Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

130. Memorandum of Conversation¹

Washington, May 3, 1978, 12:30–1:50 p.m.

SUBJECT

• Summary of the President’s Meeting with Prime Minister Takeo Fukuda

PARTICIPANTS

• U.S.
• President Jimmy Carter
• Secretary of State Cyrus Vance
• Secretary of the Treasury Mike Blumenthal
• Zbigniew Brzezinski, Assistant to the President for National Security Affairs
• Ambassador Robert Strauss, Special Representative for Trade Negotiations
• Mike Mansfield, U.S. Ambassador to Japan
• Ambassador Henry Owen, President’s Special Representative for Summit Preparations
• William Gleysteen, Acting Assistant Secretary of State for East Asia and Pacific Affairs
• Mike Oksenberg, NSC Staff Member (Notetaker)
• Mutsuyoshi Nishimura (Interpreter)
• Japan
• Prime Minister Takeo Fukuda
• Sunao Sonoda, Foreign Minister
• Nubihiko Ushiba, Minister for External Economic Affairs
• Fumihiko Togo, Japanese Ambassador to the U.S.
• Yoshiro Mori, Deputy Chief Cabinet Secretary
• Masuo Takashima, Deputy Minister of Foreign Affairs
• Toshijiro Nakajima, Director-General, Ministry of Foreign Affairs
• Hisashi Owada, Assistant to the Prime Minister (Notetaker)
• Ryuichiro Yamazaki (Interpreter)

President Carter: Mike, why don’t you get the discussion started with the analysis of the economic situation.

Secretary Blumenthal: Fine, Mr. President. We have gone through a difficult economic period. In our view in recent weeks the situation has begun to improve. We are engaged in communication with your colleagues on a number of mutual problems and are working up to the Bonn Summit in July.

I have been fully aware of the difficulties caused Japan by the rapid movement in exchange rates. We have tried to adopt both fundamental and short-run measures to ameliorate the situation. The basic instability in exchange markets has been caused by the energy crisis, resulting in different rates of growth and rates of inflation, causing trade surplus in Japan, Germany, and Switzerland, and inflation in the United States.

The long-term solution to inflation in the United States was outlined by the President in his April 11 speech.² Our goal is a 4½ percent growth rate. We intend to reduce the rate of inflation, and we will soon secure final enactment of an Energy Bill. This, plus the success of the Multilateral Trade Negotiations and our determined resistance to protectionist sentiment will make a success of our efforts.

Our monetary policy remains committed to following a flexible exchange rate. We will not peg the dollar to a particular level of value, or even to a zone or range of value.

Here are our measures for correcting short-term disorder in exchange rates:

—International Collaboration. The United States and Germany have developed and expanded a swap agreement which helps stabilize the dollar-yen relationship.

—Our gold sales are intended to provide further stability.

—Consultations with Japan. The Bank of New York and the Bank of Japan, as well as our Treasury and the Ministry of Finance, will exchange information daily to help deal with short-term problems.

As to the long-term solution, Japan clearly has an important role to play. Reduction of Japan’s trade surplus is a key requirement. And key to this is for Japan to achieve a 7 percent growth rate.

Co-financing of the World Bank with a Japanese contribution would also improve the stability of the dollar-yen exchange rate.

A final element of our own policy is to work closely with you and to collaborate in the international organizations. We are engaged in efforts to secure maximum contributions to the World Bank and to such regional banks as the ADB, with aid on an untied basis. Collaboration in the International Monetary Fund is equally important. The Witteveen facility will contribute to this. We discussed the IMF surveillance mechanism in Mexico a few days ago and we should all collaborate closely on the results of that meeting.³

I am not going to comment on trade. Ambassador Strauss may want to do that.

Prime Minister Fukuda: I thank Secretary Blumenthal for his remarks. I agree with his assessment. I basically agree with him as to how we should proceed.

Last year at the London Summit, various countries set targets as to the growth rate they intended to attain: West Germany pledged 4 percent and reached 2.4 percent; the United States pledged 5.8 percent and reached 4.9 percent; Japan pledged 6.7 percent and reached 5.3 percent. All the other countries did not meet their targets of growth.

