97. Memorandum From Secretary of the Treasury Shultz to President Nixon1
- Economic Aspects of this Month’s Negotiations with the Japanese
The effort to achieve a short-term trade and financial package with the Japanese prior to your Hawaii trip is useful and desirable from several standpoints. At the same time, there is a clear danger that, carried too enthusiastically in certain directions for the sake of the appearance of a harmonious “big package,” our basic continuing economic problem could be aggravated. I find some possibilities under consideration that would be potentially counterproductive by giving a false sense of progress, make it more difficult for the Japanese Government to build the support at home for more fundamental, needed action in the future, and possibly prejudice negotiations in other directions.
These dangers can be avoided if we do not fall into the trap of appearing to enthusiastically accept essentially “window dressing” transactions as a substitute for the hard and continuing effort to produce a lasting equilibrium in Japanese (and, thus, U.S.) payments. All efforts should be made to increase the imports from the United States, and to reduce the trade imbalances. However, prepayment should not be an objective.
Such payments are of little or no help to us in the short-run, since Japan has no alternative at present to holding dollars in any case. To the extent they relieve pressure for other measures to actually increase imports into Japan, they could be counterproductive to our longer-term efforts.
In the strictly financial area, the Japanese have apparently proffered long-term low interest rate loans in yen. These should certainly be rejected for they dig us in a deeper hole and are a bad precedent. Long-term dollar investments are a matter of relative indifference to us, and should not be accepted as a Japanese concession (although we are willing to talk about it when convenient to them).
Finally, the Japanese are interested in a statement from the highest levels of the U.S. Government that they can use to help sanctify the present yen-dollar exchange rate. Their pressure poses a problem. On the one hand, realistically, a change in the yen exchange rate may soon be necessary [Page 251] to achieve balance. On the other hand, in avoiding placing your prestige on the line with respect to the present yen rate, we do not want to give the opposite impression we look to a break-up of the Smithsonian Agreement. Thus, a formula of words must be found that, while supporting the Smithsonian Agreement in general as a useful interim step, avoids a commitment to the specific yen-dollar parity in the future.