The Bush-Kaifu Meeting Jude Wanniski February 27, 1990

The Tokyo stock market seems to have at least temporarily pulled out of its tailspin, probably awaiting news from the Friday/Saturday meeting in Palm Springs that President Bush has hastily arranged with Prime Minister Kaifu. The 11% plunge in the Nikkei Dow these last ten days is obviously tied to the breakdown in the U.S.-Japan trade talks, as we argued last week, along with the Bank of Japan's foolish tightening of monetary policy to assuage U.S. Treasury officials. The Tokyo slide has not spread to Wall Street because it is the Japanese economy that would take the most damaging blows from U.S. trade sanctions and related monetary disorder. There is, so far, no suggestion of retaliation by Japan should the Bush Administration impose Super 301 trade sanctions on Japan as a result of the impasse in negotiations.

The Palm Springs meeting is worrisome because there is so little room for maneuver by either political leader. Kaifu and the Liberal Democratic Party emerged from the national elections 10 days ago in an awkward, weakened position. As BusinessWeek reports in its March 5 issue:

The LDP may have promised its way into a corner in exchange for the 275 seats it won. To avoid offending small shopkeepers, LDP candidates made sure not to talk about reforming Japan's retail laws, a major obstacle to increased sales of U.S. products. They promised farmers they would shut out rice imports — bad news for American growers. Plus, the estimated $1 billion cost of the LDP's campaign makes the party even more dependent on contributions from business interests that favor protectionism.

It is of course our view that the United States has no business telling the Japanese, who after all have a democracy, how they must manage their domestic policies to avoid punishment by us. It is arrogant, presumptuous and bullying on our part to push Tokyo around just because we have the power to do so. A superpower, no less than an individual, should conduct itself according to the golden rule, and it is painfully obvious that if the roles were reversed, we would be furious at Japan dictating industrial, agricultural and monetary policy to us. All the people of Japan can do is smolder and hate and watch the value of their capital assets tumble as they prepare to take the blows of U.S. trade sanctions.

We have little doubt that Treasury Undersecretary David Mulford is behind the Bank of Japan's interest rate squeeze. Mulford last week addressed the Japan Society in New York with his patented tough talk: "The U.S. administration is coming under increasing pressure to resort to legislative solutions as the perception grows that unfair practices in Japan's financial markets not only benefit Japanese financial institutions but also have an effect on other areas such as trade and direct investment." The bank's governor, Yasushi Mieno, two weeks ago returned from a visit to Washington and told the Japanese press the U.S. Treasury wanted the yen stronger, which can only mean Mulford.

Mieno has been jacking up rates in Japan on the excuse that while the general price level has shown no sign of inflation, he must act to bring down the inflation in asset values! Stock prices are inflated! Tokyo real estate is inflated! The goose that lays the golden eggs is inflated! It's his job, he says, to arrest this inflation! This is of course nonsense of the worst sort, as Makoto Utsumi, the outspoken Vice Minister of Finance for International Affairs, last week pointed out in the ministry's public brawl with the Bank of Japan: "Asset inflation is, by nature, different from inflation in the proper sense of the word." Inflation is a decline in the monetary standard by which assets are measured. Mieno's tightening is purely and simply an attempt to assuage Mulford's appetite. The Nikkei finally came off the floor when the Finance Ministry intervened to buy bonds, injecting liquidity.

How is President Bush going to deal with this state of affairs? The press is assuming that he is going to confront Kaifu, perhaps kindly and gently, but with clear demands for concessions. From his acquiescence to the Super 301 Trade Bill in 1988, which President Reagan would have vetoed if not for his Vice President's preference that he sign, Bush has allowed himself to be caught up with many of the arguments advanced by the protectionist elements in both parties. He has CEA Chairman Michael Boskin and OMB's Richard Darman pulling toward the free trade position, but Treasury's Nick Brady and White House Chief of Staff John Sununu have been successful in pulling toward the hard line.

The Palm Springs meeting is a historic one, a crossroads in history. It's unlike any other meeting between a U.S. President and a Japanese leader in this century, because there is so much at stake and so little room for maneuver. The "trade issue" is simply a metaphor for the century-long problem of Japanese expansionism, its necessary expansion beyond the barren rocks that make up that densely crowded island nation.

I've recommended to the administration that the President invite Prime Minister Mulroney and President Salinas to the California summit with Kaifu. The gesture will immediately be seen as a moderating influence on U.S. interventionism in Japan's domestic affairs. It will also put the trade issue in a broader context. As I'd suggested to the President in a letter last fall, the people of Japan cannot and will not yield to the U.S. on the central rice issue, because we have not given them any reason to trust us on our reliability as a trading partner. (Remember the Nixon shock of 1971.) But multilateral guarantees from Canada and Mexico as well can resolve this problem. Obviously, Mulroney and Salinas would restrain an otherwise tough-talking President Bush, which would help produce an optimum outcome of this meeting.

The Tokyo stock market has not been falling because of its overpriced, "inflated assets." It has been falling because Japan is highly vulnerable to the kind of insensitive bludgeonings and bashings that abound in the U.S. Congress and in too many nooks and crannies of the Bush Administration. There is nowhere for Japan to turn if the United States imposes sanctions as a result of the failure of these so-called Structural Impediment Initiative talks. All we can hope is that Secretary of State Jim Baker -- who assured everyone when he was Treasury Secretary in 1987/88 that the Omnibus Trade Bill would do good, not evil -- will figure a graceful way out of the confrontation that's coming. It would be a shame if the week that produced a personal victory for Baker in Nicaragua, on the gamble he took a year ago, would be marred by an impasse in Palm Springs and a renewal of the market decline in Tokyo.