Section 3. North America


1. The United States of America


(1) Internal and External Situations

(a) Internal Affairs

(i) Domestic politics in the United States developed mainly around the presidential election, the embarkation of the new administration and the establishment of its political foundation. In the 1988 presidential election, George Bush, who had served for eight years as Vice President in the Reagan administration, was elected president. The new Bush administration, while stressing the continuity of the Republican government in the three straight terms, is gradually hammering out policies that reflect the Bush philosophy.

President Ronald Reagan enjoyed broad popular support even at the end of his term, and stepped down after serving two consecutive terms, the maximum duration allowed by the Constitution.

(ii) Presidential Election

In the presidential election, the highlight of the political scene in 1988, there was a tendency for the campaigns to focus on election tactics rather than on policy discussions because of the lack of national issues. The Republican Party nominated Vice President Bush as presidential candidate and Senator Dan Quayle as vice presidential candidate while the Democratic Party nominated respectively Michael Dukakis, Governor of Massachusetts and Senator Lloyd M. Bentsen, Chairman, Committee on Finance. Both sides were engaged in the campaign heavily utilizing TV advertising.

At an early stage, the Dukakis camp was in the lead, but Bush reversed the tide of the campaign after the Republican Party's national convention in August. Eventually, on November 8, Bush gained a landslide victory winning 40 out of 50 states and resulted in 426 votes out of 538 elecoral college votes.

Bush's triumph was basically the result of the fact that the majority of voters favored to keep and advance Reagan's course. Another reason for his victory was the adroitness with which his camp ran a vigorous election campaign to establish Bush's image as president, and also to define him as the "mainstreamer" in U.S. politics.

(iii) Congressional Elections

The Republican Party demonstrated its overwhelming strength in the presidential election. However, in the congressional elections held simultaneously for 33 seats, or one-third of the total in the Senate and all 435 seats in the House, the Democrats, who had held the majority in both Houses, won one more seat in the Senate and three additional seats in the House to bolster their dominant position in Congress. The outcome of the congressional elections did not particularly reflect Bush's popularity. Rather, it showed a strong tendency for the electorate to vote differently in the presidential and congressional elections.

Twelve gubernatorial races resulted in a net Democratic gain of one with the Democratic total of 28 governors to the Republican's 22.



(iv) Embarkation of the New Administration

President Bush, who was sworn in as the 41st President of the U.S. on January 20, 1989, appealed, in his inaugural address, for unity and called on Congress for cooperative relations based on bipartisanship. At the same time, he clarified his stance of grappling with the problems of the homeless, drugs and crime which had been left unresolved, in a bid to build "a kinder and gentler" nation, thus winning high popular support.

The lineup of the new administration comprised mainstreamers, moderates and administrative experts of the Republican Party, including Secretary of State James A. Baker who was nominated immediately following the presidential election. In consequence, the Bush administration was considered as less ideological, more practical and realistic than the former administration. The nomination of former Senator John Tower as Secretary of Defense failed to obtain the approval of the Senate, and this seemed to be the first setback for the new administration. However, it escaped a major blow by nominating Congressman Richard Cheney, a popular Minority Leader in the House, instead to the post of Secretary of Defense.

The President discreetly pushed forward with personnel appointments and policy reviews while establishing the practical and consensus-based approach in policy and decision makings. Bush demonstrated his leadership in external affairs by performing, for example, his part creditably at the NATO summit in May 1989 and at the Arch Summit in July the same year, and by also addressing his policy on the Soviet Union with the view, "beyond containment." Domestically, he was put in a difficult position to strike out a new policy line in part because of financial restraints, but he announed a bill calling for revising the Clean Air Act, introduced anti-crime measures, including firearms control, etc., and also set to work on the solution of the problems which had been left unresolved in the past. This won him a high rating.

(v) Policy Agenda for the New Administration and Priority to Cooperation with Congress

With respect to policy-making, the Bush administration makes it a basic rule to build "a gentler" nation while furthering policies for "peace and prosperity" of the former administration.

On domestic programs and economic policies, the President has continued to maintain firmly his stance of not raising taxes though the reduction of the budget deficits is a problem of paramount importance. In addition, he has taken up, as major tasks, implementing economic growth measures (cutbacks in budget deficit; promotion of industrial developments primarily through tax incentives), investing in the future U.S. (enhancing standards of education; environmental protection; more effective fight against drugs and crime), and making "a kinder and gentler" nation (improvement of child-care; measures for the homeless; political ethics problems).

