Foreign Relations of the United States, 1969-1976, Volume XIX, Part 2, Japan, 1969-1972

87. Minutes of Senior Review Group Meeting¹

Washington, August 6, 1971, 4–5:45 p.m.

SUBJECT

• Japan NSSM 122

PARTICIPATION

• Chairman—Henry A. Kissinger
• • State
  • Mr. U. Alexis Johnson
  • Mr. Marshall Green
  • Mr. Winthrop Brown
  • Mr. Richard Erickson
  • Mr. Philip Trezise
• • Defense
  • Mr. David Packard
  • Mr. Armistead Selden
  • Mr. Dennis Doolin
• • JCS
  • Adm. Thomas H. Moorer
  • Brig. Gen. William C. Burrows
• • CIA
  • Lt. Gen. Robert E. Cushman
  • Mr. Maurice Ernst
• • Treasury
  • Mr. Paul Volcker
• • CEA
  • Mr. Herbert Stein
• • OMB
  • Mr. Kenneth Dam
• • CIEP
  • Mr. Peter Peterson
  • Mr. Deane Hinton
  • Mr. Richard Allen
• • NSC Staff:
  • Col. Richard T. Kennedy
  • Mr. John H. Holdridge
  • Mr. Robert Hormats
  • Mr. Mark Wandler

SUMMARY OF CONCLUSIONS

It was agreed that:

—An early date will be sought for an NSC meeting on the range of issues likely to come up at the Econ Com meeting in September.

—The Working Group should redraft its paper,² answering the specific questions on political and security issues which were raised at the meeting:

—Do we want the Japanese to continue to depend entirely on us, or do we want them to take a more autonomous stance?

—What do we want the Japanese to do and what do we have to do to give reasonable assurance of the results we seek? What do we do if we do not get these results?

—How much of a development and security role should the Japanese play?

—How will the Japanese use their great power status?

—What categories of joint military exercises might we carry out with the Japanese?

—The CIEP should consider the specific economic steps we can and should take, bearing in mind our political and security interests and objectives. It should try to determine if there are any economic issues important enough to override our political and security concerns.

—Both studies should be ready by August 17, when they can be melded together at another SRG meeting and prepared for presentation to the President.

Dr. Kissinger: We have a nice, cozy group here. Who is the New York Times man? I have seen few issues arouse the passions that this one [Japan]³ has.

There are two aspects to the paper. The first is general political orientation we want Japan to follow during the foreseeable future, say during the next three to five years. What importance do we attach to Japan? What do we expect will happen? Second, is a series of economic issues on negotiating strategies and detailed economic policies.

I thought it would be better to start out by discussing the general directions we should follow, first on the political and security issues and then on the economic issues. Then we could ask Pete and his group to work out specific options on negotiating steps and on policies for the economic issues. When this has been done, we can come back here and meld everything together for consideration by the NSC.

I don’t think we should discuss such things as revaluation of the yen at this meeting. Instead we should discuss the economic issues in general terms. We should talk about the price we might be willing to pay on the political and security issues to bring about the situation we want. If everyone is agreeable, I think we should proceed in this way.

Everyone was agreed.

(to Mr. Johnson) Alex, what do you think?

Mr. Johnson: I agree with you. But I want to stress the time element. We have the Econ Com coming up in September, and I think it is desirable and important to have an NSC session on the range of issues likely to come up at Econ Com meeting. We should give the Japanese some indication of the approach we are going to take.

Dr. Kissinger: We can have this NSC meeting the first week in September.

Mr. Johnson: That’s a bit on the late side. The Econ Com is of major importance to both countries. It’s important that we give the Japanese as much time as possible to prepare for it.

Mr. Packard: When is the meeting?

Mr. Johnson: It’s September 9–10. We are preparing for it now. We drafted some position papers and held an inter-agency meeting. Work has been assigned. Of course, many of the issues we discuss today will also surface in the other papers. We need to focus on these issues, and we need to have an NSC meeting in ample time before the Econ Com meeting.

Dr. Kissinger: It is essential that the President not be asked to make individual decisions without a basic strategy. The President is gone for the weekend. Let me check around. Let’s see if we can’t come up by Monday⁴ with a suitable time for the NSC meeting. I think our relationship with Japan is crucial enough for us to make a special effort.

