha s bee n frozen . Althoug h economi c rivals , the threa t o f th e forme r Sovie t Unio n t o bot h countrie s kept u s o n th e sam e sid e i n almos t al l issue s o f worl d affairs. Wit h tha t mutua l threa t gone , I thin k U.S.-Japa n relations ove r th e nex t 2 0 year s ar e goin g t o nee d t o be redefined . I believ e th e industria l landscap e ha s a lo t t o d o wit h the wa y th e U.S . an d Japa n wil l compet e i n th e future . Our primar y problem , "we " bein g th e Unite d States , i s that we'r e no t investin g enoug h eithe r i n genera l invest ments o r eve n i n R&D . W e contribut e abou t 1. 4 percen t of ou r GN P t o industria l R&D ; German y contribute s jus t under 2 percent; Japan i s at 2. 2 percent . Thi s deficienc y i s going to b e a long-term proble m fo r us . A critical questio n bot h fo r th e Unite d State s an d Japa n is what typ e o f firm i s going t o bes t equippe d t o compet e in the twenty-first century . I think that' s a n ope n question . In th e U.S. , I gues s th e leadin g firm o f th e pas t 2 5 year s (but no t continuousl y ove r th e las t five years ) wa s IBM . Before that , ou r leadin g firm wa s Genera l Motors . Bot h companies wer e verticall y integrate d industria l giant s spread aroun d th e world—an d bot h a t th e momen t ar e basket cases . If yo u aske d wha t ar e th e tw o mos t successfu l larg e firms i n th e Unite d State s toda y ther e woul d b e man y candidates, bu t I woul d selec t Inte l an d Microsoft . Ver y different i n thei r styl e o f operatio n an d i n th e wa y the y 222

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make thei r products , the y ar e bot h horizonta l firms: The y attempt to sell their products to others in industry. Neithe r attempts t o produce it s own computer s o r us e its product s in som e othe r field. Japanes e firms i n general , certainl y al l the largest firms, ar e still very heavily vertically integrated . It ma y b e tha t U.S . firms an d Japanes e firms ar e differ ent i n nature . I t ma y b e tha t IB M an d G M wer e jus t unlucky, o r i t ma y b e tha t industria l productio n i n th e twenty-first centur y require s a differen t styl e o f firm. I don't kno w whic h corporat e structur e i s best . I d o thin k that condition s i n th e econom y chang e significantl y ove r 20- an d 30-yea r periods , an d whicheve r typ e o f firm pre vails, th e industria l pictur e i s no t goin g t o remai n a s i t appears i n 1993 . In conclusion, I think tha t Japan's reputatio n i s going t o rise i n th e Unite d State s fo r a variety o f reason s tha t hav e nothing t o d o wit h trad e issues . As a n America n wh o ha s visited Japan severa l time s I realize that mos t Japanese ar e knowledgeable abou t th e Unite d States , an d I' m embar rassed t o sa y that mos t American s kno w virtuall y nothin g about Japan . I think thi s wil l change , tha t Japa n wil l ris e on th e America n rada r screen . Risin g to o hig h o n th e radar scree n o f th e Clinto n administration , however , ma y be a sourc e o f regret—I' m sur e ou r ow n pharmaceutica l industry, fo r instance , woul d hav e preferre d les s attentio n from th e administratio n ove r these past fe w weeks. On th e economic front , I don' t thin k tha t trad e wil l b e th e onl y friction. I thin k ther e wil l b e mor e attentio n t o issue s o f 223

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investment, an d to the extent that trade is a friction I think that i t wil l b e deal t wit h o n a case-by-cas e basi s rathe r than mor e broadly . I thin k tha t Japa n wil l b e flexin g it s muscle s mor e o n the internationa l scene , wit h som e reluctance : T o th e ex tent tha t i t doe s ther e wil l b e significan t disagreement s between th e U.S . an d Japan , somethin g whic h ha s no t happened sinc e World War II . Japan an d th e U.S. will vote different way s o n th e Securit y Council , an d peopl e wil l b e upset. I see Japan's militar y strengt h becomin g a concern , and I thin k bot h countrie s wil l b e ambivalen t abou t thi s issue. Finally , I believ e tha t th e abilit y o f foreig n nation s to inves t i n Japan wil l prove t o b e o f significan t economi c concern fo r th e next decade .

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PANEL DISCUSSIO N I would lik e to hea r comment s now fro m ou r panelists , an d the n w e will ope n th e discus sion fo r question s fro m th e floor . MERTON MILLER : I have tw o ver y brief comments . First , just a little warning t o Professo r Kawa i an d hi s colleague s about extrapolatin g pas t Japanes e behavio r int o th e fu ture. Remembe r tha t th e demographic s ar e changin g again, an d that' s a very importan t elemen t in the picture . For Ji m Tobin , I hav e som e reassurin g news . I believ e that Clinto n wil l no t onl y b e reelecte d i n '96, bu t afte r him Gor e an d afte r hi m Hillary (mayb e even before Gore) . I agre e wit h Ji m tha t Clinto n won' t solv e th e unemploy ment problem. I t may eve n get worse. In fac t I expect tha t it will ge t worse durin g hi s administration. Bu t that didn' t stop Roosevelt . Roosevel t was reelected fou r times , and h e was neve r abl e to solv e the unemploymen t problem—an d he incidentall y ha d a ver y lon g perio d o f chea p mone y policies goin g with him . Clinton wil l b e reelecte d becaus e he' s rediscovere d th e same strateg y tha t Roosevel t did , an d it' s a ver y effectiv e one. See , a s a non-Keynesia n I don' t worr y to o muc h about th e deficit . I don't eve n loo k a t th e deficit . I look a t the fractio n o f nationa l resource s tha t ar e bein g take n b y the governmen t an d use d t o provid e services , an d I se e this goin g up . It' s alread y goin g u p unde r th e Clinto n MARTI SUBRAHMANYAM :

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administration. No w it' s true, as Jim suggests , that they'r e going t o finance som e o f tha t b y taxes , bu t it' s no t goin g to b e taxe s o n Clinton' s supporters . It' s goin g t o b e taxe s on wha t ar e calle d th e upper-incom e groups . Thi s i s ex actly th e sam e tric k tha t Roosevel t used . I think it' s a very effective one , and I think i t will work . JAMES TOBIN : It' s jus t a matte r o f history . Economi c growth i n th e recover y tha t starte d i n 193 3 wa s double digit i n rea l terms . I t wa s 1 0 percen t pe r yea r i n Roose velt's first term , an d th e unemploymen t rat e wa s reduce d from 2 5 t o 1 4 percent . Ther e wa s stil l a lo t o f roo m lef t before wha t happene d i n th e secon d ter m o f course , an d the mobilizatio n fo r war , bu t ther e wa s a substantia l re covery occurring . MERTON MILLER : I t didn't see m that wa y then . JAMES TOBIN : Yes , i t did . I' m no t goin g t o g o afte r Mert's politica l forecast s abou t th e election , bu t I don' t think unemploymen t wil l be worse in 1996 . MASAHIRO KAWAI : Regardin g th e Japanes e economy , I would jus t lik e t o clarif y tha t I di d no t mea n t o sugges t that i t will continu e t o perform indefinitel y a s it has in th e past. W e kno w tha t Japanes e societ y i s aging . I n th e first twenty year s o f th e nex t century , sa y b y th e yea r 202 5 o r something, abou t 2 0 percen t o f th e Japanes e populatio n will b e abov e th e ag e o f 65. Obviousl y thi s i s goin g t o have a n effec t o n th e basi c economic behavio r o f Japanes e consumers, a s savers . What I was tryin g t o sa y wa s tha t I don't thin k eithe r th e expansio n o f th e Japanese econom y 226

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in th e 1980 s o r the current recessio n hav e anythin g t o do with demographi c factors . S o over the next 20 or 30 years people's consumptio n an d saving s behavio r wil l certainl y change, and this is going to cause alarm o n the part of our bureaucracy becaus e th e Japanese ar e goin g t o sav e less . But that's wher e the Japanese econom y wil l be affected . MASAHIRO YODA : I' d lik e t o commen t o n th e Japanes e contribution t o international affairs . Ther e i s a lot of tal k about changin g th e constitutio n i n Japan , an d recentl y there i s a lot of tal k abou t whethe r Japa n shoul d sen d its troops overseas . These ar e very, very difficul t issues . Since World Wa r I I Japa n ha s bee n transforme d int o suc h a peaceful countr y tha t non e o f th e Japanese peopl e toda y have an y actual sens e o f what i t means t o get involved i n war. I have a little differen t mentality . Mayb e I have live d too man y year s in overseas countries . I hea r a lo t o f tal k abou t changin g th e constitution . I should b e very muc h fo r it. I feel it' s time fo r Japan t o do something t o b e mor e involve d i n internationa l affairs , not jus t i n term s o f militar y power . I n additio n t o th e Communists, the Socialists, and the elderly, powerful LDP leaders ar e ver y muc h agains t changin g th e constitutio n and would limi t the Japanese contributio n t o internationa l affairs. Bu t I d o no t thin k w e ca n continu e t o jus t giv e money an d never tak e any action. As fo r th e openin g o f th e ric e market , whic h Merto n Miller discusse d i n hi s talk today , i t i s a very , ver y sym bolic politica l issue . I would hat e t o se e my name appea r 227

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in som e newspape r sayin g tha t th e Managin g Directo r o f Sanwa actuall y support s openin g th e Japanese ric e marke t to overseas . MERTON MILLER : I'l l tak e th e blame . MASAHIRO YODA : I don' t ea t muc h ric e myself , bu t it' s ridiculous t o rejec t th e impor t o f rice . It' s jus t a symboli c issue, an d I don' t thin k th e LD P wil l d o to o muc h abou t opening the rice market in Japan. As a consumer I do hop e that ther e will b e pressure fro m th e U.S. government . MARTI SUBRAHMANYAM : I think Professo r Mille r an d I will mak e u p fo r you r defici t i n ric e consumption , Mr . Yoda. RICHARD ZECKHAUSER : I think ric e consumption i s relatively unimportant . I thin k i t woul d b e ver y goo d fo r America, particularl y i f we'r e worrie d abou t anythin g coming clos e t o trad e parity , t o sto p dealin g wit h rice , which ha s unfortunatel y becom e suc h a symboli c issue , and worry abou t a variety o f othe r issues . On th e electio n return s I' m no t goin g t o tr y t o secon d guess Professo r Tobi n an d Professo r Mille r a s t o whethe r Clinton wil l ge t reelected , bu t I will mak e th e observatio n that th e les s Presiden t Clinto n worrie s abou t gettin g re elected at each stage as he moves through policy, the bette r it wil l b e fo r th e U.S . econom y an d fo r Japan . Peopl e spoke a lot today abou t th e differenc e betwee n short-ter m and long-ter m perspective s o f economi c performance , looking a t corporations . Th e sam e thin g ma y b e tru e vis a-vis countries , especiall y i f ther e wer e som e wa y tha t Clinton didn' t hav e t o worr y abou t havin g hi s policie s 228

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rejected. I woul d lik e t o insulat e Presiden t Clinto n fro m reading th e nex t day' s pol l result s i n term s o f formulatin g economic policy . Th e sam e thin g wa s tru e o f th e Bus h administration, th e Reaga n administration , an d ever y ad ministration befor e that . Bu t I hope that Presiden t Clinto n worries les s abou t hi s reelectio n tha n th e peopl e o n thi s panel. MARTI SUBRAHMANYAM : Le t m e as k th e panelist s a question tha t ha s bee n o n m y min d an d perhap s o n th e minds of others , and tha t i s about th e virtual stagnatio n i n real income of a large segment o f the middle classes of thi s country ove r th e las t tw o decades . Thi s i s a n issu e which , as a n observe r an d a s a n economist , I hav e t o resolv e i n the contex t o f a worl d wher e w e hav e trad e agreement s like NAFTA , th e emergenc e o f Easter n Europe , an d th e growing importanc e o f China . Ho w ca n th e averag e American worker , o r fo r tha t matte r th e averag e Japanes e worker, maintai n hi s o r he r standar d o f livin g i n th e fac e of growin g wag e competitio n fro m peopl e i n othe r coun tries whose productivit y ha s bee n goin g up muc h faster ? MERTON MILLER : I don't thin k damag e i s being don e t o the middl e clas s a t all ; i t i s the peopl e a t th e botto m wh o are i n fac t competin g agains t imports . Wha t ca n b e don e about that ? It' s no t a s simple a s saying, "Pou r mone y int o education." We'v e poure d hug e amount s o f mone y int o education. Somethin g i s dreadfull y wron g wit h th e wa y our educationa l syste m works , an d I don' t kno w wha t it is. JAMES TOBIN : I thin k ou r proble m i s basicall y tha t th e 229

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rate o f productivit y growt h i n th e econom y ha s bee n to o slow fo r a lon g time , no t jus t recentl y bu t beginnin g bac k in th e mi d seventies , an d tha t woul d b e a problem eve n if we wer e a close d economy . Rea l wage s woul d b e declin ing, o r a t leas t no t rising . W e hav e som e redistributio n within a s a resul t o f trad e an d th e competitio n o f low wage workers throughou t th e world. W e have som e redistribution withi n th e labo r force , a t th e apparen t expens e of member s o f ou r labo r forc e wh o ha d noncompetitiv e high wage s i n th e firs t place , suc h a s i n ou r automobil e industry, an d we'r e no t goin g t o restor e tha t kin d o f ad vantage. But on e ha s t o remembe r tha t othe r countrie s ar e no t going t o giv e u s product s acros s th e boar d withou t som e recompense, an d ou r proble m i s not tha t we're no t furthe r ahead o n th e balanc e o f trade , bu t wha t term s w e hav e i n the balanc e o f trade . I f th e term s ar e bad , that' s jus t a reflectio n i n a financial contex t o f th e failur e o f ou r productivity, whic h i s somethin g w e hav e t o remed y bot h by investing in education, an d b y R&D an d higher genera l investment ove r a lon g perio d o f time . It' s no t somethin g that's goin g t o happe n ver y quickly . W e ar e a lo t mor e efficient i n man y way s tha n thos e othe r countries , includ ing Japan, especiall y in the production o f nontraded good s and services . MERTON MILLER : That' s on e o f th e nices t thing s I eve r heard yo u eve r say abou t ou r economy . RICHARD ZECKHAUSER : I don' t thin k there' s al l tha t much w e ca n do . I think tha t i f yo u g o bac k t o th e 1950 s 230

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or 1960 s t o giv e Professor Tobi n hi s due, which ma y hav e been th e heyda y o f America n productivity , growth , an d prosperity, w e ha d larg e number s o f peopl e workin g i n highly pai d manufacturin g job s who wer e less skilled tha n their counterpart s oversea s wit h nowher e nea r th e acces s to th e technolog y an d capita l tha t w e had , an d ove r th e long ru n thes e peopl e wer e boun d t o los e som e competi tive edge . I n addition , ou r educationa l syste m ha s gotte n worse. It's just accelerate d tha t trend . American productivit y i n mos t industrie s i s stil l highe r than productivit y aroun d th e world . I thin k tha t a tren d has developed durin g the eighties that will continue durin g the nineties , whic h i s basicall y tha t ou r technologica l elit e will d o extraordinaril y well , an d on e o f th e question s i s whether w e ca n pa y th e peopl e wh o ar e towar d th e bot tom en d o f our populatio n enoug h t o make them competi tive. I f w e can , they'l l d o great . I f w e can't , they'r e goin g to d o poorly . I want t o disagre e wit h on e poin t here . Everybod y say s that i n th e Unite d State s peopl e aren' t maintainin g thei r standard o f living . I thin k that' s no t true . I thin k i f yo u appropriately correc t fo r produc t quality , th e America n standard o f livin g i s goin g up . Anybod y wh o compare s 1960 car s with 199 0 car s can se e that they've dramaticall y improved. W e coul d engag e i n a lo t o f protectionism , bu t we would en d up driving down ou r standar d o f living with higher price s an d lousie r products . I don' t thin k that' s a particularly smar t thin g t o do . I thin k tha t i t wil l hel p some peopl e ove r th e shor t ru n bu t i t wil l clearl y hur t 231

