New Directions in U.S.
Economic Relations with Japan
Japan is the second largest economy in the world. After enjoying high
economic growth rates in the 1970s and 1980s, Japan went into a period of very
slow economic growth, instability, and deflation in the 1990s—a decade that is
still called the “lost decade” by macroeconomists. And this weak economic performance appeared
to be continuing as the Bush Administration came into office.
But having a strong
Japanese economy was a high priority for the Bush Administration. Stronger growth in Japan would benefit the United States and the world. It would provide Japan with the resources to play a key role with
States and other allies in providing security and development
Thus from the
beginning of the Bush Administration efforts were made throughout the
government to find ways to work with Japan to encourage higher economic growth. The efforts started at the top with the
excellent relations developed early on between President Bush and Prime
Minister Koizumi. The economic
relationship took new directions, emphasizing (1) friendly, but candid,
discussions and (2) a greater emphasis on monetary and banking policy for
economic stimulus rather than fiscal policy.
I recall one of our first bilateral inter-agency meetings with Japan on economic issues. The meetings took place
in my office on the same day that our military intervention began in Afghanistan. We all stopped our discussion to watch the
military action on TV and, as economic officials we began to talk about the
need for funding for reconstruction in Afghanistan.
The selections in this
section illustrate how the financial part of our policy was implemented in real
time. They emphasize financial issues,
and in particular ending the deflation and dealing with the non-performing
loans, both drags on economic growth.
The first selection—a
speech given in Tokyo—reviewed the U.S. position on the problems facing the
Japanese economy with suggestions for solving the problems. Before joining the
Bush Administration, I had a strong interest in Japanese monetary policy—having
been an adviser to the Bank of Japan before entering government—and I built on
this experience in this speech.
Selections 2 and 3 then report on the progress over the next year and a
half. By October 2003 it became clear to us that the new policies were
beginning to make a difference and I used the opportunity of a speech before
the Japan Society to make these views public. Deflation was diminishing and the recovery
was proving more sustainable than in the past, good signs of macroeconomic
stability. The policy now had to focus
more on the supply side to raise long-term productivity growth.
Items 4 and 5 give two
perspectives on the Bush Administrations overall approach to Japan during the first term. To be sure, not all aspects of our economic
relations with Japan are covered in these selections.
Exchange rate policy and U.S. collaboration with Japan in Afghanistan and Iraq, for example, are other important parts of
our economic relation with Japan. In the view of Ambassador Baker, who
played an essential role on these economic issues, the overall relation between
States and Japan during this period was the best in many years.
Economic Growth in Japan, Japan
National Press Club, Tokyo, Japan,
October 22, 2002
on Economic Reform in Japan,
Remarks at the Symposium on Building the Financial System of the 21st
Century: An Agenda for Japan
and the United States,
October 3, 2003
Economic Recovery in Japan Be Sustained? Japan
Society, New York, December 5, 2003
Relations Between the United States and Japan, Kyoto Stanford
Center, Kyoto, Japan, May 13, 2004
Directions for U.S. Economic Policy Towards China and Japan, Deer Creek
Club, St. Louis, MO, October 21, 2004