Will Japan Rise to the Occasion?

The Honorable William Clark at the Asia Society Washington Center

April 27, 1998

Good evening ladies and gentlemen, it is a great pleasure to be here at the Asia Society Washington Center participating in its distinguished Contemporary Affairs Series. I would also like to thank Judith Sloan for the kind introduction. A little known fact about introductions is that they are usually drawn from information supplied by the speaker and, thus, are not likely to be overly critical. As many of you know, I spent 14 years in Japan and am somewhat culturally conflicted. In Japan it is normal to start an address with an apology to show humility. In the United States we normally start with a joke to loosen up the audience. Blending these two traits, I will start with an apology for not having a joke.

As I look back on the last few years, I am struck by how much the ground had shifted in the United States - Japan relationship in that short space of time and, yet, how little has changed. I was in Japan two weeks ago, at the time when the Japanese Prime Minister, Ryutaro Hashimoto, first announced his latest budgetary effort to jump start the Japanese economy. There have been two subsequent announcements of the same policy. I was taken by the mirror image of attitudes there and here in the United States. I will elaborate on that a greater length a little later, but for now, and this may be heresy in some circles, let me say that I believe the people and governments of both Japan and the United States are uncomfortable with their relative positions in the world today. Neither country seems to found its comfort zone – so to speak – with regard to foreign policy, bit it economic, political or national security in nature. With that view in mind, I would like to share with you my view of the role the United States and Japan will play in the next few years. In the course of my remarks, I promise to avoid references to U.S.-Japan relations in the 21st century, the next millennium, or the year 2000!

The search for a new paradigm continues in both countries today, as does the generous use of the prefix "post" – for example, post-cold war, post-bubble economy Japan, post-Deng China, and now post-crisis Asia (although this may be premature) – as we describe the world in which we live. It is fine to look to the past with a goal of better defining, or perhaps divining, the future – but I believe tomorrow's Asia has signposts which we all can clearly see today. I will identify some of these shortly.

In the United States and abroad, many policy analysts lament the fact that our recent domestic revival has failed to stimulate greater popular discussion about – or political attention to – our nation's future role in the world at large. America's historic and seemingly continuous flirtation with isolationism is well-known, but it is still remarkable that, even in this time of rapid travel between far distant points, so many of our leaders, for example in the Congress, have yet to venture abroad to learn about foreign affairs at first hand. The cynics among us – or political commentators as they are sometimes called – would ask about the domestic political spin for foreign travel, despite the fact that terms such as "global marketplace" and "international competitiveness" are constantly being used by the business press to explain many of the headline grabbing mega-mergers and corporate acquisitions occurring daily in our economy. Interestingly, no one, not even tradehawks in Congress, points today to competition from "Japan Inc." as spurring this new round of mergers and acquisitions. In very recent memory, Japan meant "trade problems" for Capitol Hill and "attractive buyers" for Wall Street. Today, the former is still true and will increase, while the latter has greatly receded. American attention on Japan today, ironically, remains firmly focused on that country's continued domestic economic malaise. And here is where that mirror image that I mentioned earlier comes into the equation. Ten years ago the average American was being told and indeed was feeling the effects of a stalled economy. We were being frightened by the "great sucking sound of NAFTA" and a downsizing of American industry that would, we were then told, greatly increase the number of Americans in low wage jobs. One wag said the Japanese would be doing microchips while we would be doing potato chips. (Actually I borrowed that from an Indian friend) And the Japanese were telling us how to fix our economy in light of their successful model. The joke then was about the American and the Japanese who were to executed for some offense. The executioner ask the Japanese if he had a final wish and was told he would like to make a few remarks before departing this life. The executioner turned to the American and asked if he had a final request. The American said yes, please hang me first, I can't stand another lecture on productivity.

