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

92. Memorandum of Conversation¹

Washington, July 17, 1972, 11:30 a.m

PARTICIPANTS

• United States
  • Secretary of the Treasury George P. Shultz
  • Under Secretary for Monetary Affairs Volcker
  • Schubert Dyche, OINF
  • Michael Unger, OINF
• Japan
  • Nobuhiko Ushiba, Japanese Ambassador to U.S.
  • Michio Kondo, Finance Minister, Embassy of Japan

SUBJECT

• Summary of Ambassador Ushiba’s Call on Secretary Shultz

Ambassador Ushiba stated that he would be leaving for Tokyo tomorrow morning to meet with the new Prime Minister who takes great interest in our mutual problems. He also stated that Japan’s exports to the United States had eased very much compared to last year partly because of voluntary agreements on textiles, autos have leveled off and electronics have slowed. However in spite of these changes, a large trade imbalance exists which Japanese business and government is anxious to see reduced. The Ambassador believes that unless the trend is eased by September or October, there will be very strong protectionist pressures in this country.

Secretary Shultz stated that the strong Japanese surpluses were not compatible with a stable world system. It’s not only a question of protectionist sentiment but in a broader view it is not compatible with global stability. He further stated that some very substantial changes with real magnitude were necessary. The United States appreciates the goods Japan supplies us with—our consumers want them. The Secretary stated that he had met the new Prime Minister at a breakfast here and stated that the Prime Minister was a strong man and that if he decided to do something, it will get done.

The Secretary commended on the recent go around on the financing of a nuclear power plant in Japan.² Japan has the resource and should have financed the plant itself. It’s a question that goes beyond exports. What we want is a stable world trading and payment situation and given the income and price elasticities of Japan they are not consistent with a stable world system.

Ambassador Ushiba stated that the Japanese well understand the problem and that they were moving in the right direction by trying to reflate the economy and use foreign exchange for useful purposes. These things take time but Japan is moving in the right direction.

Secretary Shultz stated that it was important to have major things happen to bring about a better trade balance. The magnitudes are gigantic and that while little things are important they add up to numbers like $100 million or so—which is just a drop in the bucket.

The Secretary asked the Ambassador if there was any prospect of Japan setting targets for increased imports from the United States. He felt this was useful for the short run. The Ambassador stated that this was one of the themes to be taken up at the meeting in Hakone.³ The Ambassador wanted to know if this was a proposal from the U.S. side. Secretary Shultz stated that it was not a formal proposal, but was a substantive thing to talk about.

Ambassador Ushiba stated that Japan was considering some emergency measures such as stockpiling certain commodities.

Secretary Shultz stated that he thought this was a possibility which might be considered but such actions should be considered within the framework of a $3.6 billion trade surplus with the United States and $8 billion overall. The numbers that have to be brought into balance are very, very large.

Ambassador Ushiba stated that he had been informed by his government that the basic trade trend is changing—that trade should be less this year than last. Under Secretary Volcker inquired as to whether the Ambassador was referring to trade with the United States. The Ambassador stated yes. Under Secretary Volcker stated that he didn’t believe this was true.

Mr. Dyche stated that the results to date for 1972 indicate a deficit approaching at least $3.6 billion for the year, quite apart from various forecasts that also show deficits in this range. It’s difficult to see how a reduction for the year will come about in the next five months.

Ambassador Ushiba stated that he is certain that by end of year—by this fall a change will occur in the trading pattern. The effect of the revaluation is beginning to be felt and it is getting much more difficult to sell in existing markets.

Secretary Shultz stated that we must be realistic—the magnitudes are gigantic and that steps which have potential for real magnitude must be taken.

Ambassador Ushiba inquired as to what steps Secretary Shultz had in mind.

Secretary Shultz said that a few had been mentioned earlier. He thought the revaluation last December should have been greater.⁴ Our studies showed a revaluation of 25 percent would have been appropriate, even though we agreed it probably could not be done at one time. Our economy is growing faster this year and our imports will go up. He then reiterated that the problem was a broad world matter and Japan must take actions with real magnitude.

Ambassador Ushiba inquired as to whether Secretary Shultz thought the U.S. economy would continue to expand.

Secretary Shultz replied that he thought so. The building of inventories is beginning and economy moving quite well. The GNP problem is net negative exports—a problem in the expansion of last year. Basically economic expansion seems to be moving quite well—probably better than we forecast last January. Price indexes with some exceptions are settling down. A major problem is the management of 1973-74 budget, but the President has a way of getting things around to his point of view. He stated he thought the domestic economy looked good.

Ambassador Ushiba asked how the dollar looked.

Secretary Shultz doesn’t feel that there should be a new dollar crisis at this time. The U.S. economy is now stronger and prices are settling down. He thinks that the relative position of the dollar abroad if anything, has moved in a more positive direction. However, there remains the big deficit in our balance of payments with Japan and Canada. It’s a joint problem and unless there is a better balance, he sees no chance for stability.

Ambassador Ushiba asked a question about when the G-20 would be meeting.⁵ Also what happened to G-10?

Secretary Shultz felt the two groups would have continuity and perhaps the two would come together at some point. He indicated that the G-20 is broader to include the developing countries. He stated there are a number of things that have to be worked out—not only in an intellectual sense but in an administrative sense. The United States wants to stay close to Japan as we have a common problem.

Secretary Shultz asked Under Secretary Volcker if he had anything to add. To this Under Secretary Volcker stated that it was only a matter of emphasis. We don’t have much time as the foreign exchange markets show. Although the speculation occurs in Europe, one of the main reasons for speculation is the imbalance between the United States and Japan, and speculation won’t go away until our problem is resolved.

Secretary Shultz, in concluding, wished Ambassador Ushiba a pleasant trip and asked him to give his regards to Ambassador Ingersoll.

Ambassador Ushiba replied that he would do so.

Michael Unger

1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, Japan General. Confidential. The meeting was held in Secretary Shultz’ office. Drafted on July 18 by Unger and approved by Volcker. Ambassador Ushiba also met with Flanigan on July 15 prior to his travel to Tokyo. A memorandum of that conversation, dated July 17, is ibid.
2. On July 1 Export-Import Bank President Henry Kearns send a memorandum to Under Secretary Volcker informing him that on June 28 he had communicated with the Chairmen of Tokyo Electric Power and the Japan Atomic Power Company about financing two projects from Japanese dollar sources. Both had responded that it was not possible in the timeframe necessary to line up financing. General Electric Vice President Hoyt Steele also informed Kearns of the need for Export-Import Bank financing “if the United States is to achieve a major supply situation.” (Ibid.) On July 7 Federal Reserve Governor Brimmer wrote Volcker expressing his concern over an Export-Import Bank nuclear power loan for Japan, with which he had reluctantly concurred in the National Advisory Committee meeting. (Ibid.)
3. Special Trade Representative Eberle headed the U.S. negotiating team that met with Japanese trade negotiators at Hakone, Japan beginning July 25. See Document 93.
4. See Document 221.
5. The C-20 met for the first time on September 23; see Document 244.