On the diplomatic scene, the President has so far pursued policies on the Soviet Union, Central America, Middle East peace, People's Republic of China, cumulative debts plaguing the developing nations, and environmental problems and so on.

In the intervening period, the Bush administration, which pays priority consideration to cooperation with the Democratic Party-led Congress, reached bipartisan accord on the framework of the budget for FY (fiscal year) 1990 and aid to the contras. It also gave due heed to Congress in the management of policies, including the "Super 301" provision of the Omnibus Trade and Competitiveness Act of 1988. Congress, on its side, has basically upheld the President's appeal for cooperative relations. On the other hand, President Bush exercised his first veto, as he had suggested, against the Congress-passed minimum wage increase because of his differing views on the margin of wage increases.

(vi) Moves of the 101st Congress (1989-1991)

In the former half of 1989, Congress had its hands full deliberating the approval of presidential appointment for the new administration even after the solution of the Tower problem. And, a drastic reshuffle of the Democratic leadership in both Houses attracted attention. In the Senate, Robert Byrd was succeeded by George J. Mitchell as majority leader and became chairman of the Appropriations committee, while in the House, Speaker Jim Wright, and Tony Coelho, Majority Whip, were forced to quit because of their ethics charges, with the result that Thomas S. Foley, Richard A. Gephardt and William H. Gray became newly elected speaker, majority leader, and majority whip, respectively.

(b) Foreign Policy

(i) President Bush, who had made public, during the presidential election campaign, his intention of following President Reagan's foreign policy line, announced in his January 20 inaugural speech and February 9 speech to Congress that he would maintain a strong U.S. to secure world peace, conduct an active foreign policy, and forge ahead with a bipartisan foreign policy in cooperation with Congress.

On March 24, the President revealed a new policy on Central America, formulated on the basis of bipartisan accord with Congress, to continue humanitarian assistance to the Contras until February 1990 when a general election is scheduled to be held in Nicaragua. This policy is said to be a typical product of the Bush diplomacy which places a strong emphasis on coordination with Congress.

President Bush announced, in a series of speeches, more of his new foreign and defense policies, including a policy on the Soviet Union. The basic line of thinking behind these policies features (1) a firm belief in the victory of freedom and democracy, (2) further promotion of democratization, (3) consolidation of the Western alliances, and (4) maintenance of strength.

It is the view of the Bush administration that the present-day advancement of freedom and democracy in the world offers an ideal opportunity to build a new world and that this opportunity must be utilized effectively. On the other hand, it holds that there are many new challenges ahead and that in particular, such problems of global dimensions as regional disputes, proliferation of missiles, chemical weapons and nuclear weapons, and the environment, terrorism and drugs must be tackled urgently by all the countries of the world, both in the East and in the West. The Bush administration has hence appealed for the international community to work together positively to solve these problems.

(ii) East-West Relations

On May 12, President Bush revealed his new policy on the Soviet Union, where he manifested his basic stance of "integrating" the Soviet Union into the international community, looking beyond "containment," and yet called on the Soviet Union (1) to reduce forces, (2) to abandon the Brezhnev doctrine, (3) to contribute to the settlement of regional disputes, (4) to respect political pluralism and human rights, and (5) to cooperate for the solution of global problems. In announcing this policy, the president hailed perestroika now spreading through the Soviet Union and its foreign policy based on a new thinking, and stated that the U.S. and its Western allies are ready to respond to new developments in the Soviet Union. This expressly indicates the Bush administration's willingness to build more stable future East-West relations on the basis of coordination and cooperation.

Both the U.S. and the Soviet Union, at their Foreign Ministerial meeting in March, agreed to include global problems such as the environment, terrorism and drugs as new agenda, in addition to conventional agenda such as human rights, arms control and disarmament, regional disputes, and bilateral relations. And at the U.S.-Soviet Foreign Ministerial meeting in May, thorough negotiations were conducted with regard to these five agenda. Again, in June, U.S.-Soviet arms control talks were resumed in compliance with an accord reached at their May Foreign Ministerial meeting. President Bush's proposals on CFE, made at the NATO summit in late May, may well be described as reflecting his administration's positive attitude toward arms control and disarmament issues.

President Bush, upon visiting Hungary and Poland July 9-13, clarified his stance of extending support to these East European countries in their struggle for democratization.