Today, in a similar vein, the same Japanese, who also only a few years ago, complained first of "Japan Bashing," next of "Japan-passing" and then "Japan-nothing" could today live without their newfound attention and advice – solicited and unsolicited – coming out of Washington. Perhaps we should call it "Japan-fixing"? Conversely, Japanese opinion on international affairs carries the greatest weight with the U.S. when it is offered in the context of Asia's economic recovery. And even then such advice is expected to take the United Sates position fully into account. In fairness, not much advice or action on Asia's recent economic problems came out of Tokyo.

As to the portions of the bilateral equation that are not about commerce, the U.S.-Japan security alliance, of course, remains in place and efforts continue to better adapt it to a changing world. Nonetheless, the shift in emphasis in the bilateral relationship in the last year has been dramatic when compared to the past. On the political front, interaction in Asia is developing rapidly and will, without doubt, impact on the shape and direction of the U.S.-Japan relationship.

When policy makers from both countries discussed regional developments last spring, Japan was in the midst of revamping its defense guidelines and making those changes that were politically palatable regarding U.S. bases on Okinawa. Both countries agreed to modify a comfortable and, until then, successful security relationship and to reach for something new, this during a period when much of Asia perceived the United States as exercising more power than it actually had and Japan as exercising less influence than it actually had.

A flare-up of tensions across the Taiwan Straits and a crisis on the Korean Peninsula were regional contingencies of great concern for both countries at this time last year. Now, today, our mutual concerns – in the short to mid-term – are predominately economic. Will Taiwan and China devalue their currencies in the wake of the economic fall-out in the region? Will the Republic of Korea's drastic economic reform plan be successfully implemented by its new president? The stakes in these two outcomes are equally great for both the American and Japanese economies. Still, last year's security concerns have neither lost their relevance nor their importance for both countries. From an aggregate perspective, it is quite clear to me that each country needs the other to meet future challenges in Asia. The United States is beginning to realize that it cannot do everything alone, and that it does not have the answers for all of Asia's problems. We are also learning that the United States cannot abandon its leadership role in a multi-polar world nor can it quietly withdraw from efforts to ensure regional stability around the globe. Japan, on the other hand, understands that it – despite serious domestic distractions – will need to do much more regionally and globally if it is to live up to the expectations of its friends and neighbors.

There are exogenous events – signposts, if you will – on the horizon which both countries can influence to some degree but ultimately cannot control. For example:

Assuming that the aforementioned assumptions hold true, how do Japan and the United States fit in the new regional picture? Part of the difficulty in gauging where we will both be lies with the fact that expectations regarding each country are changing, as the world changes around them. In fact, the story of U.S.-Japan relations in 1998 continues to be the reversal of fortune from a decade ago. The Nikkei index (Japan's equivalent of our Dow index), which flirted with breaking 40,000 in the late 1980's, is today in the 15,000 to 16,000 range and is now a symbol of the shortcomings of Japan's bubble economy of the late 1980's, more than of the once revered, and feared, Japanese brand of capitalism. Expectations have diminished. The Hashimoto government, in the wake of implementing its ad hoc fiscal stimulus packages two weeks ago would welcome the prospects of a Nikkei index average hovering above 16,000 for the July elections for Japan's Upper House of the Diet. On the other side of the Pacific, the Dow topped 9,000 – a historic high and an amazing rebound from a decade ago – and Americans now worry about the downside of the business cycle. Still, the shrill rhetoric of past warning of Japan's coming industrial dominance has since been replaced by whispers of schadenfreude. But some things remain the same, the United States continues to accumulate record trade deficits – and Americans on average save less than they did a decade ago. Despite the beginning of Japan's long touted "Big Bang" financial reforms, the Japanese people remain skeptical about the true health of their financial system. A very recent poll indicated that today over 40% of the Japanese people expect the Japanese economy to be worse in a year than it is today, only slightly over 6% thought the economy would improve. Japanese continue to put their money away in "safe" areas for deposit – record amounts of money have poured into Japan's Postal Savings System which is guaranteed by the government. And the sales of home safes have been one of the bright spots in an otherwise depressed retail market – which also demonstrates that there is still a serious lack of mattresses in the typical Japanese house or apartment. But absent from today's news stories about its moribund financial system is the recognition that Japan remains the second largest global economy and the top lender to the world – and these two distinctions will not change any time soon. I was recently asked on national television if the IMF would have to address the Japan problem? My answer was that, for the foreseeable future, the IMF would only be going to Japan in search of funds.

