BRIEFING MATERIALS FOR THE PRESIDENT'S MEETING WITH PRIME MINISTER NAKASONE

Created: 1/2/1954

OCR scan of the original document, errors are possible

Briefing Materials for the President's Meeting With Prime Minister^

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Briefing Materials for the President's Heeling with Prime Minister5

CONTENTS

Nakasone's Meeting with the President

Tensions and Tactics

Limits to Japanese Flexibility

How Japan Will Play trie United States

Political Setting

Nakasone's Political Standing

Objectives of Nakasone's New Administration

Selected Issues

Japanese Interest in Disarmament

Japan's Relations with the Soviet Union

Japan and Ch 1na--Grow1ng Strategic and Economic Ties

Japan and the Two Koreas

Pacific Basin Economic Cooperation

Japan's New Initiatives in Africa

at ion

Status of Software Protection Legislation

Liberalization of Japan's Telecommunications Market

The Defense Spending

Japanese Defense Procurement

Defense Technology Transfer

Controlling Technology Loss

Economic Growth and Budget Issues

Matrix on the Status of Economic Issues

Coiwliiidl^nceAjtrKy

DIRECTORATE OF INTELLIGENCE4 Nakasone's Meeting with the President

Shortly after forming his new Cabinet in early November,

Nakasone said that ihe period before President Reagan's

Inauguration was -more important than generally realized" because

the President would be formulating his second administration's

policies. We believe Nakasone wants to use his January visit to

hangesS polIcy .toward Japan in order toto deal with domestic Issues

Nakasone and the Foreign Ministry do not expect Washington

ssufbut anticipate that

! I"J?1, on the US agenda. Nakasonea special committee to deal withsueir-

ther Ministries see less urgency, however, believing

trade will notroblem until the second halfc because the recovery has kept US unemployment down.

Nakasone probably will point to the new committee and

j,"era! two years as

Indications of his sincerity In working to resolve trade aitierences.

memorandum was prepared by the Office of in support of President Reagan's meeting with Nakasone5

Asian Analysis Prime Minister

WARNlNGJfTjTICE INTELLIGENCE SOURCES ANV*ETHOOS INVOLVED

DIRECTORATE OF INTELLIGENCE4 Limits to Japanese Flexibility

A more assertive approach that reflects Japan's growing self-confidence as an independent world power will temper the Prime Minister's inclination to make concessions to the United States. Nakasone may be Increasingly sensitive on this score.

With the bilateral current account surplus likely to beillion this year and even higher next/trade friction wTTT continue to trouble the relationship.

okyo's effort to reduce its budget deficit will prevent expansionary government spending that could stimulate domestic demand--an essential ingredient for Import growth.

evenue shortfalls will stall any wholesale tariff

reduction and may mandate exclsetaxes that could put US productsisadvantage.

Tokyo's increasing unwillingness to respond to what It perceives as the unreasonable demands of US special interests will be the oost serious limit to its flexibliiy in dealing with trade differences. Press reports and public opinions polls indicate the Japanese believe their markets should be more open, but thereonsensus that the trade imbalance with the United States is not Japan's fault. Rather. Tokyo sees it as the result

A

memorandum was prepared In support of President Reag Nakasone

WARNING INTELLIGENCE SOURCES AND JJTTHOOS INVOLVED

the Office of meeting with

East Asian Ana Prime Minister

Of che strong dollar created by high US Interest rates. In addition, Tokyo believes that the flow of funds and goods from Japan has helped fuel the US recovery

The government's agenda for economic restructuring could exace-Daie trace friction. Con-petition between Japan ancTn? United States in technology markets and Tokyo's practice of protecting some of its less competitive sectors already create tensions.

MITI--seeking to promote the domestic software industry-is still working on software protection legislation that would Include provisions objectionable to the United States.

he Japanese are committed to domestic satellite development to spur scientific research and for nationalistic reasons. US arguments against uneconomic indigenous production carry little weight with Tokyo, which will continue to protect government-related satellite programs.

olicies that protect both depressed industries and the cumbersome distribution system are essentially social we fare programs designed to bolster employment. For political.reasons, they probably cannot be eliminated.

We believe new or evolving areas, such as high technology, telecommunications, and finance, where interest groupsoth Japan and the United States are still fluid, offer the best opportunities for relatively quick action to ease trade differences.

Japan's dependence on trade for vital resources andexpansion could lead Tokyo to respond tocountries that run counter to US interests.

he Japanese will Increasingly join the EC and ASEANUS "protectionist"

apannder pressure to open markets to US competitors, such as Australia.

Japan's need to diversify energy supplies willar"er* such as Iran and raisehP0 ly* ventures, such as .

rom cheJapanese interest in oil In Vietnam.

okyo may attempt to Improve ties with the Soviet Union by encouraging tradeeadin to better political relations. Japan will probably provide financing for the Sakhalin natural gas project if the Soviets cannvest.-nenj plan and find Japanese buyers for the gas.

Nakasone has only limited flexibility on defense, although no likely successor is as well disposed toward US views on security matters. As with prime ministers before him, Nakasoneremium on the Security Treaty with the United States, butontrast he also believes Japan should Improve its own defense capabilities. His personal ability or that of any primematter how sympatheticto make significant changes in defense policy, however. Is questionable.

ecause defenseolitically charged issue in Japan, the Prime Minister's rivals In the LOP can use it againstprevents him from moving too far ahead of the consensus within the party.

ost Japanese believe the current effort on defense is adequate, making'major changes in security policy unlikely, in our view, unless Tokyo faces an unequivocalramatic change in the Soviet threat or fundamental uncertainty about its security relationship with Washington.

urthermore, budget cutsarious politically sensitivelocal government, construction, andmake Tokyo reluctant to increase defense spendingercent of GNP.fl

Central IWJlgqxeAgo-cv

DIRECTORATE OF INTELLIGENCE4 How Japan Will Play the United States

The Prime Minister's major objective during his discussions with the President will be to contain disagreements over trade and defense and demonstrate to his countrymen his continued ability to manage the US-Japan relationship. The Nakasone. administration will use several time-tested strategies.

