Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

5. Memorandum of Conversation¹

Tokyo, February 8, 1973, 9:30 p.m.

PARTICIPANTS

• Kiichi Aichi—Minister of Finance
• Takashi Hosomi—Special Advisor to Finance Minister
• Koichi Inamura—Vice Minister for International Finance
• Shigemitsu Kuriyama—Councillor, Minister’s Secretariat (Interpreter)
• Paul Volcker—Undersecretary of The Treasury
• Ambassador Robert S. Ingersoll
• Sam Y. Cross—Department of The Treasury
• James J. Wickel—Second Secretary (Interpreter)

SUBJECT

• Monetary Situation

Minister Aichi and his aides greeted Undersecretary Volcker and his party at the entrance of the Finance Ministry Residence and quickly escorted them inside to the drawing room.

Following minimal formalities, Undersecretary Volcker referred to the President’s letter to Prime Minister Tanaka² and thanked Minister Aichi for receiving him on such short notice. He explained that extreme urgency of the monetary problem required action this weekend, and dictated his visit on short notice. The fact that the United States wished to consult Japan first, ahead of any other nation, should reveal the urgency confronting Japan for two reasons: (1) Japan accounts for the greatest part of the United States trade deficit, which underlies their bilateral, and the world’s multilateral difficulties; and (2) the United States and Japan, the two strongest economic powers, have a common responsibility to resolve this problem. He said that the President has already indicated his own strong feelings on these points in his letter to Prime Minister Tanaka. If the United States and Japan could not resolve this problem, he concluded, then no one could.

Minister Aichi responded that Prime Minister Tanaka and he have studied the substance of the President’s letter carefully, and understand his present position clearly.

Undersecretary Volcker without adding anything to the President’s letter, emphasized that the President does have strong convictions about the United States relationship with Japan in the context of this world situation, under which the monetary crisis is merely the surface manifestation of a great problem facing all countries. We have come to the turning point, he warned, and either we manage the situation or it manages us.

Minister Aichi asked the Undersecretary to confirm that his visit to Tokyo is being kept confidential.

Undersecretary Volcker replied that we are trying to keep it confidential, but cautioned that there could be a problem if his absence is noted in Washington; his absence would be prolonged because he also hoped to visit Europe after leaving Japan.

Minister Aichi agreed with some animation that it would be good for him to go on to Europe, particularly Germany.

Undersecretary Volcker expressed the frank reservation that it would be pointless for him to go to Europe without reaching a satisfactory agreement in Tokyo.

Minister Aichi said that the purpose of this confidential meeting is to exchange views frankly and in light of the Undersecretary’s mission he hoped to have “significant discussions” this evening.

Undersecretary Volcker thanked him, and said that he would speak bluntly and in confidence. He also asked that everything he might say this evening be reported frankly to Prime Minister Tanaka.

First of all, Undersecretary Volcker described the situation as we viewed it, emphasizing two aspects. (1) There is a monetary disturbance, and until the causes of disequilibrium are corrected, these disturbances would continue. European and American financial communities both feel strongly that Japan accounts for the largest part of the United States deficit, and while we appreciate Japan’s attempts to take actions to preclude a disturbance, nevertheless, we and the world feel that Japan has undertaken an impossible task. The imbalance has caused the disturbance, and because Japan is dealing with it by passing dollars on to the rest of the world, its effect appears elsewhere. That is why the President feels strongly that there are serious political (apart from any economic) implications arising from this disequilibrium, which in turn affect the monetary market.

(2) He explained that the domestic problems he faces loom large in the President’s thinking because they affect our external relations. For example, the new Trade Bill being drafted for submission to the Congress soon will certainly face difficulties in the Congress, and will become both a focus for debate and a symbol indicating whether the United States continues on the path of open economic relations with the world, or whether it will be forced to take another path. The debate could go either way, and he warned that we could be pushed unwillingly along the other path if our economic problems are not resolved. He simply could not overstate public and Congressional pressures to have the Administration answer one simple question: “What are you going to do about the balance of trade and payments problems now that the dollar is under attack?” The implied threat is that the Congress will do something if the Administration does not. However, the basic question does have an answer, which is why he is in Tokyo. It would not be an easy answer, but he knew of no other for the United States and Japan to deal with the trade imbalance and the disruption of the monetary market it causes.