(iii) Policy on Asia

The Bush administration attaches as great an importance to the Asia-Pacific region as the former administration, and assumes that the importance of this region will further increase in the future. President Bush visited Japan, the People's Republic of China and the Republic of Korea in February soon after his inauguration, while Secretary of State Baker attended a meeting on multinational aid to the Philippines, held in Tokyo in July, and he later also attended an ASEAN Post Ministerial Conferences with Dialogue Partners at which he appealed for Pacific Basin economic cooperation. These are testaments to the great interest the Bush administration holds in the Asia-Pacific region.

With regard to the armed crackdown on the pro-democracy movement by the Chinese government, President Bush announced on June 5 five-point measures, including suspension of arms exports and suspension of visits between U.S. and Chinese military leaders. Furthermore, on June 20, the Bush administration introduced another measure, i.e. suspension of all high-level exchanges of officials between the U.S. and China, and sought to postpone consideration of new international financial institutions' loans to China.

The Bush administration condemned the Chinese government for its severe suppression of its people in disregard of human rights, but it takes a cautious stance of maintaining certain relations with China, refraining from taking economic sanctions which will seriously affect the Chinese people.


(c) Economy

In 1988, the U.S. attained substantial economic growth of 4.4%. Since the autumn in 1982, the U.S. economy has recorded the longest period of economic expansion in peacetime. In these years, the unemployment rate (5.4% in 1988) has fallen and the inflation rate (price increase rate of 4.1% in 1988) has been held down. On the other hand, with signs of an overheating economy a tight monetary policy was adopted and the official discount rate was raised to turn down the possibility of inflation (August 1988 and February 1989).

The U.S. government forecasted that in 1989, though the growth of personal consumption and housing construction would slacken and government expenditure would decrease, economic growth would be sustained by the increases of exports and steady equipment investment. However, economic growth projections have been revised downward from the original 3.3% to 2.9%. Although the U.S. fiscal and trade deficits, so-called "twin deficits," which have had a grave impact on world economies as well as the U.S. economy, have shown improvements, these deficits still remain at high levels.

With regard to the fiscal deficit, it stood at $155.1 billion in FY 1988, $5.4 billion more than in the previous fiscal year. In FY 1989, the fiscal deficit is expected to amount to slightly higher than $150 billion, exceeding the original projection. With respect to the budget bill for FY 1990, the President and Congress reached agreement in April 1989 on the framework of budgetary appropriations, to reduce the deficit for FY 1990 to a $99 billion level to meet the cutbacks targeted by the GRH Act.

As for the trade deficit, exports ran at a high level based upon the recovery of price competitiveness due to the dollar's depreciation and the trade deficit for 1988 was $119.8 billion, showing a dramatic drop for the first time in eight years. In 1989, the trade balance has continued to show improvement, but U.S. trade deficit with Japan still remains stalled while U.S. trade deficit with the European Community (EC) and newly industrialized economies (NIEs) have been reduced. As a result, the ratio of the U.S. trade deficit with Japan to the total U.S. trade deficit has risen, making the U.S. trade imbalance with Japan more conspicuous.


Results of U.S. Financial Balance and Its Estimate


U.S. Major Economic Indices 


U.S. Trade Statistics


(2) Relations with Japan

(a) General

(i) While Japan and the U.S. have grown increasingly interdependent in recent years, and economic frictions between the two countries have become chronic due to the bilateral trade imbalance, the Japan-U.S. trade situation was relatively calm from the latter half of 1988 through early 1989. This was largely due to the fact that bilateral talks on public works, beef and citrus issues had been resolved and also that an improving trend was seen in the bilateral trade imbalance because of the yen appreciation, the dollar depreciation, and so forth.

During the presidential election campaign, the Democratic candidate criticized Japan from economic angles, but this did not become a big issue.

(ii) However, Japan-U.S. economic friction has become more intense since the beginning of 1989. One of the reasons is that the Japan-U.S. trade imbalance, which had been showing a trend to contract, temporarily resumed an expansionary trend after November 1988. A second reason is that the U.S. has become wary of Japan's economic strength and technological capabilities with the growing Japanese economic presence in the U.S. in the middle of uncertainties about U.S. prospects of solving their problems, including the "twin deficits." These circumstances lie at the background where the joint development of the FS-X, a cooperative project related to the Japan-U.S. security relationship, was seen by some people in the U.S. as a matter of economic competition.

