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News Release

The United States Should Stop Bashing Japan

October 3, 2001

Contact:    C. Fred Bergsten    (202) 328-9000

Washington, DC—The United States should now terminate the unique Japan-specific economic policy that it has pursued for the past three decades, according to this comprehensive new analysis of economic relations between the world's two largest national economies. The United States should henceforth treat Japan like any other major economic power, mainly within the multilateral context of overall US foreign economic policy. No More Bashing: Building a New Japan-United States Economic Relationship recommends that the United States publicly enunciate this new approach at the earliest possible opportunity. The latest manifestation of the traditional policy, the Economic Partnership for Growth announced during Prime Minister Koizumi's visit to Washington in June with its maze of task forces and working groups, should be quietly shelved.

Japan is the only country toward which the United States has conducted a country-specific economic policy in the postwar period. That policy developed in the 1970s and 1980s when the United States experienced a prolonged period of economic difficulty and Japan ascended to global prominence. It was aggressively promoted by the US Congress and large parts of the business community, and was implemented by administrations of both parties. The policy took different forms and pursued different specific goals but remained a central feature of US strategy for about 30 years.

The Japan-specific policy of the United States derived from several key premises:

  • Japan's dynamic growth and competitiveness posed a serious threat to US economic dominance and even prosperity;
  • Japan embodied a unique brand of capitalism that was "unfair" in numerous respects and required "fighting fire with fire";
  • The United States had unique capabilities to influence Japanese policy due to Japan's security (and economic) dependence on the United States, and the nature of its domestic political system.

No More Bashing argues that all these elements have changed dramatically. The United States experienced resurgent economic growth, based on a substantial and probably sustained rise in productivity growth, in the second half of the 1990s. Japan has been mired in stagnation for almost a decade and is now experiencing its fourth recession during that period. The United States is now threatened by Japan's weakness rather than by its strength.

In addition, Europe has completed its economic integration and created the euro. China has grown dramatically. As a result of all these developments, Japan's share of the world economy (and even the Asian economy) and US international transactions has declined markedly. For example, Japan now accounts for only 20 percent rather than the historic 60 percent of the US trade deficit.

Moreover, the end of the Cold War has undercut the primary justification for the implicit division of labor between Japan and the United States with respect to security and development assistance matters. The rise of China has further complicated-and added urgency to-the needed redefinition of the strategic relationship between Japan and the United States. The tragic events of September 11 underline the importance of a strong strategic relationship with Japan and reinforce the impracticality of using any US "security leverage" to pursue economic goals.

The success of reducing border impediments to trade between the two countries also means that the key issues are increasingly ones of deregulation and liberalization within Japan, where the old model of American gaiatsu ("foreign pressure") is likely to be ineffective if not counterproductive in the future. At the same time, the formation of the World Trade Organization with its expanded dispute settlement mechanism, and the broadened mandate of the International Monetary Fund to monitor national banking systems and recommend needed reforms in them, have increased the efficacy of addressing outstanding trade and financial issues through multilateral approaches. If foreign pressure is to be used to encourage domestic reforms in Japan, it is better that this pressure come from multilateral organizations that Japan has voluntarily joined.

The United States would of course still conduct important business with Japan bilaterally, as with all other major powers, especially to promote economic reform in Japan and those in Japan who support reform. However, such initiatives would be implemented mainly within the multilateral context of overall US foreign economic policy. The arrival of new administrations in both countries appears to offer an appropriate opportunity for such a fundamental policy reconsideration.

No More Bashing makes a series of specific proposals for pursuing the recommended multilateral strategy. The United States should use the new trade round in the World Trade Organization, for example, to open Japan's agricultural and services markets where the United States has substantial competitive advantage. The round should also forge new rules on competition policy, which have become central to most of the two countries' trade and investment disputes in other sectors, and on regional trading arrangements, which Japan has begun to pursue for the first time in the postwar period. The United States will of course have to agree to address issues of concern to Japan, notably the implementation of its antidumping safeguards and Japan's inadequate position in the International Monetary Fund and some other international institutions, in that same multilateral context. The book also draws a series of conclusions for the organization of foreign economic policy in both countries to implement the proposed new policy approach.

No More Bashing also considers and rejects three possible alternative strategies that the United States could pursue toward Japan:

  • a "bypass Japan" strategy that would essentially ignore it in the future, as some US companies now do; this would be foolish and politically unsustainable in view of Japan's continuing economic weight and importance to both the US and world economies;
  • at the other extreme, pursuit of a Japan-United States free trade area or monetary union á la European Union; the study finds neither an economic nor political basis for such "deeper integration"; and
  • a "business as usual" continuation of the Japan-specific policy of the past three decades, which is rejected for the reasons outlined.

About the Authors

C. Fred Bergsten has been director of the Institute since its creation in 1981. He was also chairman of the Competitiveness Policy Council, which was created by Congress, throughout its existence from 1991 to 1995 and chairman of the APEC Eminent Persons Group throughout its existence from 1993 to 1995. He was Assistant Secretary for International Affairs of the US Treasury (1977-81), Assistant for International Economic Affairs to the National Security Council (1969-71), and a senior fellow at the Brookings Institution (1972-76), the Carnegie Endowment for International Peace (1981), and the Council on Foreign Relations (1967-68). He is the author, coauthor, or editor of 28 books on a wide range of international economic issues, including Whither APEC? The Progress to Date and Agenda for the Future (1997), Global Economic Leadership and the Group of Seven (1996), The Dilemmas of the Dollar (second edition, 1996), Reconcilable Differences? United States-Japan Economic Conflict (1993), Pacific Dynamism and the International Economic System (1993) and America in the World Economy: A Strategy for the 1990s (1988).

Takatoshi Ito is a professor at the Institute of Economic Research at Hitotsubashi University in Japan. From 1999 to July 2001, he served as Deputy Vice Minister for International Finance in the Ministry of Finance in Japan. He was senior advisor at the research department of the International Monetary Fund from 1994 to 1997. He was a professor at the University of Minnesota's economics department from 1990 to 1991; a visiting professor at Harvard University's Kennedy School of Government and Department of Economics from 1992 to 1994; a visiting scholar at the Bank of Japan's Institute of Monetary and Economic Studies from 1990 to 1992; and a national fellow at the Hoover Institution, Stanford University, from 1984 to 1985. He is the author of The Japanese Economy (1992) and coauthor of A Vision for the World Economy (1996), Political Economy of Japanese Monetary Policy (1997), and Financial Policy and Central Banking in Japan (2000).

Marcus Noland, senior fellow at the Institute, has been senior economist for international economics at the Council of Economic Advisers as well as a visiting professor at Johns Hopkins University, the University of Southern California, Tokyo University, Saitama University, and the University of Ghana, and a visiting scholar at the Korea Development Institute. He has written many articles on international economics and is the author of Avoiding the Apocalypse: The Future of the Two Koreas (2000) and Pacific Basin Developing Countries: Prospects for the Future (1990). He is coauthor of Global Economic Effects of the Asian Currency Devaluations (1998), Reconcilable Differences? United States-Japan Economic Conflict (1993), and Japan in the World Economy (1988), coeditor of Pacific Dynamism and the International Economic System (1993) and editor of Economic Integration of the Korean Peninsula (1998).

About the Institute

The Institute for International Economics is a private nonprofit research institution for the study and discussion of international economic policy. The Institute, directed by C. Fred Bergsten, provides fresh analyses of key economic, monetary, trade and investment issues and recommends practical policy approaches for strengthening public policy toward these important topics. The Institute receives funding from a large number of private foundations and corporations.