With the above as background, Undersecretary Volcker said that the President is prepared to announce an answer this weekend, provided Japan and the Europeans agreed. In broad terms, the President is prepared to outline an answer which would include monetary actions within the framework of the general proposals we have made to move the world along the path of greater cooperation. Therefore, we feel that it is essential, just as Japan must feel it essential, to inquire whether Japan thinks it can be done.

With respect to trade matters, Undersecretary Volcker explained that the authority which the President must secure from the Congress to conduct new trade negotiations should be broad, going beyond tariff negotiations. Multilateral safeguards have been mentioned in our own preliminary internal discussion of this legislation, and we consider it essential that the trade legislation include authority to impose specific import surcharges for BOP purposes, consistent with our monetary proposal. Having outlined this background for the monetary decision we would have to make, he explained that, if we were successful with our monetary decision, we would not wish to see the Congress focus on these safeguard provisions only and forget about the other trade expansion considerations.

In all frankness, Undersecretary Volcker predicted that the Administration would not be able to tell the Congress that it should not try to resolve the situation in its own way, if we fail to resolve the monetary crisis, if we continue to hear the news on TV that the dollar is still under attack, if we cannot provide a better answer to redress the disequilibrium in trade, and if we have no other solution. He explained that it was with this sense of urgency that the President wrote to Prime Minister Tanaka.

Minister Aichi thanked him for this frank presentation on the United States domestic situation, which he would have requested in any case before reviewing Japan’s domestic situation. He asked what measures the United States intends to take on the trade bill, and the monetary crisis. He recognized that no resolution is in sight yet, despite Japan’s efforts to rectify its trade imbalance with the United States, but now that dollars have begun to flow into Europe as well as Japan, he imagined that the United States would be concerned about restoring confidence in the dollar, and might even be considering devaluation.

Undersecretary Volcker, responding directly to this “appropriate question,” appreciated that whatever we might do would not lead to a cure overnight. The possibility of perversity in the results underscored the need to take actions which could clearly be seen to be adequate over the long run, since there would be no immediate effect in real terms visible in our BOP. The Smithsonian Realignment had been a great achievement in the right direction but the fact could not be hidden from the market that it was inadequate.

Apart from any question of its adequacy, Minister Aichi responded instantly that Japan is observing the Smithsonian Agreement, and is supporting the dollar in the Tokyo foreign exchange market.

Getting to the point, Minister Aichi said that the President stressed the urgency of the situation in his letter to Prime Minister Tanaka; so has the Undersecretary this evening. If the measures he wished to discuss would not have an immediate effect on the trade imbalance, he could only conclude that Undersecretary Volcker had flown to Tokyo to make a monetary request of Japan, and asked frankly what it might be.

Undersecretary Volcker said that he could respond with all the conviction he had. First, Japan is the largest source of the United States deficit; second, Japan is not the only source of the United States deficit; and third, we recognize where we wish to go in the monetary area in the long run. Therefore, he concluded that a large realignment is necessary between the dollar and the yen, and between the yen and the other leading currencies. Germany (one of Japan’s leading competitors) has already revalued upward several times. What he wished to propose this evening is a division of responsibility, under which both the United States and Japan each would make a difficult decision.

Minister Aichi replied that Japan sees no need to revalue the yen upward. In fact, he hoped to continue working toward the system of international cooperation on which a start was made at the Smithsonian. Frankly speaking, he could not agree with the Undersecretary’s proposal, because he believed that the monetary problem should be resolved on the basis of multilateral consultations to be conducted later. Even though this may not seem ideal from the Undersecretary’s point of view, he promised to work to build a definitive consensus in such consultations among the leading nations. He also stressed that he anticipated that the deficit nations, as well as the surplus nations, would bear some responsibility in achieving a solution.

