Michael Lehmann
Chalmers Johnson
Shorenstein Reports on Contemporary East Asia
Number 5
May 1995
The continuing rise of the Japanese yen relative to the American dollar prompted the organizers of the Shorenstein seminars to invite Dr Chalmers Johnson, an outspoken authority on Japan, to present his views on the effects of the high yen on the Japanese American alliance and to suggest appropriate U.S. action. To introduce the subject Economist Michael Lehmann explains the background of the high yen phenomenon. Their presentations are summarized herewith. The seminar was held May 16, 1995, at the Asia Foundation in San Francisco with the cosponsorship of the Japan Society of Northern California.
Michael B. Lehmann is professor of economics at the University of San Francisco. He is the author of The Business One Irwin Guide to Using the Wall Street Journal. He is currently working on an analysis of twentieth century U.S. economic history tentatively entitled "Flash in the Pan: The Institutional and Ideological Roots of America's Economic and Social Decline." It is scheduled for completion in 1996.
Chalmers Johnson is president of the Japan Policy Research Institute, a nonprofit research and public affairs organization devoted to public education concerning Japan and international relations in the Pacific. He was a professor at the Berkeley and San Diego campuses of the University of California from 1962 to 1992 and held endowed chairs in Asian politics at both institutions. Johnson has published some twelve books on Asian subjects, including MITI and the Japanese Miracle. His latest book is Japan: Who Governs? The Rise of the Developmental State.
Michael Lehmann
At the end of World War II, the United States led the effort to establish the Bretton-Woods system of fixed exchange rates for international transactions. One of the central objectives of this system was to set the value of the dollar sufficiently high to encourage imports by U.S. consumers, thereby fueling a recovery in the war-devastated economies of Europe and Asia. To this end, the dollar-yen exchange rate was set at US$1=¥36O.
Minor readjustments were made in the exchange rates established under Bretton-Woods in response to the downward pressures on the dollar's value created by other nations' economic recoveries. These minor changes became increasingly ineffective during the 1960s, particularly as the U.S. buildup for Vietnam fueled American demand for imports (and, hence, foreign currencies) and increased pressures to devalue the dollar. President Nixon responded to these pressures by taking the dollar off the gold standard in August 1971, effectively ending the Bretton-Woods system.
From that day on, international exchange rates would be largely determined by capital markets. Governments of the leading industrial nations abandoned efforts to set exchange rates directly. Instead, they began to rely on two more indirect tools to manage monetary policy. First, they could raise or lower domestic interest rates. Raising rates would attract foreign investors, increasing the international value of the domestic currency, at least in the short term; lowering rates would obviously have the reverse impact. Second, central banks could intervene in international markets by buying or selling large sums of particular currencies in an effort to alter their exchange values.
Given the miraculous recovery of the postwar Japanese economy, Nixon's decision to adopt a floating exchange rate policy had an immediate and profound effect on the dollar-yen exchange rate. Within a single year the value of a dollar dropped almost 100 yen, or approximately twenty-five percent. Stubborn U.S. inflation after the oil shocks of the 1970s continued to erode the international value of the dollar: by 1978, the dollar was worth less than 185 yen.
In October 1979, Federal Reserve chairman Paul Volcker raised U.S. interest rates precipitously in an effort to combat inflation. These high interest rates attracted foreign currencies at a furious clip, pushing the dollar's value back up to over 250 yen in less than a year. The U.S. government, along with American companies and consumers, went on a furious buying spree with the newly strong dollar. The result was the explosion of the U.S. trade deficit that is still with us today.
In September 1985, Central Bank and Treasury representatives from the United States, Japan, Germany, Britain, and France met at the Plaza Hotel in New York to develop a common policy to reduce the dollar's international value and thereby reduce the mushrooming American trade deficit. By the late 1980s these efforts had lowered the dollar's value against the yen to the 120 range. The decline in the dollar's value against the currencies of our major trading partners has continued, so that today the dollar is worth less than 90.
On first glance, the Plaza accord participants appear to have succeeded. But while the value of the dollar has fallen, the U.S. trade deficit with Japan, which was the real issue at hand in the Plaza accord, remains. Many economists have long believed that a lower currency value alone is sufficient to overcome a trade deficit. This belief, which was clearly shared by the Plaza accord participants, is historically incorrect. The value of the dollar has fallen, but the trade deficit remains. And, as long as Japan has such an enormous trade surplus with the United States, we must, absent an equally large trade surplus in our favor with someone else, be a debtor nation. Of course, the United States is not merely any debtor nation. At the end of World War II, we were the world's largest creditor; today we are the world's largest debtor.
