109. Telegram From the Department of State to the Embassy in Japan1
91702. For Ambassador.
Please deliver immediately following letter to Sato from President, underscoring its personal and confidential nature and need to keep fact and content of letter private. If unable to deliver personally, make sure Sato sees message before President’s announcement 11:00 a.m. Washington time, January 1. Septel contains details of balance of payments program and announcement.
“December 31, 1967
Dear Mr. Prime Minister:
At the close of 1967 we take satisfaction in the many constructive accomplishments we have achieved together. I greatly value our talks in November and the steps we then took to strengthen our partnership to work together for an enduring peace and human betterment in Asia. I think we can take pride in the arrangements for the return to Japan of the Bonin Islands, and in the fundamental understanding on the future of the Ryukyu Islands. We can also be proud of our achievements in the Kennedy Round, and in the emergence of the Asian Development Bank as an active institution with the prospect of additional special funds.[Page 252]
The speculative fever of these weeks has severely tested our methods of cooperating on economic problems; but, we have continued to work together effectively in a financial world suddenly beset by fear and disorder. We have, thus far, met and repelled a serious threat to the foundations of the international monetary systems, which, in turn, could also undo the accomplishments of the Kennedy Round and the unity of the system of international commerce.
Meanwhile, the agreements at London and Rio on a plan to supplement existing reserve assets are a further reason for solid satisfaction, as we look to the longer future.
In these achievements Minister Mizuta and Governor Usami of the Bank of Japan have played important and, indeed, vital roles. I know that they have contributed much to the recent efforts to preserve order in the gold and foreign exchange markets. I am reassured by our mutual determination to exert a constructive force in the world financial system. This, I know, reflects a clear common understanding of the importance of international monetary cooperation in creating that environment of safety and opportunity which is required for the continued growth and stability of our nations’ economies.
During our talks in Washington in November, I shared with you our concerns with the balance of payments position of the United States. Your most helpful and constructive response of offering to undertake actions resulting in a $300 million improvement in these accounts and to consider seriously further steps was most gratifying to me personally. It was particularly appreciated in view of the deficit Japan is facing in its own balance of payment position during 1967 and of the burden Japan is sharing for assisting the developing countries of Asia particularly.
Nevertheless, despite these and other helpful actions by our partners, our concern about the balance of payments position of the United States has been increased by events of recent weeks. As a result, I am announcing, on January 1, 1968, a new and vastly strengthened program to reduce our deficit and strengthen the international monetary system.
In the program, I will press for the tax increase to restrain excessive demand in the United States and to reduce our budget deficit to manageable proportions. I hope that this bill will soon become law. This, in itself, should be a helpful factor in our balance of payments and should demonstrate to the world that we will keep our own economic house in order. And the Federal Reserve has already made clear its determination to use monetary policy to this end.
But much more needs to be done; and we propose to do much more. Our balance of payments actions are designed to improve both our current and our capital accounts.[Page 253]
These actions will be painful to the United States and, to some degree, to our international partners. They are designed to avoid as far as possible adverse effects on the developing areas of the world. We hope they will result more in the reduction of surpluses than in the shift or increase of deficits. And we have kept very much in mind the views of other countries and the international economic institutions.
In this effort we wish to proceed within the spirit and the letter of the recent Resolution of OECD the Ministerial Council that the adjustment of the American deficit and the European surplus is a matter of common concern, to be handled cooperatively. Surpluses in international payments are the mirror image of deficits. Thus, both surplus and deficit countries must strive to reach balance and act cooperatively to this end. This is no less true in the 1960’s than it was in the late 1940’s and 50’s. when we carried the responsibilities of a surplus nation. This concept was definitively developed by our best economic and financial experts in a carefully prepared OECD Report on “The Adjustment Process” in August 1966.2
Our deficits have been the net result of a current account surplus, including a trade surplus, inadequate to support foreign exchange costs of our external capital flows, foreign aid programs, and military expenditures for the common defense. During the period of the “dollar gap,” these deficits helped redistribute the world’s monetary reserves—the time has come, we all agree, to bring them to an end.
As we see the problem, we need to act to improve our current account, reduce capital outflows, and neutralize more fully our net foreign exchange expenditures in the common defense. Our new program is designed to move us strongly towards equilibrium. But full success will require the understanding and cooperation of our partners. It seems axiomatic to us, and basic to our view of the OECD Resolution, that those in strong reserve positions, or in surplus, should avoid actions that increase surpluses, should not take offsetting action to preserve their surpluses—indeed, that it will be necessary for them to take positive action to move toward balance. Otherwise, the only result will be to shift the adjustment burden to those who can least bear it or to make it more difficult for us to achieve balance. In our judgment—and, I believe, in your judgment—it is important for the United States to move decisively toward balance with the least possible dislocation to the world’s system of trade and finance. Our mutual security and collective well-being, which rest upon the continuing strength and unity of the international economic system, are at stake. It is in this sense [Page 254] that I hope that you and your Government will appraise our new and strengthened program. I have asked Ambassador Johnson to call on you to explain our new program more fully. I have also asked Undersecretary Rostow to visit with you in Tokyo next week to review further both this program and the entire scope of our mutual cooperation.
Our two governments are also planning to hold a meeting of the Subcommittee of the Joint Cabinet Committee in late January to consider our respective balance of payments problems. This meeting will afford an opportunity to discuss with you in detail our new program as well as the bilateral actions we have already agreed to during our meeting in November in the light of balance of payments problems faced by both our countries.
I trust you and your key ministers will support this program as you in the past have supported other measures to defend the dollar, thereby helping to preserve confidence in the system we have built so diligently together and in which we have such a great mutual stake.
Lyndon B. Johnson”