The biggest issue in Japan-United States economic relations over the next few years is likely to be the large and growing current-account imbalance. There are those who deny that this imbalance is a major problem; however, it has aspects that cannot be ignored. There are serious and persistent political issues that arise on the microeconomic level of individual industries, and there is the possibility that investment decisions will be made that will be inefficient from the viewpoint of international resource allocation.

In this chapter I argue that international differences in tax systems can be a major cause of external imbalance. I also make some observations concerning the inefficiency of investment decisions. I intend to demonstrate the importance of international coordination of tax systems as a policy issue for the future.

The external impact of surplus savings

The salient feature of the Japanese economy since the first oil crisis in 1973–4 has been the persistence of fiscal deficits and current-account surpluses in the face of a macroeconomic performance so good that it has drawn worldwide attention. To put it another way, the Japanese economy, which is extremely adept at recovering its equilibrium, may be described as macroeconomically well balanced in comparison with the other major industrial economies. At the same time, though, it suffers from persistent imbalances within its private, public, and external sectors. Unfortunately, Japanese economic policy over the past several years has not been based on a solid grasp of this distinctive feature of the country's economy.