Mr. Johnson: It is very important—and there is such a wide divergence of views.

Dr. Kissinger: Exactly. We could do one of two things. We could move this general discussion into the NSC right away, or we could wait until we have the more detailed papers and options before we go into the NSC. I will talk to the President about this. I think he should hear the general arguments soon so that he can get them fixed in his mind. This is especially important now because of our initiative with China.

We’re going to be asking the Japanese to consider new directions which we have been telling them about in the abstract for several years now. If we let the situation drift, it could have serious consequences. Many countries in Asia will wonder what these new directions mean, and Japan is a test-case for the non-Communist part of Asia. For these reasons, we are concerned about the situation.

Let me turn first to the general political problems. After reading the papers, I had the impression that there is such a fear of the possibility of reconsidering our policies toward Japan that there is great pressure to strengthen the existing relationship. I don’t want to challenge that, but I do want to pose a couple of questions.

First, do we want the Japanese to depend entirely on us, even if we chose Option 1? Or should we also consider what the U.S. policy would be if Japan, over the next five years, takes a more autonomous stance? Do we want Japan to take a more autonomous stance? I am no expert on Japan, but I thought that, with or without China and considering the economic potential of Japan, we should look at whether this will happen anyway. Is this one reality we should plan for? Alex?

Mr. Johnson: In the natural course of events, Japan will take a more autonomous stance. At the same time, Japan will continue to feel dependent on us for the nuclear umbrella and will be anxious to preserve the relationship with us.

Dr. Kissinger: When De Gaulle was in power, he was convinced that he was protected by our nuclear umbrella, and he felt free to pursue his own course. Won’t it be the same thing with the Japanese?

Mr. Johnson: It’s not really the same thing. The Japanese are concerned we may transfer our affections to the Chinese. That’s one reason, in fact, they have reacted the way they did to our China initiative. They have always had this concern.

The Japanese have always said our record with the Chinese was better than theirs. When I was there, they constantly told me their great fear was that we would make a deal with China at their expense. I probed to find out what they meant by “expense,” but they had trouble defining the word.

The Japanese memories of the war are fresh. They know we went to war with them over China. Their memories of the 1924 Exclusion Act, of the freezing of their assets and of other discriminatory measures are still fresh. They recognize the gulf that separates us. There is real concern, perhaps in an irrational way, that we will put them aside in favor of the Chinese.

Dr. Kissinger: How do they think we will do this?

Mr. Johnson: They can’t articulate it very clearly.

Dr. Kissinger: We went through the same thing with the Germans after the war.

Mr. Johnson: That’s right. The Japanese, as you know, founded their post-war policy on a relationship with the United States. I don’t think they can or would turn to Moscow.

Dr. Kissinger: Why not?

Mr. Johnson: Basically because of the historical animosity.

Dr. Kissinger: On the Japanese side?

Mr. Johnson: On both sides. You have to consider such things as the Russo-Japanese War, the Soviet betrayal of Japan and the Kurile Islands. If Japan were to turn to Moscow now, the Soviets would have to give back the Kurile Islands, but they can’t afford to do this because it would open up their eastern frontiers. Another important reason Japan is not likely to turn to Moscow is that the Soviets don’t furnish raw materials or markets for the Japanese.

I don’t see a Japan-China axis developing, either. I do see, however, a neutral Japan—a Japan taking an independent position. If, for example, they lost confidence in our nuclear umbrella, they could renounce the Security Treaty in order to avoid domestic problems. This could be tempting for them.

Mr. Packard: As the Chinese develop their missiles and as we back out of the area, there could be great pressure on Japan to do this.

Mr. Peterson: Why can’t we make a case for Japan to develop her own nuclear capability?

Adm. Moorer: They think this is unnecessary as long as we provide the nuclear umbrella.

Mr. Johnson: That’s right. Japan can be a maverick, and the pendulum can swing wildly from one extreme to the other. We are afraid we might get the Japanese to move too much.

