U.S. - Japan Economic Relations

MODERATOR: Please join me in welcoming a U.S. Treasury Department Official to the Foreign Press Center. He's going to talk a bit about U.S. and economic relations. This session is on background. Those of you from wire services you can file right away, but just please respect that it's on background.

MODERATOR TWO: And our definition of background is he would be a U.S. Treasury Official. And then obviously you'll have -- I will after this -- I will hand you copies of his speech that's embargoed until 12 p.m. And then if you want to quote that directly that's fine.

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: Okay, great.

MODERATOR: Why don't we get started? And we're going to begin with some into comments and then we'll take questions.

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: All right, I'll make my introductory comments rather brief. Again, Anne-Marie will get you get a copy of the text of the speech that I'll be giving today at noon before the Mansfield Foundation up on Capitol Hill. I note in the speech that my relationship with Senator Mansfield goes back a long ways. My father actually was a student of his at the University of Montana in the late 1930s, early 1940s. They subsequently worked together in the Senate and then my father played a key role in the establishment of the Mansfield Foundation. And I also talk in the speech about the fact that I first went to Japan in 1970 on a troop transport plane on the way to combat in Vietnam. My second visit was on Air Force One with Ronald Reagan when he visited Prime Minister Nakasone in October of 1983. And then when I was at the State Department between 1989 and '91, I was in Japan quite frequently as we worked very closely together with Japan during those years as the Cold War came to an end.

And now, as we're preparing next week for the visit of Prime Minister Abe, we're working on both the security and economic dimensions of our relationship. Both aspects of the relationship, that is both security and economic issues, are essential to making the indispensable partnership between the U.S. and Japan the strong foundation for peace and prosperity both in Asia and in the rest of the world.

In the speech I note that on the economic side, I think we need to set our sights a bit higher. We need to take actions in both of our economies and together to better the prospects, the economic prospects in our bilateral, regional and global relationships. I talk about the focus that both countries have right now on free and fair trade with an emphasis on the Doha round and also the importance of the free flow of capital across borders based on open investment policies. And as we can strengthen the U.S.-Japanese alliance and partnership, it also allows us to do more together globally. Japan is a very key member already at the United Nations, World Bank, IMF, G-7, G-8, G-20 and APEC. In fact, Japan will take the chair of the G-7 and G-8 next year and then will host APEC in 2010. Those present us with a real opportunity to reach out to the newly emerging economies: Brazil, Russia, India and especially China. Both governments, that is both Japan and the U.S., are reaching out in new ways to China, especially in the economics sphere. That's very important both bilaterally for the region and for the world. And yet at the same time, it is the Japanese-U.S. partnership that remains the firm foundation for peace and prosperity in Asia and elsewhere in the world. And we need to make sure that we invest as much time and effort into the U.S.-Japan relationship as each of us do in our outreach to China.

I note, too, that we work together not just in the region but far beyond, noting the very important role that Japan has played in Afghanistan, in Iraq, and on our common effort to stop the financing of proliferation and terrorist activities. In that section, I note particularly that on May 3rd, there'll be a ministerial-level meeting in Sharm el-Sheikh, Egypt, to launch the International Compact with Iraq and we expect that Japan will there at the ministerial level with a strong pledge of support for the Iraqis.

I also note that we're both working very closely together on implementation of UN Security Council Resolution 1747, that is, ending the proliferation activities of Iran. One bank in particular is mentioned in that resolution, Bank Sepah, and Bank Sepah also has been fostering financial links between North Korean and Iranian proliferation entities. That's one of the reasons why there were designated by the world community in that unanimous resolution.

But, again, I conclude by saying that this indispensable partnership is one that requires us to remain active and engaged in both economic and security terms. Certainly the leaders will do a lot when they get together next week. But it's important for others in government and in the private sector to do their part to keep this partnership strong, growing, and even stronger in the future, again to the benefit of our two countries, to the region, and to the world.

