Changing U.S.-Japan Economic Relationships and International Payments Imbalances
Yoshitomi, Masaru, Business Economics
The economic relations between Japan and the U.S. have changed subtantially. Japan is now the world's largest creditor nation, while the U.S. is the largest debtor. The U.S. still has the largest GNP in the world, with Japan second, but Japan's technological and financial power has increased enormously. After a brief review of the international dollar problem of the 1980s, the author discusses international management of the dollar. This management is difficult because of persistent U.S. budget deficits. Japan is faced with the conflicting problems of stimulating its domestic demand and reducing its external surplus. The best policy for Japan's domestic economy may not fit well with its international responsibilities. The U.S. should practice macroeconomic discipline and not leave the responsibility to others.
IN THE 1980s U.S.-Japan economic relationships have turned 180 degrees in global financial markets. Because the bulk of the huge increment in the U.S. current account deficit fell into Japan's external surplus and in turn Japan's extra savings financed a large part of the U.S. deficit, this new interdependence between external imbalances of the two economies has created hitherto-unknown sensitivities in economic relationships.
Financially, Japan has suddenly become the largest creditor nation in dollar terms, thanks to the rapid accumulation of large current account surpluses of the past several years; just and opposite has occurred for the key currency country, the United States. Changes in monetary policies and interest rates in Japan now strongly influences sentiments on Wall Street regarding American interest rates. stock prices, and the value of the dollar. This development reflects the fact that Japanese savings finance the bulk of the U.S. domestic budget and external deficits.
Such international finance by Japan takes the form not only of portfolio investment (bonds and stocks) but also of direct investment in factories and real estate. The latter form of overseas investment exports the Japanese style of management and technology as well as Japan's high price of land. Because these capital outflows are the counterpart of the current account surplus, the external imbalances tend to heat up trade conflicts between the two countries. The conflicts have arisen because of the alleged closed nature of Japanese markets and the strengthening of U.S. protectionism. It is ironic that the U.S. Trade Bill passed the Congress and was signed by President Reagan in August 1988, when the volume of U.S. exports had already risen by 20 percent per year during the past year or so. Retaliation by other countries to the actual applications of protectionist clauses in the Bill would be the worst impedement to such an export boom by the U.S.
International economic corporation or coordination has become ever more complex because of the historically unprecedented combination of the stunning rise of Japan's technological and financial power with the relative decline of the American economy, an economy, however, that still has the highest. GNP in the world and has the dominant currency as well.
This unique combination imposes an extremely difficult task in international coordination with respect to who initiates what leadership in which fields and who should exercise sanctions how in order to impose what disciplines on domestic economic management of the major countries, including the U.S. In the past, the key currency country was in a position to take the leadership and exercise sanctions, on the basis of its own disciplined domestic economic management and hence its own position as a stable, pivotal anchor in international financial markets.
Today, I cannot cover all the important issues just briefly touched above but I shall concentrate on a few basic issues. They will be: (1) the international management of the dollar problem in the 1980s; and (2) Japan's global responsibilities in the unique combination of the technological and financial rise of Japan and the relative decline of the U. …