U.S. dissatisfaction with economic relations with Japan, mainly voiced by Congress, is evident in the Super 301 section of the Omnibus Trade Act enacted in August 1988. This provision obligated the U.S. Trade Representative (USTR) to negotiate for the elimination of priority practices of other countries which form trade barriers, and in the case of the failure of such negotiations, to take sanctions against the country or countries involved. The Super 301 section of the trade act presents great problems in relation to GATT rules, but the enactment of such a provision, which is binding on the government to attain results in a given period of time, reflects strong Congressional dissatisfaction with Japan. The enactment of this provision made the management of Japan-U.S. economic problems more difficult.

(iii) Apart from economic friction, voices for the so-called burden sharing by Japan are getting stronger as a result of the growing international status of Japan. There is deep-rooted argument mainly in Congress that the U.S. is bearing an excessive burden for the maintenance of world peace and security at a time when the U.S. is ridden by massive fiscal deficits and that more burden should be shouldered by West European countries and Japan which have acquired great economic strength.

Japan, for its part, intends to forge ahead voluntarily with the "international cooperation initiative" so as to realize a "Japan contributing more to the world," and thus contribute to the world in all aspects but an international military role. In this regard, Secretary of State Baker, in his testimony before Congress in January 1989 and on other occasions, said that he didn't want to call it burden sharing but creative responsibility sharing, while President Bush, in his press remarks made on the occasion of Prime Minister Takeshita's visit to the United States in February 1989, said that responsibilities for peace take many forms. In this way, their views coincided with the position of Japan's.

(iv) Japan and the U.S., sharing the values of freedom and democracy and the responsibility for the development of the world economies on the principle of a free market economy, are faced with many challenges and opportunities. And the two countries now have an opportunity to realize new developments in their relations by overcoming the current challenges through mutual cooperation. It is just at this crucial juncture that the new administration was inaugurated in the United States. A Japan-U.S. summit, held in February 1989 between Prime Minister Takeshita and President Bush, was of great significance in that accord was reached on a basic policy for the management of relations between the two countries for their new development.

The two leaders agreed , first and foremost, at their summit meeting, that the starting point of the Japan-U.S. relationship was that the two countries are allies and friends that believe in the common values of freedom and democracy, and the free economic system, and that their relationship is basically sound while the bonds which bind the two countries together are growing increasingly strong every year through the maintenance of interdependent cooperative relations in a broad spectrum of areas, including cooperative relations in national security based on the Japan-U.S. security arrangements, and close economic relations.

The leaders were also of the same opinion that it is not surprising that a great variety of problems have arisen between Japan and the U.S., principally in economic and trade areas, considering their closely interdependent relations, that what is important to bear in mind is that Japan and the U.S. have solved various problems in the past in the spirit of "cooperation and joint endeavors," and that the two countries should continue to solve problems on specific items through "dispassionate dialogue and efforts" and in the spirit of "cooperation and joint endeavors."

Furthermore, as a result of Japan's greater international contribution, cooperative relations between Japan and the U.S. are no longer confined to a mere bilateral level but are developing as a global partnership on the basis of which they cooperate with each other in tackling problems of global dimensions. The Prime Minister and the President agreed, therefore, to further enhance "policy coordination" and "joint endeavors" in an effort to promote their consultations and cooperation in dealing with global problems. The U.S., for its part, holds extremely high expectations of the role Japan will play in contributing to the solution of global problems. There is no limit to the themes for Japan-U.S. consultations and cooperation, but an appropriate approach to East-West relations, the securing of peace and prosperity in various parts of the world, including Asia, the Middle East and Central and Latin America, the strengthening of the multilateral free trade system, support for economic development, of the developing nations, by, for example, promoting the new debt strategy, and the solution of global environmental problems are their examples.

Such a basic policy for the management of Japan-U.S. relations was also taken over by Prime Minister Sousuke Uno and President Bush.

(v) Now that Japan and the U.S. are going through a phase that is extremely important to their bilateral relations, it must not be forgotten that the U.S. is a country of diversity where contradicting views on Japan exist. For example, while there is vehement criticism against Japan in the economic field, good will toward Japan remains strong. The favorable U.S. sentiment toward Japan was expressly evidenced by the fact that President Bush decided, before being sworn in as president, to attend the Funeral Ceremony for Emperor Showa and that his decision was hailed by the American people as a whole. On the economic scene, moreover, Japan is looked upon by the U.S. not merely as a competitor but as a partner.