I would open it up to questions.

MODERATOR: Who would like to ask the first question? Okay.

QUESTION: Thank you. I had a question on U.S. and Iran on financial terrorism. Nick Burns has been talking about what Japan or the Europe organizations can do beyond the UN resolution. I was wondering what your assessment is of what Japan has been doing with Iran and what your expectation is further?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: Well, certainly, the focus that we have in the Treasury Department right now is implementing the two unanimous Security Council Resolutions 1737 and 1747, and specifically each of those contain financial sanctions. And of course that's the lead that we take inside the U.S. Government and working with Japan and other governments overseas. Certainly the focus of the international community's work has been on the illicit conduct in which Iran is engaged and that has been condemned by the world community. And so I would say that not just the U.S. and Japan, but anyone in the world, needs to use their own authorities to do anything they can to make sure that their financial system is not used to support the proliferation objectives of Iran, whether the conduct is specifically mentioned in the resolution or just related to that. So again, my thought would be from the Treasury Department perspective, and I'd defer to Nick on the State Department views, is that every country has a responsibility to keep its banking system not only safe and sound, but also secure from abuse by anyone who would want to use the financial system to support proliferation, terrorism, drug dealing or organized crime. And so, again, that means making sure that we implement fully the resolutions, but that we watch for any other form of illicit conduct that could be conducted in our banking systems and put a stop to that.

MODERATOR: Do you have a question?

QUESTION: The Japanese economy seems to be continuing its growth. And I was wondering what is your view in how to stimulate or even accelerate the growth perhaps by continuing their current structural reforms and so on?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: In the speech I lay out a number of ideas that we would have and, again, for the on-the-record part I would just refer you to the speech. But let me just mention a few if I could and to be accurate I'll turn to it in the speech.

First, both in the U.S. and in Japan we need to have sufficient openness and flexibility in our economies to adapt to the changes that are taking place so rapidly in Asia and the rest of the world as a result of globalization. We know there are things we need to do on the U.S. side, not least increase our saving rate. And we've been putting particular focus on reducing our deficit, which is now only 1.9 percent of GDP and the President has submitted a plan to eliminate the deficit by 2012. We know that's an important part of what we need to do. In Japan, the growth-led strategy that Prime Minister Abe has laid out we think is exactly the right direction.

A few of the reforms that are being actively discussed in Japan right now, which we would encourage, would include making it easier for workers to change jobs and reenter the labor force during their careers. That is to have that labor force flexibility that allows people to adapt and seize new opportunities. I think that Prime Minister Abe had said that he thinks Japan should be a society where everyone has the opportunity to take on a new challenge and that might mean changing jobs, maybe even lines of work during the course of one's career.

I personally like many senior U.S. government officials have gone back and forth between the private sector. In the private sector I've been a lawyer, a banker, I headed a software company. I was an executive at a major media company. Those were all challenges for me but again, they provided great opportunities for growth, professionally and personally.

Second, to raise productivity, we think the Government of Japan should encourage competition, the entry of new firms, and the introduction of new technologies and products. Many of the strong sectors in Japan have extensive regulation that make it, I think, more difficult for those sectors to realize their full potential.

Third, both of us recognize that efficient capital markets are the lifeblood of a strong economy and that investor confidence and appropriate regulation are necessary to ensure competitiveness. And the key is striking the right balance between market integrity and entrepreneurship. And Japan has made progress in advancing financial market reforms since the late '90s and in improving its regulatory environment since the creation of the FSA, but it still has a long way to go to be competitive with other major financial markets. And I talk in the speech about greater regulatory transparency and predictability and finding ways, again, to introduce new savings and investment products that would benefit Japanese consumers.

And fourth and finally, reduction of the government's role in financial intermediation is also critical for the efficient and competitive Japanese financial markets. And here we talk particularly about the privatization of Japan Post and in this transition it's important that Japan establish a level playing field for the privatized post financial institutions before they introduce new products so that private sector firms from all countries can have an opportunity to compete fairly.

