The recent U.S.-Japan accord pledging reforms in business and cultural practices is of great importance -- especially to Japan. It coincides with significant changes, already underway, that are transforming Japanese society.
If Japan carries through the internal reforms it promised in the cumbersomely defined "Structural Impediments Initiative" (SII), it likely will benefit its own population and enhance its influence in world affairs.
But don't expect the agreement to do much to cut the $49 billion American trade deficit, regardless of upbeat comments from American and Japanese officials.
Internally, Japan may be poised at the beginning of a bold new era, with electoral power shifting away from the rural to the urban areas, breaking the stranglehold that rice farmers have had on the Liberal Democratic Party. The land, tax and other reforms that will be stimulated by the SII talks should, over time, help Japan lower retail prices, focus on consumer needs and expand the supply of badly needed public amenities such as parks and sewers.
"We may be seeing the collapse of the whole postwar structure in Japan," says New York economist Sam Nakagama, who has good sources in Tokyo. "Japan, as a manufacturing country, ought to be for free trade. That's what big business there wants."
Prime Minister Toshiki Kaifu demonstrated he takes seriously President George Bush's invitation at Palm Springs, Calif., earlier this year to engage Japan in a "trialogue" with America and Europe in managing the emerging post-Cold War international order. Japan has the wealth, strategic position and desire to be a major player on all global fronts. Tokyo's new clout was much in evidence at the economic summit, symbolized by its unilateral decision to proceed with a $5 billion loan to China.
Japan was pressured into the SII exercise as a way of averting a second unilateral designation by the United States as an "unfair trading nation." That humiliating status was laid on Japan, India and Brazil in 1989 as a result of tough trade legislation pushed through by Democratic majorities in Congress.
Bush and Kaifu needed some agreement they could bring to Houston. For Kaifu, it presents Japan as willing to make changes that will focus on something other than exports. For Bush, it shows an increased sensitivity to global pressure to cut the U.S. budget deficit, underscored by his reversal of the "no new taxes" pledge.
They hope the SII deal will quiet the hawks in each country who would rather promote and extend the animosity that has been injected into U.S.-Japan relations in the past couple of years.
The terms of the SII deal require extensive changes on both sides. The United States is supposed to move toward a balanced budget; increase its national savings rate while reducing the cost of capital; make major improvements in a run-down educational system; and consider ways of giving shareholders a stronger influence in corporate affairs.
Japan, for its part, agreed to spend more money on public works, the idea being that such construction would lead to expanded imports of building materials, furniture, etc.; modify the "large retailers law," which by protecting "mom and pop" neighborhood stores discouraged the creation of supermarkets that are more likely to import goods; limit business cartel practices; and revise policies that keep land prices high, thus artificially limiting home construction. It also agreed to take steps to reduce prices that consumers must pay, which frequently are higher in Tokyo (even for Japanese goods) than in New York.
To be sure, it's a long way from SII paper pledges to a balanced budget, low-cost-of-capital economy in the United States, with a decent educational system and a new focus on quality performance. It's an equally long way to a restructured Japanese society that abandons its production-oriented economy, controlled by the old-boy keiretsu network, in favor of a consumer-oriented economy like the United States.
Not everybody thinks the SII talks were a good idea. One Japanologist, Prof. David G. Goodman of the University of Illinois, argues that complex cultural issues such as the retail distribution system should have been addressed by architects and urban planners, rather than by trade negotiators. He notes that Tokyo's high rating for safety of citizens is credited to "the vitality of its myriad individual neighborhoods with their mom and pop stores."
But in the real world, architects and urban planners would never have been invited to discuss Japanese mom and pop stores: It was the trade imbalance that forced the issue.
Ironically, factors other than the SII agreement will largely determine the trade balance-imbalance for many years ahead. An American recession in the next year (a good possibility) could affect imports and exports to and from all trading partners.