Foreign Relations of the United States, 1961–1963, Volume XXII, Northeast Asia

331. Memorandum of Conversation⁰

Washington, June 20, 1961, 4 p.m.

SUBJECT

• United States and Japanese Balance of Payments Problems

PARTICIPANTS

• Japan
  • Prime Minister Hayato Ikeda
  • Foreign Minister Zentaro Kosaka
  • Kiichi Miyazawa, Member of the Upper House of the Japanese Diet
  • Shigenobu Shima, Deputy Vice Minister for Foreign Affairs
  • Koichiro Asakai, Japanese Ambassador to the United States
  • Teshiro Shimanouchi, Counselor, Ministry of Foreign Affairs, Interpreter
  • Nobuhiko Ushiba, Director, Economic Affairs Bureau, Ministry of Foreign Affairs
  • Akira Nishiyama, Minister, Embassy of Japan
  • Tadao Kato, Counselor, Embassy of Japan
• United States
  • The Secretary of State
  • Douglas Dillon, Secretary of the Treasury
  • Chester Bowles, Under Secretary of State
  • Edward Gudeman, Under Secretary of Commerce
  • Rowland Burnstan, Assistant Secretary for International Affairs, Department of Commerce
  • George W. Ball, Under Secretary of State for Economic Affairs—B
  • R. Sargent Shriver, Director of the Peace Corps
  • Edwin O. Reischauer, United States Ambassador to Japan
  • FE—Walter P. McConaughy, Assistant Secretary
  • NA—Leonard L. Bacon, Acting Director
  • NA—Richard L. Sneider, Officer-in-Charge of Japanese Affairs
  • Edgar J. Gordon, Acting Chief, FE Division, Office of International Finance, Treasury Department
  • NA—Kingdon W. Swayne, International Relations Officer
  • James J. Wickel, Interpreter, Department of State

The Secretary called on Secretary Dillon to speak on the subject of the United States balance of payments. Secretary Dillon opened his remarks by stating that he would like to associate himself with the statement made earlier by Secretary Rusk about the GARIOA settlement.¹ He expressed great pleasure that a mutually satisfactory settlement of this difficult and vexing problem had been reached.

Turning to the United States balance of payments situation, Secretary Dillon noted that there has been a considerable improvement in the first few months of this year, the upturn having begun late last year. For the past three years there have been very substantial deficits; for 1960 the figure was $3.8 billion. However, an analysis of this figure discloses that there was a great improvement in the basic trade deficit, from $4 billion in 1959 to $1.9 billion in 1960; the remaining $1.9 billion in 1960 was the result of short term capital movements.

In the first quarter of 1961 the overall deficit was at the annual rate of $1.2 billion, made up of a deficit from short term capital movements at an annual rate of $1.9 billion (identical to 1960) and a surplus in the basic trade account at an annual rate of $700 million (compared with the 1960 figure of $1.9 billion).

Several points should be made about these figures. The surplus in the basic account is not as favorable as it appears. It is largely the result of a decline in imports due to our business recession which reached the low point of the cycle during the first quarter. Imports (annual rate) were $1.3 billion less than last year. Thus, if imports had equalled those of last year, the basic trade account would show a deficit of $600 million (annual rate) instead of a surplus of $700 million. The business upswing has now begun and we should begin to see higher import levels in the fall. We expect that they will return to the December 1959 level which was $2 billion over the level of the first quarter of 1961. This level of imports would create a deficit in the basic trading account of about $1.25 billion.

While our imports have been temporarily low because of the business recession in the United States, the economies of Europe and Japan have been booming and our exports have been good. We hope this will continue. On the other hand, the temporary drop in our import level should soon be corrected and this will produce a continued imbalance in our international payments. We therefore believe we must continue with the President’s program to preserve a reasonable balance in our international payments, for such a balance is essential to the maintenance of the value of the dollar.

Looking to the future, we hope, by carrying out the President’s program, to reduce our out-payments by $1 billion to $1.5 billion. At the same time we expect our commercial imports will increase by about $2 billion so that the other trading nations of the world will not be hurt by our reduced out-payments under the President’s program.

With respect to the short term capital flow, the rate of the outflow for the first quarter of 1961 was the same as for the whole of 1960, but was much less than the very high rate reached last fall. This year the components of the short term capital outflow are also different. Last year there was a combination of substantial capital outflows for business reasons, such as the search for higher interest rates, plus large speculative outflows. The latter have all but disappeared, but the outflow for business reasons continued during the first quarter of 1961 at approximately the same level as 1960.

The short term capital outflow in the first quarter of 1961 had some interesting aspects. The largest amount went to Japan as financing for Japanese imports from the United States. The next largest amount went to Germany, where German businessmen were borrowing dollars in New York as a hedge against a possible further revaluation of the German mark. (We do not think the Germans will reevaluate the mark again.) Because of these special factors, we think the short term capital outflow situation during the first quarter of 1961 is better than it appears on the surface. Greater confidence is also being shown in the value of the dollar. There has been a net gold inflow of more than $100 million since February.

Prime Minister Ikeda expressed his appreciation for Secretary Dillon’s analysis of the balance of payments situation. He had watched the situation very closely and considered that it was no longer a cause for great concern. On the Japanese side, gold and dollar reserves have been built up to about $2 billion but there have been deficits on merchandise account of about $600 million so far this year. This is a matter of considerable concern and is a question which the Japanese view as a real test for the Ikeda Cabinet. The Prime Minister said he anticipated that business conditions would improve in the United States in the second half of 1961 and expected that Japan’s situation would be helped by substantially greater United States imports from Japan later this year. He expressed the hope that the United States could assist Japan in balancing its payments by continuing to make purchases in Japan from ICA and DLF funds.

Prime Minister Ikeda noted that there are two primary reasons for the imbalance in the Japanese payments situation. First, Japan has liberalized the importation of cotton and wool, and purchases of these commodities have increased considerably. Second, as a result of Japan’s trade liberalization program, Japanese manufacturers feel they must improve the productivity of their plants by importing large quantities of expensive industrial equipment. Japan is devoting 20 percent of its GNP to capital investment. It needs this high rate of investment because it is the least developed of the well-developed countries. The rising imports are not for luxury goods but for raw materials and a greatly increased quantity of industrial machinery. Most of this machinery is being bought in the United States.

0. Source: Department of State, Secretary’s Memoranda of Conversation: Lot 65 D 330. Confidential. Drafted by Swayne and approved in S and B. The time of the meeting, which was held at the Department of State, is taken from Rusk’s Appointment Book. (Johnson Library) This is one of six memoranda of this conversation: the memorandum on GARIOA is cited in footnote 1 below; the memoranda on trade liberalization and textiles are Documents 332 and 333; the memoranda on the Administrative Agreement and the Peace Corps are not printed. (All in Department of State, Secretary’s Memoranda of Conversation: Lot 65 D 330)
1. After the Prime Minister expressed appreciation for the GARIOA settlement, which had been initialed in Tokyo on June 9, Rusk stated that the United States had been very satisfied with the settlement and planned to use some of the proceeds for financing aid to less developed counties. See Document 353.