CHAPTER 10

New Directions in U.S. Economic Relations with Japan

Japan is the second largest economy in the world. After enjoying high economic growth rates in the 1970s and 1980s, Japan went into a period of very slow economic growth, instability, and deflation in the 1990s—a decade that is still called the “lost decade” by macroeconomists. And this weak economic performance appeared to be continuing as the Bush Administration came into office.

But having a strong Japanese economy was a high priority for the Bush Administration. Stronger growth in Japan would benefit the United States and the world. It would provide Japan with the resources to play a key role with the United States and other allies in providing security and development assistance.

Thus from the beginning of the Bush Administration efforts were made throughout the government to find ways to work with Japan to encourage higher economic growth. The efforts started at the top with the excellent relations developed early on between President Bush and Prime Minister Koizumi. The economic relationship took new directions, emphasizing (1) friendly, but candid, discussions and (2) a greater emphasis on monetary and banking policy for economic stimulus rather than fiscal policy. I recall one of our first bilateral inter-agency meetings with Japan on economic issues. The meetings took place in my office on the same day that our military intervention began in Afghanistan. We all stopped our discussion to watch the military action on TV and, as economic officials we began to talk about the need for funding for reconstruction in Afghanistan.

The selections in this section illustrate how the financial part of our policy was implemented in real time. They emphasize financial issues, and in particular ending the deflation and dealing with the non-performing loans, both drags on economic growth.

The first selection—a speech given in Tokyo—reviewed the U.S. position on the problems facing the Japanese economy with suggestions for solving the problems. Before joining the Bush Administration, I had a strong interest in Japanese monetary policy—having been an adviser to the Bank of Japan before entering government—and I built on this experience in this speech. Selections 2 and 3 then report on the progress over the next year and a half. By October 2003 it became clear to us that the new policies were beginning to make a difference and I used the opportunity of a speech before the Japan Society to make these views public. Deflation was diminishing and the recovery was proving more sustainable than in the past, good signs of macroeconomic stability. The policy now had to focus more on the supply side to raise long-term productivity growth.

Items 4 and 5 give two perspectives on the Bush Administrations overall approach to Japan during the first term. To be sure, not all aspects of our economic relations with Japan are covered in these selections. Exchange rate policy and U.S. collaboration with Japan in Afghanistan and Iraq, for example, are other important parts of our economic relation with Japan. In the view of Ambassador Baker, who played an essential role on these economic issues, the overall relation between the United States and Japan during this period was the best in many years.

1. Raising Economic Growth in Japan, Japan National Press Club, Tokyo, Japan, October 22, 2002

2. Progress on Economic Reform in Japan, Remarks at the Symposium on Building the Financial System of the 21st Century: An Agenda for Japan and the United States, Gotemba, Japan, October 3, 2003

3. Will Economic Recovery in Japan Be Sustained? Japan Society, New York, December 5, 2003

4. Economic Relations Between the United States and Japan, Kyoto Stanford Center, Kyoto, Japan, May 13, 2004

5. New Directions for U.S. Economic Policy Towards China and Japan, Deer Creek Club, St. Louis, MO, October 21, 2004