Sidetrack the United States by encouraging discussion of jess .sensittve issues. An agenda filled with issues that are not central to Japanese concerns is suited for thisthe alacrity with which both the Prime Minster and Foreign Minister have seized on the Pacific basin and African relief. Talks on nuclear disarmament .and global economic recovery also this purpose. Hi^HIVV

Try to ease US pressure on trade and defense by emphasizing action in other areas. Tokyo mayist of "favors-Japan has done for the United States to accentuate the positive, turn attention from bilateral disagreements, and encourage US toleranceo-slow Japanese approach on pending US requests. The list could include:

Increased economic assistance, particularly for LDCs designated "strategic" by the United States.

acking for the Caribbean Basin Initiative.

avorable votes in the United Nations and other world bodies on issues of concern to the United States.

This memorandum was prepared by the Office of East Asian Analysis in support of President Reagan's meeting with Prime Minister Nakasone

WARNING INTELLI ANO

SOURCES INVOLVED

IING NOWTJEETHODS IN

to avoid

On trade, emphasize on Washington, over trace fat 1

date or turn pressurecussIon

If efforts to avoid discussion of differences Tokyo will point to promotion of Japanese direct foreign Investment, export restraints, and trade packages that

lized promises and small tariff reductions.

He probably will offer to extend auto export restraintsat leastashington desires.

apanew trade package In mid-December

containing advanced Implementation of Tokyo Round tariff reductlons--largely directed at the LDCs.

akasone will stress the importance of Japanese

Investment in the United States and might mention the unitary tax Issue and barriers to Investment posed by the Defense Department for national security reasons.

e will cite recent progress on financial liberalization .and standards and point to the potential for US sales created bv the liberalization of the telecommunications market.

On defense, claim that significant departures In defense policy would arouse Japanese arid Asian fears, assert that jTpan cannot afford to do more, and keep US attention focused on che defense budget." In our view, domestic and Asian concerns do exist, but they are not as serious as the Japanese portray. igger problem is the conservatives' reluctance to paytronger defense.

In portraying budget difficulties, rather than military requirements, as the key factor that shapes Japan's defense efforts, Tokyoescribing one of Its objective political realities. But the Japanese also use this explanation to avoid unpleasant questions concerning Self-Oefense Force military capabilities. The Japanese probably will point to:

from a

in defense very low base.

Dramatic personal Intervention by the Prime Minister to secure additionalin minute increments.

reparations for breachingercentreference to the small sums involved.

Support for relatively low cost efforts to Improve bilateral Military cooperation hasimilar purpose In the past.

RACT ORCON

The Japanese try to use aore effective jointplanning and exercises, agreement on defense technology transfers, purchases of US military equipment, strong host-nation support--al intrinsically beneficial to the United States--to dodge the larger issue of whether they need to make basic changesefense policy.

Maintain that trade and defense should be treated as separate issues.The Japanese underline both the importance of treating each problem on Its own merits and the danger of permitting disagreementsne area to spill into the other. Nonetheless, the Japanese themselves regard the two as Intimately connected. They see defense spendingrag on the national economy and likely to undermine Japan's trade performance. Morever, in playing the United States, Tokyo has tried to point to increases In the defensedq.et to deflect attention from economic differences.

Cultivate the impression that pressure will probably be 1neffective--and that public pressure wilt beroductive:Japanese negotiators often emphasize that the Prime inlster must be responsive to the opinions of other LOP leaders, the party's supportersgriculture and business, androm being as forthcoming as he might wish to be.

This argument contains considerable truth, but the domestic political scene is more flexible than the Japanese usually suggest, and Tokyo's foreign policy is asroduct of what the external s1 tuation seems to demand as of what the Japanese deem desirable.

As the political or financial price of concessions Increases, however, so will the Prime Minister's need to demonstrate that changes are truly required in order to keep

rations on track. Public statements by high-level US officials tend to be more effective than private messages In influencing key domestic constituencies whose agreement the Prime Minister must obtain to carry out painful policy adjustments. The Japanese argue, however, that such statements couldationalistic backlash and that. In the context of the subtle

n? Japane" iocU] Infraction, quietofficial channels are more

e believe strong public US pressure will Indeedrice, butan be reduced if US requests are not total surprises, are explained in reasonable terms, and do not require abrupt departures from Japanese policy.

.ne Stimulate concern that Japanese concessions could threaten LDP aom. nance,. lokyo sometimes suggests that giving ground on trade or defense will alienate critical LDP supporters and

SECflcL**tTFORN Np^ffffTRACT ORCON

endanger the party's control of the Diet, thereby undermining its ability to secure passage of bills of Interest to the United States. The possibility of an early election makesikely

tactic.

LDP support is sufficiently tenuous that giving ground on an Issue of Importanceey interest group could threaten the party's majority, although this Is by nooregone conclusion."

If the LDP lost its majority, management of bilateral relations would Indeed become more complicated. Even so, the LOP could ally with one of the moderate opposition parties, which share its view of the importance of the US-Japaneftwlng governmentirtually out of the question.

toaKypKt Agy.cv

DIRECTORATE OF INTELLIGENCE4

This memorandum was prepared by the Office of East Asian Analysisupport of President Reagan's meeting with PrimeS. %

DIRECTORATE OF INTELLIGENCE4 Objectives of Nakasone's New Administration

Domestic Goals

Nakasone's primary domestic target during his second administration will be to reduce the government deficit--projected toillion in Japan fiscalithout significantly raising taxes. This priority will govern his approach to other programs. In an effort to fulfill commitments made by previous administrations, his Cabinet will attempt to raise defense and foreign aid spending but will use administrative_reform to continue to reduce other government expenditures. H

Pressure Is building within the LOP for morefrom Nakasone's rivals whoeakness theyand from Oiet members who want to stop reductionsprojects. For their part, the oppositionfight any increase in defense spending, especiallyercent-of-GNP limit. inority in they can stalj debate, thus preventing passage ofat ion

The bureaucracy, facedhrinking pool of funds, will vigorously lobby for key programs. The economic ministries, for example, have tried to sell budget Increases by arguing for funding basic research that will aid restructuring toward high technologyational goal. usiness nonetheless opposes budgetary expansion, fearing retreat from administrative

This memorandum was prepared by the Office of East Asian Analysis in support of Presidenteeting with Prime Minister Nakasone

WARNING NOIftt INTELLIG&rTCE SOURCES ANO MEPflODS INVOLVED

reform policies could lead to tax increases. Business leaders in general also oppose Increased defense spendingbeyond that necessary to satisfy the United States.

