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55. Telegram From the Embassy in Japan to the Department of State1

14287. Dept please pass all OECD capitals. Geneva also for MTN. Bangkok for Heginbotham. Subject: U.S.–Japan Subcabinet Talks.

1. Summary: U.S.-Japan Subcabinet talks were friendly, constructive and frank. Both sides agreed A) that OPEC surplus likely to persist for some years and adjustment to it is major impediment to world recovery that requires industrial restructuring efforts, and B) that in face of sluggish world demand, protectionism poses grave danger to liberal trade system. We welcomed Japan’s efforts to stimulate domestic demand2 and pressed Japanese to open market to imports in order to bring current account into deficit at an early date,3 thereby shouldering greater share of burden of deficit with OPEC. The Japanese identified U.S. energy policy as also needing improvement and forecast that recently announced stimulative measures would reverse current account trend, holding surplus to $6.5 billion for all of JFY 1977. We welcomed new measures but remained skeptical that they would do the job especially on current account. Japanese agreed to our proposals to set up an informal, technical-level joint forecasting group and a joint steering committee to identify obstacles to and means by which U.S. exports to Japan would be expanded. Views on North-South issues and aid programs were essentially similar. End summary.

2. Although bilateral issues were not ignored, the emphasis at the U.S.-Japan Subcabinet talks September 12–13 was on the macro-economic responsibilities of the world’s two largest market-oriented economies. The Japanese were in full accord with Under Secretary Cooper’s description of the sorry current state of the world economy, his identification of the OPEC surplus as the paramount immediate problem, and the danger of protectionism tearing apart the international trade framework that has served Japan above all so well. The Japanese likewise recognized that the present imbalance in the pattern of [Page 198]current account deficits—especially that of the U.S.—is unsustainable in the face of protectionist pressures ultimately engendered by stubbornly weak global demand. But despite our persistent, if polite, expressions of doubt, and admitting that previous forecasts had been very wide of the mark, the Japanese (Deputy Foreign Minister Yoshino and EPA Director General for Coordination Miyazaki) stuck to his forecast that the recently announced package of stimulative measures will reverse the trend in Japan’s current account and hold the surplus to $6.5 billion for end of the current Japanese fiscal year (ending March 31, 1978).

3. The Japanese called on the weaker economies to place their own houses in order and asserted that by stimulating Japanese domestic demand without igniting the fires of inflation, Japan would make a major contribution to world recovery. Miyazaki identified the lack of Japanese investor and consumer confidence as the toughest impediments to full recovery. Yet further government expenditures would, he asserted, risk inflation.

4. Matsukawa (MOF) noted that the rise in the value of the yen had begun to cut into Japan’s exports quantitively but that a “J curve” effect could be observed. Matsukawa declined to offer an estimate as to when the exchange rate effects would begin to show up in the trade account, but asserted that, on a yen basis, the role of exports in recovery had already begun to diminish. Recognizing that there had been some remarkably large errors in previous forecasting, Miyazaki and Matsukawa agreed to the establishment of an informal joint working group on the technical level to monitor forecasts.4

5. Assuming a characteristically aggressive stance, Masuda of MITI 5 asserted that the dramatic rise in the importation of oil accounts in the main for the U.S. current account deficit and this deficit had in turn led to a weakening of confidence in the dollar. Cooper replied that increases in U.S. energy consumption were below historical trends, that imports reflected the decline in domestic oil production as well as increased consumption and that the President’s energy package will attempt to bring import levels down to 7.5 million B/D by 1985—below [Page 199]even current levels. Furthermore, increases in the U.S. trade deficit in recent months were due to the faster pace of U.S. economic recovery and to changes in our trade patterns with LDCs. Bergsten also noted that on a trade weighted basis the dollar had actually strengthened in last two years.

6. In response to Bergsten’s question on official export financing, the Japanese denied that official export credit was major factor in expansion of plant exports. Noting that Japanese plant exports remain far behind those of the U.S. and West Germany, Matsukawa (MOF) asserted that while Japanese plant exports had risen 42 percent in last three years, EXIM Bank financing of such exports had only climbed 10.4 percent. Matsukawa also restated that despite rumors to the contrary, Japan still adheres to the Washington agreement on official export financing.

