Tokyo buys surplus American anger: Japan is trying to meet US trade demands, but Peter Torday finds we've been here before

WHEN Japan's Prime Minister, Morihiro Hosokawa, meets President Bill Clinton today, he faces rising American frustration at the huge US trade imbalance with Japan and a growing threat of trade sanctions by the US Congress.

His one trump card, the undeniably impressive Y15,250bn ( pounds 95bn) domestic economic stimulus package, is already being derided in some quarters of the US government only days after it was made public. Officials grudgingly, and inaccurately, described it as a 'moderate step'.

In spite of public posturing, the package should go some way to assuaging American anger, even if there are many doubts over whether this stimulus to domestic demand will boost import growth any more than the ill-fated slide in Japanese interest rates in the late 1980s, which led to the boom and bust of the bubble economy.

On the surface, US frustration is justified. Latest Japanese figures show that its trade surplus with the rest of the world rose to dollars 141.43bn last year from dollars 132.6bn in 1992. In part this is due to the impact of the steep rise in the yen, which initially pushes up the dollar value of the surplus: a given volume of imports become cheaper when measured in dollars before the cheapness has had time to encourage a higher volume.

In yen terms the current account surplus dropped by 2 per cent to Y14,610bn in 1993.

And in volume terms there are much clearer signs that the trade picture is set to alter radically. As the graph shows, export volumes (which measure the quantity of exports rather than their value) dropped by 6 per cent in the year to October. Import volumes rose by 3 per cent in the same period.

Research by the Organisation for Economic Cooperation and Development suggests that this trend will accelerate. The estimated 30 per cent appreciation of the yen since mid-1992 should cut the trade surplus by dollars 60bn in 1992-97.

The fact that Japanese export volumes are already waning even though world trade is projected to expand by 5.4 per cent this year, and likely to accelerate later this decade under the new Gatt regime, demonstrates the potentially dramatic shift in store for Japan's trade performance.

However, there are two trends that must worry the Americans. First is the fact that Japan's sharp loss of trade competitiveness also implies that the trend of shifting production overseas - chiefly to low-cost sites in South-east Asia - will speed up.

That means that while the trade figures may tell a promising story, Japanese goods assembled abroad will continue to flood the world.

The second is that although import penetration is growing - as Japanese consumers search for low- priced alternatives to high-priced domestic goods - it appears that it is the Europeans, at least in the all- important field of cars, who are benefiting. American cars are expensive, and do not have as many exclusive dealerships.

This result has increased the pressure on the Clinton administration for 'managed' trade agreements, under which numerical import penetration targets are set for cars, car components, telecommunications equipment, insurance products and medical goods.

The US wants import penetration to double from the present level of 7 per cent of national output. And the US trade lobby will be pressing for action, especially since the only genuine managed trade accord in existence today, covering semi-conductors, is breaking down.

It is thus no accident that in recent weeks, Congressional threats to invoke the Super-301 trade law, under which the administration is required to retaliate unilaterally against countries with closed markets without reference to Gatt, have mounted sharply.

Making matters worse, the healthy growth rate of the US economy and a modest rise in the effective dollar exchange rate is swelling US demand for imports. The trade deficit is projected to hit a record dollars 160bn this year, reinforcing protectionist pressures in Congress.

A key problem facing US policymakers is the fact that it is very hard to sell imports in Japan. The distribution network badly needs reforms and often raises import costs sharply, or simply blocks distribution beyond the Tokyo region.

The Americans, however, are skating on thin ice. If they push Japan too hard, the effects on the economy could be counter-productive.

The US began pressing for a more open Japanese economy in the early 1980s, prompting a long period of low interest rates in an effort to boost domestic demand. The result was boom and bust, leading to the collapse of the bubble economy and little lasting benefit to US exports to the country. Now the Japanese economy is being pushed into a potentially dangerous loosening of fiscal policy.

Bowing to western demands, over one-third of the latest package takes the form of tax cuts - most of which are a one-off income tax rebate that should directly boost domestic demand. The balance of the package comes as public spending and loans to make up for the current reluctance of Japanese banks to lend. Moreover, many analysts believe that the impact of three earlier boosts to public spending will finally be felt this year.

Research by UBS economists suggests the estimated final effects of the package will be equivalent to some 7.5 per cent of national output - perhaps the biggest postwar economic stimulus in any G7 country.

(Photograph omitted)