The history of the 1930’s may not repeat itself, but we can draw some lessons from it. The troubles with Japan grew out of economic issues. The extreme militarism and nationalism fed on the strong impulses for lebensraum and markets. It’s possible that extreme nationalism could assert itself once again over real or imagined economic issues.

Mr. Packard: I agree with you, Alex. If we took an extreme position and cut out their markets, we could force them to develop this extreme nationalism.

Mr. Johnson: I don’t want to go into the specific economic issues now. I think the basic issue is whether we discriminate against the Japanese. This could mean that we pick Japan out for different treatment than we give other countries, or it could mean that the Japanese feel we pick them out for different treatment. That is the basic political issue. There are a lot of things we can do on the economic side, however, which will not get us to that point.

The Japanese are an emotional people, not that we are not. The pendulum can swing wildly. The picture of a Japanese officer cutting off the head of a prisoner and then weeping fifteen minutes later at the sight of cherry blossoms is perfectly credible.

When they were isolated, they were very isolated. In 1868 when they decided to modernize, they modernized like nobody ever did before. When they were faced with certain problems in the 1930’s, they handled these problems like nobody ever did before. On August 15, 1945, the pendulum swung back in the other direction. It can swing again.

We do the same thing. In the 1930’s and 40’s we thought of the Japanese as a stupid, little people who made toys that fell apart. During the war, the Japanese were ten feet tall—evil incarnate. After the war, they became polite, little people again. We thought of such things as geishas.

Dr. Kissinger: They didn’t discourage this view, did they?

Mr. Johnson: No, they didn’t. Now, however, they are becoming ten feet tall again. I frankly sense a growing fear here of Japan on the economic side. The Japanese are not ten feet tall, and they are not three feet tall. They are about five or six feet tall—and damned good competitors. I don’t think we have to fear them.

Mr. Packard: We provide a nuclear umbrella for the Japanese. We also did a lot to help them build up their economy. This situation has lasted two and a half decades, but we are on the verge of a new era.

Mr. Johnson: Many Japanese understand the position they are in. They have had a closed economy. If they continue with this, they know that other countries will close their economies to them. The issue is whether they think it is in their interest to open their economy.

Dr. Kissinger: I understand the analogy you were making about the Japanese situation. I want a strategy that will prevent them from making these wild changes. What do we want them to do in order to prevent these fluctuations? If our policy with China is successful, Japan’s relations with China could also get better. Japan hasn’t faced the problem of its political role in the world. Japan is a country of 110 million people and an almost tribal-like society. It’s becoming a dominant economic power. What are the Japanese going to want to do as they become aware of the role they play? What is it we have to do? What do we want them to do?

Mr. Johnson: Option two.

Dr. Kissinger: As I understand it, this option means that we want them to engage in more developmental assistance, but to be less exploitive. It also means that we want them to be more active in the security field and that we want them to grant military assistance for nonlethal items to friendly forces. We do not want them, however, to play the principle role in Southeast Asia. We want them to cooperate with Korea on such things as joint air defense. In sum, you want us to treat Japan as a major power without nuclear weapons. Am I correct?

Mr. Johnson: They should be treated in such a way that they don’t feel compelled to get nuclear weapons.

Dr. Kissinger: What would make them a major power then?

Mr. Johnson: Their economic and political power. Theoretically, they could even have a seat on the Security Council.

Mr. Packard: That’s a unique idea. Maybe we should follow it and be a non-military great power.

Dr. Kissinger: It is a unique idea. At least we would get our low defense budget.

Mr. Packard: We want the Japanese to play a larger role than they have been playing, but at the same time we don’t want them to play too large a role.

Dr. Kissinger: Just for my education, could you tell me how we would structure this for the President? What do we want the President to focus on? Could you also tell me what the Japanese would get out of this? They would continue to get our nuclear protection, right?

Mr. Johnson: Right.

Dr. Kissinger: If they think they are getting this for free, there is no incentive for them to be responsible.

Mr. Packard: When the Chinese missiles are operational, this will sober the Japanese.

Adm. Moorer: They are aware of this now. I called on Sato in January, and the only thing he wanted to talk about was China.

Dr. Kissinger: I know he doesn’t want to talk about textiles.

Mr. Packard: I think we have some leverage with them.

