Trade Move Holds Risks : Reagan Pressure Shakes Japanese

TOKYO — Townsend Harris, America’s first consul general to Japan between 1856 and 1862, wrote in his memoirs that a crucial element in dealing with the Japanese was use of threats and display of power.

So well known is the use of threats to extract concessions that a word for it has entered everyday speech: gaiatsu (foreign pressure). Foreigners familiar with Japan use the Japanese word in daily conversations.

Even Japanese officials in a minority seeking change often appeal to foreigners behind the scenes to apply gaiatsu (pronounced guy-ah-tsoo) on their behalf, American envoys have noted.

But U.S. threats over economic frictions attracted little more than yawns from the Japanese until President Reagan decided March 27 to exercise power against Japan for what he called its failure to uphold a semiconductor agreement.

Talked Tough Many Times

As Commerce Secretary Malcolm Baldrige put it, “There are probably a good many Japanese, as well as Americans, who have made note of the fact that Uncle Sam had perhaps threatened or talked tough 50 times but had never backed it up.”

Baldrige understated the case. American threats date back to 1966, when Commerce Secretary John T. Connor said in a speech here that the Japanese government “can make a stitch in time that can save nine as regards . . . the fabric of U.S.-Japan economic relations.”

The United States, Connor added, was determined “to uphold the principles of equity and reciprocity--positively or negatively--whichever is called for.”

Two decades later, Reagan’s first application of economic force shows that gaiatsu has effects: New measures--from a policy to stimulate Japan’s domestic economy to discussion of American complaints over car telephones--have suddenly been taken up.

But this gaiatsu also has shown that the old tactic carries dangers.

Reagan’s decision to impose punitive tariffs of 100% on Japanese electronic goods stirred the world’s stock and financial markets into a reaction that already has injured both the United States and Japan.

In the United States, some interest rates went up, threatening to dampen the American economy. In Japan, the yen climbed to yet another high, threatening to sap profits of Japanese exports even more.

Reactions to Tariffs

Treasury Secretary James A. Baker III, testifying Wednesday before the House Appropriations Committee, said the market reaction to new tariffs on Japanese imports, including a 57-point plunge Monday in the Dow Jones industrial average, was an overreaction but was based on well-founded concerns.

“It was a good example of adverse reaction we would see from world economic systems,” said Baker, if the United States imposed stronger protectionist measures.

Fears of Dollar’s Collapse

It also led Finance Minister Kiichi Miyazawa to speak of fears of a global collapse of the dollar.

“The market instinctively knows that a further weakening of the dollar will become an impediment to the inflow of capital into the United States,” added Satoshi Sumita, governor of the Bank of Japan.

Announcements by major American banks of higher prime interest rates counteracted the momentary upset on both stock and foreign exchange markets, which Japanese institutional investors had helped create. By the end of the week, the stock market had bounced back with a record one-day gain in the Dow Jones average.

Fears that Reagan’s sanctions marked the beginning of a trade war with Japan persuaded such Japanese institutional investors as insurance companies to sell off part of their investments in U.S. Treasury bonds. That contributed to lower prices and higher interest rates for the bonds, which, in part, set the stage for the increase in prime rates in the United States.

The logic of the insurance firms was that only by driving the dollar’s value down still farther could the United States substantially reduce its trade imbalance with Japan, which last year reached $58.6 billion. Forty percent of Japan’s global exports go to the American market.

These developments underscored a comment by Mark E. Buchman, executive vice president of Union Bank, in an interview in Los Angeles in January, 1986.

“If the Japanese withdrew their holdings of U.S. Treasury bonds tomorrow,” Buchman said, “it would be like dropping a bomb in the middle of the trading floor” of financial markets.

Last week, it was only a grenade that exploded--spontaneously and not in retaliation. But the potential for worse damage remained because of Japan’s new status as the world’s leading creditor nation and its major source of capital as well as an important underwriter of the big U.S. budget deficits.

By the end of last week, both Baker and U.S. Trade Representative Clayton K. Yeutter were moved to reduce the pressure by saying that the United States is not seeking a trade war with Japan.

Yeutter added that Japan is a “great and respected friend” of the United States, despite the dispute over semiconductors.

New Dangers Surface

The application of gaiatsu also pointed to new dangers in Tokyo of the United States’ pushing too hard: Japan for the first time warned of counterretaliation.

Hajime Tamura, minister of international trade and industry, threatened to “consider” abolishing all or part of the U.S.-Japan semiconductor agreement if the Reagan Administration “forcefully” imposes the retaliatory tariffs “unilaterally” April 17. Both he and Foreign Ministry officials reiterated the warning in mid-week.

Despite Japan’s conviction that the United States is wrong in accusing this country of violating the semiconductor agreement, Reagan’s sanctions drove home, as nothing else has, the seriousness of Japan’s deteriorating economic relations with the United States.

A Foreign Ministry official, who asked not to be identified, described relations as being in a “pre-crisis” stage.

