Japan After the Sake, the Prickles

By BARRY HILLENBRAND TOKYO

Victories are best savored slowly, but Prime Minister Toshiki Kaifu barely found time for the customary postelection rituals last week. No sooner had he hammered open a keg of sake to celebrate his Liberal Democratic Party's renewed majority in the lower house of the Diet than he confronted a formidable problem: Japan's strained relations with the U.S.

Not only the perennial bane of the U.S.-Japan trade imbalance but also a widening array of other economic conflicts threaten to poison the relationship over the coming months. During the election campaign that ended with balloting on Feb. 18, Washington muted its complaints about Japanese economic practices. Within hours after the scandal-shaken L.D.P. won a healthy victory, taking 275 out of 512 lower-house seats, the steady tattoo began again. "Kaifu is determined to deal with these problems," says a Tokyo bureaucrat. "They are on the top of his agenda."

And of Washington's. Four days after the vote, a mission headed by Deputy ; U.S. Trade Representative S. Linn Williams began a third round of talks known opaquely as the Structural Impediments Initiative (SII). The complex negotiations, which began last September, are aimed at resolving the trade issue by reshaping fundamental structural aspects of the Japanese and American economies.

On the U.S. side, diplomats are urging the Japanese to increase public spending, streamline the country's local distribution system for goods, and strengthen antimonopoly laws to give foreign products easier access to Japanese markets. The Japanese want the U.S. to promise to trim its budget deficit and significantly hike the national savings rate, thus reducing the demand for Japanese imports and bolstering American corporate competitiveness. An interim report on the talks is due by April.

An equally prickly issue is the so-called Super 301 dispute between the two countries. Within the next few months U.S. Trade Representative Carla Hills must decide whether to impose sanctions against Japan under Section 301 of the U.S. trade law, adopted in 1988 to give Washington more leverage in prying concessions out of countries with allegedly unfair trade practices. Last May Japan was specifically cited for restricting sales of forest products, satellites and supercomputers. Tokyo claims that Super 301 sanctions violate international rules governing fair trade, and declines to negotiate the substance of the disputes under the threat of such penalties.

Even if the SII talks are a success, there is growing concern on both sides of the Pacific that strains run deeper than the trade deficit. In the past two years the deficit has narrowed by 13%, shrinking from $52 billion in 1987 to $45 billion in 1989. American exports to Japan jumped from $31.4 billion in 1987 to $48.1 billion in 1989, a 53% increase. Timberland shoes and Procter & Gamble soaps are becoming popular consumer items across the Pacific.

Polls indicate, however, that irrational suspicion of Japan is growing in America, fueled in part by Japanese purchases of prominent U.S. companies and real estate and by a sense that America is falling further behind in the technology race. Says a State Department expert: "We could knock down every trade barrier there is and cut down our trade deficit to zero, but we still must face this issue that we believe Japan is becoming the dominant economic power, and we're losing our ability to cope."

The L.D.P.'s election win may help with several of the immediate problems. | The Liberal Democrats are perceived as being more willing to compromise with the U.S. than Japan's opposition parties, which espoused more protectionist policies to favor farmers and small shopkeepers. The voting outcome may also be useful in strengthening the position of Kaifu, whom one Washington-based diplomat calls a "very healthy influence" on the U.S.-Japanese relationship. This week Kaifu will attempt to smooth relations with the U.S. when he makes a hastily scheduled trip to California to meet with President Bush.

A relative political unknown without a strong base in the L.D.P., Kaifu, 59, was named Prime Minister in a moment of desperation last August. The party had just suffered an embarrassing defeat in the upper-house election, and was plagued by scandals involving everything from tainted stock dealings to a loquacious mistress of a previous Prime Minister. Now that the Liberal Democrats are out of danger, Kaifu's rivals within the party would like to replace him. They belittle his foreign policy experience and claim he cannot tackle problems of the magnitude of the U.S.-Japanese friction. Kaifu is keenly aware that his longevity in office may depend on how well he handles the strained ties -- and that is no small incentive.

With reporting by J.F.O. McAllister/Washington