Security and Foreign Policy Goals

Under the second Nakasone administration, Japan's policy will continue to be dominated by an approach that defines Its security primarilyconomic terms. Japanese political and government leaders are comfortable with the notion that national security depends on economic success based onIn turn sustains domestic stability under an LOP government. One of Nakasone's primary goals, therefore. Is to ensure that the 'international political and economic environment remains congenial to Japan's foreign trade. To do so he will:

eek to sustain world trade and monetary arrangements.

ndorse projects of interest to the LOCs, such as ASEAN solidarity, the Contadora process, and freedom for Namibia.

romote political stability and economic growthhe LOCs through expanded foreign aid and cultivate Japan's Image through cultural, sports, and educational exchanges. ^

Japan's vulnerability to an interruption in the flow of Imported food, fuel, and raw materials is at the top of Tokyo's list of national security concerns. Nakasone's government will, therefore, continue to pursue programs that:

aintain domestic production of rice and coal.

iversify import sources.

educe import requirements through Industrial restructuring and conservation.

uild stockpiles and maintain foreign exchange reserves.

On the export side, Tokyo's priority objective is to maintain access to aarketsorth America and. Western Europe for Japan's new, high-technology industries. To counter the protectionist threat, Nakasone's government will:

romote free trade and emphasize Japan's steps to open

its own markets.

hift export Industries to third countries or offer to. build production facilities In markets that might otherwise be closed. _tf

Military Security Strategy: Most of the LOP and Its backers take the Soviet threat seriously andigh value on the US-Japan alliance, but they essentially believe the US nuclear deterrent solves Japan's security problem as long as the United States maintains military parity with the USSR and the Mutual Security Treaty is ffect. Although the Japanese military establishment has grown in size, sophistication, and public acceptance, it Is still intended to perform only limited military functions. From one perspective, Tokyo hasremium on the political purpose of the Self-Defense Force: that is,eans to satisfy minimally US demands on defense burden sharing so that bilateral differences do not threaten the Security Treaty itself. *

Aspirations for World Leadership

Nakasone has long believed that Japan should conduct itself with greater Independence and self-confidence. Although Japanese generally take prideis successlevating Japan's international status, they reaain suspicious of schemes that might embroil the country in foreign conflicts and are concerned that Nakasone's known Interest in strengthening Japanese defenses could leadursuit of International stature based onary power.

Prime Minister's personal ambition to leave his mark on Japanese history and his need to use foreign policy achievements to buttress his somewhat shakey domestic political base coincides with his national pride. Given public sensitivity to his pro-military policy, his attempt to persuade the Japanese electorate that he can keep relations with the USSR on an even keel is particularly Important. He has stressed support for US efforts to reopen arms control talks with the Soviets and backs an expanded Japanese dialogue with Moscow.

WLWLWJf Nakasone hopes someday tooresume

discussions on the Northernor 1es--an unlikely developmentoal that combines spirationstatesman and his

nationalism.

Nakasone also hopes to play the role of mediator in areas of international tension. He apparently believes, for Instance, that he may be able to facilitate forward movement on .the Korean Peninsula by brokering contacts between Seoul and Seijing and broadening nonoffldal Japanese channels to North Korea. Japan will probably also continue tooleediating the Iran-Iraq conflict.

Centra* Iredigpxe Agcnc/

DIRECTORATE OF INTELLIGENCE

4

Japanese Interestisarmament

a favorite Japanese theme, disarmament has recently received heightened rhetorical support from Prime Minister Nakasone and Foreign Minister Abe. Both recognize that Japan's Influence is only marginal, but they see clear domestic politicalreJoriDol icy advantages in continuing to champion the issue. I

Most postwar Japanese politicians have identified themselves closely with peace-related issues in order to respondtrong domestic sentiment that Japan must not be drawn into another war.

akasone Is particularly sensitive on this score, given his reputationawk as well as press and opposition party accusations that he wants to "remilitarize" Japan and strengthen security ties with the West.

ressure on Nakasone is Intensified because his foreign minister, who has accordedentral place in his "creativerime contender for leadership of the ruling party.

akasone's position is not complicated by an activehowever, and serious opposition toortheast Asia has noti ali zed.

This memorandum was prepared by the Office of East Asian Analysis in support of Presidenteeting with Prime Minister Nakasone

Nakasone has used support for disarmament to legitimize his ts to strengthen Japan's security.

ublicizing support for Washington's effort to reopen arms control talks with the Soviet Union helps him distract domestic critics opposed to expanded security cooperation with the United States.

Nakasonetrong interest in the aborted INF negotiations, pointing to the needlobal agreement that wouldoviet shift of SS-ZOs eastward, where they could threaten Japan. We believe one objective was to broaden Japanese security horizons beyond the traditional focus op_ the US alliance to include Western

Expressions of support for Western firmness and solidarity

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CaVM WdHgrreeAg-XY

DIRECTORATE OF INTELLIGENCE4

Japan's Rotations with the Soviet Union

Tokyo has taken an Increasingly tough stance toward the USSR since the, and despite Prime Minister Nakasone's interest in promoting dialogue, Japanese-Soviet relations will probably remain cool.

ajor improvement In political relations depends on Soviet willingness to reopen discussion of the longstanding Northern Territories problems. Ue believe Nakasone cannot afford to back down on this Issue, and Moscow will continue to stonewall because of the islands' strategic significance and concern over the adverse impact territorial concessions might have on future border talks with China.

he Soviets will probably continue their campaign to foment Ill-will between Japan and both its Asian neighbors and the United States. The Japanese are aware of--andstrategy.

oscow shows no sign of moderating Its continuing

military buildup in East Asia. Many Japanese suspect thisntended in part to Intimidate them into conforming to Soviet wishes.

oscow's heavy-handed treatment of Japan, combined with the Invasion of Afghanistan and the KAL shootdown, has increased popular antipathy toward the USSR, heightened Japanese awareness of the Soviet threat, and contributed to improved domestic political support for the Self-Oefense Forces and the US-Japan alliance.

m was prepared by the Offices of East Asian Analysis and of Soviet Analysis in support of Presidentmeeting with Prime Minister NakasoneanuarJ

NTELLIGENCi^fouRCES AND METJJOGS INVOLVED

conomic relations are on the decline, partly because political relations have deteriorated but also because large-scale Siberian resource development projects are no longer attractive to Japanese businessmen.

