Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

194. Memorandum of Conversation¹

Tokyo, November 12, 1971, 6:05 p.m.

PARTICIPANTS

• Prime Minister Eisaku Sato
• Ambassador Hideki Mazaki (Interpreter)
• Terou Kosugi—Private Secretary to the Prime Minister (Excused himself after opening remarks)
• Secretary of the Treasury John S. Connally
• Ambassador Armin H. Meyer (Excused himself after opening remarks)
• James J. Wickel—American Embassy, Tokyo (Interpreter)

SUBJECTS

• (1) Opening Remarks
• (2) China
• (3) Vietnam and Korea
• (4) Second Kissinger Visit to Peking
• (5) President’s Moscow Visit
• (6) Economic Matters
• (7) Okinawa: Nukes and Bases
• (8) Closing Remarks

[Omitted here is discussion of the first five subjects.]

(6) Economic Matters

The Secretary explained that the President had to take the steps he did on August 15 to prevent any decline in our ability to maintain adequate military strength to ensure security, and to avoid the destruction of our ability to maintain an economic assistance program. Only by maintaining a strong economy, he reasoned, could we support our economic assistance efforts and even some increase in our defense establishment. The President is now able to move to reduce tensions with the USSR and the PRC because he is dealing from strength, but he cautioned the American economy must be kept strong.

The Prime Minister said that the Secretary bears a heavy responsibility on his shoulders. He appreciated that the President’s peace diplomacy depended on the continued maintenance of a strong deterrent posture in the interest of peace, and agreed that the American economy must be kept strong to ensure that purpose.

The Prime Minister said that Finance Minister Mizuta had informed him of his earlier discussions with the Secretary.² He speculated that the present monetary situation would not be easily resolved, since the EEC tends to move as a bloc, but one of its members, France, does not understand why it should move at all. He recalled meeting General DeGaulle, who threw out his chest and proclaimed that France would develop nuclear weapons to ensure its own defense; even though he admitted that France was too poor to afford a nuclear parity with the United States, DeGaulle wanted a force d’frappe to free France from its dependence on NATO. He commented that France is incapable of cooperating with anyone, even in economic matters. Japan is cooperating, he noted, but there is a need to persuade France to do so, much more than Germany.

The Secretary agreed completely, and said that it is easier to persuade all the other European countries than France, which seems to have a fixation about nuclear weapons as well as gold.

The Prime Minister said that the United States had been generous with many countries, and that Canada and Japan, and the NATO countries, including Germany, would cooperate in an effort to rebuild the United States economy, but he feared that this objective could not be easily achieved in the G-10. He asked for the Secretary’s frank and confidential appraisal of the prospects and of the role he expected Japan to play.

The Secretary replied that he had just postponed the G-10 meeting supposed to be held November 22-23, because discussions with the representatives of its members gave clear signs of a direct collision with France over the gold and monetary problem.³ The other nations feared that no good would come of a meeting at this time, he said, and presently consideration is being given to a meeting December 7-8, although a new date has not been fixed.

The Prime Minister agreed that it would be best not to meet until adequate preparations had been made. He apologized for not catching the news story about the postponement by explaining that he rarely reads newspapers because he finds their excessive hostility to his government distasteful.

The Secretary, by way of clarification, said that a meeting for the G-10 was not planned for November 22-23; the members were merely being sounded out, but the French leaked a report that it would be canceled.

The Prime Minister said little good would be served by speaking ill of France, but he noted that General DeGaulle, indebted as he was for the help of the Allied Powers, never thought of returning any favors.

The Secretary said that France had its problems, and that the UK would probably follow the French lead, at least until it obtained full membership in the EEC.

The Prime Minister said that the UK could probably play a useful role in the EEC vis-à-vis France in view of its special relationship with the United States.

The Secretary replied that one would think so, but these days, with its membership in the EEC pending, the UK could hardly be called helpful.

Still the Prime Minister thought that UK membership in the EEC would be beneficial in the long run since its presence would make it easier for the United States to present its views to the EEC.

Changing the subject, the Prime Minister said that he is deeply concerned that Japan and many other countries are feeling a sharp recession, which could, if unchecked, slip into a world depression. The United States economy is fundamental to this situation, he observed, but it could not be called bankrupt. Nevertheless mounting waves of recession could be seen on all sides and a reliable world system had to be rebuilt quickly. He did not believe that a breakdown in the system would lead to war at this late date in history.

The Secretary agreed that the United States had to correct its imbalance. Had it not acted August 15 to suspend gold convertibility it would have been exporting its depression to the world, he said, and the President felt that he had to act to bolster our own economy which was weakening to the danger point.

The Prime Minister said that he fully understood the need to suspend gold convertibility, but felt that the time had come to consider replacing it with a new system, based perhaps on SDRs.

The Secretary agreed.

The Prime Minister felt that it might get easier to deal with floating rates, and as more experience is accumulated exchange rates might be decided more naturally on that basis. He suggested considering a new system because there could be no return to gold convertibility, and perhaps floating exchange rates would provide a self-adjusting basis for realignment. He had not given up hope of a return to fixed rates (but not gold convertibility) although he conceded that the day of fixed rates might also end at some point.

The Prime Minister added that monetary adjustments are also of vital concern to the one million Okinawans who live on a dollar economy. Fortunately he worked out an arrangement with Finance Minister Mizuta to provide for the Okinawans to exchange their dollar holdings for yen upon reversion at the old rate, 360-1.

The Secretary then told the Prime Minister that he had made no specific suggestions about currency adjustment, burden sharing or trade liberalization in his discussion of United States economic problems with the GOJ Cabinet Ministers he had met; he had only outlined the nature of the United States problem and expressed the hope that they would consider how best Japan could help. He said that he informed all the Ministers that the United States seeks only to balance its payments, not to gain advantage over any other country, and looked forward to receiving suggestions on how Japan would help in whatever manner is politically acceptable and least offensive and economically feasible.