Undersecretary Volcker pointed out that this is not what he proposed. All he asked for is agreement on specifics in terms of quantities and an order of magnitude of rate exchanges we could both agree to now as the key to resolving the situation upon us. We could, of course, continue to work toward a cooperative system. Now, however, in the context of our vision we are prepared to meet half-way, and he emphasized most strongly that we need a major change now. Therefore, he proposed a 10–20, or 10–10 formula, because it seemed to us that a 50–50 sharing would be both politically and economically defensible, on condition the Europeans stood still, which is what he intended to explore in Europe in the next day or two.

Minister Aichi replied that he had asked for the United States views, but could not make a detailed statement on their merits only on the basis of one or two hours discussion this evening. Therefore, he wished to limit his response to an expression of appreciation for these views, which were stated very frankly.

Undersecretary Volcker described some additional aspects as subsidiary but important. One major problem we face in the long term evolution of the monetary system is the high price of gold, which leads to spirals in the exchange system, giving rise directly to the monetary difficulties we wish to resolve. Therefore, he said that we would also be prepared to announce publicly our position on gold (as we described it in our previous meeting³) and would be prepared to agree jointly to a two-tier system, on the selling side only. We would thus go back to the regular IMF rule, and would sell gold in the market, at prices and at times of our own choosing. This aspect relates not only to Japan, but to the need to secure support in Europe, particularly from a certain country.

One final aspect raised by Undersecretary Volcker was not crucial to Japan, but would indicate the path was wished to take in the long run: any action we take on the exchange rate front should be accompanied by a reiteration of our interest in phasing out capital controls.

Undersecretary Volcker concluded his remarks saying that he would promptly see whether he could get the key European nations to agree to this concept, that is, if this concept is agreeable to Japan, particularly the first point related to exchange rates, and if we have reached a consensus on the amounts. Our own thinking is that it would be faster to do this without a meeting of the G–10.

Undersecretary Volcker warned that our alternatives are few—they amount to one. Of course, we could take no action and leave everything to the market, in which case we could expect to see continuing market disturbances and additional floats, the exact opposite of what must be done to reduce our BOP deficit.

Minister Aichi thanked him (with restrained temper) for this very concise “demand” and pointed out firmly that there is a proper order for doing things. As Japan’s Finance Minister he could not have refused to hear what the United States wished to say, despite the short notice given. He emphasized that Japan, in its own view, recognized that it could not maintain its economy without the cooperation of the United States, in terms of which philosophy it has always done its utmost to take into account the United States position.

Undersecretary Volcker commented that Germany absorbed $3 billion in two or three days. By way of objective observation, not criticism, he did not believe that Germany could continue to buy dollars. Perhaps tomorrow, or the day after, Germany would have to change its policy. If Germany decides to float he asked whether Japan is prepared to do the same.

Minister Aichi said that Japan’s position is that it could not consider revaluing the par value of the yen without first floating for a period of time to determine its true market value. He explained that the Diet is now sharply debating the JFY 73 (beginning April 1) draft budget, which is based on the present rate. If the yen were revalued before the budget passed, the GOJ would have to withdraw its draft budget, which under Japan’s parliamentary practice would require the GOJ to resign en bloc. The impact on the United States would be great if the GOJ were to collapse in this fashion. He explained that he has been seeking to postpone the C–20 Meeting until April in the expectation that the draft budget would be adopted by March 31.

Minister Aichi said that Japan is watching the German situation closely, and if the German authorities act to end the disturbance by closing the exchange market, Japan would also close its exchange market and float for a considerable period of time to determine the true market strength of the yen versus other currencies.

Minister Aichi stressed that the first priority of the GOJ is to pass its own budget. Following that, at the C–20 meeting, he would consult individually with the key countries, in confidence and not as part of the plenary meeting, about rate realignment. It was in this sense that he said earlier that there is a proper order for doing things. He could not make any further statement, but assured the Undersecretary of his deep concern over rate alignment (apart from the extent of any change in the rate). Above all, he wished to work out a satisfactory adjustment against the dollar, but he was concerned that the other nations, especially Germany, might not agree on the rates the Undersecretary proposed. Of course, he added, he has been discussing this with the Germans. He assumed that the Undersecretary could gauge the depth of his concern with the rate question, and concluded by stating that in principle he “understood” the Undersecretary’s statement.

