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May 19, 1995
Mortgage rates spent most of this week bouncing off the 8.125% bottom of a new trading range (30-year, "zero and zero" prices). Rates should hold between there and 8.375% at least until the June 2 employment report.
Industrial production fell for the second straight month, down .4%, and industrial capacity utilization dropped to 84.1%, well under the 85% inflation danger zone. April housing starts failed to rebound from a sorry March.
Trade sanctions against Japan begin today, and will probably expand beyond punitive tariffs on luxury cars. Nobody can anticipate the full extent of consequences.
This August we will celebrate the 50th anniversary of the end of unpleasantness which was triggered by America's previous sanctions on Japan: the oil embargo in July, 1941.
At first look, it seems silly for American negotiators to focus on exporting automobiles to Japan. In some ways, it's like forcing Iowa to import corn.
However, the particular choice of ground for this combat doesn't really matter. The over-valued yen has not reduced Japan's grotesque surplus, and its failure to do so has exposed Japan's trade manipulations beyond any possible misunderstanding. We need to pick a fight, and cars are as good a place as any to start. The old quality arguments are no longer valid, especially at these exchange rates.
It is tempting to accuse Japan of cheating, but such Western labels aren't descriptive. Japan's artfully closed markets reflect a society with values very different from ours, and an economic society in deep trouble.
Japan's compulsive drive to win the export/import game is ruining its economy. Japan does not trade, it only exports, which has lead to extraordinary distortions: a people living poorly at home and rich only when abroad; a 58% stock market crash; most of the export winnings lost in foreign investments; a banking crisis; and the beginnings of an uncontrollable deflationary spiral.
Change in Japan is nigh impossible. In the first response to the sanctions, Japanese auto makers have decided to pick up the tab. Sell a $50,000 car, make a $5,000 profit, and pay a $50,000 penalty so as not to lose market share. This is a uniquely Japanese decision: pay any price to stay on plan, even if the cost is higher than any benefit from the original plan. Banzai!
Maybe that's the grand solution: Japan will continue its $60 billion surplus, and we will impose $60 billion in tariffs, and Japan will pay. Anything to avoid changing its economic society.
Japan was closed to the world until Commodore Perry and his well-armed "black ships" demanded an opening in 1854. A mere 140 years later, under pressure from Treasury Secretary Rubin's black limousines, Japan may disappear from view once again.
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