Trade friction between Japan and the United States is an obvious fact. What is far less obvious is how each nation will address this problem. In this chapter, I would like to discuss how Japan proposes to alleviate the trade friction that has resulted from an enormous Japanese surplus on its current account and a correspondingly enormous U.S. current account deficit.

In addressing this problem, one is at first confronted by its sheer enormity. How are we to deal with the huge external imbalances facing the global economy today? How can we literally restructure the Japanese economy in a manner that will alleviate international friction while preserving domestic tranquility? Japan's approach to this admittedly large and complex issue has been three-fold. First, efforts, must be made to improve market access and increase domestic demand. Second, exchange rate realignment should be implemented. And finally, efforts must be made to restructure Japanese industry along more productive lines by gradually shrinking economically depressed industries.

In the course of the past year, important and encouraging developments have already occurred on the world economic scene. Cooperative efforts to realign exchange rates have been more or less successfully implemented, interest rates have declined, and new initiatives to address the debt situation have emerged. A series of measures have been adopted by Japan to improve market access and expand domestic demand, and European efforts to redress structural rigidities are at least being discussed. Finally, recent oil price declines are also considered to have beneficial effects in general, although the full impact on oil-producing and debtor countries is yet to be assessed.