77. Memorandum of Conversation1


  • Japan
    • Mikio Mizuta, Minister of Finance
    • Takashi Hosomi, Vice Minister for International Finance
    • Kanzo Tanigawa, Director General, Customs Bureau
    • Koichi Inamura, Director General, International Finance Bureau
    • Toyoo Gyoten, Special Assistant to Vice Minister of Finance for International Finance Bureau
    • Michio Kondo, Counselor (Financial), Embassy of Japan
  • United States
    • Secretary of the Treasury John Connally
    • Under Secretary for Monetary Affairs Paul Volcker
    • Assistant Secretary John Petty
    • Deputy Assistant Secretary William Cates

The Secretary began by stressing that although exchange rate changes will have to be worked out on a multilateral basis, it is imperative that substantial changes be made. Another point he wished to emphasize was that the textile matter, which had not received much [Page 189]attention during the EconCom meeting, was of the utmost importance.2 The U.S. Government all the way up to the President is seriously concerned about the textile issue. Minister Mizuta asked if textiles would be discussed at the Rogers-Fukuda lunch.3 Secretary Connally replied he did not know and that the last he heard was that it would not be but he believed that, diplomatic niceties aside, if problems exist between our two countries, they should be fully and frankly discussed.

Secretary Connally suggested the smart thing for the U.S. and Japan to do would be to get off in a corner and agree on a trade arrangement between themselves and invite in other countries, including LDCs. Japan and the U.S. should trade for each other and not in competition. Minister Mizuta replied that in the long future he felt that Japan, the U.S., Canada, and Australia might well get together on the Pacific Basin concept. Secretary Connally pointed out that Europe was forming a trading bloc against the U.S. and Japan. These two countries should protect themselves. However, he posed one condition: that the U.S. get a head start of six months because otherwise we would never catch up with Japan. Mr. Volcker doubted that six months would suffice.

Minister Mizuta said that when Ambassador Meyer visited him two weeks ago he had told the Ambassador that this was his third stint at being Japan’s Finance Minister. The first two times Japan was in balance of payment difficulties and the U.S. was very helpful. He is grateful for that help and is the only Japanese Finance Minister who has had that experience. Now he is aware that the U.S. is in difficulty and he is willing to cooperate in turn. The argument he raised yesterday over fundamental disequilibrium was perhaps misunderstood. He meant to say that the Japanese performance in the first two quarters of 1971 has been extraordinary due to cyclical conditions. Discounting this extraordinary performance and adding the yen float and the surcharge, he thinks that the Japanese surplus would be even smaller than the normal surplus Japan should expect.

Secretary Connally replied that Minister Mizuta has had more than his fair share of bad luck in being Finance Minister three different times—once is plenty.

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Secretary Connally wished to emphasize that regardless of U.S. attitudes in the past the time has come when we must seek correction for our balance of payments difficulties. While we understand Japanese political difficulties and the problems of the party and personalities governing Japan, we hope that Japan and other countries will recognize our problem and will help us now as we helped in the past. It is only fair to say, Secretary Connally went on, without in any way meaning to be threatening, once the President understood the problem and made his decision other countries would be very mistaken to assume that we are not determined to solve our problem. We have seen the U.S. trade account deteriorate steadily from 1964 to 1971. This has been a strong and lasting trend and is a serious warning to the U.S. Secretary Connally added that he, and in his opinion the President, are convinced that we cannot solve this problem with monetary or fiscal policy or exchange rate changes alone. Trade barriers including tariffs, internal taxes, non-tariff barriers, export subsidies, etc. of other nations were tolerated in the past by the U.S. because our position was so strong that we could afford to be tolerant. Now it is time for an appraisal of tariff and non-tariff barriers all around the world.

The Secretary said that he was not singling out Japan, but cited Japanese forecasts of a $12 billion trade surplus in 1975. There are other countries with whom we have similar difficulties—in particular Canada, whose automobile industry we helped set up and which now provides incentives for the Michelin Tire Company to come to Canada to make tires for the U.S. market. The Canadians are going to have to help us too.

The Secretary added that we are aware that thus far there is some question in the minds of governments around the world as to whether the U.S. is really serious in its determination to solve its balance of payments problem. There should be no question. The President is very concerned and completely determined to solve the problem. If other nations do not come to realize this, there will be great difficulties for all of us.

Minister Mizuta replied that, as Fukuda had said yesterday, we are fully aware of the implication behind the President’s new economic policy and we are also aware that internal measures—fiscal and monetary—are not enough to solve the U.S. problem. The Japanese are ready to cooperate, but Minister Mizuta is not confident that the current favorable balance of payments for Japan will last another three years. He pointed out that Japan has historically had a balance of payments deficit and that the capital structure and income levels in Japan remain low. If the yen were as strong as others think, the announcement of the President’s new policy would not have had such an unsettling effect in Japan. The stock market decline and general concern indicate that Japan is indeed vulnerable.

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Minister Mizuta, however, added that he is pleased to be Finance Minister this time around because for the first time he is able freely to spend money in an effort to stimulate the Japanese economy. Minister Mizuta reiterated that Japan was willing to share the burden in an international cooperation effort but re-emphasized that he is not optimistic about Japan’s balance of payments.