Undersecretary Volcker appreciated the Minister’s two points. His own presence in Tokyo, without talking to any other nations, should show how strongly we wished to work out a solution in close cooperation with Japan in our common broader interests, for together we shared an extremely difficult, mutual problem. He could not be more conscious of the timing (even without knowing the timing of Japan’s budget) for he warned that we have only a few hours at best to reach a solution, which would be difficult under the best of circumstances. He recalled former FRB Chairman Martin’s⁴ pithy saying: “the market waits on no man, no President and no Prime Minister” and warned that we now have that kind of a monetary situation. He saw two difficulties with the Minister’s approach, and was certain that Germany (and not just Germany) could not do what the Minister implied without creating the very kind of political disaster for us in Europe which we are all trying to avoid: the problem would arise within the EC with Germany’s freedom to act and respond being sharply constricted. The danger, at best, would be a proliferation of the kind of controls, with disastrous political by-products that we are seeking to avoid. Second, from our point of view, without pleading poverty or weakness on Germany’s behalf, he said that Germany is in a different position than Japan. Germany’s BOP are close to equilibrium, and it has a small surplus on current account. Further, Germany must worry about its trading partners, for example, having already revalued upward 30% against the Franc. While we do have a general problem with Europe including Germany, the United States could not single out Germany. He said that he is not speaking in terms of ideology; his practical concern whether Japan floats, or doesn’t, is that speculation against the yen would make the rate move differently, and may well give a misleading indication of its true market value, because of Japan’s intensive controls on capital. If Japan were to float the yen for six months, or a year or two, a true rate would emerge, but a short-lived float would give a misleading picture. He questioned seriously whether we could live through the period between now and the C–20 Meeting without serious political and economic consequences. We seek a harmonious effect, not haggling over rates in the context of antagonism, which would not produce a solution in harmony. We could discuss the proper levels, but he pleaded that Japan consider fully a “clean” not a “dirty” solution,⁵ one not based on ideology and preconceptions.

Undersecretary Volcker said that he had only one decision to make tonight, whether to go to Europe, and if so, when. He would be prepared, if it were considered desirable on an overall basis, to stay over in Tokyo until tomorrow morning. He thought that the Minister’s comments indicated that it might be desirable to stay over.

Undersecretary Volcker added one comment, that the President’s willingness to take the initiative on the United States side is tied to the trade bill. He could not predict how the President might feel a month from now, if Japan floated later. With a float now there would be no compelling need for us to take action to resolve the monetary situation with the wrong tool.

Minister Aichi heatedly denied that the GOJ would consider a “dirty float.” Rates should be adjusted among the governments, and he said that the float would provide useful data for the GOJ to adjust the rate later, although it would not be an absolute indicator for a new yen rate. He said that the Undersecretary has been very frank. It is not that he does not understand, but in general, he did not know what Japan would do. If the United States wished to argue its political circumstances, then he felt that it should also consider Japan’s political circumstances, noting that both Ambassador Ingersoll and Mr. Wickel were well aware of these. Since Japan does not consider it necessary to revalue the yen, to do so by yielding to United States pressure would cost the GOJ its political life. With respect to timing, he said that the budget would not be passed for at least another 50 days. He explained that he and Prime Minister Tanaka have already discussed the President’s letter in great detail, and he has listened to the Undersecretary’s proposal this evening; no matter how many more hours he were to wait in Tokyo, the Minister said that he could not go beyond what he has already said. He asked the Undersecretary to understand his answer.

Since this meeting is absolutely confidential, Minister Aichi was able to say that it should be obvious that Prime Minister Tanaka and he are agreeable to discussing a rate change with the United States, but that the timing is all important. First they must get the budget through the Diet. Even before receiving the President’s letter he said that they had decided firmly that they did not wish to take the great decision to float the yen before April 1.

Undersecretary Volcker replied that he appreciated this response fully in both senses, the difficulty on the GOJ side and the forthcoming nature of the proposal. What he feared, however, is that it did not take into account the fact that this is not merely a bilateral problem: it also represents a difficult situation with respect to Europe, and he was not clear how this kind of a solution would fit into that part of the problem. Conceivably, it could aggravate it, because it would place a great burden on Germany.