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them ove r th e lon g run , an d I don't thin k tha t ver y man y economists woul d disagre e with tha t poin t o f view . MARTI SUBRAHMANYAM : I agre e wit h you . I wa s jus t quoting a sort o f widel y hel d perception . RICHARD ZECKHAUSER : Unfortunatel y th e onl y peopl e who liste n t o economist s ar e other economists . MARTI SUBRAHMANYAM : I was jus t wonderin g i f there' s a differen t poin t o f view on thi s in Japan, becaus e Japan i s going t o b e pu t i n th e sam e situation , thoug h perhap s from a differen t angle . Wha t i s th e Japanes e respons e t o this issue ? Yo u hav e a billio n Chines e wh o ar e no w be coming mor e an d mor e technologicall y adep t an d ar e go ing t o reall y compet e directl y wit h you r relativel y high wage econom y i n Chines e terms . MASAHIRO KAWAI : I don't thin k th e Japanese industr y i s very worrie d abou t low-wag e competitivenes s comin g from China . The y ar e producin g ver y differen t kind s o f products, an d durin g th e 1980s , Japan establishe d a n in ternational divisio n o f labo r acros s Asi a an d th e Pacifi c Ocean b y pushin g ou t ou r inefficien t factorie s an d indus tries. It' s a nic e divisio n o f labo r fro m th e viewpoin t o f Japanese manufacturers . I n th e ver y lon g run , however , since th e siz e o f China' s populatio n i s mor e tha n on e billion people , o r te n time s a s muc h a s th e Japanese, onc e their pe r capit a incom e rises—an d it' s risin g ver y fas t now—the economi c scale will be quite comparable t o tha t of Japan o r coul d eve n excee d it , an d that' s causin g som e alarm fro m a political an d militar y perspective . But not i n 232

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the nex t te n years . Low-wag e competition ? I don' t thin k that's reall y a n issue. I just want t o add one word abou t th e Clinton adminis tration's focu s o n education, competition , an d investment. I thin k it' s tru e tha t th e Japanes e governmen t wante d George Bus h to be reelected, becaus e the Japanese govern ment an d busines s wante d t o se e free r trad e continue . They feare d tha t th e Clinto n administratio n woul d b e quite protectionist . A t the sam e time , however , th e Japanese governmen t an d businesse s wer e sayin g durin g th e Bush administratio n tha t th e United State s shoul d becom e stronger, shoul d inves t more , shoul d increas e productivit y and s o forth , an d now we are seeing som e activit y alon g those lines . A strong United State s is quite preferable fro m th e viewpoint o f Japan. Japa n doesn' t wan t t o b e a leader . Japa n wants someho w alway s t o b e numbe r two , an d Japa n wants t o hav e a bi g brother . That' s reall y th e mentality . So when th e Japanese econom y grow s an d threatens area s of the U.S. economy, the truth i s that th e Japanese govern ment an d businesses don' t kno w wha t t o do. That's reall y where they'r e comin g from . MASAHIRO YODA : Actuall y i n comparing th e labor mar kets i n Japan an d th e U.S., in Japan w e don' t hav e ne w immigrants o r ne w laborers fro m oversea s countries , and in thi s country , o f course , yo u alway s hav e a suppl y o f new labor . Also , they ar e educated. Yo u still have the best kind of labor force . For Japan i n the short term, as Merton 233

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Miller mentioned , ther e i s concer n abou t th e pressur e o f cheaper labo r fro m Asia n countrie s t o som e extent; bu t i n the lon g ter m Japan' s practica l intentio n i s t o establis h international division s of labor. So Japanese industries wil l be moving oversea s fo r cheape r labor . Not onl y ar e the y lookin g fo r cheape r wages , bu t also , like Honda o r Toyota , Japanese industrie s ar e moving ou t in consideratio n o f trad e frictions . I n th e lon g ter m I' m rather concerne d abou t th e de-industrializatio n o f Japa nese industry . I n thi s countr y productivit y i s stil l ver y high, bu t mos t industrie s ar e movin g thei r factorie s over seas. I f American s woul d tr y t o produc e som e ver y goo d products i n thei r ow n countr y i t woul d hel p th e improve ment o f it s balance o f payments . Questions and Answers I' d lik e t o as k Professo r Tobi n t o commen t o n a fe w point s tha t I think ar e interrelated . I t seem s ther e i s a lo t o f debat e withi n th e Clinto n administratio n abou t whether t o have an industrial polic y or not. What ar e you r views on this ? I also wondered i f you coul d sa y somethin g about Rober t Eisner' s vie w o f th e budge t deficit . (H e say s there i s n o deficit. ) Lastly , wha t rol e shoul d governmen t take i n increasing productivity ? I wonder whethe r th e lo w rise in productivity i n th e Unite d State s in recent years ha s been du e t o th e fac t tha t s o muc h o f ou r researc h an d development ha s bee n i n th e militar y rathe r tha n th e civilian sector . QUESTION:

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O n industria l policy , I don' t thin k tha t this administration i s going to be in the business of picking winners i n the private secto r t o subsidize on any big scale. I thin k thei r mai n emphasi s i s goin g t o b e o n doin g th e things tha t government s ca n an d shoul d do , an d doin g more o f the m an d doing the m better , o r helpin g th e stat e and loca l government s d o mor e o f the m an d d o the m better. Some things like transportation, th e high-speed rail , and so on, probably nee d government t o take a leadership role . It remain s t o b e seen whethe r they'r e wort h it , or a t leas t what shoul d b e spent on them. I do think the main empha sis is going t o be on mor e R& D both b y government an d the privat e sector , convertin g DARP A (Defens e Advance d Research Project s Agency ) fro m th e Pentagon int o civilia n research an d development, assistanc e to the economy, and improving education , a very hard thin g to accomplish . As for productivity increasing , what can the government do? Asid e fro m thos e direc t program s tha t involv e publi c investment, i n the long run I don't thin k i t does any good. In 199 3 deficit reductio n i s a wa y of increasin g nationa l saving an d ful l employment , increasin g th e amoun t o f investment. Slowly , gradually , almos t imperceptibl y tha t will increase productivity i n the future . That's th e point o f defici t reduction . It' s not a goa l fo r its ow n sake. The whole purpos e o f defici t reductio n i s to do bette r fo r futur e generations : I f th e thing s yo u d o t o reduce th e defici t i n a slac k economy , a wea k economy , result i n less investmen t rathe r tha n more , actuall y weak JAMES TOBIN :

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ening th e economy furthe r i n the process, tha t purpos e i s defeated. S o do it at a time whe n th e additional savin g by the government , o r the least dissavin g o f the government , will actuall y bea r frui t i n highe r investmen t rathe r tha n being wasted i n higher unemployment . Robert Eisne r woul d agre e wit h that , s o in tha t sens e I agree with him . What I don't agre e with i s that ther e is no deficit. T o put it more exactly , by any definition o f deficit , whether yo u us e Eisner' s o r th e conventiona l ones , th e deficit ha s definitely grow n muc h large r sinc e 1980 . It has reduced nationa l saving , and the level of the deficit an d of the nationa l savin g has been underestimated ever y year by using conventiona l measure s rathe r tha n Eisner' s mea sures. RICHARD ZECKHAUSER : I thin k probabl y Eisne r wa s worried abou t undu e alar m abou t th e defici t i n th e lat e 1970s, an d then h e carrie d tha t over , critically , t o a tim e when ther e wa s really a legitimat e reaso n fo r bein g wor ried abou t th e increase in the deficit . QUESTION: Professo r Zeckhauser , yo u wer e talkin g about th e potentia l fo r investmen t i n Japa n i n th e nex t decade. Wha t abou t th e fac t tha t Japa n itsel f i s investin g overseas in Southeast Asia , and according to some source s is going to be the economic superpowe r o f the twenty-firs t century? Als o yo u wer e talkin g abou t R&D . I n Japa n R&D i s generall y sponsore d b y th e government , an d I think we'r e tard y i n realizing tha t governmen t investmen t is an important ste p fo r improving education , production , and industr y i n general. Semite c in Austin, Texa s i s trying 236

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to d o somethin g abou t R&D , but we'r e jus t beginning . We're i n th e initia l stage s compare d t o othe r countries . Also, you talked abou t Microsoft . I was wondering i f you knew that Bill Gates, the founder, droppe d out of Harvar d at 19 . No t t o us e hi m a s a n example , but , yo u know , sometimes fact s an d perspectives hav e a way of reversin g themselves in illuminating ways . RICHARD ZECKHAUSER : Firs t o f all, I agree that Japan is investing a lot more tha n w e are. What I' m worried abou t is ou r investin g somewha t mor e i n Japan . I thin k i f th e U.S. di d inves t mor e i n Japan , i t woul d b e a signa l tha t we're doin g better . W e woul d en d u p exportin g more , and w e woul d als o en d u p understandin g th e Japanes e economic syste m better . Yo u have t o hav e a presenc e o n the groun d i n order t o be part o f the economic fabri c o f a nation. I didn't kno w Bil l Gate s droppe d ou t of Harvard . The peopl e wh o shoul d b e mos t concerne d abou t Bil l Gates droppin g ou t of Harvar d ar e the fundraisers there , who ar e abou t t o launc h a $ 1 millio n drive . H e coul d provide th e full amoun t al l by himself, which woul d b e a very nice gesture . I thin k tha t th e Semite c investmen t i s unclea r a t best . That's probabl y no t th e wa y th e Unite d State s doe s it s R&D best . I would prefe r t o see investment ta x credits or equivalent sort s o f level playin g field type s o f measures a s opposed t o havin g governmen t goin g int o collaborativ e efforts. I have hear d Semite c mentione d 60 0 times i n the last two years. In its day, I used to hear abou t the Manhattan Project . I don't thin k th e Manhattan Projec t wa s very 237

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successful, certainl y no t ecologically, fo r reason s tha t ha d nothing t o do with th e degree of investment. I don't thin k that we can compare ourselve s in this instance with Japan . Japan i s a totall y differen t society , an d wha t work s wel l there i s no t necessaril y goin g t o wor k wel l i n th e Unite d States. So Semitec is ambiguous here . We d o hav e lot s o f successe s t o lear n from , however , and I would lik e t o try and find out what i t is that cause s an Inte l o r a Microsoft t o be successful, unbelievabl y suc cessful b y any standards yo u could conceivabl y ascrib e t o any governmen t sort s o f researc h activity . Th e answe r then is that I don't wan t t o learn muc h fro m abroa d abou t government subsidie s i n R&D . I d o wan t t o lear n fro m abroad abou t th e important stuff , an d I think tha t fortu nately th e Clinto n administratio n i s intereste d i n doin g that a s well . T o th e exten t tha t the y star t goin g i n th e directions tha t Professo r Tobi n mentioned , well , mayb e we shoul d d o th e calculation s an d figure ou t whethe r a high-speed rai l woul d work . I' m a littl e bi t suspiciou s there, however , becaus e I think it' s very har d fo r govern ment to do honest calculation s o n itself. I just want to help you with the vocabulary a little. When Europe builds Airbus, that's a subsidy. But when w e do it, it's a government industr y branch . QUESTION: I wa s wonderin g i f an y o f th e panelist s would car e t o commen t o n th e nee d fo r ne w economi c indices i n measurin g economi c health , an d th e bes t way s of movin g forward . I hav e a littl e difficult y wit h gros s domestic product , becaus e I think i t measure s mor e gros s MERTON MILLER :

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consumption tha n i t doe s productivit y an d efficiency an d quality necessarily. I think if I went out and bought a solar water heate r an d i t worke d prett y wel l tomorrow , gros s domestic consumptio n o r gros s domesti c produc t woul d peak, an d the n nex t yea r i t woul d dro p of f becaus e I wasn't usin g a s muc h gas . So in thos e kind s o f area s d o you se e a need fo r new economic indicators ? JAMES TOBIN : It' s probably no t possible to have a single indicator tha t wil l serv e fo r al l th e purpose s tha t yo u might wan t t o us e it . Gros s domesti c produc t o r gros s national produc t i s a goo d measur e o f productio n i n the economy. Ove r tim e i t goes up and down, an d this mean s something. Yo u ca n se e what i t means . Bu t that doesn' t mean ove r lon g period s o f tim e tha t ou r welfar e ha s increased b y the same amount . A s an indicator, GD P omits some thing s lik e leisur e tim e o r polic e service s o r th e building o f prisons , whic h migh t bette r reflec t a n increas ing quality of life. Then we have the question of estimatin g environmental damag e versu s improvement s i n th e envi ronment. Thi s is another problem . As a perso n wh o mad e a modes t effor t t o produc e a modification o f GNP that coul d b e used mor e a s a welfar e indicator, I don't reall y thin k tha t yo u can just substitut e one secto r indicato r fo r another . We'v e ha d lots o f differ ent indicators of economic and social health in our society, and w e have t o put up with th e fact tha t w e need a vector and not a single scanner number . QUESTION: I wan t t o as k Professo r Zeckhause r abou t the emergin g ne w organization s tha t yo u talke d about , 239

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specifically horizonta l firms versu s verticall y integrate d firms. Ar e ther e an y othe r point s yo u wan t t o elaborat e on? RICHARD ZECKHAUSER : I don't thin k so . What I' m try ing t o sugges t i s tha t academic s ten d t o develo p optima l prescriptions fo r thing s tha t ar e five year s old . Govern ments develo p the m fo r thing s tha t ar e te n year s old . I wanted t o star t thinkin g o f th e future an d speculating o n the ide a tha t probabl y we'r e goin g t o nee d t o hav e mor e products that put components togethe r to make a composite package , no t to ge t something lik e a 586 chip comin g out o f a company lik e Apple Computer . I f you think, a s I do, tha t i n th e futur e ther e ar e goin g t o b e significan t technological advances , mayb e you'l l thin k i n term s o f whether w e coul d b e bette r equippe d t o utiliz e thos e ad vances. A t th e presen t tim e th e majo r U.S . firms ar e ill equipped, an d mayb e som e o f th e Japanese giant s aren' t structured enoug h eithe r i n relation t o the new technologies. It's all speculation. I n a n articl e i n th e Economist i n January I indicated tha t althoug h th e U.S.'s spending on R&D is not as hig h a s Japan's, ou r implementatio n o f R& D is mor e effective. I was wondering i f the panelists coul d commen t on tha t perspectiv e i n terms o f the Clinton administratio n and als o th e APE C formatio n tha t Professo r Kawa i ha d mentioned. I n othe r words , ho w ar e th e U.S . and Japa n working no t onl y simultaneousl y o r wit h eac h othe r bu t also wit h thos e othe r entitie s an d wit h APE C a s a n eco nomic corporation ? QUESTION:

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APE C i s a regiona l corporatio n where som e institutiona l difference s ar e equalized . I t i s basically a hodgepodg e o f differen t interest s tha t ar e agreeing to a kind o f loose economi c cooperation . Bu t it's not a free trad e are a or an institution tha t tries to establis h a singl e decisio n maker , lik e t o som e exten t th e E U o r NAFTA. I don't thin k it' s going to have a really bi g effec t on productivity , o r o n th e effectiv e implementatio n o f R&D i n either Japan o r the United States . MASAHIRO KAWAI :

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CHAPTER 8

Recent Economic Trend s an d Japan-U.S. Relation s under th e Clinto n Administration March 8, 1994