What is necessary is to make efforts to step up the positive aspects of our relations, looking at the relations in global perspectives, and from an overall standpoint always keeping the whole of the U.S. within our view.


(b) Japan-U.S. Economic Relations

(i) Japan-U.S. economic relations have been increasingly close in recent years, with the result that economic interdependence between the two countries has evolved to an unprecedented extent notably in such areas as trade, finance and technology. On the other hand, economic frictions has continued of permit between Japan and the U.S. with the background of the persistently large trade imbalance, and in the U.S. protectionist pressure to Japan - a reflection of U.S. frustration with the trade imbalance that does not easily shrink.

(ii) The Japan-U.S. trade imbalance somewhat shrank in 1988 for the first time in six years. Reflecting the shift in the Japanese economy to domestic demand-led growth, Japan's imports from the U.S. in 1988 posted a dramatic upswing ($10.5 billion, up 33.5%) compared with the preceding year, and Japan's exports to the U.S. slackened. As a result, Japan's trade surplus with the U.S. was $47.6 billion in that year, down 8.6% from the previous year.

(iii) In the first half of 1988, Japan and the U.S. resolved many issues, including the public works issue, GATT 12 agricultural products issue, beef and citrus issue, a revision of the Japan-U.S. Agreement on Cooperation in Science and Technology, and problems involving the Japan-U.S. Agreement on Cooperation in the Peaceful Uses of Atomic Energy. As a result, Japan-U.S. trade friction abated for a while in the latter half of 1988, except when the American Rice Millers Association (RMA) filed a Section 301 petition with the office of the U.S. Trade Representative (USTR), demanding that Japan open its rice market to imports.

In the presidential election, held under the circumstances above, the trade problems with Japan did not become an issue.

(iv) However, despite progress in Japan's import expansion Japan-U.S. trade frictions began increasing again in intensity at the beginning of 1989.

In January 1989, President Bush's Republican administration made its debt and has since been forging ahead with realistic policies based on due regard for cooperative relationship with the Democrat-led Congress. This policy is reflected in trade problems with Japan as well.

Almost simultaneously with the birth of the Bush Administration, several private sector organizations in the U.S. submitted to the new administration their reports, which contained policy proposals recommending managed trade with Japan. It is noteworthy in particular that ACTPN, composed of 45 executives of major U.S. corporations, proposed that negotiations be conducted to ask Japan certain market shares in several areas where the U.S. has competitiveness, while ECAT suggested that the U.S. trade deficit with Japan be reduced by half over the next five years. These recommendations clearly reflect U.S. frustration with the situation when little major improvements have yet been seen in the bilateral trade balance despite the settlement of many individual issues and the progress in the adjustment of Japan-U.S. currency exchange rates. It should be noted that these recommendations brought forward dangerous arguments that the U.S. government should negotiate with Japan in quest not so much of "opportunities" as "results" since Japan has many "invisible trade barriers."

(v) In the spring of 1989, the provisions of the Omnibus Trade Act, which was enacted in August of 1988, came into effect, the application of the so-called "Super 301" and "Telecommunications" clauses to Japan created much attention.

In April 1989, the USTR released an annual National Trade Estimate report on foreign trade barriers in accordance with the Super 301 section of the Act. And on May 26, the USTR identified Japan as a "priority country" for the self-initiation of investigation of practices with regard to supercomputers, satellites and forest products," along with Brazil for its quantitative import restrictions, and India for its curbs on trade-related investment and established practices in its insurance market. To this, Japan made its statement that such a unilateral determination made by the U.S. is a "matter of extreme regret" and that Japan cannot conduct negotiations with the U.S. under the threat of unilateral U.S. sanctions. Again, with respect to the unilateralism of the Super 301 provision of the trade act, Japan voiced opposition to it at the OECD Ministerial Council, held from late May through early June 1989, and at the subsequent Arch summit meeting in July, on the grounds that it could jeopardize the multilateral trading system and circumvent the successful Uruguay Round of negotiations, along with inclination toward bilateralism and managed trade. Japan maintains that both Japan and the U.S. should seek to resolve their bilateral problems through talks, in the spirit of cooperation and joint endeavors with a view to maintaining and further developing good bilateral relations.