On the contrary, Minister Aichi felt the reverse to be true. He reasoned that international cooperation is important, and Germany must make the first move; if Japan did so, it might push Germany into a crisis; Germany is facing a dollar rush, and thus should float first; Japan would follow suit, and thus support international cooperation. Should Japan move first he feared that Germany would have to face even greater problems, and Holland as well. Frankly, he hoped that the Undersecretary would go on to Bonn to talk to the Germans about their floating first. If there is any good news that he could give the Under-secretary, it is this.

Undersecretary Volcker assured him that the Germans have a different view.

Minister Aichi said he was speaking in the abstract; no doubt the Undersecretary has more information, but even on a theoretical basis his views are the opposite of the Undersecretary’s.

Undersecretary Volcker said that he is troubled by the Minister’s earlier point. In economic terms, which affected political relations, it is not the Germans who have a major imbalance; it is correct that Germany is exposed to the pressure of an inflow of dollars, in part because it has the freest market. It is ironic that having a free market puts pressure on a country and makes it suffer, which could turn it to restrictions and the consequent political antagonisms.

Minister Aichi replied that Germany is under pressure, but that it contradicts the facts to say that Japan is hurting Germany. He then asked whether the Undersecretary felt that Germany would revalue immediately.

Undersecretary Volcker said that he looked to Germany reasonably to take the lead in Europe to keep the EC nations from devaluing along with the United States. While he has not yet talked to the Germans, he felt that it is reasonable to expect this. He wished to explore with the Germans what United States devaluation they could get the Europeans to live with but in all candor, he would have difficulty in going to the Germans and telling them they must float. The Germans would find that such action would place them in direct political antagonism with their EC partners, with all the consequences that would imply. There are a number of problems, not with Germany, but with France.

Minister Aichi said that he understood. If the United States can get the agreement of the Europeans, he agreed that Japan would float the yen.

Undersecretary Volcker asked where the yen would float: Ivory soap floats to the top of the water, but Palmolive floats down. He said that the basic economic situation requires Japan to do more than Europe and if the Minister agrees to that basic point, and to the precise amounts, he thought he could gain European approval. As a basic concept, he hoped that the Minister would agree to the idea that the United States and Japan would share the burden.

Minister Aichi stated as the basic concept that Japan and the United States would share the burden in principle. He asked the Undersecretary to understand fully the damaging effect of any discussion of rate changes on the Diet deliberations, and therefore asked that he keep any understanding between Japan and the United States in strict confidence, without mentioning it in Europe. Since the GOJ has repeatedly declared in the Diet that a rate change is out of the question, he reiterated that any discussion of specific rates would have to await the passage of the budget.

Undersecretary Volcker said that he understood, but pointed out that this approach would leave the United States exposed.

Minister Aichi said that this kind of important problem is one for Prime Minister Tanaka and himself to keep in mind. Nonetheless, in principle a yen/dollar adjustment would have to await passage of the budget. In principle he agreed with the concept of sharing the responsibility, but all he could say now is that he has listened to the United States views, and that the GOJ would study the question of the yen rate later.

Undersecretary Volcker noted, in this connection, that he has heard that Japanese export contracts are being written at the rate of 270–1, probably assuming no adjustment in European rates, in an area in which the United States and Japan compete. He said that we have been discussing a rate lower than 270–1, for that rate would not move the yen up much in comparison to Europe.

Mr. Inamura explained that the prevailing rate for all contracts is not 270–1, although there are some individual cases of this rate.

Undersecretary Volcker said that he too understood that it is being used only in some contracts.

Turning to the question of the amount, Undersecretary Volcker said that our economists say that a 10–10 ratio is the minimal appropriate change. There may be no need to listen to everything the economists say, in all due respect to their perfection, but still, their advice could not be ignored. We do know for a fact that the Japan–United States trade imbalance is important in adjusting other rates, and that Japan’s competitor is not the United States, it is Europe; thus we assume that Japan would not wish to revalue vis-à-vis Europe. His proposal would not, he felt, represent an insuperable magnitude, in terms of Japan’s relations with Europe. Yet, the foreign exchange markets are all based on the dollar, when the dollar is moving.