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M E R T O N MILLE R I was amuse d whe n I saw th e latest issu e of Japan and the World Economy. There' s a lovely articl e b y K . Miyagaw a in which h e refers t o the Japanese distributio n system , an d notes tha t eve n i f b y chanc e the y actuall y overturne d tha t Japanese retailin g la w abou t whic h there' s bee n s o muc h complaint, i t i s b y n o mean s clea r tha t tha t woul d hav e any effec t o n increasin g Japanese imports . That whole lin e of guf f ha s bee n grossl y oversold . I didn' t thin k thes e quotas woul d hav e an y seriou s effec t o n anything , bu t they didn' t hav e an y grea t cos t either . The y wer e jus t s o much talk . All tha t changes , however , th e minut e yo u star t talkin g about bringin g Supe r 30 1 (th e claus e introduce d b y th e Bush administratio n t o forc e Japa n t o ope n it s marke t t o American goods ) bac k ou t o f th e close t an d star t talkin g seriously abou t trad e retaliation . Tha t wa y I thin k lie s disaster, no t jus t fo r America n an d Japanes e consumer s but fo r th e whol e world . I can onl y hop e tha t there' s stil l time fo r th e administratio n t o com e t o it s sense s an d t o back of f fro m thi s craz y gam e o f chicke n tha t it' s playin g with Japan . Frankly I' m no t terribl y hopeful , becaus e having reape d so muc h politica l benefi t fro m demonizin g Japa n I thin k Clinton no w ha s to mak e good o n hi s tough tal k o r he ha s another Bosni a o n hi s hands . S o I' m fairl y pessimisti c 245

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about that . A s a n economis t I hav e t o believ e a Pareto improving solutio n wil l alway s emerge , bu t I' m worrie d about it . I'm worrie d abou t on e othe r thing , an d I wil l clos e o n that note. I think tha t the administration's pushin g so har d on th e export lin e is actually goin g to strengthen th e hand s of th e MO F bureaucrat s an d th e MIT I bureaucrat s tha t I detest s o much , an d tha t I thin k ar e a ver y negativ e par t of Japanese economi c life. They ca n sa y now : Look. Al l thi s piou s tal k fro m th e American s abou t free trad e an d s o on , it' s clea r no w a s w e tol d yo u al l along tha t tha t doesn' t reall y mea n anything . The y know an d w e kno w tha t trad e i s jus t anothe r for m o f warfare. W e tr y t o penetrat e thei r markets , the y tr y t o penetrate ou r markets . At the momen t w e happen t o b e a littl e dow n an d a t a disadvantage , bu t we'r e al l play ing the same sort o f mercantilis t game . I thin k Clinton' s har d lin e i s goin g t o strengthe n thei r hands agains t th e reformis t win g o f politician s tha t I se e finally startin g t o sprin g u p i n Japan , whic h woul d b e a shame. I wil l sa y n o mor e fo r now , bu t w e ca n discus s these issues further durin g th e Panel Discussion . I turn i t over t o Jim .

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JAMES TOBI N Merton Mille r an d I have appeare d o n a numbe r o f plat forms togethe r an d w e always disagree , so it's unfortunat e in a wa y tha t I hav e t o agre e wit h mos t o f wha t h e sai d this mornin g o n thi s topic . Actually I wrote a piece i n th e Boston Globe abou t thi s th e othe r day . I' m no t goin g t o read i t bu t I' m goin g t o dra w upo n i t brazenl y i n m y remarks thi s morning , a s I assum e no t ver y man y peopl e here read th e Boston Globe. Perhaps peopl e hav e forgotte n tha t i t was onl y las t Jul y that Clinto n wa s i n Toky o fo r th e G- 7 meetin g wher e h e and th e Japanes e Prim e Ministe r adopte d th e so-calle d framework fo r a Ne w Economi c Partnershi p betwee n Ja pan an d th e Unite d States , ami d a goo d dea l o f fanfare . I went t o th e troubl e o f readin g tha t documen t jus t th e other day , an d it' s actuall y quit e moderate. It does not sa y that there' s a sinfulnes s i n bilatera l imbalance s o f trade , and i t doesn' t sugges t tha t ther e shoul d b e an y numerica l targets fo r th e bilatera l balanc e o r fo r th e overall Japanes e surplus, althoug h i t doe s refe r t o th e surplus—th e overal l surplus, no t th e bilatera l one—a s a problem . Th e closes t it come s t o talkin g abou t target s an d quota s i s to endors e objective criteri a fo r progres s in the various trade relation s to b e negotiated i n th e framework agreement . It doe s sa y tha t th e criteri a coul d b e bot h qualitativ e and quantitative , bu t th e mai n ide a wa s tha t ther e woul d 247

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be meetings , continuou s meetings , o n al l kind s o f join t problems betwee n th e tw o countries , includin g AID S an d a lo t o f othe r nontrad e issues . Eac h subjec t woul d b e monitored i n frequen t meeting s o f bilatera l committees , and ther e woul d b e a biannua l summi t meetin g betwee n the President an d th e Prime Minister abou t thes e matters . This al l seeme d se t t o g o las t year . I t was ver y differen t in ton e fro m th e acrimon y w e had th e othe r da y whe n th e Summit brok e u p i n Washington , eigh t month s later . Th e framework agreemen t ha d n o chanc e t o work . I t wa s adopted onl y las t July, befor e Hosokaw a wa s Prim e Min ister. This fi t o f anger , this breaking of f o f furthe r negotia tions, wa s no t onl y earl y i n th e tenur e o f Hosokaw a bu t also earl y i n th e lifetime , th e suppose d lifetime , o f th e framework agreement . Clearl y ther e wa s a lot o f accumu lated bitternes s an d resentment towar d Japanese trade an d the Japanese econom y behin d wha t happene d las t month , feelings tha t di d no t hav e anythin g t o d o wit h th e validit y of th e framewor k agreemen t itself . Now a lo t o f thing s didn' t happe n a s w e migh t hav e hoped. Th e macroeconomi c measure s las t summe r tha t were suppose d t o pe p u p th e Japanes e econom y an d i n the proces s pe p u p Japanes e deman d fo r foreig n goods , including America n goods , didn' t wor k ou t tha t way . Ac tually recessio n i n Japan go t worse, and th e recovery mea sures tha t th e governmen t trie d t o ge t throug h wer e no t only fairl y mil d a s suc h measure s g o bu t the y didn' t eve n get throug h th e Diet . Th e bilatera l imbalance , no t eve n 248

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mentioned i n the framework agreement , go t worse, and s o did th e overall Japanese surplus . I thin k it' s stil l tru e tha t th e bes t vehicl e fo r restorin g relationships righ t no w an d fo r coolin g of f th e trad e wa r would b e jus t t o retur n t o th e framewor k agreement . It' s not th e documen t tha t Merto n Mille r an d I woul d hav e written, bu t it' s a reasonabl e documen t fo r gettin g bac k on track . I think i t could b e phrased i n a way t o giv e bot h the Clinto n administratio n an d th e Japanese a face-savin g way ou t o f th e curren t impasse . Bill Clinto n obviousl y like s playing a very activ e rol e i n international trad e policy . I n fac t I thin k a t time s h e ha s tended t o equate international economic s with foreig n pol icy. How h e wishe s tha t wer e true ! I mean it' s easie r tha n Bosnia, Somalia , o r Russia , an d al l thos e othe r problem s that kee p intruding upo n hi s time an d attention . Also, h e ha s reaso n t o b e worrie d abou t th e fragilit y o f the recovery, which ha s gone on pretty well during his first year i n office . H e wa s no t abl e t o pu t an y fiscal policy fo r recovery int o hi s program . H e wa s force d t o devot e th e entire budget t o reducin g th e budget deficit , rathe r tha n t o his ow n publi c investmen t progra m o r towar d givin g th e economy a boost . The n th e Federa l Reserve , whic h wa s seemingly cooperativ e with th e Clinton recover y until February 4 , al l o f a sudde n sa w a n inflatio n tha t nobod y els e could se e an d raise d th e Federa l fund s rat e targe t b y 2 5 basis points , settin g of f a ver y puzzlin g respons e i n th e financial markets . Greenspan intimate d tha t his taking thi s 249

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action o n th e short-ter m rat e woul d actuall y caus e long term rate s t o fall , becaus e i t woul d b e suc h a reassuranc e to th e marke t tha t th e Federa l Reserv e hadn' t gon e t o sleep about th e possible dange r o f inflation . Well, instead o f causin g long-term rate s to fall, it cause d them t o ris e b y mor e tha n th e increas e i n th e short-ter m rate. Tha t probabl y won' t last , bu t certainl y Greenspa n threw th e financia l market s fo r a loop , suc h a loo p tha t George Soro s apparentl y acte d lik e a rationa l economis t in believin g tha t th e trad e wa r prospect s woul d caus e the dolla r t o appreciate—an d instea d o f tha t th e dolla r depreciated an d th e yen appreciated , thu s losing him $60 0 million. (Onl y a smal l par t o f th e amoun t h e ha d gaine d on th e Britis h poun d a coupl e o f year s earlier , s o I wouldn't fee l to o sorr y fo r him. ) At any rate , Clinton's enthusias m fo r doin g trade polic y in a n activ e wa y wa s show n b y hi s makin g th e NAFT A and th e GATT-Urugua y Roun d hi s ow n crusades , eve n though the y ha d bee n starte d actuall y b y previous admin istrations. Al l th e tim e h e keep s sayin g tha t exports , ex ports, exports , ar e going to b e jobs, jobs, jobs, and I think he doe s se e export s a s th e mai n sourc e o f jo b creation , given th e fragilit y o f th e recover y an d th e absenc e o f do mestic fiscal and monetar y stimulus . But Clinto n seem s t o b e schizophreni c o n trad e policy . On th e on e han d h e wa s fo r NAFT A an d th e Urugua y Round an d GATT , an d h e doe s hav e som e economist s i n his entourag e whos e instinct s (i f no t a s stron g a s Merto n Miller's), ar e fo r fre e trad e o r i n tha t direction , peopl e 250

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who ar e internationalists i n economic policy. O n th e othe r hand, h e als o ha s som e lawyer s wh o apparentl y wer e frustrated alon g wit h thei r client s wh o couldn' t mak e their desire d arrangement s i n Japan , an d wh o hav e accu mulated grievance s i n additio n fro m thei r privat e life . So w e hav e o n th e on e han d a par t o f th e tea m tha t i s internationalist an d multilatera l i n it s approach , an d o n the other han d a group o f hard-line protectionists. Clinto n has sometime s bee n o n on e sid e an d sometime s o n th e other. We kno w a s economist s tha t Americ a doe s no t com e into thes e argument s abou t who' s interferin g wit h trad e with clea n hand s o r wit h an y licens e fo r self-righteou s complaints abou t th e sins of the rest of the world, whethe r the Europea n Communit y o r Japan . A s a matte r o f fac t the res t o f th e worl d know s ver y wel l abou t America' s own restriction s o n imports , al l ou r quota s an d retalia tions. Accordin g t o th e Financial Times, the y hav e n o sympathy wit h th e Unite d State s i n thi s quarre l wit h Japan. The internationalis t view , which on e would hav e hope d the Clinto n administratio n woul d stic k with , i s tha t w e are fo r multilatera l trade , we'r e fo r rule s o f th e gam e tha t are agreed throughou t th e world. We're no t fo r fre e trade , that's impossible , bu t a t leas t w e hav e rule s o f th e gam e and w e hav e neutra l internationalis t arbitration s o f trad e disputes i n th e GATT . Japa n pick s u p a lo t o f point s i n the worl d communit y b y sayin g they'r e willin g t o d o tha t while th e Unite d State s trie s t o b e bilateral , appointin g 251

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itself prosecutor , judge , an d jur y o n Japan' s allege d in fringements. I thin k Prim e Ministe r Hosokaw a i s quit e justifie d i n resisting th e ide a o f agree d numerica l target s fo r share s o f American o r othe r import s i n particula r industries , aut o parts, semiconductors , o r whatnot. Japan ha d a bad expe rience with th e semiconductor agreement . They mentione d a figure, intendin g i t t o b e a kin d o f approximate , desir able goal . Then , whe n i t didn' t quit e materialize , th e United State s acte d a s i f i t wer e a contrac t tha t ha d bee n breached. It' s prett y understandabl e tha t Hosokaw a doesn't wan t t o agre e o n an y mor e specifi c numerica l re sults. It is ironic that jus t when the y have a politician, a Prim e Minister, wh o i s probabl y mor e tha n th e previou s one s dedicated t o deregulatin g th e Japanes e market , no t jus t deregulating i t fro m officia l restraint s o f trad e bu t fro m the unofficia l cozines s o f Japanes e relationship s amon g themselves, tha t w e al l o f a sudde n sa y we've ha d enoug h of thi s an d it' s go t to stop . What we'r e reall y askin g in many case s is not th e liftin g of officia l barriers , whic h ar e ver y rare—ther e ar e n o tariffs, bu t there are certain officia l discrimination s agains t foreign supplier s tha t w e hav e goo d reaso n t o oppos e and as k t o hav e corrected—bu t i n larg e degre e w e ar e essentially sayin g that wha t w e want i s for th e Japanese t o arrange t o purchase mor e o f ou r stuff , an d t o chang e thei r tastes an d thei r habits . Obviousl y that' s no t somethin g w e 252

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ourselves woul d b e prepare d t o do . I f anybod y said , "W e want a certai n shar e o f right-han d steerin g whee l car s to b e purchase d i n America, " w e woul d laug h the m ou t of court . The mos t importan t thin g Japan coul d d o right now i s I think quit e consisten t wit h th e relation s tha t th e majo r macroeconomic power s o f th e worl d hav e wit h eac h other—namely t o hav e som e coordinatio n o f macroeco nomic policie s i n th e interes t o f th e worl d a s a whole . I n this cas e Japan's par t woul d b e to tak e vigorou s measure s of macroeconomi c fiscal stimulus—governmen t spendin g for thei r ow n publi c investment purposes, tax reductio n t o get the m ou t o f th e recession—tha t woul d hav e a by product o f increase d deman d b y th e Japanese fo r import s from everywhere , including the United States . It woul d b e bette r t o achiev e tha t recover y i n Japanes e domestic polic y b y a fiscal stimulu s tha n b y monetar y easing. Monetary easin g would ten d t o depreciat e th e yen , and a s fa r a s th e surplu s an d th e balanc e o f trad e ar e concerned, tha t woul d se t thing s bac k compare d wit h a domestic fiscal polic y tha t woul d provid e th e stimulu s itself. I thin k it' s certainl y withi n genera l internationall y acceptable behavio r fo r th e Unite d State s an d th e othe r G-7 countrie s t o continu e pressur e o n Japa n t o tak e tha t kind o f macr o measure . Afte r all , th e curren t accoun t surplus o f Japan i s largely a macroeconomic phenomenon . It reflect s th e exces s o f Japanes e domesti c savin g ove r it s own domesti c investment , an d th e opposit e tendenc y i n 253

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the Unite d States . W e ar e no t goin g t o solv e th e imbal ances o f curren t account s o f trad e unles s w e solv e thos e macroeconomic discrepancies . Doing little things with thi s specific industr y an d tha t specifi c industr y jus t shift s thos e imbalances aroun d an d doe s no t ge t rid o f them .