There are at least three reasons why the U.S. trade deficit has persisted despite the dollar's fall. First, it is true that the Japanese do cheat to some extent, making it difficult for U.S. companies to access Japanese markets even where our products are a better value in terms of price and quality. Second, it is also true that U.S. quality continues to lag behind that of Japanese products in many critical sectors. The Japanese are notoriously fickle consumers; lower priced but second-rate products simply do not sell well in Japan.
More important than either of these first two factors, however, is a more profound third difference between the Japanese and the Americans. The Japanese economy is organized, whereas the American economy is not. The Japanese economy is consciously mercantilist: there is an explicit strategy of cooperation between public and private sectors one that is intended to achieve a trade surplus with Japan's major trading partners. Individual U.S. firms are no match for this well-organized competition.
Unfortunately, there is little that the United States can do about our trade deficit as things currently stand. As long as we continue to believe that it is only Japanese discrimination against specific U.S. products that has prevented a lower dollar from lowering our trade deficit with Japan, the trade deficit will persist. Unless and until the U.S. government and private companies transform their attitudes about the values of public-private cooperation, the U.S. trade deficit with Japan will remain, no matter how low the dollar falls.
Chalmers Johnson
One of the institutions of the Japanese-American alliance formed by the Security Treaty of 1952 is the Shimoda Conference. Shimoda is the town at the tip of the Izu peninsula where, in 1856, Townsend Harris set up the first U.S. consulate in Japan. In the era since the end of the Allied occupation of Japan after World War II, there have been some fifteen conferences between Japanese and Americans held in the otherwise unimportant but symbolically significant place of Shimoda, the most recent of which concluded in October 1994. In the past, the Shimoda conferences have brought together a range of Japanese and American leaders from business, academic institutions, government, and the mass media to talk about the state of the relationship. This past autumn, reflecting the newfound if tenuous interest in APEC, the Asia-Pacific Economic Cooperation forum that the Australians pioneered and whose general meeting was the occasion of the first Pacific summit meeting a year ago in Seattle, other Asian leaders also attended the Shimoda Conference, including representatives from South Korea, China, Indonesia, Malaysia, Thailand, Australia, Singapore, and others.
What resulted this past autumn at Shimoda was an excellent example of the central paradox of Pacific international relations at the present time. On the one hand, representatives of the APEC countries other than the United States stressed a uniquely Asian approach to such matters as human rights, democracy, and conflict resolution. It was argued that the Asians settle conflicts through consensual, collegial, and nonconfrontational norms and that these methods are preferable to the imposition of Western values onto Asia. The APEC nations also argued that they were underrepresented in the annual Group of Seven (G-7) summit meetings of the advanced industrial democracies and that in the future they should coordinate views before the G-7 summits and have their views presented at the summit by Japan. When asked why the United States or Canada could not equally well represent APEC views at the G-7 summit, they answered that Japan is a preferable representative because it is an Asian nation.
At the same time, the delegates to this year's Shimoda conference also agreed that a continued U.S. military presence was essential to continued stability and peaceful economic development in the area (despite Asian values about conflict resolution). Any U.S. military withdrawal was viewed as likely to result in tension between China, Japan, and ASEAN and potentially great uncertainty and instability in the region. Many delegates recognized the need eventually to develop some kind of multilateral security mechanism for the Pacific, but this was discussed only in a theoretical sense. The conclusion was that the Asia First strategy of many delegates -- what the Japanese speak of as the "restoration of Asia" -- works only if the United States continues to play its unilateral Cold War role. And yet, no one could think of any reason why the United States should do so.
In the five years since the Berlin wall came down and the Soviet Union imploded, the main trends in trans-Pacific international relations have been three: first, Japan's main opinion leaders -- the bureaucracy, heads of big business, journalists, and intellectuals -- have been preparing the country for the end of the Japanese-American relationship as presently constituted; second, China has started to react to Japan's enormous economic influence by balancing Japan's potential power and exerting China's own economic influence among the overseas Chinese and non-Asian investors; and third, American foreign policy has been drifting, reflecting inertia left over from the Cold War in military deployments and expediency in day-to-day policy depending on domestic political considerations. While these forces are working their way into the consciousness of the peoples of the Pacific region, the concrete pattern of relations boils down to one of waiting for some incident that will make the intrinsic situation extrinsic. Such an incident would reveal how the global balance of power has shifted in favor of Asia and how little prepared the Americans are for coping with this development.