So again, I think it's that combination of openness, competitiveness and flexibility that is important, very important to our economy, that we would continue to encourage on the part of the Japanese economy.

QUESTION: A follow-up question. With respect to the next big meeting between Mr. Bush and Minister Abe, what do you think will be the main issues in the economic area between the two of them?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: Well, I would think that very high on their agenda would be discussion of our common interest in seeing progress on the Doha round. There cannot be a successful conclusion of Doha without strong leadership by both the United States and Japan and certainly other countries, but I think it would be very important for the two leaders to have a very detailed discussion on what together we might do to bring the round to conclusion.

I think, too, that we have other global issues of concern to both our countries such as energy security and climate change. And, recognizing that tackling global climate change will require global solutions with fast-growing economies like India and China, put together the Asia Pacific Partnership on Clean Development and Climate with Australia, China, India, South Korea, the U.S. and Japan. We've also made significant efforts to broaden and strengthen the U.S.-Japan nuclear energy partnership. Japan was one of the first countries to endorse our Global Nuclear Energy Partnership Initiative and will be the first to sign a joint action plan. So I think that would also be an important discussion.

And then third, I think that -- again, I should say this, I'll let the White House say exactly what the agenda would be, but certainly from our perspective, too, the idea of how each country could send a clear signal that it's open to investment; that is, the free flow of capital across borders, because of the strength that that brings both to the individual economies and the bilateral and global economies.

I, for example, in my speech about the very important purchase of Westinghouse by Toshiba and how this was a case that was approved by the U.S. Government within the initial 30-day period. There has been some concern about how open the U.S. is to investment, but that was a case approved very soon after the Dubai Ports case. And I know that this is something that the President thinks is strongly important to the U.S. Government, and therefore I would imagine that it would be a topic of discussion between the two.

I worked at the White House, though, for eight and a half years. I know that when leaders get together, every department comes in and says these are the most important issues you must discuss. And so clearly there'll be political and security issues on the agenda. But again, I would think that those would be some of the most important economic and financial issues for the two leaders to discuss.

QUESTION: Would you like to comment on the CFIUS reform should be directed?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: Sure. We think that, first, the CFIUS process has worked quite well since the Dubai Ports World case. We learned a lot of lessons in that case. I think the Congress needs to be more closely involved and it now has been. We think the companies need to know that no matter how well they do working with the Executive Branch, they also need to work with the Congress, particularly those senators and congressmen from states where the jobs are located.

Our role is to strike that balance between open investment and protecting national security. I think we've set a pretty good standard since a year ago. That is when the Dubai Ports case ended. We have cleared over 100 cases since that time, including Toshiba Westinghouse, Alcatel-Lucent and some other cases that were quite difficult. And we're now working closely with the Congress on amending the law. The law is now almost 20 years old. We think it needs to be updated both in the post-fall-of-the-Wall and post-9/11 time period. The House has passed its legislation. We're waiting now for action in the Senate. But I think that we share the same goal of sending the signal that we are open to investment, that while of course we have to protect national security, that can be done in a way that makes clear that open investment is very beneficial to the United States and to the world economy.

I might say in the United States, we have over five million Americans who work for companies overseas. That's roughly 5 percent of our workforce. But that 5 percent of our workforce makes up 10 percent of our capital investment, 15 percent of our annual research and development, and 20 percent of our exports. And, 30 percent of those jobs are in manufacturing, which is three times as high as the rest of the economy. So these are good jobs, high-paying jobs in important sectors. And we want to send the message that we're open to investment from Japan and elsewhere and we hope that Japan, too, will be open to increased foreign investment.

QUESTION: I have a question on the North Korean sanctions. The $25 million that Macau -- is -- the Treasury said it is dirty money from account trading or so. But you -- the Treasury said okay to transfer the money to North Korea. Some people have a question on this agreement, for example, UN -- former UN Ambassador Bolton. Could you explain the measures you have to take now? Why did you release the money to North Korea?

