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

203. Memorandum From the Special Representative for Economic Summits (Owen) to President Carter¹

Washington, March 1, 1979

SUBJECT

• US Economic Policy Toward Japan (U)

You asked that I work out with interested US officials an economic strategy regarding Japan. This memo reports the results. Mike Blumenthal, Bob Strauss, Tony Solomon, Dick Cooper, Jules Katz, Dick Holbrooke’s staff, Fred Bergsten, and others have been involved in these discussions. I have tried to take account of helpful views that we have received from Mike Mansfield²—and also from Pat Caddell, who has recently returned from Japan. (U)

1. The Problem. Because of Japan’s moderate growth policy and, more importantly, because of the various Japanese domestic practices that inhibit access to the Japanese market, Japan’s current account surplus is substantial. Recent CIA estimates suggest that the surplus may be declining more rapidly than we had expected, partly because of the effects of yen appreciation—which have not yet been fully felt. Our economic experts who recently visited Japan estimate that the surplus will be significantly smaller this year than in the past two years. They also estimate, however, that it may increase after 1979 and remain large for several years. (C)

This large Japanese surplus has adverse effects on the world economy. Together with restrictions on US business entry into Japan, it has generated demands on the Hill for anti-Japanese protectionist legislation, which only intense personal efforts by Bob Strauss have held in check and which will prevail later this year in the absence of changes in Japanese policy. Majority Leader Byrd, Senator Bentsen, Congressman Rhodes, and other influential Congressional leaders are deeply, bitterly, and increasingly concerned with this issue. These US pressures for change in Japanese policy have generated deep resentment in Japan; passage of anti-Japanese legislation would dramatically compound the damage. If we cannot soon devise a cooperative US-Japanese approach to this problem, it could severely damage the wider US-Japanese political and security relationship. (C)

2. Japanese Attitudes. The Japanese feel that they are doing everything possible to reduce their surplus—both in shifting from an export-led to a domestic-led economic expansion and in reducing import barriers. Some progress has been achieved: Administrative steps have been taken by Japan to increase imports, and MTN and textiles agreements have been negotiated. (C)

The Japanese are reluctant to accelerate these remedial policies: Their budget deficit is already large and they feel that there would be political difficulties in increasing it further; their business community resists larger imports of manufacturers; and they are chary of trade policies that might lead to later balance of payments deficits. (C)

But the Japanese are also anxious to avoid a confrontation with the US. They now understand that Congressional reactions to Japanese policies could place MTN in jeopardy and cause anti-Japanese-protectionist legislation to pass. And they are anxious to avoid further yen appreciation, which might result from a continuing large current accounts surplus. (C)

3. Short-Term. The task now is to translate the resulting Japanese desire for compromise into specific understandings. Our immediate need is to persuade Japan to take certain MTN-related actions—notably opening government monopolies to outside bidding, and phasing tariff cuts so as to “front load” these cuts in the early years. (C)

If these decisions are taken quickly, they will have a beneficial effect on the U.S. private industry advisory reports that must be completed and made public when we submit MTN implementing legislation to the Congress in April. The Japanese understand this, and relevant negotiations between them and us are underway. (C)

4. Medium-Term. Reducing the Japanese surplus will require not only specific early decisions, such as noted above, but longer term changes in Japanese policies regarding domestic demand and access to the Japanese market. If persuasive assurances that these changes are going to be made can be secured at the Summit, this will enhance our chances of passing MTN and defeating anti-Japanese protectionist legislation, both of which may be coming up for a vote in late summer. (C)

In part, these assurances require specific Japanese actions, e.g., commitments to submit a supplemental expansionist budget to the Diet in September, and revision in present Japanese import procedures. In part, they may require a long-range agreement between the US and Japan about the trade and economic goals that both countries will seek to achieve in the next five years. The specific actions would be an earnest of good intent; the long term agreement would make clear both that basic changes are needed and that these changes will take several years to complete. (C)

If the Japanese decide to move in these directions, corresponding US commitments (e.g., to promote exports, improve productivity, and reduce oil consumption) could be used by the Japanese Government in presenting its decisions to the Japanese public as part of a balanced package. US actions in other fields might also help to create an environment in which we would be more likely to get the concessions we want from Japan:

—Japan is interested in an Alaskan oil swap, and this is being studied by DOE. (C)

—Gerard Smith believes that we might be able to meet Japanese nuclear concerns by cooperating with Japan and Australia to build a jointly owned and operated enrichment plant in Australia; he will examine this possibility. (C)

—A US-Japanese program of technical aid to Asian countries is a favorite idea of Ohira; we are considering whether our proposed new Institute for Technological Cooperation³ could be used to this end. (C)

—A US-Japanese grains agreement might be popular in both countries, and Agriculture proposes to discuss this at a technical level with the Japanese.⁴ (C)

4. Timing. Needed Japanese actions were discussed with Ambassador-at-Large Yasukawa, when he visited Washington recently.⁵ Further discussions will take place during Mike Blumenthal’s visit to Japan.⁶ When Dick Cooper and I go to Tokyo for the meeting of the Summit Preparatory Group in March, we will try to agree with the Japanese on how different economic issues might be distributed among your upcoming bilateral and Summit meetings with Ohira, so that something of use to us emerges from each of these meetings. (C)

In the present state of Congressional opinion, high-level meetings that only resulted in an exchange of views would be a setback. Meetings that achieved or clearly foreshadowed concrete economic agreements would be helpful in both countries, and could also be the occasion for reaffirming the central political and security importance of the US Japanese relations.⁷ (C)

I will submit a further progress report to you when I return from Tokyo. (U)

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Country Chron File, Box 24, Japan: 1–3/79. Confidential. Sent for information. Carter wrote at the top of the page: “Good memo. J.” The memorandum was sent to Brzezinski for forwarding to Carter under cover of a February 27 note from Owen, who noted that he had checked the memorandum with Platt. (Ibid.)
2. Between November 1978 and March 1979, Owen and Mansfield exchanged a series of letters on U.S.-Japanese economic relations; the letters are in the Carter Library, National Security Affairs, Staff Material, Special Projects File, Henry Owen, Box 22, Japan Bilateral 3/79 in Tokyo: 3/79 [II].
3. See Document 311.
4. Carter wrote “good” in the margin adjacent to this paragraph.
5. Memoranda of conversation of the February 1979 meetings between U.S. officials and Takeshi Yasukawa, Ohira’s personal representative, are in the Carter Library, National Security Affairs, Staff Material, Special Projects File, Henry Owen, Box 22, Japan Bilateral 3/79 in Tokyo: 3/79 [II]; Carter Library, National Security Affairs, Staff Material, Special Projects File, Henry Owen, Box 22, Memcons: 1–4/79; and Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Country Chron File, Box 24, Japan: 1–3/79.
6. Blumenthal visited Tokyo March 4–5 at the end of a trip to China that began on February 24. A memorandum of conversation of Blumenthal’s March 5 meeting with Ohira is in the Carter Library, National Security Affairs, Staff Material, Special Projects File, Henry Owen, Box 22, Japan Bilateral 3/79 in Tokyo: 3/79 [II]. Blumenthal reported on his trip to Carter in a March 5 memorandum. (Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 122, 3/7/79 [2] He also met with Carter on March 6 to discuss the trip. The portion of the March 5 memorandum on Blumenthal’s stay in China and the March 6 memorandum of conversation are printed in Foreign Relations, 1977–1980, vol. XIII, China, Documents 224 and 225.
7. Carter wrote “True” in the margin adjacent to this paragraph.