However, with the dollar continuing to strengthen, there is great incentive for Asian economies, as well as economies in other developing countries, to devalue their currencies and, in effect, attempt to export deflation. Asia's current excess capacity has the potential to create enormous deflationary fallout in the region. This is why China's pledge not to devalue its currency has drawn rave reviews, while Japan's serious lending to the region has been greeted by comparative silence! In the words of one analyst, "The problem in Asia today is that trying to export deflation," and "Asian currencies, including the yen, will have to depreciate further against the dollar and deutsche mark." The net result of such a course of action would be a significant rise in the current account deficit of the United States. Many argue that the U.S. trade deficit should not be the driving force behind U.S. Government policy, but the political reality in Washington dictates otherwise. With American interest rates stable, other analysts express concern that Japan may begin to sell-off its vast U.S. Treasury holdings in an effort to strengthen the yen. While this might be true in the short run, it will be offset by the current moves by Japanese insurance companies to move a portion of their huge pension portfolios into U.S. Treasury instruments to take advantage of our interest rates, which are significantly higher than those in Japan.

It is critical that Japan, with over forty percent of its trade with Asian economies, open up its markets to regional imports and rely less on its traditional policy practice of exporting its way out of recession, if it hopes to fulfill its role in Asia. The U.S. policy approach toward Japan in the coming months will require greater finesse than simply urging more fiscal stimulus and tax cuts. To a large degree the United States and Japan are talking past one another these days. As we were with productivity ten years ago, the Japanese are tired of being told to reinflate their economy, so tired they have tuned out. If fixing it were easy, the Japanese economy would have been fixed long since. We, therefore, must maintain a delicate balance between pressing Japan to do its share in the region's economic recovery by absorbing Asia's output and encouraging the country to stay the course with difficult domestic financial reform. In Japan, with public anxiety about the economy at its worst level in 15 years, we may be putting too high an expectation on spending habits of the average Japanese consumer. After all, of that huge savings pool in Japan that we hear so much about, over 60% is held by people over the age of 65. These folks are not likely to buy a new sports utility vehicle or go on any other spending spree. The great dilemma is that a rejuvenated Japanese financial system is a prerequisite for regional economic stability, but such a prospect precludes Japan solely exporting its way back to health.

With all of this as background, we might expect that discussions over regional security issues – the U.S.-Japan story of last year – would be put on hold. But just as expectations about Asia's future economic performance are changing, perceptions about security threats in the region are also undergoing similar adjustment. The confidence that grew from Asia's economic miracle was once feared by some observers as being dangerously close to the hubris that could spark a regional conflict. Dramatic financial developments have since changed the political-military calculus for the region and it is only logical that the United States force structure in Asia should reflect these shifts – and that means our base configuration for forward deployed American forces in Asia must and will change as well. And for Japan, that will mean fewer U.S. installations on Okinawa and on the mainland. A natural evolution from that assumption is that Japan's Self Defense forces will be called upon to take a greater – not lesser – role in maintaining regional stability. The connection between the two has, unfortunately, not been made by political leaders in Japan or, indeed, in the United States. A recent Diet decision preventing Maritime Self Defense Forces from acting in concert with U.S. naval forces in a regional conflict is evidence of this disturbing lack of awareness of the larger picture. Both countries need to acknowledge – sooner, not later – that the number of American ground forces in Asia will decrease. This should be coupled with the sure knowledge that other countries will attempt to leverage this trend to increase their regional influence. Therefore, the United States and Japan must develop a coherent rationale for their military posture and articulate their new vision to the public in both countries. In this area, the two governments must be seen as acting on the basis of foresight and planning if they hope to avoid their actions being wildly misinterpreted.

