The current American-Japanese economic conflict is "extremely serious and will get much worse," international economics expert C. Fred Bergsten said yesterday in a speech to the Japan Society in New York.
He labeled the current episode "the nastiest" of three in the past 12 years, with racist overtones already present, and an "obvious spillover to the re-emerging issue of security relations between the two countries."
Bergsten, an assistant Treasury secretary in the Carter administration and now director here of the Institute for International Economics, blames Japanese-U.S. problems primarily on a "severe exchange-rate misalignment between the dollar and the yen."
He offered a new idea--admittedly "a bit unorthodox"--on how to bolster the weak Japanese currency. His idea is that Japan should once again "manipulate" its capital account, as he said it had done in 1979-80, to limit capital outflows and to promote capital inflows.
A cheap yen--now 245 to the dollar--results in a strong price advantage for Japanese goods. In turn, this boosted the Japanese trade surplus with the United States to $18 billion last year, Bergsten said. He predicted that Japan's trading edge would remain relatively unaffected unless the yen were to strengthen to between 180 and 200 to the dollar.
Bergsten did not take issue with the more or less standard explanations of U.S.-Japan trade frictions focusing on Japanese protectionist instincts, government guidance of and help for business, and American failures on the productivity and export promotion fronts.
But he argued that none of these "phenomena" explains "the periodic outbursts of U.S.-Japan economic conflict which have occurred on three fairly discrete occasions over the past 12 years." Rather, he says, the exchange rate has been "the villain" in all three periodic conflicts, with the dollar in each case moving into an overvalued position vis-a-vis the yen.
He said that the best way to cure the situation would be an altered macroeconomic policy mix in the United States and Japan that would narrow interest rate differentials. But because this is not in the cards as a realistic option, Bergsten argued that the best way to boost the yen rate against the dollar would be for Japan to impose a temporary moratorium on all capital outflows by Japanese residents, including those made for foreign direct investment.
In addition, he said that the Japanese government should follow an "aggressive" policy of borrowing abroad to finance its domestic budget deficit. "The result would be a dramatic improvement in Japan's capital account, which should immediately push the yen substantially upward," he predicted. Among other steps he recommended is an aggressive Japanese effort to attract foreign investment in government yen-securities, presumably by paying high interest rates.
Bergsten said the United States should endorse such a Japanese initiative, and support it by intervening directly in the exchange markets to bolster the yen. He charged that the Reagan administration's refusal to intervene in exchange markets was one of the main factors in keeping the yen at an undervalued level.
In addition, he blamed protectionist rhetoric for weakening the yen, because it gives rise to fears that Japanese exports will be reduced in the future.