In current account balances, your country had a deficit of $10 billion while the Japanese surplus was $14 billion. The situation is even more difficult this year.

The dollar is the key currency in the world. It is essential for the dollar to be stable. Japan and West Germany are trying to rectify their trade surplusses. These endeavors are not just to benefit the United States but benefit the whole world economy. We recognize our responsibility to rectify our trade surplus.

The depreciation of the dollar and the appreciation of the yen, however, meant that we were unable to reach our growth rate target. Had the dollar-yen exchange rate remained stable, we would have reached our goal of 6.7 percent last year. But because prices in the United States went up, the dollar value of our exports also went up. We expect another large surplus this year.

This year our goal is a 7 percent growth rate and a reduction in the surplus of our current accounts. Attainment of these goals is our responsibility to the world economy.

My major concern presently is how to cut the surplus. Let me give you my analysis of this.

On the export side, the yen value appreciated 30 percent in the past year, but this appreciation has not yet had its effect. Three exports account for 43 percent of the total value of Japanese exports to the United States:

—Steel. Due to the trigger price mechanism, we anticipate that steel exports to the United States will decrease 10 to 15 percent in volume.

—Automobiles. Though there is a long list of orders for automobiles, our goal is to keep the volume of sales the same as last year or less, if possible. We are pursuing administrative measures to this effect.

—Color TVs. We talked about this last year. We expect a 30 percent decrease in exports below the level of 1976, the year during which sales surged in the American market.

How these efforts to reduce exports in three key commodities will affect the dollar value of our exports is uncertain. If inflation continues in your country, then the value of these exports will still rise.

We appreciate the measures you intend to take to curb inflation. Anyway, the value of our exports to the United States will be affected not just by our own restraint but by your capacity to control inflation.

As to imports, our goal of a 7 percent growth in GNP should help. Some Japanese economists are pessimistic and doubt that we can attain a 7 percent growth rate. But based on my observations in the last four months, I am quite optimistic. I believe we are on the path to a 7 percent growth rate which is necessary in any case for domestic reasons. If the steps we have already taken are not sufficient, I will then take the necessary measures. This growth rate will increase imports, but there will be a time lag.

I have therefore concluded that urgent measures are necessary for the following:

—We seek to increase our import of enriched uranium and make advance payment for it. I request the President to consider favorably this proposal.

—We have sent the Ikeda purchasing mission to the United States.⁴

—We intend to stockpile non-ferrous medals.

—We intend to stockpile petroleum.

—We will purchase such civilian airplanes as the DC–980.

But I would repeat my concern that if inflation continues and the dollar continues to be devalued, then we are in a vicious cycle. Specifically, I have two concerns. First, the depreciation of the dollar will have a worldwide negative impact on trade. And second, as to Arab oil prices, although there is no immediate sign of problems given the supply of oil, as the dollar continues to be depreciated, then the Arabs may increase the price of oil, and this would become a worldwide problem. The background is the oil problem. United States consumers use 2½ times as much oil as the Japanese. I know of the Energy Bill. When I visited Congressmen yesterday I asked the Senate for an early conclusion for the Energy Bill for the rest of the world.

As to the international monetary situation, the results of the Mexico Conference were satisfactory. As to your suggestion that we cooperate with the World Bank, we will study this on a case-by-case basis.

I have proposed that we float World Bank bonds in Japan.

As to special economic assistance, we had earlier pledged to double ODEA assistance in five years, but we have changed this target to three years.

As to various research and development projects in the energy field, and joint research, I believe a joint energy resources fund would contribute greatly. I request the President to consider this. Japan is willing to cooperate, and cooperation would make a global contribution.

I repeat my view that a strong United States is important to world peace and prosperity.

I welcome the daily consultations on matters of currency exchange rates. As to the IMF, we will keep close contact with its officials and with you.

Also related to the energy situation, I talked to you last year about nuclear energy. It is necessary to cooperate in this field. We believe that nuclear energy is necessary. Japan is strongly in favor of nuclear non-proliferation. We are also in favor of pursuing the peaceful use of nuclear energy. We do not believe these two goals are incompatible. Last year, I made a request about Japan’s strong interests in the peaceful use of nuclear energy. I request the President carefully to consider this request.