The Americans continue to fantasize about their being the "lone superpower" without realizing that unipolarity renders the global dimension of strategic competition irrelevant. Current U.S. forces and deployments are no longer appropriate for the actual military situations that may occur, and the United States is close to being in a position of armed impotence. At the same time, the country's continued assumption of a Sparta-like role as global policeman ignores the profound shift that is under way from military to economic power and raises the question of whether the United States will follow the former USSR into geostrategic irrelevance once it has bankrupted itself.
Meanwhile, the Japanese profited more handsomely from the Cold War than any other power, and they are of course delighted to see many of its arrangements perpetuated regardless of how irrelevant they may have become. They continue to believe that their unbalanced "partnership" with the United States is still viable and that they can still behave as an export-oriented developing country even though they enjoy the largest trade surpluses ever recorded.
In my view, the most important fact about the post-Cold War Asia-Pacific region is Japan's growing economic dominance and the degree to which this is integrating the nations of the region. The means of integration are trade, direct investment, aid, financial services, technology transfer, and the example of Japan as an inspiration for an Asian model of development. In general, all of the Asian nations depend on Japan for loans, technology, investment, and foreign aid, whereas they depend on the United States as a military counterweight to Japan and China, as a consumer market for goods manufactured in Asia, and for higher education. The questions are Can the Japanese-American relationship be rebuilt along new lines and can the hopes of APEC be politically realized? Or is the post-Cold War world to be divided into three blocks -- Europe, North America, and Asia -- with Japan trying to offer leadership of the latter? Let me take up these questions.
In my opinion, the historic contribution of the United States to the enrichment of Asia was not particularly its wars, military deployments, diplomacy, or treaties. It was, rather, its markets. The United States bought the high-quality, low-priced manufactured goods produced in East Asia-first from Japan, then from the NICs (the newly industrialized countries of South Korea, Taiwan, Hong Kong, and Singapore), then from Southeast Asia, and today from mainland China. Without a market for these products, there would have been no East Asian economic miracle. One problem that has always existed with Japan's idea that the East Asian economies were like a V-formation of flying geese, with Japan as head goose (aside from the fact that China may not always like being number two goose), is that nobody ever asked where these geese were flying. They were actually flying to Los Angeles! One important fact about the post-Cold War world is that this destination can no longer play its traditional role. A new primary market for Asian manufactured goods must be found. That market must become Japan, or else the area will experience very serious economic instability in the immediate years to come.
The U.S. market cannot continue to play its traditional Cold War role for at least four reasons. First, the U.S. economy is not growing fast enough to continue to absorb most of Asia's exports. Second, the produce of Asia is now so large that no distant foreign market could possibly absorb it all. Third, the United States needs to cut consumption as a percentage of GDP (gross domestic product) in favor of savings and investment, whereas Japan needs to increase consumption. Consumption in the United States constitutes fully 68 percent of the domestic economy, whereas it is only about 56 percent in Japan. I agree with the Japanese that we Americans consume too much; one of the best places to cut down would be on Japanese imports. Fourth, the United States has no alternative but to attend to the demographic and socioeconomic trends in its southern neighbors, particularly Mexico. To do otherwise is to leave open the possibility that what happened in Nicaragua during the 1980s will occur along the length of our southern border. Our answer is to give Mexico privileged access to our market, which implies some closure of the American market to Japanese platforms in Malaysia and elsewhere in Southeast Asia.
The United States is very much aware of the importance of its military forces in East Asia. The United States is virtually the only Pacific power with the capacity to project power over long distances. That capacity is one that it should not abandon, but it needs to be brought into the service of a realistic, post-Cold War policy toward Asia. The United States no longer has any need to intervene in, for example, a Korean civil war. Its presence in the Korean war four decades ago -- when I myself first became involved with Asian affairs -- was dictated by concern for the actions of Communist China and the USSR. Today, both of these nations in their current forms (that is, China and Russia) have diplomatic relations with the country they were then fighting. Moreover, the Republic of Korea has two times the population and ten times the productive power of the North; it should be fully capable of defending itself in any contest that did not involve external powers or nuclear weapons. I believe that the United States should continue to guarantee the Republic of Korea's security from nuclear attack but that U.S. ground forces, based in the country for almost fifty years, should be withdrawn.
