IP: Hashimoto's threat

[David Farber <farber () cis upenn edu>]

Date: Wed, 25 Jun 97 13:45:06 UTC
To: <fukuzawa () ucsd edu>
From: <rbevacqua () bap japan ml com> (Ron Bevacqua)


Dear Fukuzawans,


During the Q & A session following a speech at Columbia
University on Monday night, Prime Minister Hashimoto was
asked the following question:


"In light of the fact that, over the past 20 yrs the US dollar has
lost about 50% of its value against the yen, do you think it is in
the long term interest of Japan and its people to continue to
accumulate US government securities?"


His response, courtesy of the Asahi (June 24, evening, p1) was:


There are no officials from the Fed here, are there? The truth
is that on several occasions we have been tempted to sell large
amounts of US bonds. For example, when I was negotiating with 
(yari atta) Mickey Kantor, or [there was volatility because] the 
US was not concerned about maintaining the role of the dollar 
as an international reserve currency. Holding US bonds is not the 
only option. Rather, selling treasuries and buying gold is another 
option. However, if the Japanese government were to let that 
happen (houshutsu) even once, it would have a big impact on the 
US economy, wouldn't it? There are many countries who hold US 
bonds as foreign exchange reserves. They have continued to buy 
US bonds even when the value of the dollar fell, which has 
given some support to the US economy.  This is pretty obvious. I hope 
the US will engage in efforts and cooperate to maintain exchange rate 
stability, so that we would not succumb to this temptation to sell off 
US bonds and switch our foreign reserves to gold."


The news contributed to the biggest decline in the US stock market
(192 pts) since Black Monday, and there is ample reason for it:
the Bank of Japan owns well over $200bn in US bonds, and total
Japanese holdings of US bonds are somewhere in the neighborhood
of $500-600bn. To put that into perspective, the average US
deficit (ie, total new bond issuance in a single year) over the past 
several years is about $100bn.


Hashimoto didn't mince his words. His comment, at almost 3 minutes,
leaves little room for misinterpretation.  Nevertheless, MoF immediately
backpedaled: it issued a written statement this morning in Hashimoto's 
name which said that, "it is regrettable that what I said was
misinterpreted.  
What I wanted to say is that our policies have always been based on 
maintaining favorable relations with the US.  Japan will continue to 
cooperate with the US to keep the currency markets stable." MoF did,
however, admit in that statment that the "temptation to sell US Treasuries
existed."  


Perhaps his comments simply reflect his own opinion. They came 
after a prepared speech, so it seems the remarks were off-the- 
cuff.  And, as I understand it, he did indeed make a similar threat 
back in 1995. Moreover, such a big sell-off of US bonds would
almost certainly be against Japan's interest: it quite likely would lead to a 
stronger yen, and it would almost certainly send the US economy into
a recession, which would hurt Japanese exporters. Perhaps this explains 
why MoF tried to spin the comments the other way.


Whether the threat is empty or not, the result is a nightmare for the 
entire Japanese government. Rule number one of Japanese diplomacy 
is to keep Japan out of the headlines and off the radar screens, 
especially in Washington. Until today, Clinton/Rubin et al have been 
playing a little politics with Japan's trade surplus, but the fact (a) that 
they have done nothing to alter policy and (b) US unemployment is 
under 5% suggests that they are willing to accept a higher Japanese 
trade surplus as long as it doesn't cost them politically.  That worked 
well when Japan was off the radar screens in DC. Now, however, 
Hashimoto may have put Japan back on the map, and Clinton may have
a tougher time fending off criticsm of a rising trade imbalance with Japan.


Fukoku Kyohei,
Ron Bevacqua