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M A S A H I R O YOD A I'm happ y t o b e surrounde d b y distinguishe d scholar s rather tha n th e malcontent, frustrate d lawyer s o f th e Clin ton administration . I' d lik e t o commen t o n th e curren t U.S.-Japan trad e issue . Just afte r th e inauguratio n las t year i t became clea r tha t the ne w Clinto n administration' s strateg y towar d Japa n placed a n emphasi s o n quantitativ e result s in trade negoti ations. Durin g th e first yea r o f th e administratio n ther e was a n expectatio n tha t th e Japanese-America n relation ship woul d mov e i n a ne w an d positiv e direction , espe cially wit h th e adde d incentiv e o f a ne w governmen t i n Japan le d b y Prim e Minste r Hosokawa , whic h promise d change. Unfortunately, thi s expectatio n o f chang e i n a positiv e direction betwee n ou r tw o countrie s ha s yet to be realized . Instead, th e U.S.-Japa n relationshi p ha s com e t o a poin t resembling a worst-case scenario . I n fact , w e could proba bly sa y tha t w e hav e reache d a n impass e o n th e improve ment o f relations , sinc e th e U.S.-Japa n Summi t faile d t o produce a new trade policy when i t concluded i n Washington o n Februar y 11 . This faile d Summi t resulte d i n th e unexpecte d strength ening o f th e Japanes e yen , whic h migh t furthe r weake n the strugglin g Japanes e economy . T o preven t th e furthe r strengthening o f th e yen , Japa n coul d ope n it s marke t t o 255

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imports. A t th e sam e tim e th e Clinto n administratio n ha s revived th e Supe r 30 1 claus e t o forc e Japa n t o ope n it s market t o America n goods , an d ther e i s renewe d interes t by the U.S. Congress t o impos e retaliator y trad e sanction s against Japanes e imports . Th e whol e situatio n give s th e appearance o f a trade war . As someon e doin g busines s her e i n th e Unite d State s I hav e seriou s concern s abou t th e presen t situatio n an d additional apprehensio n abou t ho w w e ca n solv e thes e serious problems . I t appear s tha t bot h ou r government s have unusua l expectations , an d a realit y ga p exist s be tween the m tha t ver y likel y ha s contribute d t o th e break down o f th e recent trad e talk s i n Washington . The Japanes e ma y hav e overestimate d th e leve l o f trus t and confidenc e tha t Presiden t Clinto n ha d i n Prime Minister Hosokawa . The y di d no t giv e enough consideratio n t o the powerfu l effec t thei r sayin g n o woul d hav e o n th e negotiations. O n th e othe r hand , th e American s believe d that i f the y showe d a stron g stanc e o n trade , suc h a posi tion would withou t fai l lead to compromise from th e Japanese. I n addition , th e American s ma y hav e overestimate d Morihiro Hosokawa' s abilit y t o dea l effectivel y wit h th e Japanese bureaucracy . The tw o mai n theme s o f th e trad e talk s betwee n Japa n and th e Unite d State s wer e trad e surplu s reductio n b y th e Japanese governmen t throug h macroeconomi c polic y an d the establishmen t o f measure s t o ope n specifi c marke t sectors such a s automobiles an d the financial markets . The Japanese objecte d t o establishing new American target s o n 256

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either macr o o r micr o levels , whic h le d directl y t o th e collapse o f th e discussion las t month . I strongl y fee l tha t ther e i s a perceptio n ga p o n severa l points whe n i t come s t o th e U.S.-Japa n trad e imbalance . The trad e imbalanc e show s a huge surplu s fo r Japan , thi s is fo r sure , an d th e assumptio n i s tha t thi s i s becaus e Japan's market s ar e close d an d Japa n import s ver y little . Let m e begi n b y sayin g tha t th e growt h o f Japan's surplu s has finally begu n t o slo w down. Japan's trad e surplu s wit h the Unite d State s appear s t o hav e peake d i n th e middl e o f 1993, an d th e economi c slowdow n i n Japa n ha s pu t a damper o n an y increase i n imports . Japan's curren t expor t growt h rat e compare d wit h las t year becam e negative . I t i s expected tha t economi c recov ery i n Japan wil l b e accompanie d b y a gradual increas e i n imports a s th e surplu s continue s t o sho w a decreasin g trend. A s fa r a s th e figures fo r th e U.S.-Japa n imbalance , looking a t the m fro m th e America n viewpoin t th e defici t with Japan increase d t o ove r $5 9 billio n i n 1993 , a shar p rise fro m $4 1 billio n i n 1990 . That figure account s fo r 5 0 percent o f th e tota l America n trad e deficit . Thi s defici t increased becaus e th e U.S . increase d import s fro m Japa n while it s export s t o Japa n remaine d th e sam e o r shran k due to th e recession i n Japan . Japanese export s t o th e Unite d State s i n particula r in creased 10. 4 percen t i n 199 3 compare d wit h 1992 . Thi s rise in import s fro m Japa n wa s a resul t o f th e recover y o f the America n economy . A s a consequenc e ther e wa s a sharp increase in demand fo r machiner y an d equipment — 257

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fax machine s an d copiers as well as semiconductors. Japan supplies virtuall y al l th e world' s fa x machines , copiers , and LCDs . Japan an d Americ a cooperat e t o produce com puters. Th e Japanes e mak e memor y chips , whil e th e Americans mak e th e CPUs . Many American s believ e tha t Japa n i s a countr y tha t imports ver y little , bu t nex t t o Canad a Japa n i s i n fac t America's larges t tradin g partner . Las t yea r Japa n im ported $4 8 billio n o f America n goods , roughly 1 0 percen t of America' s tota l export s o f $46 5 billion . Venezuel a an d Mexico follo w Japan a s America's third an d fourt h larges t trading partners . Tota l America n export s t o Japa n ar e even large r tha n th e tota l amoun t t o Grea t Britai n an d Germany combined . Tota l America n export s t o Japan ar e even large r tha n th e tota l o f America n export s t o al l o f South America . Rice was a topic o f discussio n las t year. Th e fac t i s tha t Japan i s th e larges t expor t marke t fo r America' s agricul tural products , totallin g $7. 7 billio n i n 1991 . The expor t total t o th e entir e Europea n Unio n fo r th e sam e perio d was $6.9 billion. So much fo r th e belief tha t Japan import s very little . When w e loo k a t th e trad e facts i n this way w e see a grea t change , an d w e als o se e th e characte r o f th e U.S.-Japan trad e relationshi p a s on e o f increase d interde pendence an d a competitio n whic h i s wholesom e an d healthy i n the long term . The trad e imbalanc e o f $5 9 billion , th e numbe r tha t grabs ou r immediat e attention , reflect s th e natur e o f eac h 258

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country's trad e structur e an d perhaps i t is the difference i n economic condition s betwee n ou r tw o countrie s a t th e present tim e tha t make s Japan' s surplu s see m large r tha n it actuall y is . I ca n appreciat e th e criticis m tha t Japanes e response t o th e trad e imbalanc e ha s bee n delaye d i n com ing, bu t o n th e othe r han d i t ca n als o b e sai d tha t th e managed trad e concep t th e Clinto n administratio n i s at tempting t o promot e i s counterproductiv e an d eve n dan gerous i n a worl d econom y tha t i s becomin g increasingl y interdependent. Let m e sa y a fe w word s abou t th e Japanes e economy . Some indicator s see m t o sugges t tha t th e Japanes e econ omy ha s bottome d out , an d fro m her e w e shoul d expec t an economi c los s o f abou t 0. 5 percen t i n 1994 . However , there's th e presen t exchang e rate . Actuall y thi s gros s rat e is calculated an d th e yen-dollar rat e i s now 11 3 yen. If th e present exchang e rat e wer e t o continu e a t abou t th e 10 5 level, ther e i s a concer n tha t al l th e positiv e indicator s would disappea r an d tha t Japa n migh t experienc e a two year perio d o f negativ e economi c growt h unprecedente d in the last fifty years, since the end o f World Wa r II . If th e Japanese econom y continue s t o b e weak , ther e i s a concer n tha t rathe r tha n seein g a n increas e o f import s we wil l witnes s a cycl e o f eve n large r trad e surplus . I n America indicator s see m t o sugges t tha t th e econom y i s finally gatherin g momentu m afte r thre e year s o f bein g slow an d weak . A wea k dolla r ma y giv e furthe r ris e t o inflation, an d ther e woul d b e impetu s fo r a risin g interes t 259

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rate. With tha t woul d com e a fear o f the destabilization o f financial markets . The continuatio n o f trade talks is essential t o cal m everybody' s fears . Just a s th e Unite d State s establishe d a targe t t o reduc e its internationa l deb t b y $50 0 billio n ove r th e nex t five years, it is my opinio n tha t Japan ha d bette r se t a nomina l goal fo r it s trad e surplu s t o b e abou t 2 percen t o f it s GDP. It is absolutely essentia l fo r Japan t o take immediat e measures throug h fiscal polic y stimulatio n t o mobiliz e it s economy, no w stuc k i n th e middl e o f th e wors t recessio n in it s history . Establishin g numerica l target s i n specifi c areas, however , distort s th e norma l suppl y an d deman d relationship. Sinc e doin g tha t place s unnecessar y con straint o n Japanes e consumers , I fee l Japa n shoul d cer tainly b e opposed t o suc h numerical targets . If Americ a set s suc h target s i t won' t b e lon g befor e other countrie s d o th e same . I t i s a stron g concer n tha t managed trad e will change the direction o f free trade . On e might as k wh y Presiden t Clinto n woul d adher e t o thi s managed trad e policy . T o avoi d manage d trad e Prim e Minister Hosokaw a mus t propos e a n alternative , th e re laxation o f regulator y constraint s o n import s tha t preven t Japanese consumers fro m gettin g cheaper an d better good s from othe r countries , an d h e mus t mak e a concentrate d effort t o ensur e tha t bot h domesti c an d foreig n companie s doing busines s i n Japan hav e a leve l playin g field o f com petition i n the Japanese market . Japan i s a cultur e tha t ha s uniqu e custom s an d treat s non-Japanese i n a manne r tha t i s ofte n indirec t an d lack 260

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ing i n clarity . I thin k i t i s essentia l fo r Japa n t o decid e specifically wha t i t wants t o preserve an d what i t is willing to chang e regardin g it s cultura l an d busines s customs . Before w e tak e u p th e discussio n o f number s t o settl e th e trade dispute , w e nee d t o decid e wha t directio n ou r trad e relations shoul d take . It i s m y opinio n tha t th e tim e ha s com e fo r ou r tw o governments t o conduc t amon g ou r bes t economist s seri ous, level-heade d discussions , suc h a s th e typ e w e ar e engaged i n her e today . Economist s an d representative s o f the busines s communit y mus t wor k togethe r t o creat e th e framework fo r resolvin g th e trad e imbalanc e betwee n ou r two countries .

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RICHARD ZECKHAUSE R I'd lik e to tal k abou t thre e dialogue s thi s morning : Firs t is the dialogu e tha t ha s take n plac e ove r th e pas t te n o r fifteen years , principall y amon g economists ; secon d i s a n internal dialogu e i n th e Unite d State s abou t ho w w e should thin k abou t foreig n trad e an d wha t i t doe s t o ou r country; an d thir d i s th e dialogu e betwee n th e Unite d States an d Japan . Fve bee n lookin g a t thes e issue s fo r th e pas t fifteen years, an d ever y yea r tha t we'v e ha d th e symposiu m her e or tha t Fv e spoke n i n Japa n th e ter m "trad e war " ha s come up . While we ofte n haven' t ha d perfec t tradin g rela tions, we'v e bee n s o fa r fro m a trad e wa r tha t I think th e "good news " i s a bi t lik e th e goo d new s durin g th e col d war: Everybod y alway s sai d w e were perche d o n th e edg e of nuclea r annihilation , an d ye t w e alway s manage d t o stay ver y fa r awa y fro m it . Tha t doesn' t mea n tha t w e shouldn't b e cautious , bu t w e shouldn' t assum e we'r e al ways just on th e verge of a trade war . The mos t interestin g thin g abou t th e first dialogu e i s that i t goes o n n o matte r wha t th e condition s are . When I first starte d goin g t o Japan , th e Unite d State s wa s doin g pretty well . I n th e 1980 s th e Japanes e econom y wa s i n fact doin g muc h bette r tha n w e were , however , an d th e economic reputatio n o f th e Unite d State s wa s severel y oversold. A s a consequence , Japa n ha d a dramaticall y 262

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exaggerated vie w o f ou r capabilities . No w th e table s hav e been turned , bu t th e discussio n i s (usually ) th e same . So it doesn't matte r wha t th e economi c condition s ar e i n th e United States . As long as Japan run s a trade surplus, it will be blame d fo r condition s i n thi s country . I disagre e wit h that view . As an aside , I should tel l you there' s very good new s fo r the Unite d States . Fro m 199 1 t o 199 2 productivit y i n th e United State s was up over 4 percent. In Japan, by contrast , it decline d b y mor e tha n 5 percent. Th e Unite d State s wa s the larges t exporte r i n th e worl d fo r th e first tim e sinc e 1980. We accoun t fo r 1 3 percent o f th e world' s merchan dise exports . Job s ar e increasin g nicel y i n th e Unite d States. Everybody assume s tha t Japan i s the chip make r t o the world , bu t fo r th e first tim e sinc e 1988 , i n 1991-9 2 the United State s was the largest manufacturer o f semicon ductor chips . These things ar e all happening, yet our trad e deficit wit h Japa n stay s strongl y unfavorabl e o r favor able—however yo u migh t lik e to talk abou t it . Let m e tur n nex t t o th e dialogu e i n th e Unite d State s about trade . Wit h th e NAFT A debate , th e term s "prices " and "costs " wer e no t mentioned . Yo u weren' t allowe d t o say that thing s would b e cheaper fo r th e typical American , or eve n th e typica l poo r American , becaus e NAFT A wa s about jobs , with th e environmen t a s a slight subtext. No w that's ver y interestin g i n ligh t o f Professo r Miller' s com ments abou t th e importanc e o f servin g consumers , tha t one o f th e bi g advantage s o f ou r extraordinaril y ope n economy i s tha t w e ca n bu y thing s abou t a s cheapl y a s 263

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you ca n anywher e i n th e world . It' s importan t a t leas t t o mention tha t par t o f th e origina l motivatio n fo r fre e trad e was enablin g peopl e t o ge t mor e consume r good s fo r th e same amount o f resources. Why more attention i s not pai d to th e consume r benefit s fro m fre e trad e i s a puzzle. A secon d puzzl e i s th e relationshi p betwee n trad e an d the differentia l i n wage s betwee n skille d an d unskille d labor i n th e Unite d States . A sever e proble m i n Americ a now i s tha t th e ga p betwee n wage s fo r skille d an d un skilled worker s ha s increase d dramatically . Th e explana tion i s rather straightforward ; w e ar e importing low-wag e goods fro m overseas , an d that' s makin g ou r lower-wag e producers tr y to compete. They d o this by paying very lo w wages. Th e onl y troubl e wit h thi s explanation , whic h could i n theor y b e true , i s tha t it' s no t true . I n fact , o n a value-added basi s ou r averag e tradin g partne r ha s a wag e that's 8 8 percent o f ours , very high relativ e t o ou r wages . The rati o o f skille d t o unskille d labo r ha s bee n increas ing. Thi s suggest s tha t th e principa l facto r drivin g thi s growing wag e differential , whic h I think i s goin g t o b e a major polic y proble m i n th e Unite d State s fo r year s t o come, is not trade , but development s i n our ow n domesti c economy. Pau l Krugma n an d Rober t Lawrenc e estimate d that a t mos t 1 0 percent o f ou r increasin g wage differentia l should b e attribute d t o trade . No w trad e i s a wonderfu l bogeyman; i t is intangible, s o it's alway s very attractiv e t o blame al l of ou r problem s o n it . The third dialogu e I' d lik e to talk abou t i s the one we'r e having wit h Japan . I thin k th e Unite d State s i s largel y 264

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putting th e dialogu e i n th e hand s o f th e wron g people , and w e ma y b e focusin g onl y o n on e issue—no t th e on e economists lik e t o tal k about . I find i t ironic . I wish tha t we ha d mor e economist s i n th e administration . I find i t disturbing tha t a lobbyis t wh o happen s t o b e a lawye r i s in charg e o f ou r trad e policy , becaus e I think tha t a legal lobbying backgroun d dramaticall y affect s a n official' s outlook. I can identify fou r area s where we could try to work ou t arrangements wit h Japa n i f w e wer e upse t abou t th e defi cit. Th e first i s th e are a o f tariff s an d quotas , an d I thin k that's a rea l loser . It' s a lose r economically ; I thin k it' s also a lose r politically . Th e Unite d States , which ha s bee n the principal natio n supportin g internationa l economi c ar rangements i n the postwar era , can' t an d won' t b e seen a s the principa l countr y tha t violate s som e o f thes e arrange ments, an d I think tha t Supe r 30 1 i s s o powerfu l tha t it' s really har d t o us e i t i n an y significan t way . W e brin g th e sword ou t o f th e sheat h an d w e leav e i t lyin g o n a tabl e for a period o f time , and the n fo r month s an d month s an d months everybod y trie s t o bac k awa y fro m it . I predic t that w e won't us e it to an y significan t extent . The secon d area , whic h wa s mentione d b y Professo r Tobin, is domestic policy. Now w e always have wonderfu l ideas abou t th e domesti c policie s tha t othe r countrie s should adopt . Thi s pas t sprin g w e ha d a littl e discussio n ourselves abou t wha t ou r domesti c policie s shoul d hav e been, an d wonde r ho w w e would hav e felt i f Prime Minis ter Hosokaw a o r som e Frenc h o r Germa n figure ha d 265

