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Great Decisions '82; Japan: strategic ally, economic rival

Japan faces a profound crisis in its relations with the United States and other Western nations.

Trade frictions and the demand that Japan increase its defense spending are only the external manifestations of this crisis. The Japanese people and government face difficult, painful choices, some of which touch the very core of what it means to be a Japanese.

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''Sometimes,'' said a strapping young junior executive in one of Japan's giant general trading companies, ''I have a feeling that we Japanese may become like the Jews, driven from our own land and forced to live among strangers by our wits.''

A senior government official says, ''A new version of the yellow peril theory has raised its head in Western Europe. We Japanese are the target. The thesis is that for all the Western clothes we wear and the Western institutions we have adopted, we are fundamentally different from Westerners. We don't share the same values, we have a different work ethic.

''Unless somehow we can persuade the Europeans otherwise,'' he continues, ''they will start to ask why they should apply to us the same international rules of economic behavior that hold good throughout the rest of the Western world.''

With the United States, another official said, the situation is somewhat better, because the Japanese-American partnership rests on more solid and multifaceted political, historical, cultural, and economic links than does the Japanese-European relationship.

Japan is the United States' major strategic ally in East Asia as well as its most important trading partner except for Canada. But the strategic relationship brings with it its own set of problems, especially since the Reagan administration started stepping up its defense budget and demanding that Japan do the same.

Japan has a security treaty with the United States under which the US pledges to help defend Japan and Japan provides the US with bases on its territory.

Since Japan spends less than 1 percent of its gross national product on defense, there has been increasing congressional and public opinion in the United States that the security treaty benefits only Japan, not the US, and that Japan is getting a ''free ride'' on defense at the American taxpayer's expense.

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Nevertheless, of the two key issues between the US and Japan this year -- defense and trade frictions -- defense is probably the more manageable issue. This is because, over the years, Japan has been progressively moving in the direction the US wants - increased defense spending and greater defense coordination with the US.

This year, despite an austerity budget designed to trim deficit spending and maintain price stability, Prime Minister Zenko Suzuki allowed the defense budget to rise by 7.8 percent (compared with 2.8 percent for welfare and zero for public works), to $11.8 billion (at 220 yen to the dollar: This rate has dropped sharply in recent weeks). Secretary of State Alexander M. Haig Jr. and Defense Secretary Caspar W. Weinberger both praised this increase.

Japanese officials feel that as long as the defense budget continues in this direction and the Japanese can show that they are making a greater effort in defense than during the nonchalant 1970s, American discontent can be contained.

But trade frictions with the US have reached explosive proportions, and even usually unflappable government officials have no solutions immediately at hand.

Last year Japan had a trade surplus of $13.4 billion with the US, and $10.3 billion with the 10-member European Community. (These are based on Japanese customs figures. According to American figures, the surplus with the US came to year.)

Europe and the US accept, by and large, the Japanese view that on a bilateral basis, sometimes one side has a surplus, sometimes the other, and that it is more important to look at the overall pattern. But it is precisely this overall pattern that disturbs them, they say. Japan's exports are almost all manufactured goods. In 1980, 55 percent of US imports and 61 percent of Britain's were manufactured goods. Less than 23 percent of Japan's imports were manufactured goods.

While other industrialized nations buy manufactured goods from each other, Japan keeps this kind of import to a minimum. Nearly 50 percent of Japan's imports, in value terms, are oil and oil products. Nearly 30 percent are other raw materials and agricultural products. Yet in terms of tariffs and import quotas, Japanese officials point out their country is about as free as Western Europe -- freer in some cases. The Japanese have no tariff on cars. Still, Japan imports only about 50,000 cars a year, compared with exports last year of nearly 4 million passenger cars and more than 6 million four-wheeled vehicles altogether.

Does this not mean, some Europeans and Americans ask, that quite aside from formal barriers, there is something about the way Japanese society is organized that maximizes exports while holding down imports? These hard-to-define obstacles, generally referred to as nontariff barriers, exist as much in the eye of the beholder as they do in obscure rules and regulations. Japan's immensely complicated distribution system is considered a major obstacle to the penetration of foreign imports. Some exasperated would-be importers even include the ferociously difficult Japanese language in their list of nontariff barriers.

The Japanese respond that they are devoted members of the world free trade system. A nation of 117 million, squeezed into four narrow islands of which only 14 percent is cultivable and with no significant natural resources, Japan must import more than half its food, all its oil, and most of the iron, coal, and other raw materials its need for its factories.

How can it import the raw materials that mean jobs for its factory workers without a substantial export surplus?

''If we are to balance exports and imports,'' said a senior official of the powerful Ministry of International Trade and Industry (MITI), ''we would have to halve our standard of living. Our gross national product per capita is about $8, 000 today. We'd have to bring that figure down to $4,000.''

''But you aren't being fair,'' expostulate the Europeans and the Americans. ''You export pretty much what you like to our markets. But you do not take from us enough of the kind of goods that mean jobs for our workers -- cars, machinery , consumer goods.''

In mid-January, MITI Minister Shintaro Abe traveled to Key Biscayne, Fla., for a trilateral meeting with colleagues from North America and the European Community, at which participants agreed that the way to solve trade problems was not to slide into protectionism but to expand trade.