Minister Aichi reiterated that the timing is seriously affected by Japan’s domestic political environment, which he has already described. Noting that Japan and the United States have moved closer, in principle, he asked the Undersecretary to talk to the Europeans, in confidence, and inform Japan of the results, in confidence. He suggested that this evening’s discussion be left at this point, recalling that he agreed earlier in this conversation that Japan would float, if Germany floated first, and that after the GOJ passed its budget, Japan would consult on a rate adjustment.

Undersecretary Volcker objected to this on the basis of two practical problems. Should he go to Europe and hold discussions as the Minister suggested, we would have a problem. If he were later to discuss in confidence with the Minister how his confidential discussions in Europe went, the train would pull out and we would be left in the dark as to where Japan would end up. It is one thing to pull out of the station if we know where the next station is, or even if we only know which way the tracks are going.

With respect to a suitable destination, Minister Aichi said that the Undersecretary could discuss the readjustment of rates in Europe, on the basis of his confidence that the GOJ would go along as soon as the GOJ budget passes; he also authorized him to state in Europe that Japan “has listened carefully to the United States views.” He asked for the Undersecretary’s views on this kind of destination.

Undersecretary Volcker asked whether he could say on behalf of the United States (subject to any information given to the Minister after his discussions in Europe) that Japan agrees in principle that a 50–50 share is the correct principle. Of course, this would depend, in part, on how much we do but he promised to inform Japan about that. However, he wanted to be able to say that Japan would take a reasonable share.

Minister Aichi said that Japan and the United States were involved in a triangular relationship with Europe, and that Europe should also bear a reasonable share.

Undersecretary Volcker agreed, conditionally, with one exception over which he has no control; he would argue forcefully, but could not guarantee what Italy would do. The UK, he noted, already is floating, and with the possibility of a clean float would probably move up against the dollar, but he could not guarantee Italy. Also he would have to negotiate with the others. He also wished to be certain about the magnitude we have in mind, and added that he would have to consult on the way home, before leaving Anchorage to decide whether to return to Washington, or to continue on to Europe. He said that he is inclined to go to Europe at present, provided the general approach under discussion is acceptable to the United States Government, and recognizing that there would be an interim period of uncertainty. He could go to Europe, and try to get the Europeans to stand still for a move by the United States, in the general neighborhood of the Smithsonian agreement, with our share a bit larger, if the Europeans did not move, and if we could talk to Japan about adjusting the rate after its budget passed, leaving to our discretion the closing of the Tokyo market and the floating of the yen.

Minister Aichi replied that Japan would go along if the Undersecretary could persuade the Europeans to stand still. He also suggested that the United States not devalue.

Undersecretary Volcker interrupted to say that we would have no desire to devalue if Europe doesn’t stand still. He wished to negotiate with the Europeans a United States devaluation of the same general range of the Smithsonian agreement, but asked again if he could be confident that Japan would float, during the interim period, until the GOJ budget was passed, and more importantly, whether the yen would float up from its present par value equivalent to the amount of our own devaluation. The eventual dollar/yen rate change would have to be twice the extent of our own devaluation, with the yen rate against the Franc, Guilder and Mark to be determined by Japan’s float.

Minister Aichi qualified this statement, saying that Japan would not float immediately after the dollar is devalued, and would not be guided absolutely by the market in setting a new exchange rate—the interim results of the float would merely provide useful data in discussing a new fixed rate in what he warned is a “highly political decision.”

Undersecretary Volcker appreciated that it would be difficult for the Minister to be more precise, but hoped that he also appreciated that the United States could be not left overly uncertain. He feared that in the short time between now and April we could not be sure when the market might demonstrate a new rate, which would depend on attitudes and speculation abroad. Between now and April, he suggested, Japan float no further than the market would accept.