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"weighed in " a s to whethe r th e Unite d State s shoul d hav e really ha d a significan t o r modes t o r n o stimulu s whatso ever. I think tha t w e would hav e rightl y said , "That' s ou r business, and w e don' t wan t yo u t o tel l us what t o do. " We coul d hav e multilatera l negotiation s o n coordinat ing macroeconomi c policy , bu t I thin k it' s unrealisti c fo r any countr y t o expec t tha t anothe r countr y i s goin g t o dramatically shif t it s domesti c policie s t o hel p u s out . Maybe ther e wil l b e a fortunat e confluenc e o f interests . If Professor Tobi n wer e advisin g Japa n h e woul d giv e the m advice tha t woul d tur n ou t t o b e goo d fo r America n ex porters, an d that' s great . Bu t I don' t thin k w e shoul d b e so naive a s to expec t tha t t o play a significant role . The thir d area , alread y mentione d muc h b y economist s but likel y t o becom e increasingl y importan t t o everyone , is militar y policy . Peopl e tal k abou t th e foreig n affair s world bein g i n somewha t o f a shambles . W e ar e i n a new, multipola r worl d wher e nobod y understand s wha t i s going t o happen , an d th e Unite d State s i s in a muc h mor e secure positio n tha n Japan . Japa n ha s t o worr y abou t Korea, a sor t o f smal l outla w countr y tha t ma y o r ma y not hav e nuclea r weapon s an d ma y o r ma y no t wan t t o use them. Successio n ther e i s very unclear. As you remem ber, w e wer e scare d t o deat h whe n Cub a go t a fe w nu clear-tipped missiles . Ho w woul d yo u fee l i f yo u wer e sitting i n Japa n today , wit h th e Unite d State s protectin g you? Chin a i s nearby , an d nobod y know s wha t Chin a i s going t o do . Let' s hop e Chin a continue s o n it s presen t course o f ver y rapi d economi c growt h an d end s u p bein g 266

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a grea t tradin g partne r fo r bot h th e Unite d State s an d Japan—but thi s outcom e i s uncertain . I thin k thi s las t i s a n are a wher e ther e wil l b e som e discussion. I strongly hop e tha t th e Unite d State s doe s no t try t o exer t significan t leverag e o n Japa n i n militar y af fairs. I wouldn' t min d i f Japa n pai d a n extr a $1 0 billio n toward th e commo n defense , whic h the y woul d pa y to ward us , but I don't thin k tha t w e want t o forc e Japa n t o be mor e o n it s ow n militaril y o r dramaticall y an y mor e than i t woul d b e otherwise . Man y Japanes e an d man y Americans woul d no t lik e t o se e tha t happen , bu t I thin k the possibility i s sitting there i n the background . In th e fourt h are a I' m a littl e pessimistic . Pressur e i s building i n th e Unite d State s ove r th e lon g ru n t o d o something abou t th e trad e imbalance . Th e Unite d State s will start t o discove r tha t al l of it s other tool s ar e inappro priate o r infeasible , an d wil l probabl y d o som e thing s that don' t violat e GAT T bu t whic h wil l com e close r t o a strategic trade policy than we have been in the past. Exam ples ar e givin g preferenc e t o America n companie s i n bid ding o n constructio n projects , o r limitin g th e number s o f Japanese student s wh o stud y a t America n universities . I predict tha t no t i n th e nex t yea r bu t ove r th e nex t fiv e o r ten year s we'l l se e mor e instrument s lik e this , becaus e everybody says , " J a P a n ha s al l thos e thing s tha t the y ca n do an d w e don' t hav e anythin g w e ca n do, " an d the n people say , "Well , wha t ca n w e do? " Ther e i s infinit e creativity i n Washington, no t alway s well directed . I lik e t o tal k abou t th e U.S . an d Japa n i n a n Olympic s 267

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metaphor. Sometime s I'v e talke d abou t bicycl e racin g an d how eas y i t i s t o b e i n th e competitor' s stream . Th e mos t interesting Olympi c even t I sa w thi s year , whic h I hop e does no t describ e ou r relationship , wa s th e short-trac k speed skating . Th e skater s elbo w eac h othe r i n th e turns , and frequentl y tw o o r thre e peopl e g o dow n a t th e sam e time. I think that' s a poor metapho r fo r what' s happenin g with th e Unite d State s an d Japan . I' d lik e t o thin k o f u s more a s bein g i n somethin g lik e a 1,00 0 kilomete r sk i race: Eac h ca n hel p th e othe r establis h worl d records , an d there ar e n o Tony a Harding s involved . I' d lik e t o thin k that Japa n an d th e Unite d State s i n th e postwa r worl d both deserv e gol d medals , no t unlik e Oksan a Baiu l an d Nancy Kerrigan .

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PANEL DISCUSSIO N MERTON MILLER : I agre e wit h Richar d Zeckhause r about th e issu e o f fiscal stimulus , bu t I' d ad d tha t it' s b y no mean s clea r tha t i t woul d wor k a s neatly a s Jim Tobi n thinks i t would. I t works o n th e blackboard, bu t it's b y n o means clea r tha t i t woul d wor k i n practice . I als o accep t Richard's poin t tha t w e can' t persuad e ou r ow n peopl e t o engage in the kind o f fiscal stimulus that Jim would lik e t o see, becaus e th e America n peopl e ma y no t thin k th e pro posed governmen t project s ar e wort h th e money . I don' t see why anyon e shoul d b e surprised tha t th e Japanese fee l the sam e way . S o I pu t muc h les s weigh t o n tha t tha n Jim does . I'm mor e worrie d tha n Richar d i s abou t retaliation . There ar e peopl e i n th e Clinto n administratio n wh o wan t the negotiations to fail s o that they can adopt a thoroughl y restrictionist policy . I don' t kno w ho w powerfu l the y ar e in the administration , becaus e nobod y reall y know s a t th e moment who' s i n power i n the administration—bu t thos e people reall y worry me . JAMES TOBIN : Th e consultatio n amon g th e G- 7 coun tries abou t macroeconomi c polic y ha s bee n goin g on fo r a long time , an d almos t invariabl y i n th e las t te n year s th e G-7 communique ha s said that th e various governments a t the Summi t ther e advis e o r hop e o r urg e tha t th e Unite d

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States tak e stron g measure s t o reduc e it s deficit . Tha t ha s been a n invariabl e recommendatio n b y Japa n an d th e other five countrie s beside s th e Unite d States , an d eac h time ou r governmen t ha s said , "Why , sure . That' s wha t we wan t t o do , too. " Thi s i s th e first tim e we'v e actuall y done something , bu t th e othe r countrie s hav e suggeste d again an d agai n wha t ou r principa l polic y shoul d be , for a long, long time. Japan itsel f agree d a t th e Summi t tha t the y nee d a n expansionary fiscal policy . It' s no t a n externa l thin g bein g imposed upo n them , bu t i t ha s seeme d tha t whe n th e government actuall y goe s bac k t o Toky o an d propose s i t then someho w i t doesn' t ge t don e b y th e Parliament . I think it' s tru e tha t non e o f th e thing s tha t we'r e talkin g about her e ar e goin g t o al l o f a sudde n eliminat e th e Japanese curren t accoun t surplus . Whethe r they'r e macr o or micr o they'r e no t goin g t o d o that . Bu t a t leas t th e macro one s ar e goin g i n th e righ t direction , bot h fo r th e world a s a whole an d fo r Japa n itself . It's no t w e who sa y Japan need s mor e infrastructure . That' s thei r ow n idea , and fiscal stimulu s ca n o f cours e b e give n eithe r o n th e spending sid e of th e budget o r o n the tax reduction sid e of the budget . Supe r 30 1 wa s invoke d b y th e United State s onc e before . Tha t wa s durin g th e Bus h ad ministration, no t th e Clinto n administration . The y actu ally went throug h wit h it , and foun d som e particular case s where the y wer e goin g t o impos e sanction s o n Japa n i f Japan didn' t shap e up . W e aime d a t Indi a an d Brazi l a t RICHARD ZECKHAUSER :

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the sam e time . I n non e o f thes e cases , however , di d w e actually d o anythin g in the end . MASAHIRO YODA : A s fa r a s th e governmen t stimulu s package i n Japa n i s concerned , the y ar e goin g t o prepar e 15 trillio n ye n ou t o f pocket . Ta x deduction , mostl y in come ta x deduction , i s ove r 5 trillio n yen , an d it' s goin g to be effective. I n the beginning the Hosokawa administra tion wa s plannin g t o hav e a multiyear , two - o r three-yea r tax deductio n befor e the y introduce d th e welfar e tax . They wer e tryin g t o increas e th e purchas e tax , th e ta x on consumption . Suddenl y the y change d th e nam e t o th e welfare tax , an d the y withdre w overnight . Unfortunatel y the pla n didn' t wor k out , bu t the y ha d th e intentio n t o reduce incom e ta x fo r thre e years , althoug h th e govern ment official s couldn' t sa y anythin g whe n the y cam e t o Washington an d eve n Tsutomu Hata , th e Minister o f For eign Affairs, couldn' t promise tha t i t was going to be thre e years o r multiyears . I think ou t o f $1 5 trillio n ye n mayb e two-thirds woul d wor k ou t a s a stimulus . Ta x cut s an d government expenditure s o n investmen t will work, bu t th e part o f th e packag e tha t woul d simpl y replac e expendi tures b y the private secto r i s not goin g to help . As fo r th e exchang e rate , everybod y i s mentionin g 10 5 yen. A t on e tim e the y sai d i t woul d b e impossibl e fo r Japanese industrie s t o adjus t t o 11 0 yen , bu t no w I thin k they ar e mayb e 7 5 o r 8 0 percen t there . Still , it take s time . As far a s three-year growt h i s concerned, I think ther e i s a great possibility tha t th e Japanese econom y won' t gro w a t all if the exchange rat e continue s a t this level. 271

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Thi s discussio n make s m e thin k of Japa n an d th e U.S . a s a squabblin g couple . Somebod y points out , "The y jus t thre w som e china ; the y brok e th e dishes. Thi s i s prett y serious! " Th e question s are : "Hav e you eve r spen t a nigh t apart? " "Ha s h e eve r punche d anybody i n anger? " An d th e answe r t o bot h o f thos e questions i s really no . I think that' s actuall y a fairly hope ful lesson , becaus e wha t i t mean s i s that bot h side s ar e s o scared o f what coul d happen tha t they won't le t it happen . The question s no w are : "Ho w ca n we create a meaningfu l dialogue withi n tha t context? " an d "Wha t rol e ca n th e people i n thi s roo m pla y i n makin g tha t dialogu e mor e fruitful an d productive? " RICHARD ZECKHAUSER :

I hop e you'r e right , Richard , but I don't know . Nobod y i n th e rest o f th e world like s t o be lectured t o constantl y b y the United State s government . Nobody like s t o b e tol d constantl y ho w t o ru n thei r economy. As you pointe d out , w e don' t lik e people t o tel l u s ho w to ru n ou r economy , either . I remember a coupl e o f year s ago th e Japanes e governmen t submitte d a lis t o f 15 0 things that th e U.S. should d o to reform it s society, includ ing ho w t o ru n ou r urba n polic e departments . Woul d w e like t o accep t thi s kin d o f lis t constantl y abou t micr o managing ou r societ y an d economy ? I thin k th e sam e thing i s tru e whethe r yo u lectur e Indi a abou t openin g u p its insuranc e busines s o r Brazi l abou t ho w t o ru n it s or ange juice business o r Japan abou t importin g mor e rice . There ar e cultura l barrier s t o overcome . Althoug h I MARTI SUBRAHMANYAM :

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cannot shar e Merto n Miller' s pessimis m tha t thi s tim e things ma y g o to o far , i t doe s see m t o m e tha t talk s ar e breaking down . I thin k befor e tha t happen s w e nee d t o look fo r a n intermediar y wh o ca n ge t people t o tal k sens e to eac h other .

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Speaker Profile s

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Editor's Note : Th e followin g profile s represen t th e title s of th e panelists a t th e tim e o f thei r respectiv e lectures . BHAGWATiisth e Arthu r Lehma n Professo r of Economic s an d Professo r o f Politica l Scienc e a t Co lumbia University . H e i s Economi c Polic y Adviso r t o th e Director-General, GAT T an d adviso r t o th e Financ e Min ister o f India . H e ha s written 20 0 article s an d authore d o r edited 3 0 books . H e write s frequentl y fo r th e New York Times, th e Wall Street Journal, an d th e Financial Times, reviews fo r th e New Republic, an d ha s appeared o n majo r TV shows. He ha s receive d man y honorar y doctorates .

JAGDISH

H . B u i T E R i s Jua n T . Tripp e Professo r o f International Economics , Yal e University . H e receive d hi s bachelor's degre e i n economic s fro m Cambridg e Univer sity i n 197 1 an d hi s Ph.D . fro m Yal e Universit y i n 1975 . He wa s o n th e facult y o f Princeto n University , an d th e London Schoo l o f Economic s an d Politica l Scienc e befor e joining Yal e Universit y i n 1985 . I n 1990 , h e wa s ap pointed a s a chai r professor . H e ha s bee n a consultan t t o the Inter-America n Developmen t Bank , Worl d Bank , an d was a Visitin g Schola r a t th e Internationa l Monetar y Fund. H e i s th e autho r o f five book s an d man y articles . He received th e Second Annua l Sanw a Monograp h Awar d WILLEM

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SPEAKER PROFILE S

administered b y the Center to write a monograph o n inter national financial market s i n 1993 . i s Presiden t an d CE O o f Toyot a Moto r Manufacturing, U.S.A. , Inc. , in Kentucky . H e joine d Toy ota i n 196 0 afte r graduatin g wit h a la w degre e fro m th e University o f Tokyo . I n 1974 , h e becam e Manage r o f th e Production Contro l Department , wher e he was instrumen tal i n developin g th e company' s productio n system . Fuji o Cho wa s name d Genera l Manage r o f th e Transportatio n Control Offic e i n 198 4 and Genera l Manager o f the Nort h American Projec t Offic e i n 1986 . I n 1988 , h e becam e a member o f th e Toyot a Moto r Corporatio n Boar d o f Di rectors. FUJIO CH

O

i s Professo r o f Financ e an d Yamaichi Facult y Fello w a t th e Ster n Schoo l o f Business . He receive d hi s B.A . fro m Princeto n Universit y an d Ph.D . from th e Massachusett s Institut e o f Technology . H e ha s published extensivel y i n th e are a o f financial future s an d options. H e i s edito r o f th e Journal of Derivatives, an d was also a senior edito r an d autho r o f a recently publishe d book, Financial Options: From Theory to Practice. Profes sor Figlewsk i ha s als o worke d o n Wal l Stree t a s Vic e President a t the First Boston Corporation . STEPHEN FIGLEWSK

I

H A M A o i s Associat e Professo r o f Financ e a t the Graduat e Schoo l o f Busines s Administratio n a t Co lumbia University . H e receive d hi s B.A . fro m Columbi a YASUSHI

