The Japanese Are Hardly Heading For The Bunkers

Tokyoites woke up to a double whammy on Feb. 12: Their city was paralyzed by its heaviest snowfall in more than 20 years, and TVs were blaring ominous reports of the failed summit in Washington. "I never thought this could happen," fretted a Tokyo fund manager as she spent Saturday in front of her TV, concerned about how financial markets would react.

She needn't have worried. While the Japanese markets did blow a gasket on Monday, they settled down within a few days, and a crisis appeared averted. In fact, many people were smugly satisfied to see Prime Minister Morihiro Hosokawa stand up to President Clinton. As Hosokawa took the high moral ground in defense of free trade, the politicians, bureaucrats, and business community united in a common front against numerical targets. Within three days, the threat of higher taxi fares had pushed trade off the front page.

So much for the siege mentality in Japan. While the Clinton Administration tries to drive a wedge between business and the bureaucracy with a rising yen and trade sanctions, Japanese officials say the Clintonites need a reality check. "It would be a serious mistake to believe Japan is a split country [on this question]," says Toyoo Gyohten, chairman of Bank of Tokyo Ltd. and a former top Finance Ministry official. "There's an amazing unanimity of view [against] America's quantitative targets."

DOSE OF MOXIE. That support helped Hosokawa become the first Japanese leader in postwar history to rebuff an American President openly. His moxie is part style. But it also reflects Japan's belief that, economic woes aside, it has more leverage with the U.S. Japan, as the world's largest creditor nation, is well-positioned to cash in on Asia's economic boom. The world continues to depend on Japanese foreign aid. And Japan is the sole supplier of key components to U.S. industry, including liquid-crystal displays for laptop computers.

Interdependence between U.S. and Japanese industry is one reason many observers think American sanctions can't work. Many Japanese conglomerates, for instance, have developed ties with U.S. companies that could lobby on their behalf. Matsushita Electric Industrial Co., a potential target of American sanctions on mobile phones, has partnerships with American Telephone & Telegraph, General Magic, and 3DO. NEC Corp. has a close semiconductor tie-up with AT&T.

What's more, many Japanese-brand products sold in America aren't made in Japan. "More than half of Japanese exports to the United States are intermediate goods," says a senior Japanese official. "If tariffs on them increase, that will affect U.S. industry." That's not to mention American consumers' likely outrage at tariffs on such popular items as cars and audio-video gear.

The Japanese also dismiss concerns about a rising yen, which has appreciated 7.6% in 1994. While Finance Minister Hirohisa Fujii has expressed concern that a yen at current levels could undermine Hosokawa's new $145 billion fiscal-stimulus package, most executives argue that the yen will weaken soon, as the American recovery continues and U.S. interest rates move up.

At the same time, many Japanese say a stronger yen would do damage to some of America's interests by discouraging U.S. industry's investment in Japan and the import flows that would follow. General Motors Corp., for one, has expressed concern that a higher yen might limit expansion of its Japanese operations. "A too-high yen would undermine our economic relationship," says Noboru Hatakeyama, an adviser to Nomura Research Institute and a former top official at the Ministry of International Trade & Industry. Japanese industrialists agree. "An exchange rate policy can't correct the trade imbalance," says NEC President Tadahiro Sekimoto. "The U.S. government can't really believe it will."

None of this is to deny that some Japanese feel vulnerable to Washington's threats. "I'm very worried about what the U.S. government may do in the way of sanctions," says Yukio Itagaki, chairman of the Japan Auto Parts Industries Assn. Atsushi Nishikohri, a member of Hosokawa's ruling coalition, shares this view. "We've been making real progress on a variety of reforms," he says. "I wish Clinton would recognize this." Indeed, Japan hasn't shut down negotiations completely: It recently agreed to further open public-works projects to U.S. contractors and has said it would consider expanding government purchases of U.S. computers.

Clinton Administration officials lack the patience for such talk. But they shouldn't underestimate Japan's will to resist numerical targets. None of this bodes well for U.S.-Japan relations. "Short-term, things will be precipitous," says Yukio Okamoto, a former Foreign Ministry official.

Over time, however, he and others are more sanguine, pointing to the intense interdependence of the two countries on the economic, security, environmental, and foreign aid fronts. "On the whole," says Gyohten, "what's happening now will result in a more mature relationship based on greater mutual respect and shared responsibilities." He's probably right. But for a while, the road to that putative Valhalla looks paved with land mines.

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