2 Japan Giants Use Muscle--as We Should

The U.S. government gave two Japanese companies licenses to make money in the world’s largest financial market the other day--privileges that Japan has been slow to accord U.S. firms operating in Tokyo.

The particular market is the global trade in U.S. Treasury bonds and bills, a highly specialized and sophisticated business. But the story of unequal treatment has become a familiar one after all the years in which Japanese manufacturers have sold their goods easily in the American market while U.S. companies faced stonewalling and subterfuge in Japan.

Specifically in this case, the Federal Reserve Bank of New York granted Nomura Securities and Daiwa Securities permission to become primary dealers of U.S. government debt issues, a market where $100 billion of Treasury issues changes hands every day, generating $300 million in daily trading profits.

Such status is all important because internationally traded U.S. government debt, at roughly $1.65 trillion and growing by $200 billion a year, has now surpassed the value of all the stocks on the New York Stock Exchange to become the world’s largest market. If you’re one of the 40 primary dealers--the 32 U.S. and eight foreign banks and firms allowed to do business directly with the Federal Reserve--you’re in the major leagues of world finance.

Financing the Deficit

And it’s clear that Nomura and Daiwa made the grade because they and their government reminded the United States that Japan helps to finance the budget deficit by purchasing $100 billion a year of U.S. Treasuries. It was a case of a good customer asking for consideration.

Meanwhile, though, American firms must operate under restrictions in Japan’s government securities market, which is no small potatoes with an estimated $900 billion in tradeable bonds outstanding. To be sure the New York Fed, as it admitted Nomura and Daiwa to the U.S. charmed circle, suggested that Japan’s Ministry of Finance loosen those restrictions. But no demand for reciprocity was made, and whether gentle persuasion will have any more effect in finance than it has in manufacturing remains to be seen.

The whole affair should teach U.S. business and government trade negotiators two valuable lessons. One is that the notion that American business faces a secure and prosperous future in internationally traded services is an illusion. Competition in banking and securities trading is going to be every bit as ferocious as that in machine tools and cars. In fact, the U.S. investment firm, Salomon Bros., reports that by many standards the Japanese banks have already replaced their U.S. counterparts as leading players on the world’s stage. Dai-ichi Kangyo has now surpassed Citicorp as the world’s biggest banking company, and the next three largest--Fuji, Sumitomo and Mitsubishi--are all Japanese.

Very Prosperous Condition

Moreover, the Japanese banks are in healthier financial shape than many U.S. banks and they are bent on global expansion. Already, they are cutting fees to win letter-of-credit business from U.S. companies.

So U.S. banks that are are trying to grow bigger to meet the challenge--such as Chemical New York, which announced on Monday that it would acquire Houston-based Texas Commerce--are on the right track.

The other lesson, so clearly illustrated by the way Nomura and Daiwa pressed their case, is that a big customer has power and should use it.

The United States this year will buy $170 billion more goods from other countries than it will sell to them--thus running a vast and worrisome trade deficit. Japan accounts for just over one-quarter of that deficit. The rest results from the simple fact that the United States is not only the largest market in the world, it is for many countries the only market. Who would take the exports of Singapore, Malaysia, Brazil, Taiwan and Mexico if we didn’t? The European Common Market firmly restricts trade, and Japan’s policies need no further comment.

But the United States has been supporting the world at some cost. Because of the trade deficit, there are unemployed or prematurely retired workers in many American cities and towns. And there is rising sentiment in Washington to pass restrictive trade legislation next year.

The trouble is that merely keeping foreign goods out, or making them more expensive by adding tariffs, won’t really help our economy or the world’s. It would be a better idea to demand that as the price of access to the world’s largest and most highly developed market, U.S. trade partners either import more American goods, or take more of the exports of developing and newly industrializing countries such as South Korea and Brazil.

Either way, pressure on the U.S. market would be relieved, and so would the resentment of unequal treatment for Uncle Sam that is behind much of the trade bill furor in Washington.