Mr. Johnson: Henry was getting to the heart of the matter a little while ago. We have to decide what we want the Japanese to do.

Mr. Packard: For one thing, they could help in Cambodia.

Dr. Kissinger: If I may be the devil’s advocate for a moment, let me say that as long as they think we are taking certain actions, they will not take these actions. They must be threatened that we will not support Southeast Asia and South Korea. They must be convinced that their own security is involved in the protection of Southeast Asia and Korea.

Once they are convinced of this, though, isn’t it possible they will find themselves in the position we were in. If they feel the freedom of Japan depends on Southeast Asia and if they know the U.S. won’t protect them, won’t they as a last resort feel compelled to send ground forces in? Then it will be a hell of a thing to keep China in line.

Mr. Johnson: It would be at least a generation before they would deploy forces in the area—or before other countries would accept deployment of Japanese forces.

Mr. Peterson: They wouldn’t necessarily have to provide the actual forces. Instead they could pay for the support of allied forces.

Mr. Johnson: I think it would be a long time before they would pay—either directly or indirectly. Nevertheless, this is the direction in which I think we should try to push them.

Dr. Kissinger: If we are to do this, we must convince them that we might withdraw unless they help out and that their help is an essential ingredient in the security of the area. We could also tell them the burden will be shared, if needed.

Mr. Johnson: We can do this first and most effectively in Korea. When I was in Tokyo, I had hoped to educate the Japanese about Korea, and I tried to get their feet wet on providing non-lethal military assistance to the Koreans. For various reasons, however, nothing ever came of this.

Dr. Kissinger: What do you mean by non-lethal assistance?

Mr. Johnson: Such things as boats, trucks and uniforms.

Dr. Kissinger: We define this so easily in the case for Japan. Maybe this definition should apply to Pakistan. As I said earlier, we have to go to the Japanese and convince them their own security is involved in the protection of Southeast Asia if we withdraw.

Mr. Johnson: This is especially true with Taiwan because it is an area of great concern to Peking.

Dr. Kissinger: We must convince the Japanese that regional cooperation is not an abstraction, but that it is essential to their security. If they do not cooperate, they will not be secure because we cannot protect them.

Mr. Johnson: This will be a delicate task for us.

Dr. Kissinger: That’s right. If the word gets to the Southeast Asian countries before it gets to Japan, we will have great problems.

Mr. Johnson: Everyone already sees that we are withdrawing from Vietnam. We have been pushing the Japanese to provide more aid for Southeast Asia. There have been some results, but the program has been marginal so far.

Dr. Kissinger: Can we get an estimate of the role they should play in aiding the countries of Southeast Asia? How much should they contribute? Should it be 50% or 75%?

Mr. Johnson: As a goal, the pattern for Southeast Asia should be the mix we now have in Indonesia, where the U.S., Japan and Europe each contribute a third of the funds for development aid.

Dr. Kissinger: When I was with the President in Asia, we asked the leaders we met which country posed the greatest danger. To our absolute amazement, the majority said: “Japan.” The Indonesian Ambassador recently paid his farewell call on the President, and he said that China was a long-term threat, but that Indonesia was worried about Japan.

Mr. Johnson: The ANZUS Treaty is really directed against Japan, too.

Dr. Kissinger: What incentive is there for Japan to change her policies?

Mr. Johnson: More and more Japanese are beginning to realize that their current policies are counter-productive to their interests. It’s a small number to be sure, but at least some of them realize it.

Mr. Packard: Can’t we get them to do something beyond this?

Dr. Kissinger: I have another question. The basic assumption in the paper is that we should treat Japan as a great power in order to keep her from developing nuclear weapons. What do we think the Japanese will do? How will they use their great power status?

Mr. Brown: First of all, they will improve their own standard of living.

Mr. Johnson: We are faced with a dichotomy. We want the Japanese to do more, yet we are worried they might take over Southeast Asia.

Mr. Trezise: They have really helped with Indonesia. Their aid performance there has not been bad, and I think this is something we can pursue. Japan can move further if we apply pressure.

Dr. Kissinger: What about the security field? This, I presume, was one of the things Secretary Laird talked about on his recent trip to Japan. (to Selden) Were you with him?