7. Japan’s import structure was defended on the grounds that (A) no nearby industrial centers exist in Asia; (B) the huge Japanese domestic market permits economies of scale that account for Japanese competitiveness both at home and abroad; (C) the Japanese distribution system is too complicated to rationalize overnight; and (D) foreign firms have not expended the necessary effort, time and resources to carry out successful marketing strategies. Japanese further asserted volume of manufactured imports is rising, but nevertheless, agreed to our proposal to establish a joint steering committee to study, inter alia, where impediments exist to the importation of U.S. products and how they may be eliminated, which U.S. products might have the highest sales potential in Japan and how MITI might be of more assistance to U.S. exporters.

8. Views on North-South problems tended to converge. The Japanese reiterated their intention to “more than double” ODA in five years, but admitted that they had yet to decide whether it would be on an absolute or portion of GNP basis. The Japanese questioned us closely on our intention to emphasize aid for basic human needs and suggested that not too sharp distinction need be made between aid to infrastructure, where the Japanese plan to lay stress, and aid for basic human needs. The Japanese also revealed they are considering an “equipment loan” category to fall between project and commodity assistance.

9. The Japanese expressed a desire for a follow-on forum to CIEC limited to energy if possible but possibly encompassing other topics as well. Cooper stated the U.S. is relaxed on this issue but would be happy to consider any suggestions.

10. On outstanding U.S.-Japan bilateral trade questions such as sweet cherries, citrus, frozen juices, computers and peripherals, and color film, Cooper noted on two occasions that we are not unconcerned [Page 200]and would continue to work on those issues, even though they were not our primary reason for coming to Japan.

11. We agreed to hold another Subcabinet meeting in the U.S. 6 to 9 months hence.

12. Press coverage (see septel)6 was extensive and fair, highlighting our call to bring Japan’s current account into deficit at an early date. (In joint press conference Yoshino stated that in accordance with Japan’s responsibilities as strong economy, GOJ policy is to work to bring current account into deficit but he doubted this goal could be achieved soon).7

13. Not cleared by USDel.8

Mansfield
  1. Source: National Archives, RG 59, Central Foreign Policy File, D770353–0857, D770336–0716. Confidential; Priority. Sent for information to Geneva and Bangkok.
  2. On September 3, the Japanese Government announced a program designed to spur domestic economic expansion and curb the country’s current account surplus. (“Japan Announces Plans To Stimulate Economy And Cut Trade Surplus,” The New York Times, September 4, 1977, p. 11)
  3. In the September 23 Evening Report to Carter, Christopher noted that Carter, responding to “reports of Japanese foot-dragging,” had directed U.S. officials “to push Japan to reduce its current account and trade surpluses.” (Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 19, Evening Reports (State): 9/77)
  4. Bergsten and Matsukawa discussed Japan’s policy on foreign exchange market intervention on September 13. (Memorandum of conversation, September 13; National Archives, RG 56, Records of Assistant Secretary of the Treasury for International Affairs C. Fred Bergsten, 1977–1979, Box 1, RPTS–3–3 Memcons 1977) Bergsten reported to Blumenthal and Solomon that he had “made clear our concerns re heavy intervention April and July which braked steady appreciations. MOF pointed with pride to relative infrequency of recent intervention but retreated ultimately to view that appreciation was ‘too fast.’ They indicated plan to check any significant yen depreciation might occur in near future thereby reducing net dollar accumulation.” (Telegram 14116 from Tokyo, September 13; National Archives, RG 59, Central Foreign Policy File, D770331–0584)
  5. Minoru Masuda was a MITI Vice Minister.
  6. Telegram 14315 from Tokyo, September 16, summarized the press coverage of the talks. (National Archives, RG 59, Central Foreign Policy File, D770336–0864)
  7. In a report to Blumenthal and Solomon on the Subcabinet talks, Bergsten suggested that the Japanese “current account surplus may remain excessive.” Accordingly, the U.S. delegation had focused “on winning GOJ agreement to publicly adopt policy objective of ‘moving Japan into current account deficit as soon as possible.’ In response, Matsukawa indicated at plenary that GOJ prepared accept current deficit and Yoshino told closing press conference that GOJ policy objective was current account deficit.” (Telegram 14116 from Tokyo, September 13; National Archives, RG 59, Central Foreign Policy File, D770331–0584)
  8. In his report to Blumenthal and Solomon, transmitted in telegram 14116 from Tokyo (see footnote 7 above), Bergsten asserted that the “Japanese clearly got our message. We repeatedly stressed broad array of dangers inherent in present situation including but going well beyond protectionism. Whether sufficient actions will result is much less clear.” Characterizing the tone of the talks as “excellent,” Bergsten commented, “Perennial problem of getting adequate action remains, but Japanese seemed genuinely willing and even eager discuss all relevant issues.”