Mr. Abe promised that nontariff barriers would be drastically reduced, and by the end of the month the government announced it was doing away with 67 of 99 that had been complained of. Among these were Welfare Ministry regulations refusing to accept the results of tests on pharmaceutical products unless they had been conducted in Japan, and tennis and baseball association bans on non-Japanese balls and bats.

The government also announced it was setting up a trade ombudsman's office to which foreign companies that felt they had been unfairly treated could appeal. This office had been recommended in January 1981 by a high-level Japanese-American advisory group headed by former Ambassadors Robert Ingersoll and Nobuhiko Ushiba and known collectively as the ''Wisemen's group.''

The removal of identifiable nontariff barriers may ease European and American complaints of Japanese unfairness, but they will not significantly affect Japan's trade surplus.

The United States wants Japan to open wider its doors to manufactured and agricultural goods on which Japanese farmers are still protected by import quotas -- notably on beef and citrus fruit.

The vexed question of the Mediterranean fruit fly has complicated talks on increasing the citrus quota. American producers claim that Japanese fears of an influx of Medflies are vastly exaggerated, while Japanese producers accuse Tokyo of bowing to American pressures at the cost of endangering Japanese citrus groves.

But if all these identifiable obstacles to the growth of American exports to Japan are removed, US Embassy sources here calculate that it would make a difference at most of $800 million. And that, compared with last year's $18 billion trade gap, is a drop in the bucket.

Recently, the US and Europe have been looking in another direction to redress their balance of trade with Japan. In 1977, when Takeo Fukuda was Japanese prime minister, Japan, West Germany, and the US pledged at the Bonn summit meeting to become engines of economic growth pulling the entire Western economy out of recession, inflation, and unemployment.

Japan's contribution, Mr. Fukuda pledged, would be a growth rate of 7 percent. In 1981, Japan's growth rate was a very modest 3.75 percent, according to the Paris-based Organization of Economic Cooperation and Development.

Still, this was the highest growth rate in the Western world. Unfortunately from Japan's viewpoint, increased exports accounted for two-thirds of this figure. Domestic demand, in other words, contributed very little.

This year, Prime Minister Suzuki projects a growth rate of 5.2 percent. Many businessmen and economists doubt the country's ability to achieve such a goal at a time when the government is on an austerity budget and tax collections increase by far less than planned. Many large businesses, having learned to be profitable even with 3 percent growth, would be quite comfortable if the official target were never met.

Furthermore, Mr. Suzuki's priority is not economic growth but reduction of deficit financing. Like President Reagan, he has promised to streamline the whole cumbersome machinery of government, making it leaner and more efficient. He has also publicly pledged to end deficit financing by 1984.

Yet if Japan is to give up its heavy dependence on exports for growth this year, it will have to stimulate domestic demand. Otherwise, the trade gap with the United States and Western Europe is likely to accelerate rather than diminish, and Japan will come under even harsher criticism from its trade partners than it does today.

Here and there, among these trading partners, one hears the demand that Japan should actively cultivate domestic demand, increase its economic growth projections from 5.2 percent to 6 or even 7 percent, and thereby help pull in imports of consumer goods from abroad. In other words, even single-handedly, Japan should be willing to take on the role of an engine of economic growth.

Within Japan, this is not yet a popular view. But there are some economists, including former Foreign Minister Saburo Okita, as well as influential politicians like Economic Planning Minister Toshio Komoto, who advocate a growth-oriented economic policy.

Let the Suzuki government defer its plan to reach zero deficit financing by 1984, they say. There is nothing sacred about this date. If the government would stimulate domestic demand by a substantial public works and housing program and a trillion yen ($4.5 billion) income tax reduction, they argue, consumer demand would rise, businesses would once more begin to invest in equipment, production would increase, and profits and tax revenue would also rise.

Japan has far less to fear from inflation than other countries. In fact, consumer prices rose only 3.4 percent last year. There is however, one major obstacle -- high interest rates in the United States.

Americans frequently complain that the yen is undervalued and that this contributes to the unfair growth of Japanese exports. But as American interest rates rise, the yen falls. (On Feb. 21 it was 240 to the dollar.) Any Japanese attempt to stimulate business at home by reducing Japan's own interest rates, already far lower than those of the US, will only cause a further decline in the yen's exchange rate vis-a-vis the dollar.

On the other hand, if Japanese interest rates are raised to make the yen internationally more attractive, domestic trade is hardly likely to perk up. Japan strongly shares the West European position that American interest rates need to be brought down.

So far Prime Minister Suzuki has not listened to domestic advocates of reflation. But he is going to get plenty of advice on this subject from foreign partners, especially as preparations proceed for the summit of the world's seven richest industrialized democracies June 4 and 5 in Versailles.

Is Japan a locomotive of growth for the entire world? It is a heady thought for a country that was still receiving development loans from the World Bank just 20 years ago.

At a deeper level, this is part of the rethinking the Japanese must do as they ponder their transition from a simple dues-paying member of the world economic community to one that is expected to take the lead.

Another part is the role Japan may be asked to take in supplying funds for international aid organizations such as the International Development Association, now that the Reagan administration is no longer disposed to have the US supply the lion's share.

Japan is in the midst of a program to increase official development assistance from a total of $10.7 billion from 1976 to 1980, to a total of about billion per year.) But Japan's aid record so far has been more a case of keeping up with the Joneses.

Can a self-centered, long-isolated nation used to thinking of itself as poor rather than rich take on a leading role? Japan may have no choice if its people are to continue to prosper in an interdependent global community.

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