Nakasone's desire tobreakthrough" in relations with the Soviet Union stems from an ambition to distinguish himself as the prime minister who persuaded Moscow to agree to discuss the territorial Issue. Withoutoviet reversal, however, his maneuvering room Is limited. The Prime Minister and Foreign Minister have said theyhe USSR until Gromyko visits Japan, and Gromyko thus far has been unwilling to come as long as Tokyo insists on brinqlnq uo the Northern Territories.

The Soviets probably seeakasone's eagerness an opportunity to Improve relations. They want to discourage growing US-Japanese collaboration on security issues In Northeast Asia and to forestall US-Japanese-ASEAN cooperation on economic ana political matters. Moscow has responded to Nakasone's overtures with efforts to Improve the political atmosphere, Including the dispatch of high-level delegations, concessions to Japan during the recent fishery negotiations, and suggestionsossible compromise on preconditionsromyko visit. The Soviets flexibility on this score will serveitmus test of tne importance they attach to Improved relations during the coming months. Even if Gromyko made the trip, however we believe prospectsramatic breakthrough In political or economic relations would regain poor. Differences on substantive issues run too deep.

nonetheless will continue to encourage expanded private and governmental dialogue with the USSR.

e wants to demonstrate at home that his commitment to enhancing Japanese security does not entail an unnecessarily provocative anti-Soviet policy.

e has also stated repeatedly that Tokyo must keep channels of communication open to the Soviet Union precisely because it is Japan's most difficult and dangerous neighbor.

e shares the prevalent Japanese view that Japan's

relations with the Soviet Union are largely dependent on US-Sov1et relations and Tokyo should not lag behind if Washington and Moscow improve their relationship.

Central Intdllgrnct Agency

DIRECTORATE OF INTELLIGENCE4 Japan and China--Growlnq Strategic and Economic Ties

Prime Minister Nakasone's visit to Beijing last March underscored the Importance both countries attach to their relationship. Converging economic and strategic interests have encouraged closer ties. Tokyo sees Chinaotentially lucrative export market, as wellignificant source of energy and other raw materials. China hopes to acquire increased Japanese Investment, financial credit, and technology, as wellarger Japanese market for Chinese goods.

Trade is running at record levels this year. Japan has been China's largest trading partner since the, accounting for more thanercent of total trade.

Japan Is also China's largest creditor, and Japanese direct investment in China is picking uplow start. Japan's Export-Import Bank recently decided to4 billion In low-interest loans to finance Chinese oil and coal development projects.

China has moved to the top spot among Japan's foreign aid recipients. Prime Minister Nakasone2 billion aid packagearch.

okyo also has agreedne-time export of nuclear reactor equipment, subject to on-site "visits" by Japanese officials. The two countries areilateral nuclear cooperation agreement.

growth of Soviet military power in Asia has prompted

dopt broadly complementary policies toward tne ujik and its allies.

this memorandum was prepared by the Office of East Asian Analysis in support of President Reagan's meetingPrakasone

NTELL IGENCE-trOURCES AND NETHODyTNVOLVED

uring Nakasone's crip, both sides reaffirmed opposition to increased Soviet deployment ofn Asia and agreed to share information on the missiles.

oth governments have opposed the Vietnamese occupation of Kampuchea and have provided strong diplomatic backing for ASEAN's efforts to bringietnamese vi thdrawal.

apan and China have condemned the Soviet invasion of Afghanistan, have refused to recognize the Kabul regime, and have sought to bolster Pakistan.

lthough Japan and China support differentboth have tried to exercise aon their respective partners.

There Is potential for discord In the Japan-China relationship as well ashe Sino-US-Japan triangle. Some in Tokyo are concernedadical leadership could reemerge in Beijing, while the Chinese remain wary of Japan's ties to Taiwan. The Chinese will also monitor Japanese response to US pressure to Improve its defense capabilities, and both Beiiing ana Tokyo will compete for the attention of US policymakers. US Japanese competition in the growing Chinese market for high-technologypuld also cause friction In the Japan-China relationship. '

Japanese officials nonetheless are generally optimistic about future bilateral relations. They view support for China's modernizationay to improve prospects for the survivaloderate leadershipeijing, help to reinforce China's

opening to thend reduce incentivesino-Soviet rapprochement. The mutual strategic and economic benefits ofrobably will encourage continued close ties.

4

L NOrORff

Central tnidkgmce Agency

DIRECTORATE OF INTELLIGENCE4 Japan and the Two Koreas

Tokyo has always given priority to South Korea overbutew years ago its tilt was circumscribedstrained relations with Seoulecurring Interestties with Pyongyang. Under Prime Ministerhas shifted decisively toward strong, open support for ' '

Immediately after his election as prime minister, Nakasone broke the bureaucratic logjam that had blocked conclusion of an aid agreement andummit with President Chun in Seoul in Chun reciprocated Innd the unprecedented exchange has helped ameliorate longstanding tensions andolitical framework for progress on substantive Issues. Even so, differences over the transfer of Japanese technology, South Korea's continuing trade deficit with Japan, and historic ethnic antagonisms typified by the treatment of Koreans living In Japan are certain to strain relations.

Accompanying Nakasone's determination to strengthen relations with the South is willingness to support Seoul on critical issues related to the North.

he Prime Minister expressed an unusual degree of

personal sympathy after both the KAL shootdown and the assassination attempt In Rangoon.

After Rangoon he also imposed sanctions on North Korea for more than one year, and he has supported Seoul's position on the inter-Korean dialogue.

Jhis memorandum was prepared by the Office of East Asian Analysis

meeting with Prime Minister NakasoneS .