Mr. Selden: Yes, I was. The Secretary did talk about this. He stressed the nuclear umbrella and modernization of the self-defense forces.

Dr. Kissinger: If Defense had its own way, what would the security role of Japan be?

Mr. Packard: The first thing would be for them to build up their own defense capabilities. They should be able to fully take over the defense of the country, including air defense.

Dr. Kissinger: What would they need an air defense for? As long as China has missiles, she wouldn’t attack Japan with planes. We don’t want them to have an ABM, do we?

Adm. Moorer: No, but we do want them to have SAMs.

Dr. Kissinger: To defend against what? If China attacks, she will use missiles.

Mr. Packard: In the short term, this might not necessarily be the case. In any case, we also want to retain our ability to operate our bases in Japan and Okinawa. And, of course, we want to see increased Japanese assistance for Korea and Southeast Asia so that we can reduce our load in those countries.

Dr. Kissinger: What magnitude are you talking about? Let’s take nonlethal items as an example.

Mr. Packard: We looked at this last year in relation to Cambodia. If the Japanese could have given $50 million worth of equipment, it would have been a great help.

Dr. Kissinger: Didn’t they contribute?

Mr. Johnson: They did, but only about $4 million—mostly trucks.

Mr. Packard: We also scratched around, if you remember, and tried to get communications equipment. If the Japanese wanted to help in Korea right now, they could provide a lot of things.

Mr. Selden: Don’t forget that they also have to modernize their own forces.

Mr. Packard: That’s true, and it’s related to the first point I raised about increasing their own capabilities.

Dr. Kissinger: This is a laudable objective. What carrots and sticks are available to carry it out?

Mr. Packard: Economic sanctions, for one thing, are available, but they should be used very carefully.

Mr. Johnson: (to Packard) Do you see an indefinite need for bases? Will we need bases through the next decade?

Mr. Packard: The bases will be very essential through the next decade, unless we think there is much less of a threat.

Dr. Kissinger: Do you believe we can continue to provide the nuclear umbrella while we are pulling our forces out of the area?

Mr. Johnson: The Japanese have a terrible dichotomy, too. They value the nuclear umbrella. They understand that our presence, including our presence on Okinawa, is a guarantee. Yet they do not perceive the threat—unlike the Germans or the Koreans. They do not see a threat coming from the Soviet Union—unless there is a nuclear conflict involving the entire world. They do not see for a generation at least a conventional threat coming from China.

Mr. Packard: This is true.

Mr. Johnson: Our military presence there is seen as a favor they are bestowing on us.

Dr. Kissinger: If that is their attitude, we can’t get a lot in return for our nuclear umbrella.

Mr. Packard: As I said before, the situation is changing, and they have more concern now. They had no reason to worry before.

Mr. Selden: When we were in Tokyo recently,⁵ Prime Minister Sato expressed a great deal of interest in the recent developments in Peking. He wanted the Secretary to give him pictures of the mounds in Peking. The Secretary went into the fact that they should modernize, and he also discussed the economic crisis. Sato, I must say, was agreeable on all counts.

Mr. Green: The major question is how do we goose the Japanese?

Dr. Kissinger: I don’t question the objectives. I want to know how we get there.

Mr. Green: The Japanese must come to appreciate that there is no other course open to them. They can’t go with the Soviets, and the Chinese approach is out of the ball park. Going nuclear is out of the question since it would scare China and the neighboring countries. The Nixon Doctrine is inducing concern in Japan because the Japanese realize they are going to have to help us. I think this is the best way we can get them to deliver.

Dr. Kissinger: In Option 1, there are inducements, but no penalties. We talk about increasing joint planning and joint exercises between U.S. and Japanese forces. This could have consequences with our relations with China. I am not making a judgment. I am suggesting that we take a closer look at our objectives and options. We already analyzed the impact on Japan of our initiative with China. If China should object to these joint exercises, for example, there is no reason we should not have them. But we should know the consequences of our actions.

Adm. Moorer: We have had joint exercises during the last few years.