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SPEAKER PROFILE S

University an d Ph.D . fro m Yal e University. Befor e joinin g Columbia Universit y i n 1991 , he was a faculty membe r o f the Graduate Schoo l of Internationa l Relation s an d Pacifi c Studies, Universit y o f California , an d a n office r o f th e Bank of Tokyo. A specialist on Japanese financial markets , he i s th e autho r o f tw o book s an d o f man y article s i n professional journals . moderator , i s Marcus Nadle r Pro fessor o f Financ e an d Economic s a t th e Ster n Schoo l o f Business. After graduatin g fro m Ne w Yor k University , h e received hi s Ph.D . fro m Harvard . Hi s researc h interest s are i n economi c an d busines s forecastin g techniques . H e has bee n Executiv e Secretar y an d Treasure r o f th e Ameri can Financ e Associatio n (1961-79 ) an d Presiden t o f th e Money Marketeer s (1983-84) . H e receive d th e "Grea t Teacher" Awar d o f New Yor k Universit y i n 1983 . ROBERT KAVESH ,

KAWAii s Associat e Professor, Institut e of Social Sciences , Universit y o f Toky o an d Researc h Scien tist a t th e Cente r fo r Japan-U.S . Busines s an d Economi c Studies, Ster n Schoo l o f Business . H e receive d hi s Ph.D . at Stanfor d Universit y whil e a Researc h Fello w a t th e Brookings Institution . Hi s fields o f interes t include : inter national finance an d ope n macroeconomics , economic s o f commodity markets , an d applie d econometrics . MASAHIRO

K u s u K A W A i s Chairma n o f th e Fuj i Researc h Institute Corporation . H e joine d th e Fuj i Ban k afte r grad -

TORU

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SPEAKER PROFILE S

uating fro m th e University o f Toky o i n 1950 . He starte d his caree r i n th e Internationa l Divisio n an d (afte r servic e in Japan, England, and Germany an d internships in investment bankin g house s i n Ne w York ) wa s appointe d a s Deputy Chie f Manage r i n the Head Offic e Busines s Divi sion. I n 1977 , he was promoted a s the Chief Manage r o f the Internationa l Divisio n an d Deputy Presiden t i n 1981. In 1991 , he lef t th e ban k t o becom e Chairma n o f th e Institute. He is also a director o f Fuji-Wolfensohn Interna tional, a join t ventur e o f Fuj i Ban k an d Jame s D . Wolfensohn, Incorporated . K u s u M O T o i s Chairma n o f Minolt a Cor poration, th e America n subsidiar y tha t market s al l Mi nolta products . I n 1954 , he cam e t o th e United State s a s the sol e sale s representativ e o f Minolta . H e oversa w th e growth o f sale s fro m $600,00 0 i n 195 5 to $80 0 millio n today. H e was named t o the Photo Marketin g Associatio n Hall o f Fame an d in 199 3 received th e Foreign Minister' s Award fo r hi s contribution t o Japan-U.S. relations . H e is the author o f My Bridge to America, Discovering the New World for Minolta. SADAHEI

L E V i C H i s Professo r o f Financ e an d Inter national Busines s at New York University . He received his undergraduate degree , MBA , and Ph.D. from th e University o f Chicago . H e has been a visiting facult y membe r a t many distinguishe d universitie s i n th e Unite d State s an d abroad. H e has been a consultant o r visiting scholar a t the RICHARD

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SPEAKER PROFILE S

Federal Reserv e Boar d o f Governors , th e Internationa l Monetary Fund , an d th e Worl d Bank . H e i s the autho r o f 50 article s o n variou s topic s dealin g wit h internationa l finance an d autho r o r edito r o f nin e books . L i V N A T i s Chairma n o f th e Departmen t o f Accounting, Ster n Schoo l o f Business , Ne w Yor k Univer sity. He earned a B.Sc. at the Hebrew Universit y o f Jerusalem an d a n M.A . an d Ph.D . a t Ne w Yor k University . Among th e school s wher e h e ha s hel d visitin g professor ships ar e th e Universit y o f California , Berkele y an d th e University o f Auckland , Ne w Zealand . H e is the autho r o f Cash Flow and Security Analysis (1992) , as well as article s for variou s academi c journal s includin g th e Journal of Accounting Research, th e Accounting Review, an d th e Journal of Accounting and Economics, JOSHUA

i s th e Rober t R . McCormic k Dis tinguished Servic e Professo r a t th e Universit y o f Chicago . He ha s serve d i n th e U.S . Treasur y an d th e Boar d o f Governors o f th e Federa l Reserv e System . He wa s a mem ber o f th e facult y a t th e Carnegi e Institut e o f Technolog y before movin g t o Chicago . Hi s wor k o n capita l structur e and dividen d polic y with Franc o Modiglian i lai d the foun dations o f th e theor y o f corporat e finance an d earne d hi m the Nobe l Priz e i n Economics . H e i s th e autho r o f man y books an d articles , includin g Financial Innovations and Market Volatility (1991) , an d i s a fello w o f th e America n Academy o f th e Art s an d Science s an d Distinguishe d Fel MERTON MILLE

R

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SPEAKER PROFILE S

low o f th e America n Economi c Association . Currentl y h e is a Public Governor o f th e Chicag o Mercantil e Exchange . s Executiv e Director/Chie f Commentator fo r Televisio n Tokyo an d Chie f Commenta tor o n th e dail y progra m "Worl d Busines s Satellite. " A graduate i n economic s fro m Wased a University , h e worked i n various positions a t the Nihon Keiza i Shimbun , Inc., risin g t o th e positio n o f Deput y Chie f Editoria l Writer befor e movin g to hi s present position . An expert i n macroeconomics an d internationa l economi c policy , h e i s the autho r o f nin e books . I n 1962 , h e receive d a n awar d from th e Japan Newspape r Publisher s an d Editor s Associ ation i n the editoria l category . SOSHICHI MIYACH

Ii

P u G E L i s Professo r Economic s an d Interna tional Busines s a t th e Ster n School . H e receive d hi s Ph.D . in Economics fro m Harvar d Universit y in 1978 . Since then he ha s bee n wit h NYU , an d i s no w Chairma n o f th e Department o f Internationa l Business . H e specialize s i n the economic s o f trad e an d investment , an d i n macroeco nomics. I n additio n t o numerou s article s i n professiona l journals, h e i s co-autho r o f a book , Microelectronics: An Industry in Transition an d co-edito r o f Fragile Interdependence: Economic Issues in U.S.-Japanese Trade and Investment.

THOMAS

A . S A M U E L S O N i s on e o f th e world' s mos t notable economists . H e i s Long-Ter m Credi t Ban k o f Ja PAUL

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SPEAKER PROFILE S

pan Visitin g Professo r o f Politica l Econom y a t th e Japan U.S. Center , Ne w Yor k University , a s wel l a s Institut e Professor Emeritu s o f th e Massachusetts Institut e o f Tech nology. Professor Samuelso n ha s made definitive contribu tions t o economic s an d finance. H e wa s a n advise r t o Presidents Kenned y an d Johnso n an d ha s bee n a consul tant t o man y businesse s an d foundations . H e i s th e first American recipien t o f th e Nobe l Priz e i n Economics , awarded i n 1970 , an d i s a regula r participan t i n th e Cen ter's events . s C . V . Star r Professo r o f Economic s and Directo r o f th e Cente r fo r Japan-U.S . Busines s an d Economic Studies . H e receive d hi s bachelor' s degre e an d Dr.Ec. fro m Hitotsubash i University , i n additio n t o a Ph.D. fro m John s Hopkin s University . Hi s book , Kiku to Washi (Th e Chrysanthemu m an d th e Eagle ) receive d th e first Rondansh o Awar d i n Socia l Scienc e Writin g b y th e Yomiuri newspape r an d i s no w availabl e i n Englis h through NY U Press . RYUZO SAT

Oi

SEKii s Consu l Genera l o f Japa n i n Ne w York. Ambassado r Sek i receive d hi s B.A . i n la w fro m th e University o f Toky o an d joine d th e diplomati c service . I n his lon g career , h e ha s hel d man y responsibl e position s i n the Ministr y o f Foreig n Affair s i n Toky o an d abroad . H e was i n th e permanen t delegatio n fro m Japa n t o th e OECD; Director , Multinationa l Cooperatio n Division , Economic Cooperatio n Bureau ; Director , Regiona l Polic y HIROMOTO

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SPEAKER PROFILE S

Division, Asia n Affair s Bureau ; an d Director-Genera l o f International Affairs , Defens e Agency . Hi s foreig n assign ments includ e Thailand , th e Republi c o f China , an d th e United States , wher e h e wa s earlie r Consu l Genera l i n Los Angeles. moderator , Sanw a series , is th e Charle s E . Merril l Professo r o f Financ e an d Eco nomics a t th e Ster n Schoo l o f Business . H e ha s bee n a visiting professo r a t leadin g academi c institution s i n En gland, France , Germany , an d India , a s wel l a s a Visitin g Chairholder a t INSEAD , Franc e an d a n Oversea s Fello w at Churchil l College , Cambridg e University . H e ha s writ ten numerou s article s an d book s i n th e area s o f corporat e finance, capita l markets , an d internationa l finance. Hi s latest boo k i s Financial Options: From Theory to Practice. MARTI SUBRAHMANYAM ,

i s th e Secon d Distric t Congressma n o f Oklahoma. H e receive d a n M.S . i n managemen t fro m Northwestern Universit y befor e receivin g a J.D. fro m th e University o f Oklahoma . Wit h healt h care , energy , an d economic growth a s his top priorities, Congressman Syna r serves o n th e Hous e Committee s o n Energ y an d Com merce, Judiciary, an d Governmen t Operations . H e chair s the Governmen t Operation s Subcommitte e o n Environ ment, Energy, and Natura l Resource s and i s the Chairma n of th e Democratic Stud y Group . He was designated on e of the "Cleanes t Dozen " i n Congres s b y U.S. News and World Report i n 1989 . M I K E SYNA

284

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SPEAKER PROFILE S

wh o receive d th e Nobe l Priz e i n Eco nomics in 1981 , is Sterling Professor Emeritu s o f Econom ics a t Yal e University . H e ha s serve d a s a consultan t t o various governmenta l agencies , includin g th e President' s Council o f Economi c Advisers , th e Federa l Reserv e Sys tem, th e U.S . Treasury , an d th e Por t Authorit y o f Ne w York an d Ne w Jersey . I n 1961—6 2 h e wa s a membe r o f President Kennedy' s Counci l o f Economi c Advisers . H e was awarde d th e Joh n Bate s Clar k Meda l an d serve d a s President o f th e America n Economi c Associatio n an d th e Econometrics Society .

JAMES TOBIN ,

T s u K A M O T o i s currentl y th e Presiden t o f JETRO i n Ne w York . A graduate o f Kyot o University , h e has serve d fo r 2 4 year s i n MIT I (Japan' s Ministr y o f International Trad e an d Industry ) o r MITI-affiliate d posi tions. Immediatel y prio r t o thi s curren t assignment , h e was Directo r o f MITI' s Polic y Plannin g Offic e wher e h e was involve d i n preparin g Japan's long-ter m pla n "Creat ing Huma n Value s i n th e Globa l Era. " H e ha s als o visite d the Roya l Institut e o f Internationa l Affair s a s Visitin g Scholar an d Syracus e Universit y a s Oversea s Senio r Re searcher. HIROSHI

Y o D A i s Managin g Directo r an d Genera l Manager o f th e Sanw a Bank , Ltd . (Ne w Yor k Branch) . After graduatin g fro m Hitotsubash i University , h e joine d the Ban k i n 1961 . His earlie r foreig n assignment s includ e being th e Chie f Executiv e o f Sanw a Internationa l Limite d

MASAHIRO

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SPEAKER PROFILE S

in London an d Presiden t an d Chie f Executiv e Offic e o f th e Sanwa Bank , California . I n Tokyo , h e wa s th e Genera l Manager o f the International Department . H e is a membe r of th e Board o f th e Californi a Chambe r o f Commerce . i s th e Fran k P . Ramse y Professor o f Politica l Econom y a t th e Joh n F . Kenned y School of Government , Harvar d University . He is a Fellow of th e Associatio n o f Publi c Polic y Management , th e Econometrics Society , an d th e America n Academ y o f Art s and Sciences . Hi s ongoin g researc h project s ar e o n th e challenges o f creatin g appropriat e commitments , makin g effective decision s unde r uncertainty , an d governin g th e modern corporation . H e i s th e autho r o f mor e tha n 12 0 articles an d tw o books , an d th e edito r o f eigh t books . Hi s latest boo k i s Strategy and Choice (1991) . RICHARD ZECKHAUSE

286

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INDEX

Accounting, U.S . and Japanese, 18 4 Agreements: bilatera l an d multilat eral, 47, 53; framework, 53 , 62; free trade , 5 1 America, 37 , 39, 80 , 126 , 153-55 , 184, 251, 260; auto industry , 1 6 3 64, 1 7 0 - 7 1 ; banks , 216; balanc e of payment s deficit , 68 ; chronic fis cal deficit , 185 ; deficit, 185 ; economic recovery, 153 , 2 5 7 - 5 8; ex ports fro m Japa n to , 70; export s t o Japan, 258 ; exports t o Lati n America, 68 ; investment b y Japanese in, 187 ; officials, 158 ; savin g and investment , 185 , 209; workers , 51 Americans, 38 , 69, 121 , 168, 186 , 212, 25 8 Ahtimonopoly Act , 6 0 Antitrust Act , violation o f b y Japanese cosmetics manufacturers , 3 1 APEC. See Asia Pacific Economic Cor poration Argentina, 70 , 15 4 Asia, 36 , 153 , 221, 232; Japan' s move toward , 205 ; security of , 3 9 Asia Pacifi c Economi c Corporatio n (APEC), 66, 206 , 240-4 1 Asia Pacifi c Region , 66 Austerity, fiscal, 4 0 Automobile companies , U.S. , 19 5 Autos, expansion o f import s fro m Ja -

pan, 14 , 15 . See also Trade; Man aged trad e Balance: bilateral , 37 ; economic, 22 ; fiscal, 150 ; of payments , 108 , 1 1 4 15, 234 ; of militar y power , 219 ; of trade, 114 , 155 . See also Trad e Bank o f Internationa l Settlemen t (BIS), 151,157-5 8 Bank o f Japan, 33 , 39-40, 125 , 1 4 7 48, 155 , 202; role in recession , 9 6 Banking: crisi s in America, 16 ; industry i n Japan, 1 5 0 - 5 1 ; regulations , 216 Banks: American , 154 ; Japanese, 125, 184 . See also Fuj i Belgium, 154-5 5 Bhagwati, Jagdish, 7-20 , 35 , 277 Big Three, 17 6 Brazil, 70, 27 0 Brokerage industry , i n Japan, 19 6 "Bubbles," 151 , 216, 15 4 Budget deficit , 62 , 115 , 212, 234, 249 Buiter, Willem, 129-34 , 157-59 , 163, 27 7 Bundesbank, 132 , 15 5 Bureaucracy, Japanese, 57, 5 9 Bureaucrats, 151 ; Japanese, 55, 161 ; MOF an d MITI , 24 6 Bush, Barbara, 2 5 Bush, George , 24, 68, 71, 75, 12 6

287

INDEX Bush Administration , 26 , 59-60 , 195, 229 , 233, 245, 27 0 Business: cycles , 154 , 178 ; Japanese, 30 Canada, 47 , 61 , 69, 25 8 Canadians, an d NAFTA , 5 2 Capital investment , 14 8 Cartels, 15 , 19 7 Central America , 13 4 Central Bank , 16 0 Change, difficult y of , 2 3 Chicago Mercantil e Exchange , 19 8 China, 52 , 70, 186 , 206, 221, 229, 266-67; competitio n wit h Japan , 232; Japan's vie w of, 2 0 6 - 7 ; Main land, 159 ; under "marke t social ism," 70 ; U.S. trade surplu s with , 70 Cho, Fujio, 167-76 , 27 8 Clinton, Bill, 6 - 8, 1 0 - 1 1 , 1 6 - 1 7 , 20 , 22, 2 4 - 2 5, 36, 47, 6 0 - 6 1, 63 , 66, 68-72, 9 6 , 1 0 5 , 1 2 0 - 2 3 , 1 2 6 , 213 , 219,225-26,228-29,245-46, 256; economi c policy a s militar y strategy, 26 ; export drives , 71; fiscal recover y policy , 249 ; meetin g with Japanese Prim e Minister i n Tokyo, 247; trade policy, 249-50 , 260 Clinton, Hillar y Rodham , 25 , 21 9 Clinton Administration , 10 , 2 4 - 2 5, 132, 2 0 9 - 1 3, 217, 221, 223, 249, 270; budgetar y measures , 131 ; debate over industria l policy , 2 3 4 35; defici t reductio n package , 210 ; focus of , 233 ; hawkish trad e negotiators, 122-23 ; instincts fo r fre e trade, 195 ; Japan-U.S. relations un der, 194-96 , 243-74; nee d fo r eco nomic stimulus , 209; people an d proclivities, 219; perspective o n R&D, 238 , 240; promotion o f