NOTICE^ INTELLIGENCS-^SOURCES ANDNVOLVED

UIAL^rOTl

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CONFIOENTIAL^rrjFORN

The domestic political liabilities inirm line toward North Korea have declined in recent years. Al1"oppos1tion parties have distanced themselves from the North, and the non-Communist opposition has moved to improve relations with the South. The LDP, therefore, is under less pressure toapoear interested inbalanced" Korea policy. M

Nonetheless, Tokyo still sees advantagesroadening nonofficial contacts with North Korea. Aside from the economic benefits of regularizing fishery arrangements, encouraging some progress on repayment of North Korean debts, and expanding trade, Japanese officials believe P'yongyang should be drawn out of its isolation and into closer contact with the West. In addition, we believe Nakasone wants to work toward legitimizing the division of the peninsula by encouraging contacts among the two Koreas and the major powers and sees Japanese dialogue with the North in this context. Although the Prime Minister probably harbors few illusions about Pyongyang's objectives, he seems to see an opening for some forward movement. He has:

oined the United States in urging China to Increase contacts with South Korea and has offered Japan's good offices as an intermediary.

pplauded the North's offer of flood relief and its willingness to resume talks with the South.

ndorsed Seou1's .request that both Koreas be admitted to the United Nations.

Nakasone hopes to beosition to act quickly shouldsigns of movement develop into an inter-Korean thaw. to take as much credit as possible for anyand is sensitive to the negative political fallouteventally the United States andan understanding without Japan's

CfnlniAgency

OF INTELLIGENCE4 Pacific Basin Economic Cooperation

Pacific 8asin economicecurring theme in Japanese policy forecade, will be hioh on Nakasone's agenda in California.

n addition to shifting the spotlight from bilateral trade friction, the Pacific cooperation Idea givesegion-wide issue on which he can work with Washington as an equal and thereby enhance his leadership image at home.

Nakasone probably sees sponsorship of Pacific cooperationay to win support among LDCs for his plansew multilateral trade round.

e may also hope that even limited success of a

cooperation plan would help Japan by smoothing relations with suppliers of important commodities. Economic expansion in the Pacific would also create new export opportunities for the United States--perhaps reducing the focus on the bilateral trade relationship.

Nakasone probably will address Pacific Basin cooperation in broad terms, but may also suggest several relatively small cooperative projects. Tokyo wants to keep the US and Japanese presence in the plan low key to avoid putting off the smaller countries and reviving memories of Japan's wartime East Asia Co-Prosperity Sphere. Bykeefling the projects small, Tokyo can also keep the cost down.

This memorandum was prepared by in support of President Reagan Nakasone

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CONFIDENT

Asian Ana Prime Minister

The projects will be practical and concrete to respond to LOC and NIC complaints that such plans are too often merely hot

air.

akasone probably will again raise the Ideaoint fund for Pacific Basin academic studies.

okyo advocates splitting human resource development responsibilities, with Japan giving low technology training on Okinawa and the United States providingeducation in Hawaii.

akasone believes theponsor the initial stages of cooperation. ^

Debates over which nations should be included and differences among Southeast Asians who would not benefit equally from the projects could easily derail the plan.

The ASEAN nations will probably balk if China and South Korea are included. They fear Tokyo and Washington might ignore Southeast Asian Interestsavor of catering to these more Important powers. China's 1nc1 us 1onlfTiiwan were excluded could also create difficulties.

Cenwlgency

DIRECTORATE OF INTELLIGENCE4

Japan's New Initiatives In Africa

years of essentially Ignoring Africa, Tokyo has begun to focus on the continent.

n mid-November Foreign Minister Abe became the first senior Western minister to visit drought-stricken Ethiopia and Zambia. During the trip he announced that Tokyo would Increase food aid to Africa byillion, bringing the total3 million for

urlng the sameoint government-private sectorthe largest Japanese delegation ever dispatched to theeight African countries to investigate how Japan could best provide financial and material assistance. Stops included Ethiopia, Zambia, and Mozambique.

esult of Abe's briefings upon his return home, Tokyo plans to step up activity in Africa, urge other Industrialized nations to provide greater support, and seek closer US-Japanese cooperation in the region. Japanese aid to Africa totaled5 million

t the request of African leaders, Japan has agreed to act as UN coordinator on African issues.

In an effort to stimulate the limited domestic interest in Africa, the Japanese Government isublicity campaign, which has Included naming Octmonth" and holding "starvation lunches."

Jhis memorandum was prepared by the Office of East Asian Analysis in support of President Reagan's meeting with Prime Minister Nakasone

NOTlCf^ INTELLIGENCE SOURCES AND METKOTS INVOLVED

CONFIOENMTTl NQftfRN

Although Tokyo's sudden Interest in expanding its role in Africa is motivated in part by humanitarianlsm, both the'Foreign Minister and the bureaucracy have seized on African issues for more important reasons.

With international attention focused on drought and famine victims in the region, Tokyo viewss an arena in which to demonstrate to Washington and other Western nations that Japanooperative ally ready to fulfill its International responsibilities.

be's political ambitions almost certainlyriving force behind his trip. Abe, who wants to.succeed Prime Minister Nakasone, hopes to gain public recognition of his "creativehout sharing the credit. Abe's earlier solo ventureiddle East diplomacy, where his efforts to mediate the Iran-Iraq war have stalled, has not served that goal well.

apanese officials have also said they want to prevent growing economic problems in Africa fromestabilizing forcerain on the international community.

hese factors suggest Tokyo's .interest In Africa could decline if the involvement of other industrialized nations falls off or if Abe identifies ather areas that better serve his political interests.

We believe the emergenceore active Japanese role in Africa, especially if Japan shares the economic burden of assisting the poorest nations, will generally serve US interests. The Japanese may go further than the the United States wants, however, by giving more than humanitarian aid to such Marxist countries as Ethiopia. Tokyo wants to keep its political foothe door and claims to be more optimistic than Washington about the prospects for Ethiopia's turnlnq to the West.