Minister Aichi understood, and agreed that we had no way of knowing what circumstances would obtain under a float. He emphasized again, that fixing a new rate represents a highly political decision for the GOJ, for which the yen float would merely provide data. In effect, he explained that he is saying that he has listened carefully to the Undersecretary’s proposal.

Undersecretary Volcker supposed, as a general plan, that Japan would float; the President would consult within our government, saying that he has been informed that Japan would float, the other governments would stand still, and that he is confident that the yen rate would float to a level of suitable equilibrium; the President would not say that the GOJ has agreed to do so, but would express his own belief with conviction that he is confident that to fix a rate at two times the amount of the United States devaluation.

Minister Aichi protested that the GOJ would be plunged into extreme difficulty if the President were to state that Japan would revalue.

Undersecretary Volcker replied that the President could say that he expects equilibrium to result.

Minister Aichi protested again that the President should not make difficult what the GOJ is trying to do.

Undersecretary Volcker argued that we thus face a dilemma. Japan has its political difficulties, but we also have political and economic difficulties, and could take no action, he warned, without the self-confidence that the GOJ would allow the yen to float up to a level of equilibrium, and that we have some idea of what that level is. As a hypothesis, he suggested that we should know where that level lies, if the GOJ would determine it, but not announce it.

Minister Aichi said that if Japan should close the market and float some technical adjustments might be needed.

Undersecretary Volcker said that we have to know where the final station is. For the political and economic settlement we seek, we need a package: in our view, a 9% devaluation with Europe standing still and Japan matching us, would produce a rate of 260–1, but he warned that we could not negotiate with Europe without knowing what Japan would do. Therefore, if Japan agrees in principle to a 50–50 sharing, in the Minister’s frame of reference, we would need some positive assurance about the final station.

Minister Aichi responded that he could say only that the GOJ has listened carefully to his views on 50–50 sharing, but was adamant about not being able to comment on specific rates.

Undersecretary Volcker asked him if he had listened to the American proposal of a 50–50 sharing “with sympathy.”

Minister Aichi said that it is his impression that 18% is too great. Undersecretary Volcker, in consideration of the mild tone of this response, asked whether he was “appalled” by the numbers in our proposal.

Minister Aichi professed that he was not appalled, just “Volcker shocked.”

Undersecretary Volcker pointed out that the question of the USG waiting for the GOJ budget to pass was not on the table. The response should be that the whole matter is crucial, in the United States’ view. We are at the crossroads, and should embark on the path to a solution in a positive light, to help repel those forces which could make us look inward. We should lay the groundwork in trade, and economic and security matters for the kind of constructive evolution we seek. If this approach is [un]acceptable, and a 50–50 sharing is not realized, he feared that there would be a grave danger that we would be forced back onto the other road which we did not wish to take. He knew that Japan has some trade protection, on the elimination of which he assumed that we would continue to explore approaches, and that Europe has trade limitations which limit Japan. Referring to Europe, he promised that we would continue to press for more relaxation between Japan and Europe, which is our common interest. However, he emphasized that a monetary decision must be reached this weekend; it would depend on his negotiations in Europe, but he did not wish to go there unless he was assured of U.S.-Japan cooperation, and had assurances about the station we are heading toward.

Minister Aichi said that he had exhausted what it is possible for him to say in response.

Undersecretary Volcker, to be certain where these talks stood, summarized as follows: the Minister could contemplate action to float the yen this weekend (i.e., close the exchange market) and then allow the yen to float, clean, until after the budget passes.

Minister Aichi explained that the GOJ has insisted in its responses to questions in the Diet that it would not revalue, and asked that the Undersecretary understand clearly that Prime Minister Tanaka could not revalue.

Undersecretary Volcker said that he recognized, and sympathized with these political and economic wishes; he understood that it would be politically delicate to delineate a new rate during the float.

Minister Aichi said that any mention of rates during the Diet debate of the budget is strictly tabu for the GOJ, but added that the GOJ would initiate a study.

Undersecretary Volcker, referring to the Minister’s response that he was “Volcker-shocked” protested that he is a mild person.

Minister Aichi jokingly said that it had been a “tall” shock, like the Undersecretary.

