All Eyes on Japan as New Asia-Pacific Trading Bloc Takes Shape

It is expected that Japanese Prime Minister Shinzo Abe will announce Japan’s entry into Trans-Pacific Partnership (TPP) free trade talks in the next few days. The TPP economies already account for 30 per cent of global output and 20 per cent of the world’s exports of goods and services. The addition of Japan would make that 40 per cent of global output and add significant heft to the agreement.

The TPP has been under negotiation since 2010 by eleven Asia-Pacific nations – among them Australia, New Zealand, Singapore, and the United States. The proposed free trade agreement is intended to expand on the Trans-Pacific Strategic Economic Partnership Agreement (2005) among Brunei, Chile, New Zealand, and Singapore.

Politically Abe faces strong opposition, not only from Japanese rice and sugar farmers, but from within his own party, the Liberal Democratic Party (LDP). Although current public-opinion polls are in favour of Abe’s Government, a crucial upper house election is due to be held in July. This has led some experts to believe that it would be in Abe’s best interests to avoid pursuing further free trade talks in order to avoid division within the LDP and ensure the party retains control of both houses.

Historically, the Japanese Government has been strongly influenced by its agricultural industry, preventing any move to join the TPP negotiations. Australian agricultural imports to Japan in particular have long been perceived as a threat to the viability of the Japanese rural sector, despite the Australian Government’s continuous emphasis on the complementary nature of Australia’s rural exports.

However, many would consider Abe’s recent talks with US President Barack Obama as clear progress towards a Japan-inclusive TPP. In a joint statement released in February, Obama and Abe indicated that the TPP was in their mutual interest with some tailoring: “Recognizing that both countries have bilateral trade sensitivities, such as certain agricultural products for Japan and certain manufactured products for the United States.”

This reflects an understanding that the agreement would include exemptions for the US auto industry, and not require Japan to immediately commit to the elimination of all tariffs, allowing for the retention of some protection of agricultural commodities. It is clear that over the long term, joining the TPP will require significant reform in Japan. It will be some time yet before these talks are finalised.

Perhaps now the time is right for Japan to conclude the six-year negotiation for a bilateral FTA with Australia.

There is a lot to like about Japan, particularly as a free-trade partner. Data for Australian trade in 2012, released by the Department of Foreign Affairs and Trade, shows that Japan is Australia’s second biggest trade partner (after China), with Australian and Japanese two-way trade comprising 12.1% of total Australian trade.

Japan is the world’s third largest economy, and recent government pro-growth policies have helped fuel a 0.2% increase in GDP. Deflation, a persisting economic problem for Japan over the past 15 years, could actually prove to work as an advantage for Australia (and other trading partners). The aggressive monetary easing under new leadership at the Bank of Japan has pushed the yen to its weakest levels in 3½ years, making Japanese exports even cheaper.

A joint feasibility study by the Foreign Affairs, Defence and Security Section of the Parliament of Australia (published in December 2006) estimated that a comprehensive FTA could add $39 billion to Australia’s GDP and $27 billion to Japan’s GDP, over 20 years. Although some experts say that the GDP forecasts have been overstated, everyone can agree that the benefits will outweigh the costs.

More pressingly, Japan needs a boost in trade. Japan’s trade balance has worsened over the past two years (mainly due to the impact of the strong yen and a rise in fuel imports). The current account deficit was ¥364.8 billion in January, after a ¥264.1 billion deficit in December 2012.

The signs are good. At the annual Australia-Japan Conference, held in Tokyo on March 1 and chaired by Rod Eddington and Japanese businessman Akio Mimura, there was said to be renewed interest in concluding an FTA.

Time will tell if Australia, and the broader region, will reap the benefits.