Japan alsoarge stake in South Africa. Tokyohave full diplomatic relations with Pretoria and forums is careful*to denouncepolicies. 8ut Japan maintains strong commeVcial South Africa. Trade amounts to more thanillion perfor about half of Japan's total trade with the We believe relations with Pretoria willthe current arrangements as long as business

1 Japanese aid to Africa totaled5 million3

CONFIDENTIA^OFORN

DIRECTORATE OF INTELLIGENCE4 Financial Liberalization

Prime Minister Nakasone considers the yen/dollar accord reached by US and Japanese finance officials last May as one of the high marks of bilateral relations He has been quick to echo Western praise of Japanese financial market liberalization, which the accord promotes. Nakasone has been almost as sensitive to US Treasury criticism of the way Tokyo is implementing some of the agreed-upon measures.

nme Minister snares US concerns about the limitel liberalization the Finance Ministry is advocating in certain areas.

In particular, Nakasone has questioned Ministry decisions to exclude securities firms from the soon-to-be created yen bankers acceptance market and to require banks to notify the Ministry before issuing Euroyen certificates of deposit. mmmmmm^

We believe prospects for resolving bilateral differences over implementation are generally good. In response to Nakasone's criticisms. Finance Ministry officials havel said they will phase out most of the restrictions that^upset tneir us counterparts. The officials have not disclosed when the restrictions will be lifted, but continued prodding by Nakasone should ensure genuine liberalizationhese areas.

On the other hand, bilateral differences over trust bankinq activity by foreigners will probably fester. Tokyo plans to carry through on Its yen/dollar accord pledge to allow foreig

This memorandum was prepared by the Office of East AsianfagarjJ^meeting with Prime Minister Nakasone5

WARNING NOTICE/ INTELLIGENC>xf0URCES AND METHODS INVOLVED

?! trust banking in Japan beginningut

the Ministryinance Intends to license only eight foreign

lu he nu<Bbei" Japanese banfcsn such

We believe financial liberalization outside the confines of the yen/dollar accordccelerate through the remainder of the decade despite bureaucratic obstacles. Continuing the pattern of the past ten years, tne maturing of the Japanese economy will provide the primary impetus for deregulation.

he economy'sransitionigh-growthedium-growth path destroyed much of the rationaleightly regulated financial system. The Finance Ministry responded with narrowly focused and piecemeal reforms, but once begun, liberalization fed upon Itself. Losers from past deregulation demanded--and continuehe form of liberalization in an area of their choice. Furthermore, the expanded freedom given Japanese banksnternational dealings is generating pressure for similar leeway at home.

n an effort to ease the nation's transition to slower economic growth, Tokyo floated massive amounts of government debt starting Issued with ten-year maturities, this debt begins maturing In the coming Japanese fiscal year. To refinance these bonds smoothly, the government must introduce new flexibility Into funding methods and terms of new Issues. Such reform will have ripple effects throughout the financial system, as regulators tend to link key Interest rates to government bond yields.

n thehen growth prospects dimmed, Japanese manufacturerseener Interest In international markets. This contributed to the mushrooming of the current account surplus, whichillion As tne surplus Increased, so did fears about regulations inhibiting the efficient recycling of funds overseas. In response, Tokyo.has Improved foreign access to yen markets for sovereign borrowers. As long as savings remain above domestic needs, we believe the Japanese Government will feel compelled to liberalize further the country's international financial dealings.

SECR

OF INTELLIGENCE4 Status of Software Protection Legislation

ODOSed bytry of International Trade1 "sofcware from copyright protection could limit exports to Japan by US firms in the service. comoute-

fieldS* Thewanls co Promote oftwareessential Ingredient in economic

tndcomputer manufacturers by

tSndlr? ceBS software, long the Industrys neduce the period of protection fronoears and Include provisions that could mandate release of software to competitors. If this occurs:

S companies would be reluctant to sell software-based services or products In Japan, fearing the release of the software, whichrequently the most valuable component.

ionS'he NICs and LDCs, mightJapanese example, cutting further Into UStrade, fjl

ikeee tnes this spring, although US pressureurf battleI and

ill

"1sin disputes with*1v< 1n

The Foreign Ministry also opposes the HITI position.

[Ms memorandum was prepared by che Office of East Asian

WARNING NOTICED'RCES AND METHp^rS INVOLVED

We believe continued pressure from the United States and Europe, combined with the bureaucratic deadlock, could push the issueolitical level in the ruling party for final arbitration. Because MITI's plan is so unambiguously protectionist, the leaders of the ruling party could well respond positively to pressure from Washington on software

1Kb I NUrORNORCOiN

SEC^TjLOtAWTTlOCO -CenO* IfWflsnKe Agency

DIRECTORATE OF INTELLIGENCE4 Liberalization of Japan's Telecommunications Market

US access to Japan's multlblllion dollar telecommunications

market will depend on tne evolution of the market after Nippon

Telegraph and Telephone (NTT) returns to the private sector In

April. Several barriersompletely open market are

possible, the most serious stemming from the Telecommunications

Ministry's (MPT) attempts to retain control of its traditional turf.

PT is drafting ordinances governing the approval of

technical standards for telecommunications equipment that are apparently more restrictive than the current regulations.

he Ministry has formed an association of Japan's largest equipment manufacturers to determine standards;

foreigners will not be allowed to attend meetings of this body.

The notification system for the establishment of telecommunications service, companies could be used to restrict foreign firms.

entryNTT'S efforts t0 exPand lrs markets also could limit US

may continue to release

technology to suppliersreferred basis.

was prepared by the Office of East Asian Analysis In support of President Reagan's meeting with Prime Minister Nakasonemmaam

NOFQft

ffyTmci

forces within Japan couldore open market. With budget growth virtually frozen except for defense and foreign aid, the economic ministries are attempting to move into new areasrder to competehare of the shrinking

MITI, the Construction Ministry, and the Transportation Ministry, which all are trying to expand their influence Into telecommunications, will oppose MPT's attempt to dominate the sector, as will NTT.

The prospect of liberalization also has energized foreign and domestic firms that wish to enter the market. Forced to surviveompetitive environment, NTT will have to base its procurement and technology sales more on profit/loss considerations than on concern for maintaining traditional relationships. Although Itikely to dominate the overall market, it probably will have to purchase equipment, software and databases abroad, improving prospects for US firms,ompetitive edge in telecommunications services.