288

managed trad e by , 259; retaliatio n against Japan by , 269; revival o f Super 30 1 Claus e by , 256; strateg y toward Japan, 255 ; trade policy , 251 Coalition government , Japanese, 2 6 27, 40,121,124 , 14 5 Commercial Code , Japanese, 6 0 Common Market , 15 4 Competition: agains t imports , 229 ; free, 33 ; in ric e market, 204 ; in semiconductor industry , 90 ; in trade, 258 ; market, 13 , 23; price, 22; wage , 229; with th e West, 15 2 Competitiveness, 163 ; American, 6 2 63, 96 ; international, 26 , 62, 7 3 100, 132 ; in the marketplace, 98 ; low-wage, 231-3 4 Consumers: America n an d Japanese , 245; U.S. , 19 4 Cooperation, bilatera l economic , 6 2 Corporate structure , difference s be tween U.S . and Japan, 222-2 3 Corporations, Japanese, 16 2 Credit, expansio n b y Federal Reserve , 155 Deficits, 163 ; bilateral, 36-37, 9 5 96; budget , 16 ; capital, 38 ; reduction, 2 1 2 - 1 3 , 2 0 9 - 1 1, 235-3 6 Deming, Dr . W. Edwards , 17 0 Democratic administration , 2 4 Democrats, an d NAFTA , 48, 53 Deregulation, 23 , 30, 33, 39, 5 4 - 5 5, 58, 63 , 215, 217; opposition to , in Japan, 63-64 ; unde r Reagan , 5 8 Derivatives, 105 , 135 ; OTC, 13 7 Derivatives market , regulatio n of , 157 Developing countries , 7 0 Diminished Gian t Syndrome , 1 2 Distribution: retail , 12 ; Japanese system of , 24 5

INDEX Dollar: depreciatio n of , 3 6 - 3 7 , 39 , 69, 94 , 120 , 183 , 185, 250; weak , 259 Dumping, 8 4 - 8 5 , 90; sanctions for , 85-86; sui t against Korea n firms , 89 Dynamic comparativ e advantage , laws of , 16 3 East Asian Economi c Groupin g (EAEG), 20 5 Eastern Europe , 160—61 , 22 9 EC, 41 , 7 0 Econometrics, 13 . See also Economi c forecasting Economic cycles , 17 8 Economic forecasting , 116 ; futility of , 9. See also Econometric s Economic health , measure s of , 2 3 8 39 Economic policy : "Ge t tougher, " 70 ; international, 54 ; Japanese, 193 ; U.S., 193 , 207 Economic problems , U.S., 211 Economic recovery : America , 153 , 2 5 7 - 5 8 ; Japan, 257 ; need fo r do mestic stimulus b y Japanese, 9 7 98 Economic stimulus , 20 2 Economic strength , a s national secu rity issue , 2 6 Economics: international , 68 ; Keynesian, 20 7 Economies, interdependent, 3 9 Economy: depresse d i n Japan, 22 , 30, 113, 203 ; global, 29, 124 ; U.S., 203; world, 17-18 , 2 8 - 2 9, 36 , 55. See also Recession ; Recover y Electronics industry : adven t o f multi media, 79 ; imports fro m Japan , 122; Japan-U.S competition , 8 2 Employment growth , U.S. , 210. See also Recover y

England, 154 . See also Grea t Britain ; United Kingdo m EU. See Europe, European Unio n (EU) Europe, 36, 6 9 - 7 0 , 1 3 1 - 3 3 , 1 4 1, 153, 155—56; European Commu nity, 251; European Currenc y Union, 40 , 154 ; European Mone tary Union , 130-31 , Europea n Union (EU) , 14 , 17 , 61, 68, 69, 130, 241 , 258; security of , 3 9 Exchange market , 15 8 Exchange rate , 28, 116 , 159 , 163, 259; effec t o n Japanese economy , 271; fixed, 131 ; yen t o dollar , 115 , 146; floatin g system , 95, 184-8 5 Expansion, American , 155 ; fiscal and monetary, 1 8 Expenditure cuts , needed t o reduc e U.S. budget deficit , 209-1 0 Export prices , monitoring of , 8 6 Exports, 185 ; American, 70 ; Japanese global, 65; managed , 14 ; U.S., 36, 209 Far Eas t Asia , 18 6 Fed, the. See Federal Reserv e Boar d (the Fed) Federal Derivative s Commissio n (FDC), need for , 13 7 Federal Reserv e Board (th e Fed), 107 , 109, 1 3 1 , 1 4 3 , 1 5 5 , 1 8 3 , 2 1 0 , 249-50; Fedwir e changes, 1 4 0 - 4 1 ; Regulation EE , 14 0 Figlewski, Stephen, 105,107-16 , 27 8 Finance, international, 3 7 Financial derivativ e markets , 142 ; regulation of , 143 ; setting polic y for, 135-4 3 Fiscal policy : American , 211 ; Federal Reserve, 21 0 Fiscal stimulus , 253, 269; in Japan , 202, 27 0

289

INDEX Float, dirty , 158-5 9 Foreign affairs , threat s t o Japan fro m Korea an d China , 2 6 6 - 6 7 Foreign exchange , multilatera l net ting, 141-4 2 Foreign investment : futur e of , 184 ; by the Japanese, 162 ; flow of , 22 0 Foreign trade , an d U.S . wage differen tials, 26 4 Foreigner-bashing, 6 9 Fortune 500 , 98-9 9 Framework: agreement , 249 ; of poli cies and rules , 1 4 France, 4 1, 132, 154-5 5 Free cash flow , 181-82 ; a s basis fo r international investment , 177-8 2 Free markets, financial, 109 , 11 5 Free trade, 185 , 205, 246, 2 5 0 - 5 1 ; advocates of , 68 ; area, 241 ; benefits to consumers , 264 ; direction of , 260; interferenc e with , 96 ; opposi tion to , 71-72. See also NAFTA ; Clinton Administration ; GAT T Freer trade , with Japan, 23 3 French, the , 15 , 52 Fuji, 80 , 12 9 Futures: an d options , 136 ; Japanese exchange in 1640 , 199-200 ; mar ket, 157 , 196-9 7 G-3, 20 9 G-7, 121 , 209, 253, 269-70; meet ing, 24 7 Gates, Bill, 79, 23 7 GATT, 15 , 18, 39, 5 3 - 5 4, 251 , 267; Uruguay Round , 61 , 69, 132 , 2 0 34,250 GDP: a s measure o f economi c health , 238-39; Japan, 36 , 122 , 124 , 146 , 149-50, 160 , 183 , 202; U.S., 35 General Motors , 164 , 222; layoffs , 68 Gephardt, Richard , 17-1 8

290

Germany, 40 , 154 , 156 , 181 , 208, 222, 258 ; reunification of , 15 5 Global environment , rol e of Japan in , 21 GNP: a s measure o f economi c health , 239; Japan, 202 ; U.S., 64, 210; world, 66 Gold standard , universal , 15 4 Government: bureaucrats , 204 ; con trol, 62 ; Hosokawa, 30 ; interven tion i n financial markets , 115 ; Japanese, 14 ; regulation o f banks , 21 7 Great Britain , 4 1 , 95, 258. See also England; Unite d Kingdo m Greenspan, Alan , 155 , 210, 24 9 Hamao, Yasushi , 106 , 117-19 , 27 9 Hata, Tsutomu , 27 1 Health care , reform of , 7 , 20, 21 2 Hedge funds , 11 6 Heisei Recession , 20 1 "Herstatt risk, " 140-4 1 High technology , 98-100 ; interna tional competitivenes s in , 73—100 "Hollowing-out o f Japan," 9 7 - 9 8 , 159 Honda, 97 , 214, 23 4 Hosokawa, Prim e Minister, 8 , 10 , 18, 20, 24, 26, 36, 6 3 - 6 4 , 1 0 5 , 1 2 0 21, 145 , 248, 252, 256, 260, 265; and deregulation , 58 ; economi c stimulus package , 65; rol e in Japanese recession, 9 6 Hosokawa Administration , 57 , 60 ; economic stimulu s package, 63, 271 House Bankin g Panel , 13 7 Iacocca, Lee , 75 IBM, 15 , 2 2 2 - 2 3; layoffs, 6 8 Imbalance, bilateral , 248; multilat eral, 37; of trade , 65 Imperialism, Japanese, 162 , 18 6

INDEX Imports, 185 ; cheaper i n Japan, 146 ; from America , 69; fro m Japan , 36 , 195; managed , 14 ; need t o rela x Japanese regulator y constraints , 260; surcharg e on , 122 ; to Japan , 245,257-59 "Industrial Vision, " 2 1 Industry, Japanese, 22, 160 , 23 2 Inflation, 151 , 249-50, 259 ; in Japan, 9 7 Institute fo r Internationa l Economics , 31 Integrated circuits , 8 8 - 8 9; flas h mem ory, 9 1 ; U.S. share o f market , 9 0 Intel, 87 , 9 0 - 9 1, 222 , 238; proprietory technology , 9 1 Interest rates , 147 ; long-term, 108-9 , 111; ris e in, 183 ; short-term, 107 , 109-10,131,155 International affairs , Japanes e contri bution to , 22 7 International financial markets , recen t developments, 103-2 6 International monetar y an d exchang e rate, need fo r dirt y float , 130-3 2 International trade , 201, 2 0 3 - 6; liber alization of , 54 , 20 6 International transfer s o f funds , 1 7 9 80 Internet, the , 15 7 Interventions, government, 158 ; of Central Bank , 15 9 Investing, b y Japanese, 30 , 14 6 Investment, 62 ; by Americans i n Japanese firms, 197—98 ; by Japanese i n U.S., 3 7 - 3 8; foreign , 180 , 186 ; international, 165-87 ; Japan an d U.S., 219-20; Japanese domestic , 197; public , 212, 249, 253; strategies for, 108 , 110 , 113 ; three stage s of, 17 8 "Iron triangle, " 59 , 15 1 Italy, 4 1, 70

Japan, 5-6, 8 - 9 , 1 1 - 1 3 , 1 5 , 1 9 , 24 , 37-40, 52 , 5 4 - 5 5, 61, 65, 69-70 , 75, 79 , 85 , 95, 97,103, 121 , 124, 126,131-33,141,145,147,149, 151, 156,158 , 161 , 163, 168, 170 , 180, 184 , 199 , 201, 203 , 206, 208, 222, 228 , 251, 253, 270; accoun t surplus, 270; allege d trad e infringe ments by , 252; American export s to, 6 4 - 6 5 ; America's defici t with , 185; an d GATT , 61 ; anti-U.S. feeling in, 204; as economic super power, 16 , 29, 236; a s high-savin g society, 185 ; barriers t o imports , 175, 195 ; bilateral balanc e of trade, 69 ; changes in, 2 0 - 2 2, 27 ; coalition government , 185 ; Com munist Party , 204, 227; demoniz ing, 245; domestic fiscal policy in , 253; economi c difficultie s in , 75, 160; economi c ris e of, 12 ; economic stimulu s in , 28, 253; exclusion o f outsider s in , 85 ; expansio n of militar y forces in , 221; export initiative by , 30; fea r of , 12 ; for eign investmen t in , 224; ful l em ployment in , 159 ; global import s to, 62 ; "hollowin g out " of , 161 ; investment i n Southeast Asi a by , 236; interest i n Asia, 206—7; international divisio n o f labo r by , 232; in ternational relations , 224; lack o f opposition partie s in , 201; Liberal Democratic Party , 227; losing lea d in hig h technology , 75 ; losing shares o f U.S . car market, 75 ; macroeconomic environmen t in , 202, 248; militar y strengt h of , 224 ; nee d for expansionar y fiscal polic y in , 270; ne w administration s in , 3—41, 55, 121 ; new perspectives for , 20 ; oligopolistic structure in , 100 ; overseas subsidiaries, 159 ; panic on (b y

291

INDEX Japan (Continued) Clinton Administration) , 14 ; perspectives o f ol d an d ne w genera tions, 22; perceptions of, 219 ; political scene in, 2 4 , 1 4 4 - 4 5, 219 , 221; post-Worl d Wa r I I mentalit y in, 227; potential fo r investmen t in , 236; publi c deb t t o GDP , 97; recession, 9 6 - 9 7, 202, 248; reformis t politicians, 246; regulation o f fi nancial market s in , 193 ; reputatio n of, 223 ; rice imports, 203; Socialist Party, 204 , 227; subsidies fo r high tech research , 100 ; surplus, 62 ; trade investmen t wit h Asia , 205; trade issue , 18 ; trade surplus , 2 8 29, 63 , 260; unemployment in , 160 Japan That Can Say No, The (Ishi hara an d Morita) , 3 8 Japan-bashing, 9 7 Japanese, the, 1 2 - 1 3 , 1 5 , 17-18 , 52, 151,249,252,256 Japanese agricultura l market , openin g to Asia , 20 5 Japanese agriculture : depressed , 204 ; future of , 20 3 Japanese authorities , 155 , 196 , 19 9 Japanese aut o industry, 168—76 ; dominated b y keiretsu, 8 1 ; technology transfer, 17 3 Japanese banks : competitivenes s of , 216; i n the U.S., 2 1 4 - 1 8; rol e in formation o f keiretsu , 80 ; solvenc y of, 12 4 Japanese bureaucracy , 125 , 160 , 25 6 Japanese buyer/supplie r relationship , 87. See also Keirets u Japanese capita l markets , pressure t o free up , 19 8 Japanese companies , 62 , 182 , 185 ; role in recession , 202; structure of , 223

292

Japanese consumers , 204, 260; acces s to U.S . commodities, 196 ; economic behavior of , 226-2 7 Japanese culture , 260-6 1 Japanese economy , 226—27, 233, 248, 259-60, 262; "bubble, " 1 4 4 52; declin e of, 145 , 255, 263; fu ture of , 202 ; government stimulu s package, 248, 271; in recession , 121, 124 ; need fo r leve l playin g field, 206; nee d fo r stimuli , 132 ; suggestions fo r recovery , 12 5 Japanese electorate , role in recession , 96 Japanese electronic s industry : firms, 90; foreig n an d U.S . investment in , 7 9 - 8 0 ; genera l trends, 77-7 9 Japanese exports , 146 ; cost-pric e monitoring syste m for , 85 ; growth rate, 257 ; shift fro m U.S . to Asia , 205; t o United States , 257; trad e surplus, 11 4 Japanese financial market , openin g of, 21 7 Japanese government , 62 , 204; an d APEC, 206; economic stimulu s measures, 149 ; reform in , 185 ; regulation o f electronic s industr y by , 79; R& D sponsore d by , 23 6 Japanese industry : declin e of produc tion, 202; de-industrialization of , 234; internationa l division s of la bor, 234 ; management style , 96; outsourcing of , 159 , 234; trade fric tions, 23 4 Japanese investment : i n foreig n coun tries, 133 ; in semiconductors, 88 ; in U.S. firms, 183; limited domesti c opportunities, 185 ; public, 14 9 Japanese jingoists , 18 4 Japanese manufacturers , 17 1 Japanese market : closed , 257; deregu lation of , 252 ; foreign share s of ,

