TIME: Almanac 1995

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<text id=89TT0421> <link 93TG0056> <link 93HT0501> <link 90TT0948> <title> Feb. 13, 1989: Tiptoe Through The Tensions </title> <history> TIME--The Weekly Newsmagazine--1989 Feb. 13, 1989 James Baker:The Velvet Hammer </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 60 Tiptoe Through the Tensions </hdr><body> Bush and Takeshita try to start out on the right foot "If they don't hit it off, we're all in the soup," warned Yasuhiro Nakasone, Japan's former Prime Minister, as his successor prepared to meet President Bush last week. But there was little cause for worry. When Noboru Takeshita became the first foreign leader to hold a face-to-face meeting with the new President, the 2 1/2-hour session was as mild as Washington's 60 degrees F February weather. Gone were the threats of a trade war. Absent too was much of the anger that provided a harsh overtone for recent U.S.-Japanese summits. In their place was the hope, albeit still as fragile as a cherry blossom, for an era of growing harmony between the two countries that together represent almost half the non-Communist world's economic output. Yet unlike the meetings between Nakasone and Ronald Reagan, who called each other Ron and Yasu, the Bush-Takeshita encounter produced few signs of rapport that could help defuse a new outbreak of tensions. The two appeared stiff and uncomfortable as they stood side by side in the White House Rose Garden after a lackluster working lunch with senior advisers. Said Bush, who will return the visit later this month when he attends the state funeral for Emperor Hirohito: "Simply put, we respect one another. We need one another." Replied Takeshita: "In your words, the new breeze is blowing, Mr. President." The ritual rhetoric could not paper over the underlying problems in the relationship between the two allies. Chief among them is Japan's stubborn trade surplus with the U.S., which now seems stuck at more than $50 billion a year. After shrinking during much of 1988, the trade gap widened significantly last November, leading some economists to conclude that the improvement has at least temporarily stalled. The trade gap has defied such remedies as the dollar's steep two-year decline, which was expected to slow Japanese exports to the U.S. by making them more expensive. One reason for the lack of success is the still considerable U.S. budget deficit (fiscal 1988 total: $155 billion), which overstimulates the American economy and its demand for Japanese products. Nonetheless, Japan has made solid progress in overhauling its economy to help ease the trade imbalance. The country is phasing out protectionist quotas on U.S. beef and citrus products, for example, and has opened its construction market to foreign bidders. Japan imported 48% more U.S.-made computers and office equipment in 1988 than in the previous year, and 55% more semiconductors and telecommunications equipment. "A massive structural change has taken place in the Japanese economy," says economist Noriko Hama of the Mitsubishi Research Institute. "We are much more import-oriented than we were a couple of years ago." While Takeshita's popularity at home has been weakened by the adoption of a 3% consumption tax that he championed and a stock scandal that forced the resignation of three Cabinet members, he has been successful in expanding Japan's role as a global philanthropist. Among the signs: a planned 7.8% increase in Japan's foreign-aid budget. The growth will lift Japanese overseas assistance to $9.6 billion for fiscal 1989, and should propel Japan past the U.S. as the world's top donor. Tokyo has also unveiled a 5.9% rise in defense spending, which boosts Japan's military budget to $31 billion. The gain failed to satisfy Secretary of Defense-designate John Tower, who denounced Japan's constitutional limit on military power as a "lousy idea" last month during Senate confirmation hearings. But the increase demonstrated Japan's sensitivity to U.S. critics who want Tokyo to shoulder more of its defense burden. The two nations remain deeply split over ways to handle the mounting crisis in Third World debt, which now totals $1.2 trillion. While Japan would like to see a bigger role for the International Monetary Fund in reducing the debt burden, the U.S. fears that approach would simply funnel public funds into bailing out private banks. Washington, in contrast, thinks the IMF should take a harder line in collecting the IOUs that it has already extended. At week's end the debt crisis perplexed senior finance officials of the seven major industrial countries, or G-7 group (Britain, Canada, France, Italy, Japan, the U.S. and West Germany), at a summit meeting in Washington. Treasury Secretary Nicholas Brady, who asked for the meeting, billed it as merely an opportunity for the participants to get acquainted with the Administration and the new Japanese Finance Minister, Tatsuo Murayama. But for the first time the U.S. conceded that a debt-reduction plan pushed more than three years ago by former Treasury Secretary James Baker has not been a complete success. The so-called Baker Plan called for debtor nations to adopt free-market policies and for lenders to make new loans on easier terms. Now some G-7 leaders have proposed encouraging greater private-bank lending to developing countries by giving the institutions some tax incentives or regulatory breaks. Despite the lingering U.S.-Japan disagreements, the two countries have become so economically intertwined -- producing everything from Hondas in Ohio to IBM computers in Tokyo -- that competitive measures like the trade deficit may no longer give a complete picture of the relationship. "The notion of the U.S. vs. Japan is obsolete in this day of globalization," observes Kenichi Ohmae, managing director of the Tokyo office of McKinsey & Co., a consulting firm. Concurs Robert Hormats, vice-chairman of Goldman, Sachs International: "We don't have the luxury of constantly fighting each other." George Bush and Noboru Takeshita have already learned that lesson. But while the two men avoided plunging into a new bowl of soup last week, they made little progress in climbing out of the old one. </body></article> </text>