“We take the current situation very seriously . . . and are tackling the issues with all available resources of the government and the ruling Liberal Democratic Party,” he said.

Sees Political Problem

Nobuo Matsunaga, ambassador to Washington, said during a home visit for consultations that U.S.-Japan economic frictions can no longer be solved as an economic problem. They must be solved as a political problem, he said.

Japanese calls for action stemmed from their fear that Reagan’s declaration of a “chips war” could spur Congress to restrictions on a whole range of Japanese products, threatening Japan with loss of access to the American market.

“The current dispute over semiconductors is not an isolated issue. It has emerged as a symbol of mounting frustration and irritation with Japan,” the prestigious Nihon Keizai newspaper commented.

Suddenly, task forces have been put to work on solutions to the entire list of American complaints against Japan, including issues the United States has not even mentioned recently.

The Finance Ministry, for example, leaked word that it is preparing to announce another round of liberalization of Japanese interest rates. Even the Agriculture Ministry, the citadel of Japanese protectionism, issued a white paper that mentioned, for the first time, a need to create an “appropriate combination” of imported and domestic farm goods.

In all previous white papers, the ministry had stressed only the need to increase self-sufficiency in food.

Studying 5 Issues

The ruling party’s Special Committee on International Economic Countermeasures, headed by Masumi Ezaki, listed five specific issues on which it hopes to work out solutions. They are semiconductors, super computer sales to Japanese government agencies and universities, contracts for American construction firms in building a new $8-billion Osaka airport, foreign participation in a new international telephone company, and purchases of American aircraft for use as the Japan Air Self-Defense Force’s next generation support fighter plane.

Ambassador Matsunaga seconded that list and added to it an appeal to import more U.S. coal and reduce Japan’s tariff on chocolate products.

The envoy also urged Japan to sharply increase its official development aid and to ease terms on loans to developing countries, as well as to provide additional funds to the world’s most indebted countries.

“The time has come for Japan to consider its international responsibilities,” Matsunaga said.

Other officials have mentioned reconsidering a decision to relegate Motorola to the Nagoya-Osaka area, but not Tokyo, in selling car telephones.

Reagan’s gaiatsu is not the only force at work in the new flurry of attention to economic frictions with the United States.

Japanese Prepare Proposals

Well before Reagan announced the sanctions, Nakasone was planning to visit the United States. Now that the trip has been scheduled for April 29-May 5, government agencies and the ruling party have been mobilized to work out a package of proposals for him to take to Washington.

Planned visits to Japan later this month by both Yeutter and Agriculture Secretary Richard E. Lyng also have added a sense of urgency.

Many Japanese now echo Washington’s call for a new Japanese economic policy to spur domestic demand--which Americans hope would mean Japanese buying more U.S. goods. But such calls from Japanese stem not so much from U.S. gaiatsu as from the 65% rise in the value of the yen in the last 18 months, an exchange-rate shift that cut 19% from yen earnings on Japanese exports last year compared with 1985, even as Japan’s trade surplus continued to grow in dollar terms.

Such calls for spurring the economy had brought little action from Prime Minister Nakasone, whose hallmark has been reduction of budget deficits, stringent belt-tightening and reform of the bureaucracy. But four days after Reagan announced the U.S. sanctions, Nakasone for the first time declared himself ready to adopt a “dramatic” package of measures, including increased government spending, to stimulate the economy.

The Hopes for Growth

Japanese businessmen are interested in more growth at home to take up the slack in demand for their products created by the drop in export volume, while the United States believes that more growth will pull in more imports.

Last year, the economy grew by only 2.5% in real terms, the smallest growth in 12 years. A government forecast for 3.5% real growth this year has been contradicted by private economists and businessmen, who fear that growth will dip to 2% or lower without stimulative measures.

Noboru Goto, head of the Japan Chamber of Commerce and Industry and a confidant of Nakasone, urged adoption of an expansionary package big enough to push growth up by an additional 2%.

Calls have also emerged for Nakasone to come up with specific policies to lend credence to a promise he made to Reagan a year ago, which Yeutter complained Thursday had not been carried out. In April, 1986, armed with the so-called Maekawa report calling for a restructuring of the Japanese economy, Nakasone said in Washington that he would transform Japan into an “import giant” sustaining itself not on exports but on growth at home.

The outlook for resolution of the myriad disputes is likely to become clear when Nakasone visits Washington in what could be the most risky venture he has made in foreign affairs since taking office in November, 1982.

It promises to bring U.S.-Japan economic relations to a watershed.

A Nakasone failure to convince American leaders that meaningful change will occur in Japan could provoke Congress to an all-out protectionist attack upon Japan.

Success, however, also could cause more trouble. If Nakasone carries a persuasive package of trade concessions with him, a Capitol Hill trade specialist in Washington said, it may encourage Congress to apply still more gaiatsu--because Congress will be convinced that it works.