Structural adjustment, dialogue, and U.S.-Japan economic relations - W. Allen Wallis' address before the Executive Committee Meeting of the U.S.-Japan Business Council in Kona, Hawaii, on Feb. 16, 1987

US Department of State Bulletin, May, 1987

Broad-gauged changes in Japanthat remove the policies, practices, and attitudes that discriminate against foreign companies, products, and services; and

Japan becoming an importingsuperpower, not just an exporting superpower.

The point I would make is not simplythat stronger Japanese growth must be generated from domestic sources if current account imbalances are to be reduced in an orderly, sustainable fashion. Rather, it is that there is a very wide range of attitudes, policies, and institutions which have contributed to the one-sided, export-oriented nature of the Japanese economy and that efforts to restructure need to take the same wide range.

I am talking about fundamentalstructural change in the Japanese economy--not, for example, the matter of how much more money should be spent on public works projects. Thus, I would hope Japan would undertake a thorough assessment of government policies which affect the allocation of resources among sectors and between consumption and savings. If government policies interfere with the transmission of market signals, the structure of the economy evolves in a distorted way.

Let me take the example ofagriculture one more time. I have already pointed out that Japan's protectionist agricultural policy directly reduces imports and costs consumers dearly. But Japanese agricultural policy has another, unintentional effect. Price supports for agricultural products in Japan encourage continued use of scarce land for farming. This system, combined with the tax treatment of capital gains, limits the availability of land for residential purposes. The scarcity of residential property is reflected in the very high cost of housing which makes it necessary to secure a large mortgage. But because mortgage financing is scarce, it is very expensive. Thus, in order to have affordable mortgage payments, a potential homeowner must come up with a large downpayment. The consumer's need to accumulate large amounts of saving to make a sizable downpayment and subsequently heavy monthly mortgage payments depresses the consumer goods market and also, perhaps, imports.

This is just one example of the kindsof government policies which need to be changed if Japan is to build a solid domestic basis for growth. Whatever the purpose of these policies, they clearly have significant side effects on the level and structure of domestic demand in Japan. This has consequences both for the current economic situation and for the future. A stronger, more flexible domestic market is important to meet the immediate problem of external imbalances, and also to prepare Japan's economy for the future, when newly industrialized countries will increase competition in export markets traditionally dominated by Japanese products.

Savings, Investment, and Structural Imbalances

The external imbalances I have mentionedreflect internal imbalances between saving and domestic investment. The surplus in Japan's balance of payments is essentially equal to the excess of its domestic savings over its investment. In particular, Japan's traditional fiscal, monetary, and regulatory policies may be encouraging higher saving, lower investment in housing and infrastructure, greater emphasis on export-led growth, and larger trade surpluses than more efficient, market-oriented policies might encourage. Japan's savings are large, and because its economy, except for export industries, is generally inefficient, only part of those savings is invested in Japan. A large part is invested abroad, and foreign investment in Japan is relatively low. Thus, an important step toward reducing Japan's payments surplus is to increase the attractiveness of Japan to investors--both Japanese and non-Japanese investors. This, in turn, requires drastic measures to reduce the inefficiencies in the Japanese economy.