US pressure has helped to accelerate the liberalization process and probably can continue to influence the developmentruly open market.

ecause telecommunicationselatively new issue, Interest groups are not firmly established and do not have the political clout of traditional lobbys such as agriculture.

PT is not experienced in the international arena and probably is susceptible to high-level pressure.

apanese businesses wishing to break Into the

telecommuncations market share, the US desirex for an open market.

The Impasse created by bureaucratic rivalries could kick decisions up to the Liberal Democratic Party, which may be more inclined to make political choices that reflect Washington's interests.

DIRECTORATE OF INTELLIGENCE

4

The Defense Spending Limit

Over the past several months politicians, bureaucrats, special study groups, and the press have begun to focus on the question of whether Japan's defense spendingshouldbreak the self-imposed limitercent of GNP setpending on defensexpected to total8 percent of GNP when the fiscal year ends onarch.

ast spring Prime Minister Nakasoneiberal Democratic Party (LDP) study group to consider revising the ceiling.

uring the summer some politicians and members of the press predictedroposed pay hike for government employees or the Japan Oefense Agency's requestercent increase in Its5 budget could push spending over the limit.

efense advocates In the LDP recommended this fall that the ceiling be revised, pointing to US pressure for Japan to do more in its own defense.

he Peace Researchprivate think tank commissioned by the Prime Minister to study defensein mid-Oecember that the ceiHnq be abolished.

In mid-December the defense caucus of the LDP is expected to recommend revising the ceiling.

Jhis memorandum was prepared by the Office of East Asian Analysis

lthough the Democratic Socialist Party also supports breaking the limit, the other opposition parties--Including the LDP's small coalition partner--are opposed, arguingould violate Japan's postwar peace orientation.

ew Halt have Included changing the cap from ercent" toercent," leaving the limitercent of GNP but removing defense personnel costs, raising the cell.lng toercent, or eliminating it

mngin^^Siber^hen

the budget Is approved by the Cabinet, but at present the timinq does not apper right forove.

Japan's rate of economic growth will allow Tokyo to sustain the present rate of defense spending growth without breaking the limit.

mbassy reporting suggests Nakasone does not now have

broad support within the LOP forevision of the eel 1ing.

reaching the limit in Oecember could work to Nakasone's advantage In talks with the President, but could also open the way for domestic criticism that he did so to follow Washington's dictates.

Japan will probably break the barrier sometime

, ,y wC2ower lnan anticipatedupplemental budgetassed. Many in the LDP would prefer the break to occur during the summer when the Diet ot In session. That timingo allow for extensive groundworkesult of debate on the issue in the spring budget hearings and the recommendations by authoritative defense studv iir mint til

o cacao

DIRECTORATE OF INTELLIGENCE 21 December 4 Japanese Defense Procurement

This spring Tokyo was forced to acknowledge It would not

c5,ves of tne "clonal Defense Prograo Outlineapan's basic military planning document, by the end of the current Midterm Operations Estimate (MTOE)

Funding problems caused byercent of GNP cap on defense spending forced repeated delays In orders of weapons systems Included in the plan.

Postponing achievement of the NOPO has pushed back any possibility of completing the already outdated Outline-defied6 thet the earliest.

The first objective of the next MTOE, coverlna Jaoan fiscal

IVorltIII'rhhe'"efoJe- the procurement shortfallshe previous plan. That will only be possible if the Japan Defense Agency's (JOA) budget is significantly

IJ I 9 n tne newreflects more balanced procurement. Incorporating improvements in the logistics

stimate emphasizesand air defense

5 reconnaissancehdefense systems

memoranaum was prepared by the Office of In support of President Reagan's meeting with Nakasone

Asian Analysis Prime Minister

IC_r^ INTELLIGENCcSOURCES AND HETHfttJS INVOLVED

-SECRET

Air Self-Defense Forces improvements will concentrate on developing tht next generation of fighters, improving the air defense warning and control system, Introducing the US Patriot surface-to-air missile system to replace the aging Nike-J, and possibly developing an aerial refueling capability for its fighters.

The Ground Self-Defense Force will seek to Introduce new tanks and improved infantry combat vehicles to be fielded primarily In Hokkaido.

Some high-level officials in the Oefense Agency and the Liberal Democratic Party (LDP) have calledevision of the goals under the NOPO. They point out that the original Outline was writteneriod of detente between the United States and the Soviet Union. They cite thep of Soviet in Asia, the KAL incident, and changes In force levels in Korea as reasons why Japan should not restrict Itself to the original framework of the NOPO. The LDP, in fact, is considering revising bothercent defense spending cap and the NOPO. The party's success with the spending limit will indicate, the likelihood of real changes in the NOPO.

DIRECTORATE OF INTELLIGENCE4 Defense Technology Transfer

Oespite exchanges of Messages and some bilateral discussions, defense technology transfer generally remains stymied, with little evident progress since the3 agreement with Washington. pecific US case has not yet been proposed to test the accord, and the Ministry of Foreign Affairs

nd cne Mln-"ry of International

Trade and Industry (HIT!) o not agree on how to handle a

when it occurs. fjf

Even so, some groundwork has been laid:

In August, Washington formally identified five general technologies for possible exchange with the Japanese.

In November, the Joint Military Technologyunder the agreement to expeditethe first time. B|

Japanese business continues to have reservations about the exchange agreement.

" IH* pri!fCf "ccorkeptical of US motives and worried that officials negotiating for access to Japanese technologies could compromise proprietary information anfi make it available to potential US competitors.

usiness also believes Washington uses US national

security concerns as an excuse for deliberately limiting Japanese access to US commercial technologies and, therefore, sees little reason to be forthcoming.

This memorandum was prepared by the Office of East AsianNakasone

WARNING NOTICE/^AND METHQJW INVOLVED

Brflit-

39

St&ifT une nun wn^ofYi

Even so, there is little evidence that the Japanese bureaucracy itself wants to move aheadmplementing the accord. So far, no ministry has taken the initiative to push implementation and none appears likely to do so until firm US proposals for technology exchange force Tokyo's hand.