SENIOR U.S. TREASURY OFFICIAL: First, just so that we have the facts straight, in September of 2005, we put out a proposed rule stating our belief that Banco Delta Asia's branch in Macau had been engaged in illicit financial activities. It was the Macanese authorities who froze the money. It was not the U.S. The Macanese authorities froze the money because they wanted to make sure that they had the detail necessary on what had been happening in their jurisdiction. And over the course of the next 18 months, we worked closely with the Macanese authorities to look at the details of those accounts. And last month we went final on our BDA rule, making clear that that bank's branch in Macau had, in fact, been engaged in those activities and we were very clear that that bank remained off limits to U.S. banks and any banks operating in the United States.

At the same time, based on lengthy discussions that we had had with the Macanese authorities, Chinese authorities, and North Korean authorities, there was a very clear understanding of what the U.S. Government principles were, focusing again on that illicit conduct. And based on the discussions we have had, we indicated to the Macanese officials that we would have no objection to a decision by them to unblock the funds. Again, we couldn't unblock the funds, we couldn't release the funds. But we indicated that based on the discussions and understandings we had, that we had no objection to the release of those funds. You've seen some of the public statements in which the North Koreans have indicated that any money that will go to them will be used for humanitarian purposes. We are very mindful of that and we are very mindful, too, of the fact that both the Chinese and the Macanese authorities are taking very seriously their responsibilities with regard to effective banking regulation in their jurisdictions. So again, the U.S. did its part by taking the rule final. That's what we do in these cases and then with our conversations with the Macanese in this area, we indicated that we would have no objection to them unblocking the funds, but the decision to do that is up to them.

QUESTION: Can I follow up on that, please? My understanding that the final ruling will go in effect on the 18th. And so the Banco Delta Asia will not be able to do any dollar transaction after the 18th. Is that a correct understanding?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: It really hasn't been able to do any transactions since September of 2005 because when we put a proposed rule out. Really what it says is that no bank in the U.S. should have any kind of relationship with that branch, so no dollar clearing, no correspondent relationships and so forth. This simply brings the regulatory effort to a close. We will obviously continue to stay in touch with the Macanese authorities on the disposition of the bank. But our regulatory process will come to a close; our involvement in engagement with the Macanese and our normal financial regulatory channels will continue.

QUESTION: So just to clarify, the BDA would want -- should they want to transact the 25 million in U.S. dollars, it would have to be done prior to the 18th? How could they actually give back the money to the North Koreans, if they can't use U.S. dollars?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: I think I will defer on that question because it gets fairly technical. What I could do is, if you could give me a card, I could make sure that our technical experts get back on that, because your question assumes that the deposits are already in dollars or that they'd be converted to dollars. I'd need to make sure that our experts who have looked inside those accounts give you a good answer.

QUESTION: The U.S. has announced an FTA deal with Korea, recently. And how do you think that might affect the bilateral relationship with the U.S. and Japan?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: Well, again, I think that a world economy works best on the basis of free flow of capital across borders based on open investment policies, flexible exchange rates set in open competitive markets based on underlining fundamentals; and third, free and fair trade. And certainly the bilateral agreements that we have struck, whether it be with Korea, Peru, Colombia, ones in the past with Australia and others, are very much part of our commitment to free and fair trade.

But I would say right now our primary focus is and remains on successful completion of the Doha Round, and I think that's where our focus is particularly with the major economies of the world in Europe and in Japan. I think that this will be a significant part of the discussion when Mrs. Merkel visits for the annual EU/U.S. summit shortly after Prime Minister Abe is here. And it would seem to me that the major economies have as their particular trade priority and focus at this point a successful conclusion of the Doha Round.

