Japan's Dollar Fix Is Its Own Fault

As a stand-up comedian, Japan's Prime Minister Ryutaro Hashimoto looks pretty good. Appearing before an audience at New York's Columbia University, with slick-backed hair and sideburns, he asked if there were any Federal Reserve officials in the audience and proceeded to "joke" that Japan might consider selling U.S. Treasury bonds unless Washington maintained exchange-rate stability. The U.S. stock market laughed all the way down 192 points on the Dow. Hashimoto was only kidding, the Finance Ministry said later. Can't you guys take a joke?

Well, sure. But we expect Hashimoto had enough of President Clinton's economic triumphalism at the Denver summit and couldn't help pulling America's chain. The truth is that Japan has no choice but to hold dollar-denominated debt because it runs an economic policy based on promoting exports and discouraging domestic demand. Instead of cutting its army of government bureaucrats, it chooses to raise taxes. Instead of generating consumer-led growth, it relies on exports overseas. Japan's chronic trade surplus is Made In Japan, and with it comes IOUs.

But Hashimoto's remarks should remind Washington policymakers that once they balance the budget, they should address the trade deficit. When a few casual remarks by a Japanese Prime Minister can send the markets into a tailspin, it is time to ask why. A decade ago, Tokyo told the U.S. that it had a trade gap because the U.S. ran a budget deficit and made shoddy products. That's clearly no longer the case, yet the trade deficit is rising with Japan. Our best guess is that today trade and investment barriers are mostly responsible for the problem. Japan's mercantilism, which is piling up that hoard of dollars making Hashimoto nervous, hurts not only its own consumers but American, European, and Korean producers as well. And that's no laughing matter.