Undersecretary Volcker expressed satisfaction that we have identified our common problem in this discussion.

Minister Aichi, raising a separate point, said that Ambassador Ingersoll and Mr. Wickel, being present in Japan, are well aware that the pro-U.S. elements within the GOJ are under attack in the Diet now, as they were in the past, even with respect to ratification of the Okinawa Reversion Agreement.⁶ He pointed out that he and others in the GOJ who share this pro-U.S. point of view also believe in the philosophy that Japan cannot stand alone, without the cooperation of the United States.

Undersecretary Volcker said that he would discuss the revaluation package with the President and Secretary Shultz, which may leave the President in the position to make a difficult political decision now with respect to dollar devaluation and the trade bill. It could leave him exposed to the possibility that two months from now this package could be found inadequate. Even so, to accept a movement in the opposite direction would be impossible. Therefore, he must probe for assurances that the President would not be left in that exposed position: we would take one road now and could not turn back. In view of the international requirements, he warned, we cannot fail.

Undersecretary Volcker also said that the Smithsonian Realignment was not a failure, even though inadequate, because it represented the best political compromise possible at that time. This time, however, he warned again that we could not fail to reach a sound economic decision; to do so could have undesirable political consequences.

Minister Aichi said that the GOJ would make “a maximum decision,” but its budget must be passed first. Should it get out in the Diet before the budget passes that he had agreed to a revaluation, or even if it appeared that he had done so, the GOJ would fall, and the strength of the LDP would be reduced drastically. Viewed even in terms of internal conditions within the LDP, this would be impermissible.

Undersecretary Volcker agreed that this is a difficult decision, but explained that we are being forced to act by the market. At this crossroad decisive action is called for. He understood and said that he would try to consider the Minister’s political problem. Now, however, he would return to his plane, and consider whether to fly to Europe. He realized that Japan and the United States could not make a final decision without knowing the European attitudes, but the first question to answer is whether it is even worth exploring the possibilities with the Europeans. In any case, this is not his own decision to make, but added that he would be in touch through Ambassador Ingersoll, or otherwise, on what to do. However, he cautioned that this subject could not be discussed on the telephone. If he could discuss the range of the amounts the Minister has in mind, however, he felt that he might well go on to Europe.

Minister Aichi, noting that the Undersecretary had already come down to 9% from his opening bid of 10% in just three hours, reiterated that the final quantity should be negotiated.

Undersecretary Volcker discouraged him, saying that he is not sure that this is the best answer. Turning to a mechanical point, he asked what to say if his absence from Washington should be noticed. Something would have to be said in that case, but he hoped that his absence would go unnoticed. If it were noticed, he explained that the Treasury would announce that he had gone to Tokyo to review the situation personally, and briefly, with the GOJ.

Minister Aichi protested that this would violate the condition for agreeing to this meeting here, that it be kept strictly confidential. He noted that the Japanese are already keenly aware of United States pressures for revaluation, and suggested that the Undersecretary simply respond that he is going to Germany.

Undersecretary Volcker replied that this would raise a question of credibility. While he did not propose to say anything himself, he reiterated that the Treasury would simply state that he is away on a brief trip to Japan to discuss the situation.

1. Source: National Archives, RG 56, Office of the Under Secretary of the Treasury, Files of Under Secretary Volcker, 1969–1974, Accession 56–79–15, Box 5, Japan (General). Secret; Nodis. Drafted on March 15 by Wickel. A notation at the top of the first page reads: “Uncleared by Undersecretary Volcker.” A handwritten notation below this reads: “No.” The meeting took place at the Finance Minister’s residence.
2. Document 4.
3. Not further identified.
4. William McChesney Martin, Jr., was Chairman of the Federal Reserve Board of Governors from 1951 until 1970.
5. A “dirty float” involves government actions aimed at managing the value of the national currency. A “clean float” is one in which there is no government intervention.
6. The Okinawa Reversion Agreement, signed by the United States and Japan in June 1971, laid out the terms for the reversion of the Ryukyu Islands and the Daito Islands to Japan from the United States. It entered into force in May 1972. (23 UST 446; TIAS 7314)