MODERATOR: Is there anyone who hasn't asked a question that would like to get one in?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: And after I give the speech and you have a chance to see it, if you have other questions, you could come back to Anne Marie, through the press center and we'll be glad to talk to you afterwards, too. But we wanted to have this today, knowing that sometimes you guys post a lot earlier than the U.S. side.

QUESTION: Can I follow up on the Doha Round? Considering that the TPA is losing its affect on July 1st, how realistic is it for the U.S. to be talking about the successful conclusion of the Doha round?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: Now, I think it's a realistic subject for the world to be talking about, not just the United States. I think it's an interest that all countries have. Remember this is called the Doha Development Round. It has a particular emphasis on what can be done to pull the developing world into a place of better engagement with the world economy. Certainly we benefit, Japan would benefit. But it's crafted to make sure that the world benefits from it. That's a goal that we share not only with other countries. I think it's a goal that is shared also within the U.S. body politic.

Clearly, we have an ongoing engagement right now with the Congress on both sides of the aisle, including the Democratic leadership on trade, not least because of the bilateral agreements that are up there. And as you mentioned, TPA has a certain set of deadlines coming upon us. But I don't think there's anyone who would suggest that we should do anything other than put emphasis on successful completion of the Doha Round. And we would try to do that in a way that is politically acceptable in the United States, just as other countries are looking for ways to make sure that the round could successfully meet whatever their political and legislative requirements are. So again, I think it is very realistic.

Those of you who have followed trade agreements know that an awful lot happens very late in the process in any trade agreement, bilateral or multilateral. I think we're reaching a very critical phase right now. Secretary Paulson noted this after the meeting of the G7 finance ministers and the Central Bank governors. And I think it is very good that the President of the United States will be sitting down with the leaders of the world's second and third largest economies, that is Japan and Europe, within five days -- I think it is -- of each other to make sure that we talk about trade issues broadly, economic issues broadly, but with a particular focus on how to move forward on Doha. So to me, it feels pretty realistic.

QUESTION: So President Bush and Former Prime Minister Koizumi, has a kind of partnership. Do you think the other new structure or partnership will be needed in between the (inaudible)?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: Well, the way I would look at it is first, that, too, would be up to the White House to decide because it would be done between the Prime Minister's office and the White House. We have a number of successful bilateral mechanisms already, including the Regulatory Reform Dialogue and others that have proved successful. We in our area have a Financial Markets Working Group, a Financial Dialogue and others.

What I say in this speech is that I think it's time to look at all of those existing mechanisms and make sure that each one of them is active and engaged and forward looking. And if all of those are working well, then let's not create new structure for the sake of structure. But if there is something that could be done to make those groups even more effective, we should look at it. Again, I would have to defer to the White House and the Prime Minister's office. I think right now in the financial markets area, we feel that we have a very good dialogue between ourselves and the finance ministry, also between financial regulators in the U.S. and the FSA, but we're always looking for ways to improve that dialogue with Japan just as we are with Europe and others.

QUESTION: Would you like to share with us your view how international financial institutions should be managed?

SENIOR U.S. TREASURY DEPARTMENT OFFICIAL: I think I know what is behind that question. (Laughter.) I think what I would say is that we are strongly committed to the important role that is played by international financial institutions and multilateral development banks. Indeed, I think you will see that there has been greater attention paid to and use made of multilateral institutions by the U.S. Government recently, going back to what we discussed earlier, with the UN on sanctions and other matters.

And we had some very good talks over the weekend, for example, about the IMF reform agenda to make sure that the IMF remains relevant to the world as it exists today, welcome the Managing Director's decision to update the 1977 Decision on Surveillance. I think that we have to look for ways again to make sure that these institutions are adapting to the very real changes in the world economy that they serve.

Listen, thanks very much. Again, we'll get you copies of the speech squared away. And again, if there are any questions, either that come out in the speech or any others that come up, please be in touch with us through the press center or Treasury. Thanks very much.