Dr. Kissinger: Can we get a list of the categories of exercises? Then we can see which ones we might want to increase. We should have the list for the NSC meeting. This is a most fluid diplomatic area, and we are almost flying blind. We have to get the basic strategy set. Suppose Japan does not increase her role in Southeast Asia and elsewhere as we wish her to. Suppose she does not see any advantage in the economic measures we would like her to take. What would we do then?

Mr. Johnson: Have another SRG meeting? Seriously, we must recognize that our influence on Japan is marginal. We cannot determine what Japan can or cannot do. We must chart the direction we would like Japan to follow, but we must know we will not be fully successful. We should also know we will have to modify our policies.

Mr. Brown: My personal view on economic sanctions is that they are more trouble for us than they are for Japan. If we take the extreme step of closing our markets to them, this would hurt our people severely. The Japanese could also deny us the bases.

Mr. Johnson: They are more worried about us than we are about them.

Mr. Peterson: I thought we were more vulnerable.

Mr. Brown: They could retaliate if they wanted to. For example, they could buy wheat from Australia or Canada.

Dr. Kissinger: We will get to the economic issues in three minutes. But first I wonder if we can get something focussed for the NSC. Can we work out the answers to the questions I raised? We should show what the various alternatives look like. What would the consequences be of a more independent Japan? What would we have to do?

Mr. Johnson: Renunciation of the Security Treaty might be one result.

Dr. Kissinger: Yes. And if so, what would the Pacific area be like? And what effect would that have on the economic situation?

Mr. Peterson: May I say a word about the relationship of the security and economic issues. Some people compare what the Japanese have spent on defense in the last ten or twenty years with what we have spent during that same period. They see that we have spent ten times as much as the Japanese and that we have put much less money back into our own economy. We discussed today how important it is for them to spend significantly more on their defense. Why is this in our interest?

Mr. Johnson: We have to ask ourselves several questions. First, if they do spend more, can we spend less? We also have to know what we want them to spend more on. Is it correct to say that a different order of magnitude of Japanese defense spending would mean less defense expenditures for us? Could the Japanese spending be compatible for us to reduce our spending?

Mr. Packard: If they spend more of their money for defense, it will be less favorable for the economy as a whole.

Dr. Kissinger: That is not a very compelling argument to make to the Japanese. Our experience along this line with the Europeans indicates that they will only spend more on defense if they are convinced their own security is at stake and that we will not spend more to provide their security. We know Japan’s tendency to extremes. Now they are non-militarists, but if we convince them otherwise, can we stop the pendulum from swinging back to the other extreme?

Mr. Peterson: How important is it for us that they spend more? If it is important, how can we compel them to do it? If they take our nuclear umbrella for granted, why should they pay for other defense measures? People do not spend their resources unless there is an incentive for them to do so.

Mr. Johnson: We could compel them to spend more by withdrawing entirely from Asia, by renouncing the Security Treaty and by saying: “It’s up to you.” Then Tom [Moorer] would come and say that he needs a much bigger navy.

Dr. Kissinger: That would be entirely against his [Moorer’s] instincts, too.

Mr. Peterson: On the economic side, I think there is agreement on what the papers say Japan should do. There is disagreement, though, on how we should get Japan to do these things. We all agree, for example, that the yen should be revalued. We will try to get the Japanese to do this through discussions.

Dr. Kissinger: Why should they do it?

Mr. Peterson: I’ll let Herb [Stein] answer that one.

Mr. Stein: Basically, a revaluation is a relatively efficient way of stopping the wasteful use of their resources. Other countries have found this to be the case.

Dr. Kissinger: Why is it wasteful?

Mr. Stein: What is useless is that Japan exports her real resources and gets non-earning assets—U.S. dollars—in return.

Mr. Packard: Maybe it would be better to devalue the dollar.

Mr. Peterson: Do we feel it is in the U.S. interest to permit Japan to build up U.S. resources and invest them in Southeast Asia? This would help Southeast Asia move ahead. But it also means that a country with capital, technology and a low cost of labor would become a strong competitor for us. We must think this through a little more. On the plus side, it would help Southeast Asia. But on the minus side, it would create a strong competitor.

Dr. Kissinger: How would we stop it?