Regional politics may force actions to be taken sooner than anticipated. China and Japan are now exploring the possibility of making a joint declaration on security and the U.S. and China already have one in place. Russo-Japan relations are entering into a thaw that may well prove permanent. Last weekend's visit to Japan by Russian President Yeltsin was very cordial, indeed. And despite recent territorial disputes, South Korea and Japan appear to be headed toward much improved relations. The new president of the Republic of Korea, Kim Dae Jung, has a strong feel for Japan and many close friends in both Tokyo and Washington. He has in a very short time done much to improve relations across the Tsushima Strait and Prime Minister Hashimoto, battered at home by criticism over the economy, could use the boost that improving his image abroad might provide. Of course, none of this may happen as just described, but U.S.-Japan relations will continue to evolve and in so doing, they will influence the pace, and profile, of regional change.

Americans are attuned to change; we expect it. Japan is uncomfortable with change, particularly when the need is to change policies that have worked so well for so long. We are all too familiar with these generalizations about the two countries. Ironically, U.S.-Japan relations have changed dramatically during the past six years, for the most part because of reaction to developments in Japan – the sudden demise of Japan's socialist party and the bursting of the "bubble" economy. Japanese have seen more government change in the past ten years than the previous twenty – although one can argue strongly that the Republicans gaining a majority in both Houses of the U.S. Congress is just as remarkable a political change. The caveat here is that so many of these changes did not track the signposts – that is they did not occur as a result of some strategic vision of the future. Nicholas Kristoff, The Tokyo bureau chief for The New York Times, astutely observed in a recent essay in Foreign Affairs that, "more than leaders elsewhere, Japanese leaders are engaged less in action than in reaction; the national agenda is shaped to a great extent by unexpected events that affect public opinion and thus constrain the options for political leaders... As a result, the main forces that have shaped postwar Japanese life, he would argue, are not politics or individuals, but the economic boom, urbanization, demographic change, the shifting status of women, and various unexpected incidents." We can only hope the future direction of the special relationship between the U.S. and Japan will not be left to chance or to blips in history. I would argue that as long as leaders in our two countries are aware of the same signposts and make effort to understand the underlying political dynamic in the other's country, then the relationship will stay on course. The true effects of the happenings and trends that Kristoff warns of are by no means only ancillary in nature, but they serve more a catalytic as opposed to directional function in terms of change. They may speed up the process of change, but control of the helm remains firmly in the hands of both governments.

What then do I draw on from all this. Are the differences in our world views so great that we are destined to eventually drift apart? While the 50+ years of security cooperation between the two nations in long in terms of the United States' 200+ year history, it is relatively short in terms of Japan's 2500+ years. Thus, whether security, politics or economics, the first rule for both governments and peoples is to take nothing for granted, to accept nothing as permanent. Second is to avoid the assumption that just because we are headed in the same direction the same remedies will work for both. While the large economic entities in both countries appear the same, the cultural and economic realities that underpin them are very different. This same admonition is true for security and politics as well. And the third is to listen. It is amazing what one can learn by eliminating the sound of his or her own voice. The Future Role of United States-Japan Relations is not an easy topic, nor one that can be fully developed in a brief period of time. Still the United States-Japan relationship and the role these two nations can and should play together in Asia and the world is certainly worthy of our best efforts.

Thank you for taking the time to hear me this evening.



The Honorable William Clark is President of the Japan Society. Prior to joining the Japan Society in 1996, Ambassador Clark was Assistant Secretary of State for East Asian and Pacific Affairs. A career Foreign Service Officer, he has devoted the major portion of his career to Northeast Asia.