The biggest problem is Japan. The dollar has been rising against most currencies, but its change against the yen is striking. At 126 yen, the dollar has leaped 60 percent from its postwar low in April of 1995. Against the mark, the dollar’s rise has been “only” half as great. It takes about 18 months for a shift in currency values to begin to affect trade flows. But eventually, because imports into the United States become cheaper and U.S. exports become more expensive to foreign buyers, the impact is felt. Late last fall, right on schedule, Japanese and other exports to the United States began climbing and growth in U.S. exports slowed. The upshot: the U.S. trade deficit rose almost $20 billion to $165 billion last year. DRI/McGraw Hill predicts it will jump 25 percent to a record $207 billion this year and an additional $25 billion in 1998. Remember: because of the 18-month lag, these results are, as they say, already baked in the cake.

But who cooked up this recipe? Though they now claim to deplore the result, President Bill Clinton and Treasury Secretary Robert Rubin have loudly cheered the two-year strengthening of the dollar. And many of our trading partners have been happy to pitch in by buying U.S. securities, which drives their currencies up and the dollar down. The world’s central banks and insurance and pension funds have bought $400 billion worth of new U.S. Treasuries; that increased the total holdings they had accumulated since World War II by fully 50 percent in just two years. Japan, by far the most aggressive purchaser, bought a quarter of the new Treasuries all by itself. “There’s no question the Japanese government has beaten its own currency down with such large purchases,” says Robert Lawrence of Harvard. “This is not just the work of private markets.”

Now, Clinton and Rubin had plenty of reason to talk the dollar down from its profound lows, since a stronger dollar has real benefits for the United States. Because it makes imports more competitive with domestic goods, it helps prevent inflation. It also attracts foreign capital–hey, somebody’s got to finance our budget deficit–reduces interest rates and increases investment, creating more jobs. But the biggest concern is Japan’s five-year recession. The U.S. Treasury fears a Japanese financial or economic collapse, which would cause markets to tank worldwide. “Rubin can’t or won’t say so,” says David Hale of Kemper, “but he’s clearly giving Japan an export edge to help them avoid disaster. There’s no other explanation.”

At some point, though, the rising buck began to bite and U.S. manufacturers began to howl. Detroit was the first to complain, after Japanese auto exports to the United States jumped 24 percent in the fourth quarter of last year and 39 percent in the first quarter of 1997. “We spend years getting competitive, and then the Japanese attack us with a currency devaluation and our own government cheers them on,” says Andrew Card, president of the American Automobile Manufacturers Association. By last February, with the dollar at around 117 yen, the administration began to grumble about exchange rates, too.

Also troubling to Washington and U.S. exporters is Japan’s failure to live up to promises to reform its economy. Instead of stimulating domestic consumption and opening its markets to imports, Japan clamped down on government spending, stalled market reform and squeezed consumers by boosting its national sales taxes 67 percent in April.

All this increases the odds of an outburst of protectionism in Washington. President Clinton said as much to Japanese Prime Minister Ryutaro Hashimoto in a private letter that was leaked to the press last weekend during a state visit by Hashimoto to the United States. “I am concerned… about a resumed cycle of large Japanese trade imbalances, financial market tension and protectionist pressures,” Clinton wrote.

There’s one hitch, though: despite much talk at last weekend’s Washington meeting of the finance ministers of the seven major industrial powers, it’s unlikely that the United States and its trading partners will do what’s necessary to bring the dollar down. That would take lower interest rates in the United States, combined with sweeping reform in Japan and even Germany, where taxes and social benefits are so high that investment and growth are sagging. But genuine reform would upset voters in Japan and Germany. Their governments will continue to push exports in order to maintain employment. So the U.S. trade deficit, if anything, will get worse. Think of it as the price of America’s economic success and its partners’ failure.