Mr. Peterson: By taking action which would discourage the Japanese from building up U.S. reserves.

Mr. Packard: I think the economic problems are more important than the defense ones in many ways. We must handle them carefully so that they don’t exacerbate the defense problems.

Dr. Kissinger: How could we tackle the economic problems so that they would have no effect on the defense problems? I don’t understand how this could be done.

Mr. Packard: We can do it. If we establish import quotas, however, this would be an extreme position.

Mr. Dam: We should approach the economic problems in more of a multilateral way than a bilateral way, and we should treat Japan as a great power.

Dr. Kissinger: How would we do this?

Mr. Dam: One way to do it is through GATT. This would be viewed as a multilateral approach, and it would not appear that we were applying discriminatory quotas.

Mr. Stein: Our balance of payments problem is involved with this. An across-the-board surcharge on imports could be set up, for example, and it would not discriminate against the Japanese. It would have an equal effect on everyone.

Mr. Volcker: The balance of payments problem is caused in part by the Japanese. We could use an across-the-board import surcharge if we start with the major assumption of Japanese imbalance. [trade disequilibrium with the U.S.]

Mr. Stein: I’m not starting with that assumption. If we have a deficit with somebody, it’s best to have it with the Japanese because they are the most docile. They are not going to ask for gold.

Mr. Volcker: We might get retaliation from the Europeans.

Dr. Kissinger: We have a practical problem. When you use pressure, the nature of this pressure is to hurt somebody—and he won’t like it. But is the price you pay for this, worth it? Are there any economic objectives we must have so that we are willing to antagonize the Japanese for them? We all agree we should press for something. Is anything so important, though, to override the political concerns we expressed before? Do you think we can achieve all our economic objectives without paying a price?

Mr. Peterson: It’s unlikely the Japanese will pay unless they are induced to do so as we just saw with the defense issues.

Mr. Stein: Do we have such strong economic interests that we have to give up other political and defense interests? The Japanese threat against the American economy is really minor and in a sense perverse. Protectionism is obviously beneficial to some sectors of our economy. On balance, however, it hurts the economy.

Mr. Peterson: Perhaps we can all be together on this. This year we estimate we will have the largest deficit in history on our balance of payments. This in turn will start to build pressures for: a major quota bill, a pull back of troops, counter-actions in Europe. We will probably have a balance of payments deficit of five to six billion dollars, and a substantial part of that is with Japan. Through the use of the undervalued yen the Japanese have decided to sacrifice growth and to increase exports.

Dr. Kissinger: How much is the yen undervalued? Is it ten percent?

Mr. Peterson: More. If a new exchange rate were to put it in equilibrium with other systems, I think the yen would be revalued 20%. This undervaluation, of course, has tremendous impact on the competiveness of products in the U.S. We can take action which is nondiscriminatory in some ways. We can also make the case, I think, that the Japanese themselves have taken a discriminatory act in undervaluing the yen. Remember, 2½ billion out of the $6 billion balance of payment deficit is due to Japan.

Dr. Kissinger: We need to set forth more elaborate political and economic frameworks so that the two of them can be related together. Then we can present both to the President. Can this be done by August 17? Can we aim for another meeting on the 17th, when we can meld this together?

1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–112, SRG Minutes, Originals, 1971 [2 of 6] Folder 2. Secret. Holdridge sent Kissinger talking points for this meeting under an August 5 covering memorandum. (Ibid., Box H–058, SRG Meeting—Japan (NSSM 122) 8/6/71) The meeting took place in the White House Situation Room. Kissinger saw these minutes on September 7. Tresize and Brown sent a briefing memorandum concerning NSSM 122 to Irwin, presumably in anticipation of this meeting. (Department of State, S/S Files: Lot 80D212, NSSM 122) Doolin summarized the meeting by noting that “each department [took] substantially the positions” advocated at previous meetings, and “No decisions were made.” (Memorandum for the record, August 9; Washington National Records Center, RG 330, OSD Files: FRC 330–76–197, Box 67, Japan, 092)
2. For the summary of the paper, before it was redrafted, see Document 84.
3. All brackets in the source text.
4. August 9.
5. Laird visited Japan July 4–11. See Document 80.