Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

17. Memorandum From the Director of the Office of Industrial Nations, Department of the Treasury (Widman) to Secretary of the Treasury Kennedy ¹

Washington, April 3, 1969.

SUBJECT

• Briefing for your Meeting with Minister Fukuda in Sydney
• Date and Time: Thursday, April 11, 1969, about noon
• Persons Expected to Attend:
• Japan:
• Takeo Fukuda, Minister of Finance
• Yusuke Kashiwagi, Vice Minister of Finance for International Affairs
• United States:
• Secretary Kennedy
• Assistant Secretary Petty
• Ralph Hirschtritt

I. Background

Your meeting with Minister Fukuda should take place against the background of increasing dissatisfaction with the current status of the U.S.-Japanese partnership arrangement. Japan is demanding the reversion of Okinawa and we in Treasury at least are becoming increasingly concerned with the trade and financial relationships. We had a bilateral balance of payments deficit with Japan last year of more than a billion dollars—including $1.1 billion on trade. The best forecasts that our people can produce show this trade deficit likely to rise to a range of $3 to $3-1/2 billion within five years. Our gross military expenditures in Japan are approaching $600 million and the Japanese spent less than $100 million here. I do not think the American people will tolerate the development of a trade deficit such as now appears to be in the cards nor do I see how the U.S. can approach balance of payments equilibrium with such a deficit with Japan.

The NSC mechanism is currently considering U.S. policy toward Japan. We in Treasury have not been satisfied with the paper which is before the Review Group.² There are attached at Tab A: (a) a talking paper prepared for Treasury spokesmen at the Review Group³ and (b) a copy of a Treasury comment for dissent attached to the document.

Your conversation should also be against the background of the strong position taken by Secretary Fowler in meetings with Japanese Minister Mizuta last year. (See Tab B)⁴ We insisted on balance of payments cooperation arrangements in 1968 which were negotiated by Mr. Petty under the direction of a Treasury-State-Defense steering group. These negotiations produced a package with a nominal value approaching $500 million although much of it was little more than window dressing. (See Tab B also.)

Minister Fukuda will probably not initiate any discussions on this subject but he will be alert to clues as to your attitude toward offset agreements.

Japan’s great economic and financial strength is new and the Japanese themselves are not yet accustomed to it. They consistently underestimate their strength. They may even express some worries about their balance of payments position this year, arguing that the expected slowdown in the U.S. will cause a very drastic reduction in their exports. The thinking of Japanese leaders still tends to be very parochial and self-centered. Their concern is with appeasing their political opposition in Japan and neither the government itself nor the Japanese Diet has an adequate appreciation for the influence of economic developments in Japan on the rest of the world. They want to be treated by the U.S. as an equal partner but also to continue to receive the special benefits that a guardian might bestow upon his ward. Anything which appears on the horizon as a possible threat to the Japanese commercial or financial position is likely to bring a highly emotional reaction. Consequently, it is difficult to get the Japanese to assume responsibilities and costs commensurate with their current and prospective economic strength.

II. What Minister Fukuda will Want

We might expect Minister Fukuda to ask the following:

a. Early Congressional action on ADB special funds—Tab C⁵

b. A comprehensive report on U.S. discussions with other industrial countries on the various issues involved in improving the international monetary system—SDR’s, greater flexibility in exchange rates, realignment of rates, and treatment of South African gold. For political reasons Fukuda must be able to say that Japan is intimately involved in all of these discussions—Tab D

c. U.S. support for an increase in Japan’s IMF quota—Tab E

d. A reassurance that the U.S. will not increase the price of gold.

e. A substantial purchase of gold from the U.S. in the near future—Tab F

f. Assurances that the U.S. will see to it that Japan gets the right to purchase new gold production for monetary reserves if European central banks are allowed to do so—Tab F

g. A continuation of Japan’s IET exemption—Tab G

h. That the U.S. forego restrictions on trade, the imposition of any border tax and make no arrangements to restrain exports of textiles to the U.S.—Tab H

Recommended positions on these questions may be found at the tabs indicated.