Secretary Connally said that the problems between the U.S. and Japan could be divisible into three areas: one, the cost of defense; two, trade restrictions; and three, exchange rates. The first two of these are best handled by bilateral negotiations between our two countries, while the third should be worked out in a multilateral context. Secretary Connally added, however, that Minister Mizuta could be very helpful in the latter area by making it clear to other countries that the U.S. problem is serious and that we are determined to solve it. No other Finance Ministers have had the opportunity for such a thorough exposure to the U.S. position as had occurred during this Ministerial meeting. Finally, the Secretary asked the Japanese Government to do some thinking about where we go from here. He pointed out that Common Market developments would change world trading patterns and that we and the Japanese should do some thinking about these developments.

In summary, Secretary Connally said that the U.S. and Japan should set about now to reconcile their first two problems (defense and trade barriers) in a bilateral framework, while the third (exchange rates) should be dealt with in a multilateral context in a different time frame.

Minister Mizuta said that his impression of the recent G-10 Deputies meeting was that the EC is not in much of a hurry to settle things. While the Minister is prepared to speak out for international cooperation, he hoped that the present uncertainty could be removed as soon as possible. What would be the American position at the G-10 Ministers meeting regarding the surcharge, the price of gold, a de facto devaluation?

Secretary Connally replied that although he would be talking to the President he did not expect to have a proposal for the G-10 meeting.4 The U.S. is reluctant to table any proposal, for one good reason that other nations always complain that we are telling them how to run their business. Other countries kept saying that the U.S. should do something. Now we have done what we could to solve our problem and it is up to the others to cooperate. If we were to make any proposal, within 24 hours every nation in the world would denounce it and us.

Minister Mizuta pointed out that each country has its own domestic political problems and that while the U.S. is asking others to cooperate, [Page 192]from the point of view of other countries, it is important for the U.S. to pave the way. If a general realignment of currency parities is made in such a way that one country’s parity remains unchanged while all others must change, this makes political decisions very difficult for the others. Therefore, all countries’ parities should change. This is a contribution which the Secretary could make at the G-10 meeting.

Secretary Connally replied that realignment of exchange rates is actually only the second priority. Trade restrictions, tariffs, non-tariff barriers which discriminate against American products are the first priority. The yen-dollar parity has nothing to do with the freedom of an American to own 100 percent of a company in Japan nor with the freedom to export to Japan. The Secretary added that he was in no hurry to fix exchange rates until the basic problem was solved because any country could change its exchange rate—against the dollar—three weeks later.

Minister Mizuta said that his reference to realignment as the first priority was based on Secretary Rogers’ opening statement at the EconCom 8. Secretary Connally replied that one should not believe what one reads in the public press.

Minister Mizuta said that he understood the U.S. argument about the removal of trade barriers but nevertheless realignment would also be important. Other countries in his opinion were seriously considering this. Secretary Connally reiterated that we do not want to tell other countries what to do. He mentioned the question of grants vs. loans and said that he could tell the Japanese that they should make more of their aid in the form of grants but he wasn’t so sure the Japanese weren’t right and that the U.S. shouldn’t tie its own aid. But in any case although the Secretary could dictate a solution to the balance of payments problems of Japan, Korea, Canada, and every other country, the result would be a world uproar. It is, therefore, up to the other countries to come forward with ideas to solve the problem. In the meantime, the dollar, the yen, and the DM are all floating so we can live for a while until every nation has a chance to evaluate its own position. We are not going to push for anything at the upcoming

G-10 meeting. Minister Mizuta replied that though the Secretary had said that the U.S. economy is sick, the sick man is still very strong. He could prescribe the cure but he doubted the sick man would accept the prescription (laughter). Secretary Connally replied that the Minister was right. We probably wouldn’t accept it: Japanese prescriptions have usually been in terms of what is good for Japan and we need something that will be good for the U.S.

Minister Mizuta thanked Secretary Connally for the Secretary’s excellent explanation of the U.S. position and promised that in international meetings Japan would participate in a spirit of cooperation with the U.S. He looks forward to further exchanges like this.

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Secretary Connally agreed that the present was a very good opportunity for himself and the Minister and their staffs to see more of one another. With the growth in power of Russia, China, and the EC, the Secretary expects that the U.S. and Japan will inevitably be pushed closer together.

William C. Cates
  1. Source: Washington National Records Center, Department of the Treasury, Secretary’s Memos: FRC 56 74 17, Memcons 1971. Confidential. Drafted by Cates on September 13 and approved by Volcker. Copies were sent to Volcker, Petty, Willis, Schmidt, Dale, Meissner, and the Executive Secretary. The conversation was held in Secretary Connally’s Dining Room.
  2. In a September 10 briefing memorandum to President Nixon regarding his 7:30 p.m. meeting with Foreign Minister Fukuda just before a dinner for participants in the ECONCOM meeting, Kissinger suggested that the President “express regret that the ECONCOM did not achieve more substantial results.” Kissinger then mentioned two items of “overriding importance”: substantial revaluation of the yen and Japanese import liberalization. He also suggested the President make clear to Fukuda that there must be agreement on textiles no later than October 15. (National Archives, Nixon Presidential Materials, NSC Files, Country Files—Far East, Box 536, Japan Volume V 7/71-9/71) No record of the President’s conversation with Foreign Minister Fukuda was found. Regarding the ECONCOM meeting, see footnote 3, Document 75.
  3. Secretary Rogers hosted a luncheon for Foreign Minister Fukuda on September 10 beginning at 12:45 p.m. (Personal Papers of William P. Rogers, Appointment Books)
  4. The G-10 met in London September 15-16; see Document 78.