The Prime Minister asked whether all the Ministers passed this examination.

The Secretary said that all were interested in the amount expected of Japan. Our own study, he explained, disclosed that the Yen would have to be revalued 24%, the Mark 18% and the Franc 13% to yield the $13 billion swing the United States needed in its payments, but he conceded that this much might not be politically feasible for Japan, in one bite. Although the OECD and other international agencies disagreed with our own $13 billion figure, nevertheless he noted they did agree that the United States needed a swing ranging from $8-$10 billion to balance its payments. Of all the Ministers he met, he said he only informed Minister Mizuta of this 24% figure; he listened without comment.

The Prime Minister asked whether Minister Mizuta fainted, and whether the Secretary is serious about the 24% figure.

The Secretary replied that Minister Mizuta might have been shocked, but he didn’t faint. He is quite serious about his figures, the Secretary said, because a Federal Reserve Board computer study showed that the United States needed a $13 billion swing to balance its payments. Even after deducting the $1 billion allowed for errors and omissions, and $1 billion for safety, the figures showed, to be objective, a need for an $11 billion swing, which is not too far out of line with the $8-$10 billion swing the IMF and OECD admit the United States needs. Calculations based on the $13 billion figure showed that the Yen had to be revalued 24%, the Mark 18% and the Franc 13%, but he admitted that 24% might be unrealistic to expect of Japan in one step.

The Prime Minister noted the September improvement in the United States balance, and asked whether this trend is expected to continue, or whether it resulted from special circumstances.

The Secretary did not know the cause, but did not believe that the September improvement was that great. Our Balance of Trade for the first six months was in deficit, he said, and this year for the first time since 1893 it was expected that the United States would run a trade deficit. In a sense there had been some revaluation, with the Yen floating upward some 9-1/2% and the Mark upward some 9%, all of which helped, he said, toward balancing our payments, but these floats amounted to less than what should be made. Politically and economically he supposed that 24% would be difficult for Japan.

The Prime Minister asked whether the United States would leave the surcharge.

The Secretary said that we would remove it, with adequate revaluation.

The Prime Minister, almost thinking aloud, said that the 10% surcharge, plus the float, almost equaled the Secretary’s figure.

The Secretary observed that the situation might correct itself if the Yen floated freely for a number of months, without government intervention; realignment might thus become unnecessary.

The Prime Minister hoped that Minister of International Trade and Industry Tanaka had explained what a great effect the surcharge is having on Japan’s trade and economy; he also hoped the Secretary understood the impact of the Yen float on Japan’s export contracts, which had declined some 40%.

The Secretary observed that Japan’s export customs clearance figures for September and October didn’t show any appreciable decline.

The Prime Minister said that September was too early to show a decline, which only began to show up in October.

To be fair, the Secretary wondered whether both nations could agree to a relatively short bilateral arrangement, say for two years, with a trigger point for reappraisal if the agreement turned out to be bad for either side. He emphasized that he was thinking of a short term arrangement, which would not lock either side into a precise long-term position, because situations do change.

The Prime Minister said that he would have more to say about Yen parity later, but now wished to ask whether the United States is considering any more voluntary restraint requests, similar to the one presented through Ambassador-at-large David Kennedy.

The Secretary said that he hoped that it would not take three years to negotiate trade liberalization, since the GOJ is on record with its own trade liberalization program. There are a number of ways to correct the United States balance of payments situation, he said, but at the moment there are no product lines as urgent as textiles. However, he hoped that Japan would accelerate its tariff reductions and relax its administrative restraints as soon as possible. He then expressed appreciation for the Prime Minister’s efforts to successfully conclude the textile agreement.

[Omitted here is discussion of the last two subjects.]

1. Source: Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, Subject Files 1971-74. Secret; Nodis. Drafted by Wickel; a typed note indicates the memorandum, which is marked “Draft,” was not cleared by Secretary Connally. The meeting was held at Prime Minister Sato’s residence. Another memorandum records the section of the conversation on economic matters in which Connally, at President Nixon’s behest (see Document 187), asked if Japan would like to join the United States in a joint venture to develop and produce an SST. Connally explained that Boeing had developed a better prototype than either the Concorde or the Soviet TU-14 but Congress had refused to appropriate additional funds for tests and manufacturing and the project had been set aside. The United States would contribute the $1 billion in research data already in hand if Japan was prepared to finance the next stage. Connally noted that the President had discussed this with very few persons and asked the Prime Minister to keep it in strictest confidence. Sato agreed to keep the proposal in confidence, expressed some interest, but said he would have to study the proposal and would respond later. (Ibid.)
2. No record of this conversation was found, but a memorandum of Connally’s 6:30 p.m. November 11 conversation with Foreign Minister Takeo Fukuda indicates that Connally met with the Finance Minister prior to his meeting with Fukuda. The memorandum records that Connally told Fukuda “there is a strong feeling in the United States that the United States has given freely of its natural resources and its people these past 25 years and that frankly this is being abused by some of our friends around the world. For example, he said, in 1971 Japan’s growth included a 25% increase in exports, and the accumulation of foreign exchange assets at the rate of $1 billion per month, to the point that Japan’s foreign exchange totals $13.5 billion, more than any other country except Germany, and greater than the United States. The American people don’t understand Japan’s restrictions against computers, aircraft and agricultural products.” (Ibid.)
3. During Connally’s conversation with Foreign Minister Fukuda the previous evening (see footnote 2 above), the Secretary said he had been discussing postponing the G-10 meeting with Under Secretary Volcker, and Fukuda, also referring to France, had agreed there was no point to a G-10 meeting without some prospect for success.