Similarly, the United States no longer has any reason to support the politically conservative Liberal Democratic Party (LDP) in Japan just because it is anti-Communist -- as the recent revelations of CIA support for the LDP from 1955 to 1972 reveal that we did in the past. We have every reason to promote multiparty democracy in Japan, and if that means that we force the zaikai, or business community, to liberalize by pressuring them with the high yen, retaliatory trade actions, and managed trade, then that is what we should be doing.
The major new element in the Asia-Pacific region is a China growing at double-digit rates. When the world's largest social system begins to grow as fast as it is growing today, it alters the regional and world balance of power very rapidly. In a very short period of time, China can have an economy as big as or bigger than that of the United States but with a per capita income still only one-fourth to one-sixth that of the United States. When such economic power is combined with China's thermonuclear capabilities (including its continued nuclear testing), its scheduled absorption of Hong Kong within less than three years, its growing economic community of interests with Russia (China has moved from being Russia's seventeenth trading partner before the onset of perestroika to second place today, just behind Germany), and its cultivation of the overseas Chinese as investors and as potential members of a "Greater China," one has a right to be concerned.
As the world witnesses the shift from the enrichment to the empowerment of East Asia, the most important relationship will be that between China and Japan. We do not know how it will develop. Many prominent Japanese strategists, such as former ambassador Okazaki Hisahiko, and some worried Americans, such as Professor Samuel Huntington of Harvard, predict future Sino-Japanese tension and hostility. Okazaki thinks that Japan is putting too much stress on the "return to Asia" strategy, and Huntington hopes that in the future a weakened United States can play China and Japan off against each other, much the way English conservatives in the 1930s hoped that Hitler and Stalin would take each other out. I believe that the much more important contingency is the possibility that China and Japan will reach a modus vivendi and cooperate with each other. In that case, the United States need not worry about having a positive policy toward Asia. Like England when it lost its colonies, the United States will have little choice but to adjust to a massive shift in the balance of power toward Asia, while seeking to obtain the best terms for trade and other forms of interaction it can get. We will all become mere tourists in Asia in need of little more than visas and lots (and I mean lots) of money.
But if Okazaki and Huntington are right and Japan's current efforts to cultivate China fail, then there is a role for the United States to play in East Asia. It will need to use its power to attempt to forge and maintain a balance of power. This is a very controversial subject, including quite open questions about who would be the major players in East Asia whose relations need to be kept in balance. Some analysts include Russia and India, but in my opinion, both are likely to be too internally preoccupied to play a major role in international relations. In my conception, the balance of power in East Asia requires a balance among China, Japan, and ASEAN, with a unified Korea and Vietnam playing the most important buffer roles, much as Poland and Belgium did in Europe after the Congress of Vienna. The United States would play the role of external balancer, guaranteeing the security of Korea and Vietnam while shifting its support among the major powers to maintain a balance. I believe this is a realistic formulation of future security problems in East Asia, but I find that very few Americans have much stomach for it. When it is proposed that the United States might guarantee the security of Vietnam against China, the reaction is Why should we do that? Why not instead adjust to and cooperate with China?
We in the United States know that our last three big wars began in Asia -- only one of which we won. History offers us every reason to continue to play a constructive role in maintaining Asian-Pacific security, including deploying and using our military forces, particularly our highly visible carrier task forces, in appropriate ways that have Asian support. But we have no reason at all to try to balance the power of Japan and China without also acquiring a major stake in the extraordinary economic prosperity of East Asia. As it stands today, American troops based in Japan cannot afford to leave their bases for a bowl of noodles, given the yen-dollar exchange rate. It does not take a Thucidides to understand that, regardless of what American political or military leaders may say, the current relationship is unstable. It is certainly not one that can easily be projected into the future. At Shimoda several Asian participants asked the Americans, What is your price to stay in Asia militarily? That is exactly the right question, and Americans cannot continue just giving the same old Cold War answers to it. But we have not the slightest indication that even if we could agree on a new role to play in Asia, the American people will want to play it, regardless of what history teaches. The situation cries out for innovative political leadership of at least the Marshall Plan variety.
The Japanese-American alliance lasted from approximately 1950 to 1990 and was based entirely on the Cold War. The Cold War is now over, and the old relationship between Japan and the United States continues through inertia, waiting either to be given a new basis or revealed by some incident to be moribund. The Cold War is over, but it is not the end of history, regardless of some Americans' attempts to sign up Hegel in support of their alleged "victory." It is rather a time of history restarted, which means that all countries should be open to a range of contingencies. They should also keep their powder dry.
Rapporteur: Ken Dubin