III. Areas in which you might wish to take an Initiative

a. Japanese ratification of SDR and support for early activation in a substantial amount—Tab I

b. Japanese leadership in support of the ADB—Tab C

c. Balance of payments cooperation (actions to offset U.S. military expenditures in Japan)—Tab J

d. Increased Japanese efforts toward trade liberalization—Tab H⁶

IV. General Comments

You probably will also wish to chat with Minister Fukuda about the forthcoming meeting of the U.S.-Japan Cabinet Committee on Trade and Economic Affairs. We do not as yet have any information on a specific date although the meeting is expected to take place in Japan in July.

Many of the foregoing issues can only be touched upon in your meeting with Minister Fukuda. Mr. Petty hopes to arrange a meeting with Vice Minister Kashiwagi which could go into more detail and cover points omitted.

Tab A⁷

Washington, March 24, 1969.

TREASURY COMMENT NSSM ON JAPAN

The Treasury believes that this paper does not give adequate attention to the relative sharing of costs and benefits of the U.S.-Japanese partnership and incorrectly assesses the trends as “increasingly valuable” to the United States. It is the Treasury view that Japan is not carrying an equitable share of the financial burden of the partnership, either budgetary or balance of payments. Furthermore, the inequity appears to be growing rather than diminishing. Unless we are able to reverse this trend and demonstrate that Japan is moving promptly and steadily to assume a greater share of these financial responsibilities, we must expect Congressional and public pressures for trade restrictions and the growth of anti-Japanese sentiment within the United States. The ability to reach an accommodation with Japan on the burden sharing question may be crucial to the continuation of the present partnership.

The scheduled meeting between President Nixon and Prime Minister Sato provides an opportunity for substantial progress in bringing about an equitable sharing of costs and benefits.⁸ We believe that the United States should not underestimate what Japan is willing to pay for the reversion of Okinawa. We believe, furthermore, that U.S. balance of payments and trade goals should be given a high priority in the quid pro quos we should seek for concessions on Okinawa.

The Treasury feels that NSSM-5 does not focus sharply enough on the question of priorities among U.S. goals and that to the extent that it does touch on this question insufficient weight is given to the need for large-scale contributions by Japan toward equilibrium in the U.S. balance of payments. Loss of world confidence in the dollar would be a disastrous blow to the security of the free world as well as to the world’s economic health and progress and the prestige of the United States. Preservation of confidence in the dollar requiring the elimination of our balance of payments deficit should be considered in that context, along with the level of forces in Japan or nuclear storage rights in Okinawa or Japanese aid for other countries in Asia. Throughout the paper there is a tendency to assume that the balance of payments problems will be solved “in a global context” making it unnecessary to look to bilateral actions by Japan as a major contribution to this problem. While the Treasury agrees that a multilateral agreement of some type may be necessary before the U.S. restores a sustainable payments equilibrium, we remain convinced that Japan, along with Germany and other major surplus countries, must bear a very substantial part of the required payments adjustment and that bilateral actions, particularly involving the military accounts, will be necessary.

For two years the U.S. has had overall bilateral payments deficits with Japan of almost $1 billion annually. With no other country have we had deficits which even approach this magnitude. The major deficit elements are our military expenditures, now approaching $600 million annually, and a trade deficit which reached $1.1 billion in 1968. Our latest projections indicate that unless special action is taken, our trade deficit with Japan may climb to $3 billion or more in five years. We cannot tolerate such a development-either politically or in terms of maintaining dollar confidence. We cannot rely on the “hope” (as this document recommends) that the Japanese will assume their fair share of the costs, but should make clear to them at the highest level that a major redistribution is necessary if the partnership is to remain viable. We should, furthermore, assign high priority to this objective in our negotiations with Japan on specific issues.

1. Source: Washington National Records Center, Department of the Treasury, Secretary’s Memos/Correspondence: FRC 56 74 7, Memoranda to the Secretary, March-April, 1969. Secret. Sent through Petty and Volcker. Copies were sent to Volcker, Colman, Jurich, Hirschtritt, and Cross.
2. Reference is to NSSM 5; see Document 20.
3. Not printed.
4. Not printed. See Foreign Relations, 1964–1968, vol. VIII, Document 179.
5. Tabs C-J are not printed.
6. Under Secretary Volcker added point d by hand.
7. Confidential.
8. In the opening days of the Nixon administration, arrangements were agreed in principle for Prime Minister Sato to pay a State visit to Washington in November at dates to be agreed on.