As for the telecommunications issue, on April 28, the USTR, after reviewing the Japan-U.S. bilateral "telecommunications agreements" required under Article 1377 of the Trade Act, determined that Japan was not consistent with "telecommunications agreements" concerning third party radio and cellular telephones. Japan deems it extremely regrettable that the U.S. had made such a determination unilaterally, despite Japan's implementation in good faith of the outcome of the telecommunications MOSS (Market Oriented Sector Selective) talks.

The bilateral talks on the telecommunications issue thus saw a stalemate. In consideration of the situation, Ichiro Ozawa, former Deputy Chief Cabinet Secretary, who had made internal policy coordination, went to Washington to assist the Japanese delegation at the bilateral consultations upon request of the Prime Minister and Foreign Minister. As a result, after twists and turns, the issue was resolved on the conditions that Japan take steps (1) to enable the use of Motorola-type cellular telephones in the Tokyo-Nagoya region and (2) to further ensure the non-discriminatory procedures for licensing, new allocations of systems and others with regard to third-party radio.

(vi) On May 25, 1989, when he announced the decision on the Super 301, President Bush proposed high-level negotiations between Japan and the U.S. over structural impediments affecting bilateral trade as a separate initiative from the Super 301 implementation. Later, the two countries confirmed that they take up structural problems of the respective countries and they also confirmed that this initiative take the form of talks, not negotiations, because of the nature of the problems involved. And at a subsequent top-level Japan-U.S. meeting, held on the occasion of the Paris Economic Summit, a joint statement was released, announcing the Japan-U.S. Structural Impediments Initiative and to conduct the talks for about one year. It is expected that this initiative will focus on Japanese distribution system and problems related to U.S. exports in addition to the issues of the savings-investment patterns in the respective countries. A joint final report is expected to be made public in the summer of 1990.

(vii) As for the rice issue, in September 1988, the American Rice Millers Association, acting upon Section 301 of the Trade Act, submitted a petition to the USTR again regarding Japan's rice import restrictions. The Government of Japan earnestly requested the U.S. government to turn down the RMA petition.

The Government of Japan repeated its position to the U.S. government that it is ready to discuss the rice issue in the Uruguay Round where significant agricultural problems of other countries are discussed, and made it clear that it opposed the rice issue being taken up in bilateral negotiations between Japan and the U.S. The U.S. government in the end decided to dismiss the RMA petition again, waiting to see the outcome agricultural negotiations of the Uruguay Round.

(viii) As regard to the plan proposed by Senate Majority Leader Byrd in early 1988 to consider the posibility of the Japan-U.S. Free Trade Area, the Japanese side took the basic view that such a plan should be coherent with the GATT rules, that the interests of third countries should not be infringed upon, and that the plan should be considered in medium- and long-term perspectives. The U.S. side gradually lost its interest in the plan as studies thereof progressed in the United States.


(3) Japan-U.S. Security

(a) Close Consultations and Cooperation

In today's world, it is difficult for Japan to maintain its security by itself. Japan is ensuring its security by possessing minimum necessary defense capabilities and maintaining the Japan-U.S. Security Arrangements. These arrangements have enabled Japan to be free from any threat of armed aggression and to prosper in peace. The Japan-U.S. Security Treaty has also made a significant contribution to maintain peace and security of the Far East.

Today, Japan and the U.S. cooperate closely with each other in the field of security and the two nations' security relations are excellent.

(b) Smooth Operation of Japan-U.S. Security Arrangements

Under the Japan-U.S. Security Treaty and the Status of U.S. Forces Agreement, about 50,000 U.S. personnel are stationed in Japan for preserving its security and international peace and security in the Far East. The Japanese government has taken various measures to ensure the effective operations of the U.S. Forces in Japan. It continued its greater efforts in 1988 to improve facilities and areas for U.S. Forces and to facilitate their activities (About \89 billion is appropriated in the fiscal 1989 budget for furnishing facilities for the U.S. Forces, Japan). On the other hand, it is important for these measures to be implemented so as to secure the smooth and effective stationing of the U.S. Forces in Japan, and in harmony with economic and social activities in regions surrounding these facilities and areas.

The U.S. Forces in Japan employ about 22,000 Japanese workers. The government supplements annually the labor cost of these Japanese workers as much as it can bear (about \53.2 billion is appropriated in the fiscal 1989 budget) from the standpoint that the stability of their employment is indispensable to the effective activities of the U.S. Forces in Japan.

Japan and the United States continued their efforts to enhance credibility of deterrence based upon the Japan-U.S. security arrangements. In 1988, too, port calls of U.S. naval ships to Japan were made smoothly and various Japanese-U.S. joint exercises took place.

