Japan's Stance Toward the U.S. and China

Toyoo GYOHTEN (President, Institute for International Monetary Affairs)

Present State of the U.S. Economy

It seems that there is an increasing gap between the superficial movement and the underlying current of the U.S. economy. On the surface, the economy appears to be growing at a reasonable rate of 3 percent or so, and inflation seems well under control. Underneath, however, negative factors are gradually appearing and adversely affecting economic conditions.

Interestingly, those specialists who are close to the current administration are more or less optimistic about the future course of the U.S. economy. On the other hand, those who do not support the Bush government are quite pessimistic, saying that the real growth rate might possibly go down to zero later this year or by early next year because of rapid increases in oil prices and interest rates.

In any case, many people would agree that something has to be done to deal with the U.S. twin deficits--the budget deficit and the trade deficit--at least in the long run. Regarding the trade deficit, there are only three possible solutions: (1) decrease consumption in the U.S., (2) increase consumption in other countries, and (3) depreciate the U.S. dollar against other currencies. These steps are easier said than done, and should be pursued gradually and carefully in order not to disturb the world economy.

Challenges for China

Regarding the exchange rate issue, the U.S. is pressuring the Chinese government to appreciate its currency and the situation is increasingly becoming political, as the U.S. Congress is threatening sanctions against China by linking this problem with the textile issue. It seems, however, that the Chinese government is unlikely to yield to the U.S. demand, although it might be willing to make the currency system a little more flexible. Full-scale currency appreciation might well damage the export industry as well as state-owned enterprises, possibly leading to the downfall of the government itself. At least that is what the Chinese government seems to be afraid of.

The Chinese government should also worry about its external image, as it obviously mishandled the anti-Japanese movement within China for the last couple of months. They must be surprised at unexpectedly severe criticisms overseas against the violent demonstrations. However hard they try to suppress any demonstrations now, the damage has been done and the immaturity of China's democracy has become apparent.

While the Chinese government is facing a number of difficult challenges, including relations with the U.S., Japan, Taiwan, etc., they should and must be flexible enough to deal with these issues in order to hold the Beijing Olympics in Beijing and the Shanghai Expo successfully within the next few years.

Japan's Own Stance

Squeezed between the U.S. and China, Japan is placed in a rather difficult position. Given China's unfriendly attitude toward Japan, it seems logical for Japan to keep the current alliance with the U.S. for sometime to come. However, the Japanese government might as well be a little more assertive to show its importance to the U.S. economy. For example, by clearly pointing out the amount and the implications of Japan's holding of the U.S. dollar.

Regarding various trade issues such as beef, Japan needs to be tough in negotiations. While the government may have to seek compromises from the diplomatic standpoint, it would be desirable to air pros and cons within Japan on any issue openly so that Japan's public views can be better understood overseas for a healthier relationship with the U.S., as well as the global community in general.

On the other hand, it is understandable why the U.S. seems concerned about the concept of an East Asian Community. Since the U.S. identifies itself as a Pacific nation, it is natural for the U.S. to feel excluded in an economic community consisting solely of Asian nations. Furthermore, without the U.S., an Asian community could be dominated by China in the future, and China's hegemony is what the U.S. is worrying about.

In fact, China appears to be overconfident these days, often suggesting that the Japanese economy depends heavily on China's high growth without regard for the fact that the Chinese economy is also dependent on Japan's economy and business investment. Japan must openly express its opinion about the mutual dependency between the two countries in order to correct any misunderstanding on the part of the Chinese government and general public.

Japan should also work with the U.S. and other democratic nations to create an international environment for China to transform itself into a democracy. If Japan and China could share the same values and the same system, there would be no concern about the future of China or an East Asian Community.