President Carter: We are scheduled to adjourn at this point. I hope I can impose on you to stay a few more minutes.

We are making every effort to solve our economic problems and to hold down inflation. The Congress and the American people are willing to join me.

Congress is considering a major bill, as you know. We have particular problems because we are both one of the leading producers of petroleum as well as leading consumer. It might be easier to settle the problem if we were simply a consumer. But I believe we are making progress.

As to nuclear energy, I believe the existence of Nuclear Fuel Cycle Evaluation will lead first to further peaceful uses of nuclear energy research and second to improved safeguards. I am committed to nuclear power with comprehensive safeguards that will prevent nuclear [proliferation?].

I would like to inform you briefly that we are making progress with the Soviets in our strategic arms limitation talks and with the Soviet Union and Great Britain in our efforts to reach a comprehensive Test Ban Treaty. We have good relations with the Arab oil producing nations.

We know we have a responsibility for maintaining world monetary stability. Japan shares with us the view that steady moderate growth and a minimum inflation are extremely important for the world economy. The moderate Arabs share that view with us.

I was gratified a few months ago with the Ushiba–Strauss Agreement⁵ that was reached with your help. I might ask Bob Strauss to comment so that the two of us would be informed if we should discuss anything between us.

Ambassador Robert Strauss: I will be brief. Under the leadership of President Carter, this Administration is committed to free trade at a time when protectionist sentiment is as strong as I have ever seen it. Last week the issue was fasteners. The clock is running out on this.

Rather than adversaries across the bargaining table, we should consider ourselves members of the same team working together. Japan simply must upgrade the quality of its offer. We must have help there so that together we can beat back the protectionist sentiment. Optical measures are frequently helpful. But they must also be substantive. You should find room for a bit more beef and citrus. This will have an impact on the Congress to give us and you time to move forward. When you send a mission, be specific with plane purchases and timber. Look for specific things. Even if the dollar value is not large, it will have an impact.

Prime Minister Fukuda: The Bonn Summit must be a success. Some say it will be a place to agree to disagree, but we must agree there. We must reaffirm our commitment to free trade.

The Multilateral Trade Negotiations will have reached a conclusion by then. Last year at the London Summit I said that strong countries must pursue as high a growth rate as possible. We will cooperate in order to stabilize international monetary currencies.

On another subject, the purchase of Alaskan oil, I understand that one-third of this oil now goes to the West Coast and two-thirds to the East Coast. Would it be possible for Japan to either buy some of this oil or swap for it? I know you have some problems with this, but we have thought about it for a long time.

President Carter: I know. I know you discussed this with Vice President Mondale just a few hours after I had become President and we had talked about it last year. We will certainly keep this suggestion in mind.

I apologize for keeping you overtime. Our discussions have been important and fruitful. There have been no toasts because this has been an informal luncheon. But I wish to express my gratitude to you. We have shared the past, we share the present, and we will share the future together.

Prime Minister Fukuda: Thank you very much. Thank you for your kind words and for your hospitality. You are the President not only of the United States but of the whole world.

(As the meeting broke up Prime Minister Fukuda told the President that he hoped to see him in Japan.)

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 36, Memcons: President: 5/78. Secret; Sensitive. The meeting took place in the White House Dining Room. Fukuda made an official visit to Washington May 1–3. Memoranda of conversation of two meetings between Carter and Fukuda, as well as U.S. and Japanese officials, during the morning of May 3 are ibid.
2. Carter announced his anti-inflation policy on April 11; see footnote 14, Docu-ment 119.
3. The IMF Interim Committee met at the Ministerial level in Mexico City April 29–30.
4. In keeping with the January agreement reached between Strauss and Japanese officials (see Documents 97 and 99), Yoshizo Ikeda, President of Mitsui & Company, led a mission in March to promote Japanese imports of U.S. goods. (Peter Kihss, “Japanese Offer a Ship to Display U.S. Export Goods in Their Ports,” The New York Times, March 16, 1978, p. D16)
5. See Documents 97 and 99.