(c) Exchange of Technology in Security and Defense

(i) The Strategic Defense Initiative (SDI) of the United States is a research program to study the feasibility of a system to render ballistic missiles ineffective by non-nuclear defense means and to pursue ultimate elimination of nuclear weapons. In July 1987, Japan signed a Japan-U.S. inter-governmental agreement on Japan's participation in the SDI research program, and since November 1988, Japanese enterprises have participated, on a one-year term, in the Western Pacific Defense Missile Architecture Study as part of the SDI research program.

(ii) With regard to the FS-X, Japan's next-generation support fighter aircraft to replace the current support fighter F-1 possessed by the Air Self-Defense Force, the Japanese government decided in late 1987 on the Japan-U.S. co-development of the FS-X based on the U.S. F-16 fighter. And on November 29, 1988, exchanges of notes concerning the joint development of the FS-X were signed between the governments of Japan and the U.S.

Early in 1989, there were increasing requests in the U.S., notably within Congress, for a reassessment of the FS-X co-development project. In late March, the U.S. government requested the Japanese government to clarify the work share of the U.S. in the production stage. On April 28, this issue was settled with the U.S. work share set at about 40% at a meeting between Japanese Ambassador Matsunaga and Secretary of State Baker.

The co-development of the next-generation support fighter is extremely significant as it is the first case of cooperation between Japan and the U.S. in the joint development of defense equipment. It is important that this co-development should be carried out smoothly and on schedule on the basis of the relationship of trust between Japan and the U.S.


2. Canada


(1) Internal and External Situations

(a) The Mulroney government, whose rate of popular support had been leveling off since 1986, has gradually recovered public confidence since the beginning of 1988. This is due to the brisk domestic economy and tangible results the Mulroney government has attained, such as the conclusion of the Canada-U.S. Free Trade Agreement, the agreement on Quebec participation in the Canadian Constitution (so-called "Meech Lake Agreement") and the Toronto Economic Summit. Under these favorable circumstances, Prime Minister Brian Mulroney held a general election in November 1988.

(b) The focal point of contention in this election was the Canada-U.S. Free Trade Agreement, signed in January 1988 between the two countries. There were heated public arguments as to the pros and cons of this agreement, which became the crucial issue in the election between the ruling Progressive Conservative Party in favor of the agreement, and the opposition patties. In the end, the Conservatives, in power for four years, scored an overwhelming victory by winning the majority of seats. Thus the Canada-U.S. Free Trade Agreement, which virtually won the support of the people, was approved by both Houses and went into effect on January 1, 1989.

(c) Having completed the first-term with positive achievement, the Mulroney government, now in its second term, has been grappling this year with various issues, including a Cabinet reshuffle and cutbacks in fiscal deficits. It is yet to be seen how the Mulroney government will tackle some of the pending issues such as the delayed ratification of the Meech Lake Agreement and fiscal deficits

(d) Since 1984, the Mulroney government has exerted efforts to attain stable economic growth with emphasis on private sector vitality and secure stable employment. In 1988, the Canadian economy posted growth of 4.5%. As a result, the employment situation improved vastly and the unemployment rate dipped to 7.7% in May 1989, the level preceding the recession in 1982. Under such circumstances, however, there are worries that Canada's international balance of payments (current balance for 1988 produced a deficit of $11.3 billion, the worst ever) could deteriorate, an inflationary trend could develop and the interest rate could rise.


(2) Relations with Japan

(a) The year 1989 marks the 60th anniversary of the establishment of diplomatic relations between Japan and Canada. Bilateral relations between the two countries are extremely favorable, and the Canadian government has hammered out a policy of strengthening its relations with Asian-Pacific countries, particularly with Japan, and is currently forging ahead with vigorous efforts to build stronger relations with those countries. The Japan-Canada relationship has gone beyond the bilateral scheme in recent years, to cover broader range of issues through close cooperation in the United Nations, the Uruguay Round of GATT negotiations, and the Economic Summits of industrialized democracies and other international fora. It is highly hoped that such relations will be promoted further.

(b) Basically, Japan-Canada economic relations are good. Canada is Japan's eighth largest trading partner, while Japan is the second largest trading partner for Canada after the U.S. Canadian exports to Japan have been increasing, which is highly desirable from the standpoint of building more balanced trade relations between the two countries.


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