INDEX 87; nee d fo r leve l playing fiel d o f competition, 260 ; openin g of , 86 , 115,245,255-56 Japanese morale , 12 1 Japanese people , 120 , 125 , 152 , 185 ; need fo r mor e balance d wa y o f life , 21 Japanese regulator y system , 55—57, 198 Japanese ric e market , 204 , 25 8 Japanese saving s rate, 13 3 Japanese stoc k market , 182 , 197 ; "bubble," 117 , 119 ; compared t o U.S., 117-19 ; "hollowin g out " of , 198; Nikke i stoc k average , 11 7 Japanese surplus , 134 , 185 , 213, 257 Japanese trad e relationships , multilat eral, 206 Japanese trad e surplus , 134 ; overal l and bilateral , 13 3 Japan-U.S. economic an d financial trends, 191-273 ; friction, 176 ; investment, 165-87 ; macroeconomi c issues, 2 0 1 - 3; ne w economi c part nership, 61, 2 4 7 - 4 8; trade balance , 108; relations , 63 , 203, 256, 27 2 Kantor, Mickey , 13 , 96, 123 , 219 Kavesh, Robert, 8-9 , 19 , 23, 3 3 - 3 4, 45, 54, 60, 66-67, 7 5 - 7 6 , 1 0 5 - 6 , 129, 167 , 27 9 Kawai, Masahiro, 200-206, 226-27 , 241, 27 9 Keiretsu, 15 , 84; history an d explana tion of , 80-8 1 Kennedy, John, 2 4 Kennedy Administration , 20 7 Korea, 37 , 69-70, 266 ; South, 70 , 161 Kusukawa, Toru, 129 , 144-52 , 158 , 279 Kusumoto, Sadahei , 84 , 87 , 18 7

Labor markets , Japan an d U.S. , 2 3 334 Latin America , 133 ; American ex ports to , 6 8 Laws, antidumping, 19 5 Layoffs, 8 ; an d outsourcing , 6 8 LDP. See Liberal Democrati c Part y (LDP) Levich, Richard, 135-43 , 156 , 15 8 Liberal Democrati c Part y (LDP) , 24, 27, 40, 55, 144-45 , 20 4 Livnat, Joshua, 157 , 177-82 , 28 1 Long-Term Credi t Ban k o f Japan, 5 Macroeconomics, 39-40 , 54 ; American, 35 ; developments, 213; imbalances, 132 ; law of , 38 ; outlook , 210; policies , 121 , 132, 200; views, 208 Malaysia, 16 1 Managed trade , 259-6 0 Market share , 13 ; foreign (i n Japan), 87; openin g o f (t o Japan), 87 ; to American companies , 63 , 87 — 88; "true, " 13-14 ; target s on , 123 Markets: access , 12-13 , 85-86 , 92 ; American, 29 , 183 ; commodities, 200; Eurobond , 157 ; Eurocur rency, 158 ; foreign equity , 179 ; free, 29 ; integrity o f the , 159 ; Japanese, 22, 201; liberalization of , 148; open , 33 ; opening of, 54 , 62 ; regulators, 158 ; Wall Street , 155 ; world, 5 1 Mayakawa Report , 16 1 Mexico, 11 , 47, 5 1 - 5 2, 6 8 - 7 0 ; fre e trade with , 7 1 Microeconomics, 4 5 Micron, 89-9 0 Microprocessing, 9 0 - 9 1 Microsoft, 222 , 237-3 8 Militarism, Japanese, 18 6

293

INDEX Miller, Prof. Merton, 193-201 , 204 , 217, 225-26, 2 2 9 , 2 4 5 - 4 6 , 2 4 9 50, 263 , 269 Minister o f Finance , 20 2 Ministry o f Financ e (MOF) , 29, 39, 196, 196-98 ; rol e in Japanese re cession, 9 6 Ministry o f Internationa l Trad e an d Industry (MITI) , 19 , 2 0 - 2 2, 29 , 79 Minolta, 7 6 - 7 8 , 81 , 83, 87 MITI. See Ministry o f Internationa l Trade an d Industr y (MITI ) Mitsubishi Bank , 18 4 Miyachi, Soshichi, 45, 5 4 - 6 0, 28 2 Miyagawa, K. , 24 5 Miyazawa, Prim e Minister, 10 , 20, 27, 61 , 7 5 Models, Economic theory , 1 6 Modigliani, Franco, 15 6 MOF. See Ministry o f Financ e (MOF ) Monetary easing , 25 3 Monetary policy , Japanese, 13 2 Multilateralism, 18 , 69 Multimedia: Japanes e involvemen t in , 79; Unite d State s lead in , 8 0 Multinational corporations : Japanese , 186 NAFTA, 11 , 45, 4 7 - 5 3, 65, 132, 229, 241 , 250, 263; and environ mental controls , 5 1; benefits of , 5 1 ; fear of , 4 7 - 4 8 ; impac t o n labor , 4 8 - 5 0 ; creatio n o f exclusiv e trad ing block, 65; oppositio n to , 5 153, 65 ; useful i n world economy , 205; vot e on , 53, 69 National Economi c Council , 26, 7 0 Nationalism, 5 2 New technologies , how bes t t o utilize , 240 New Zealand , 20 6 Nikkei Index , 19 8

294

Non-LDP, 2 4 North America , 54 , 154 , 168 , 206; economy of , 2 0 5 - 6 Northern Africa , 13 4 Open economy , advantage s of , 2 6 3 64 Outsourcing, 16 2 Overseas production , 2 2 Pacific Basin , 68-15 4 Pacific nations , economic ris e of, 1 2 Perot, Ross , 8 , 11 , 48, 71; opposition to fre e trade , 7 1 Plaza Accord , 65, 145 , 15 0 Policy: fiscal, 16 , 18 , 193; goal o f bal ance, 37; international, 194 ; Japanese economic, 57; Japanese indus trial, 57, 60; macroeconomic, 33 ; on surplu s reduction target , 16 ; public, 7 ; social, 193 ; U.S., 26 Political system , Japanese, 4 0 Postal an d Telecommunication s Bu reau, 79-8 0 Postwar period , 1 4 Problems, Japan-U.S., 8 Productivity: American , 231 ; U.S. government intervention in, 234-3 5 Prosperity, American , 7 1 Protectionism, 47 , 52, 54, 69, 7 1 - 7 2 ; in America, 195 , 213, 2 3 1 - 3 3, 251; ingraine d i n Japanese econ omy, 134 ; in industrial countries , 132; in Japan an d th e U.S., 1 3 2 33; Japanese, 3 2 - 3 3, 5 6 - 5 7 , 8 4 Pugel, Thomas, 76, 8 3 - 9 3, 28 2 Quotas, 95 , 122 , 245, 247, 25 1 R&D, 240-4 1 Reagan, 71 , 179; Administration , 229; industria l policy , 86 , 9 2 Recession, 8 ; cyclical, 202; in Europe ,

INDEX 131; i n Japan, 30 , 33, 6 4 - 6 5, 9 6 97, 121 , 149, 2 0 1 - 2, 253 , 257; in United States , 201, 211; "Post Bub ble," 201 ; worldwide, 97 , 20 9 Recovery, 96 ; in Japan, 33 , 58, 248, 253; i n United States , 36, 6 5 - 6 8 , 71, 153 , 2 0 9 - 1 1, 213 , 250; unde r Clinton, 249 ; unde r Roosevelt , 22 6 Reform: Economic , 64 ; health, 6 ; of MOF, 198 ; political, 28, 117 ; tax , 58 Regulations, 12 , 3 2 - 3 3, 151,158 ; consequences of , 138 ; easing of , 30, 80 ; global, 157 ; of financial in dustry, 135 , 138 , 217; of bee r in dustry i n Japan, 3 1 ; on industry , 79 Regulators, U.S., 198-9 9 Reich, Robert , 69 , 21 9 Relations, bilateral, 3 - 4 1; interna l trade, 132 ; U.S.-Japan, 5 , 25, 28, 37,54 Republicans, 14 ; on NAFTA , 4 7 - 4 8 , 53 Resources: American, 39 ; Japanese, 161 Retailing law, Japanese, 24 5 Rice: farming , 203 ; high cos t of, 30 ; opening of market , 2 2 7 - 2 8 ; prohi bitions o n import s t o Japan, 196 ; trade, 20 1 Roosevelt, Frankli n Delano , 225-2 6 Samuelson, Pau l A., 5, 15 , 21, 3 3 - 4 1 , 45, 63 , 6 6 - 7 3, 76 , 94-100,106 , 120-26,129,131,144,153-56, 160,167,183-87,282 Sanwa Bank , 5 Sato, Ryuzo, 5-6, 2 3 - 3 3 , 35 , 97, 283 Savings: by Japanese, 39 , 186 ; inadequate i n U.S., 7 Schiff, Michael , 16 7 Schlesinger, Arthur , 9

Schumpeter, Josef, 39, 9 8 - 9 9, 161 , 186 Seki, Ambassador, 45 , 60-66, 28 3 Self-regulation, deman d for , 15 8 Semiconductors, 84 , 258; 198 6 agreement, 85-87 , 252; competi tion in , 8 3 - 9 3 ; expansio n o f im ports fro m Japan , 14 ; IBM/Toshiba/Siemens alliance , 92; shares i n market, 83-84 , 86-87 , 91,122 ; U.S. government polic y on , 92 ; U.S. production of , 87-88 . See also Managed trad e Singapore, 69 , 19 8 Socialists, Japanese, 14 5 Slump, Japanese domestic , 15 5 Soros, George, 116 , 158 , 25 0 South America , 134 , 25 8 Southeast Asia , 134 , 159 , 163 , 206 Soviet Union, the former, 75 , 13 4 Spain, 4 1, 70, 154-55,18 7 Stimuli: economic, 30, 153 ; fiscal, 150; monetar y an d fiscal, 7 0 Stock market , 116 ; American, 183 ; Japanese, 108 , 115 ; future trend s in U.S., 108,110,11 2 Structural Impedimen t Initiative s (SII), 60 Subrahmanyam, Marti , 193 , 1 9 9 200, 2 0 6 - 7, 213, 218, 225, 229, 232, 2 7 2 - 7 3, 284 Summit: G-7 , 269-70; Tokyo , 6 1; Washington, 10 , 15,121-22 , 2 5 5 56 Super 301 , 245, 265, 270-7 1 Supplier relationship , 16 . See also Keiretsu Surplus: bilateral , 184 ; consumer , 163; Japanese, 17 , 37, 249, 253; multilateral, 183 ; net capital, 38 ; targeting of , 18 ; U.S. trade wit h Mexico, 6 8 Synar, Mike, 4 5 - 5 4, 28 4

295

INDEX Taichi, Sakaiya, 2 0 - 2 3 Taiwan, 69 ; fal l o f stoc k marke t in , 197 Takeshita, Prim e Minister, 2 7 Targets, 247: on imports , 1 3 - 1 5 ; macro o r micro , 256-57; numeri cal, 13 , 6 2 - 6 3, 123 , 252, 260; o n trade, 18 ; surplus reduction , 1 6 18 Tariffs, 32 , 95, 195 , 252; eliminatio n of, 61 ; unilateral contro l of , 5 2 Technology, U.S . race for, 9 3 Texas Instruments, 87, 9 0 - 9 1 Thailand, 179 , 20 3 Tobin, Prof . James, 2 0 7 - 1 3, 226, 229-30,235-36,247-54,266, 269-70,284 Tokyo equities , 18 3 Tokyo Stoc k Exchange , 19 7 Toshiba, 75, 9 1 Toyota, 214 , 234; investment i n Ken tucky, 169-7 0 Toyota Moto r Manufacturin g Co. , 167-76 Toyota Productio n Syste m (TPS) , 170-72 Trade: balance, 94-96, 110 , 132-33 , 209, 230 ; barriers , 252; bilateral , 251—52; disputes, 15 ; deficit, 65, 94, 105 , 114 , 213, 257, 263, 265; dispute procedures , 16 ; Expansio n Act of 1992 , 175 ; foreign, 10 ; framework agreement , 247—48; free, 11 , 15, 39, 4 7 - 4 8, 6 1, 66; fric tion, 84 ; global, 6 1; imbalances, 115, 203, 206, 247, 254, 257-59 , 261, 267 ; international, 15 , 45, 163; Japan, 248 ; managed, 13-15 , 62, 70 ; multilateral , 251 ; negotiations an d agreements , 4 3 - 7 2, 117 , 255; policy , 10 , 204, 213; officia l restraints of , 252 ; relations, 62 ,

296

194; retaliation , 245 ; rules-based , 15; quotas , 265; sanctions, 122 , 256, 2 7 0 - 7 1 ; surplus , 29, 33, 94, 114, 151 , 160, 247, 256, 259, 263; tariffs on , 265; war, 5 1 , 249-50, 256, 262 ; world, 6 3 Trade agreements , 45, 49; fear of , 47 . See also GATT ; NAFT A Tsukamoto, Hiroshi , 19-23 , 35 , 285 U.N. Security Council , Japanese inclu sion in , 221, 224 U.S. See United State s U.S.-Japan competition , 267-68; rela tions, 194 , 222; cultural barriers , 272; viewpoin t o f economist s on , 262—63; financial-economic trends , 191-273; friction s i n trade an d in vestment, 2 0 4 - 5, 223-24; futur e direction of , 24 , 261; industrial competition, 222 ; macroeconomi c policy, 266; military policy , 221, 266—67; need fo r continuatio n o f trade talks , 260; trade, 215, 2 5 561 Unemployment, 69 , 154-56 , 208 ; in Japan, 208 ; in United States , 211, 225-26 United Kingdom , 168 . See also Grea t Britain; Englan d United States , 5-9, 16 , 25-26, 47 , 5 2 - 5 3 , 61 , 66, 69 , 82, 8 6 - 8 7 , 1 0 3 , 131-33, 141 , 147, 157 , 161 , 163, 170-71, 180-81 , 197,199 , 201, 203-4, 208 , 222, 233, 2 5 2 - 5 3; absence of fiscal stimulus in , 250; bilateral payments deficit , 95-96 , 270; change s in, 20; depresse d world econom y ba d for , 209 ; dia logue with Japan, 264—68 ; domestic policy, 265; domestic savings , 62; economi c stagnatio n in , 2 1 1-

INDEX 12; economi c statu s of , 47 ; econ omy, 205, 215, 2 2 8 - 3 1, 233 , 2 6 263; electronic s firms , 90 ; exports , 263; financial equit y markets , 139 ; firms, 2 2 2 - 2 3 ; growt h i n GDP , 156; futur e o f industr y in , 83; health car e issues, 193 ; increase i n productivity, 263 ; new administra tion, 3 - 4 1; savings/investment im balance with Japan, 206 ; strategi c trade policy, 267; target fo r deb t reduction, 260 ; technological elite , 231; view s on foreig n trade , 2 6 2 65 Uruguay Round . See GAT T Values, American an d Japanese, 24— 26 Volcker, Paul , 15 5 Voluntary Expor t Restraint s (VERs) , 14 Voluntary Impor t Restraint s (VIRs) , 14

Wealth: accumulatio n of , 22 , 146 ; inequality of , 21 3 Welfare: economic , 185 ; global, 2 1 Western Europe , 20 8 World economi c community, 2 0 5 - 6 , 208,208-9,219,251 World trade , 64 ; macroeconomic pol icy, 25 3 World Wa r II , 9, 25, 154 ; Japanese economy since , 201; U.S.-led eco nomic syste m after , 2 9 Yen, the, 158 ; appreciation of , 22 , 38, 145 , 250; expensive, 159 ; level of, 146 ; pressure t o elevate, 195 ; rise of, 29 , 149 ; strengthening of , 28, 30 , 255; volatility of , 15 1 Yoda, Masahiro, 213-18, 2 2 7 - 2 8 , 233-34,255-61,271,285 Zeckhauser, Richard , 218-24, 2 2 8 31,236-40,262-71,286

297