40

Cenuaf Irwflgcrwc

DIRECTORATE OF INTELLIGENCE4 Controlling Technology Loss

In an effort to keep step with the Western crackdownlosses to the Soviet Union and Its allies, Japanand redesigned its export control program. Thedevelopment over ihe past two years has been anthe level of coordination among the ministries charged Implementing, and enforcing export controls. program has spurred both cooperative and

Formation of an interagency committee with representatives from the Trade and Foreign Affairs Ministries, the National Police, Customs, and the Japan Defense Agency to improve Japanese export controls.

ore careful review of entry visas for East Bloc trade and scientific delegations, as well as stricter interpretation of export control regulations.

nitiation of end-user certificates and some controls on reexports.

wareness programs designed to enlist public support business compliance with the stricter controls

Most of Tokyo's measures informally extend existing authorities that limit Soviet access to advanced technologies and discourage unwanted transfers before they occur. Consequently, the results are not as visible as the seizure of proscribed cargoes and prosecution of violators carried out In other COCOM countries. Nonetheless, by avoiding formal legislation Tokyo has

of East Asian Analysis

'p"1dflBJ ReagiilL meeting with Prime Minister NakasoneS.

NTELLIGEN AND METH

i NOTICaV^ GENCeTSOURCES HO<JS INVOLVEO

maintained flexibility to discourage or delay technology sales while exercising!ts near autonomous control over export licenses.

Host major trading and manufacturing firms--bellevlng they have little to lose because of the poor political and business relations.between Japan and the USSR--have accepted Tokyo's stricter controls.

any have denied Soviet requests for restricted technologies.

esult of continuing US and international pressures, as well as its own experiences with Soviet espionage activities, Japan has become sensitive to the strategic Implications of unregulated technology transfer and more aware of Japanese vulnerability toollection. h< the exception ofspionage legislation,roposals for new laws restricting trade or the activities of foreigners in Japan are unlikely. Nonetheless, Improvements made thus far probably will become permanent, with further refinements comingeasured pace, as long as the Western consensus on controlling technology leakage holds. M

DIRECTORATE OF INTELLIGENCE

4

Economic Growth and Budget issues

Prime Minister Nakasone will face some difficulties next year in his effort to manage the growth-oriented Japanese economy:

heercent growth rateig Improvement

over the previous four years' lackluster performance, but It has been driven partly by strong export performance, with the foreign sector weakening, GNP growth5 will probably slow. Our most recent figures show weakened foreign demand cutting overall growth in the third quarter4 to an annual rateercent.

rowth of the domestic economy has picked up this year, but some in Tokyo are concerned that investment will drop next year as the foreign sector's stimulus declines.

eanwhile, Nakasone's rivals within the Liberal

Democratic Party (LOP) have used proposals for boosting economic growth to question his management of the economy. Kflchi Mlyazawa, heir apparent of the Su2uki faction, and former Economic Planning Agency Director General Komoto have both called for fiscal stimulus-through Increased public spending or tax cuts.

The government's commitment to holding the line on spending in an effort to reduce the government's persistent budget deficit will constrain steps to strengthen domestic demand. The LDP's supporters In the business and financial world also favor controls on spendingmaller government sector, as does the

support of Nakasone on 2

President Reagan

East Asian Analysis Prime Minister

OURCES AND METJ#flt)S INVOLVED

powerful Ministry of Finance. The Finance Ministry hasight budget for5 that will cut most agencies' spending byercent.

efense and foreign aid are major exceptions. along with rising debt service costs, will spending up

JAPAN: THE NAKASONE ADMINISTRATION'S HANDLING OF. ECONOMIC ISSUES OF CONCERN TO THE UNITED STATESi

Comments

Financial liberalization

2. Agricultural quotas and tariffs

3. Standards and certification procedures

4. Telecommunicat ions legislation

S. NTT procurement of foreign equipment

6. Restraint on steel shipments to the United States

Much progress made in4 yen/dollar accord, which promotes deregulation. Differences over trust banking and Euroyen markets remain.

Agreement reached in4 calls for expansion of beef and citrus imports over next three years. Government refuses, however, to consider complete liberalization of agricultural Imports.

Recently have begun to accept foreign test data but Implementationeveral key are; still slow.

Foreigners will be allowed to sell value-added networks after Nippon Telegraph and Telephone (NTT) privatized in New equipment standards being drafte appears they may be more restrictive than before.

After bilateral agreement took effectoreign sales to NTT Increased Initially, bi US sales have declined recently. Outlook uncertain after return of NTT to private sector.

Have expressed willingness to accept

export restraints although have yet

to agree on limits for various types of stee

Indicates issue basically resolved during Nakasone's tenure.

Indicates progress has been made but problem areas remain.

Indicates no real movement has occurred since Nakasone took office.

WARNING NOTIfit^ INTELLIGENBCSOURCES AND METHpBS INVOLVED

COMMENTS

restraint on export of cars to the United States

Purchase of foreign satellites

to extend initial agreement0ourth year. Bureaucrats have hinted extension5 also possible.

Tokyo will allow private firms to purchase foreign satellites, but governmentomestic development of satellites remains firm.

forto practice

apan

moratorium

11. Software legislation

12. Sales of foreign cigarettes

13. Energy.purchases

Unite*

14. Removal of semiconductor tariffs

15. Foreign direct investmentapan

No movement so far and none likely

Tokyo signed agreement In4 to sperm whaling asut disagreements with Washington over interpretation have subsequently arisen.

Proposed protectionist legislationureaucratic wrangling but not yet dead.

Japan Salt and Tobacco Company monopoly on sales ended, but concerns about distribution and pricing system persist.

Participating In feasibility study of Alaski LNG project but dragging feet on boosting coal purchases.

Elimination of tariffs approved by Tokyo anc will be enacted when parallel legislation passed by US Congress.

In4 Diet revoked regulations limltin foreign Investment inapanese companies. Improvements also made in approvalirect Investments.

Depressed Industry policy

limits foreigners' sales opportunities by aiding noncompetitive Industries. Continues to restrict foreign access to industrial trade councils.

number of items subject to excise taxes, which hit import sales

WARNING NOjrff INTELLIGENCE SOURCES AND MEJflODS INVOLVED <*

Original document.

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