Canada: As Abe Makes Steady Progress In Reviving The Economy, Attentions Now Turn To Trade Negotiations

Last Updated: July 24 2013
Article by Len Edwards

In my article on Japan that appeared in this bulletin in late April, I argued that Canada should be welcoming the robust moves that Prime Minister Shinzo Abe has been making since the start of this year to re-vitalize the Japanese economy.

Japan's economic revival will lead to greater growth in Canada's exports, add to global demand for our commodities, create new opportunities for value chain partnerships in Asia and beyond through Japanese companies, and increase the choice for Canadians in attracting good foreign investors especially in the energy sector.

The Short Term Economic News is Good

Since April, the good news is that the first two "arrows" of "Abenomics" --- the January fiscal stimulus and the radical monetary policy initiatives to reverse deflation announced in April by Bank of Japan Governor Kuroda --- are having beneficial impacts.  While there was a set back in early June as Tokyo stock prices corrected and doubt crept into the market about these policies, the situation has since stabilized.

On July 11 Governor Kuroda captured headlines by indicating that the BoJ is now seeing the first signs of a broad economic recovery.  According to the Bank's quarterly Tankan Report issued July 1, manufacturers' sentiment has moved into positive territory for the first time since September 2011.  Crucially firms have started investing again. Exports are recovering slowly by volume, although more quickly in yen terms.  Consumers have increased spending, perhaps in anticipation of price inflation (consumer prices stopped declining in May), which Kuroda believes is on track to a 2% growth figure in 2 years.

Of course, this is not going to be a straight path back to economic health. There will be volatility and further setbacks.  Increased imports of oil and gas are contributing to a persistent trade deficit.  But for now things seem to be on a positive recovery track.

But Longer Term Uncertainties Remain

Prime Minister Abe unveiled the anticipated "third arrow" of Abenomics --- structural reform --- in mid June.  It covers a wide range of areas, from tax incentives to spur business investment, to deregulation, to more women in the workforce, to more openness towards things foreign: more foreign investment which stands at a relatively miniscule 4% of GDP, more foreign faculty to raise university standards, and more foreign tourists.

These proposals and others are intended to reposition Japan for real annual growth in the 3% range by 2020.   While outsiders might view these proposals as falling short of what is needed, their implementation will still be a tall order in a country of deeply embedded perquisites and practices.

If this were not challenge enough, Abe will soon need to move firmly to begin reducing the government's huge structural debt, which currently stands at 240% of GDP and is rising.  He has talked about raising the consumption tax from 5% to 8% in April of next year, moving it to 10% in due course.  How he does this without undercutting still fragile consumer spending increases is a major question.

Japan Returns "Big Time" to the World of Trade Negotiations

A key element of Abe's "third arrow" is trade liberalization.  Currently only 20% of Japan's exports are covered by trade agreements; he wants to increase that figure to 70%..

The Economic Partnership Agreement (EPA) talks with Canada launched last December are a small part of this effort, with a larger share at stake in the negotiation begun earlier this year with the EU.  In March Japan joined Korea and China to begin negotiations on a trilateral agreement which, because of China's presence, will be focused on less ambitious outcomes.

Abe's most important trade decision has been to take Japan into the Trans-Pacific Partnership.  Japan will officially join the talks as its 12th participant for the final 2 days of the 18th negotiating session underway in Malaysia from July 15 to 25.  At that time Japan will get its first hard look at the already well-advanced negotiating texts.

Officials in Tokyo have been frantically preparing over many weeks for this dive into the deep end of the pool.  Although over 100 Japanese officials will reportedly show up in Malaysia, Japan has not been seriously engaged in trade negotiations until very recently and so lacks a cadre of experienced negotiators especially on the newer issues in play.  Adding the third largest global economy to the TPP mix makes it virtually impossible for the TPP to be concluded by the end of this year, as the US wishes.

So far the EPA talks with Canada have been held on schedule and made progress. The latest round was held in Tokyo in early July. Nonetheless it should surprise no one if the Japan-Canada negotiations (and those with the EU) proceed at a slower pace given the overall importance and priority of the TPP for the Japanese Prime Minister and his government.

The TPP also represents the biggest challenge in terms of pressures for change in Japan.  The Abe government has naturally downplayed this fact, especially in the lead up to the elections on July 21 in the Upper House.  The stakes are huge since a victory there, which polls are predicting, will give the PM control of both Houses in the Japanese Diet and a freer hand for driving his economic and political agendas. Although he must know it will be impossible to deliver (and runs counter to the structural reforms that he knows are needed), he has made the promise in recent days that his government will absolutely protect five agricultural sectors in the TPP: rice, wheat, beef, dairy products and sugar.

Japan's Re-emergence Triggers Some Old Complaints about "Japan Inc"

These kinds of remarks remind outsiders of past experiences with Japanese trade negotiators. While generally welcoming Japan's economic revival and new readiness to engage in trade negotiations, some voices are raising warnings in language we have not heard for some time.

Representatives of the American automotive industry and union officials have recently sounded alarm bells with Congress and the US public that Mr. Abe's government, while talking about more open markets, will do everything in the TPP talks to protect the "mercantilist nature" of the Japanese economy, while serving the interests of "Japan Inc." in forcing open the US market even wider to Japanese exports and threatening US jobs.  They and others are also demanding that the TPP include provisions against currency manipulation.

This re-emergence of some of the old rhetoric around Japan is likely to gain some foothold politically and could make it even harder to close a deal with Japan in the TPP that the Administration and Congress can accept.

More at Stake than just Economics and Trade:

Ultimately, for the United States the TPP is more than purely a trade negotiation, and Japan is more to the United States than just another Asian economy where Washington seeks better conditions for US companies to do business.

Strategic considerations are very much in the mix.

The TPP is seen as the economic component of the US "pivot" to Asia: an instrument that puts the American stamp on the 21st century trading regime for the region, involving high ambition, hard obligations and open market standards.  It is intended to counter the tendencies among Asians themselves to softer types of agreements.  The hope is that the China will be obliged one day to join the TPP, weakening its own interest and resolve in created a parallel universe of trade rules more to its liking.

As for Japan, the United States sees a re-vitalized Japan as an important presence and counter-weight in an Asia to that will be dominated by China. The question remains as to how the US will balance off its desire for major improvements in opportunities for US business against a possible tendency "go easy" on Japan as its main strategic ally in Asia.

For those now warning Congress about the TPP and Japan, the answer is already evident.  On July 16 the Financial Times reported Steve Biegun, Ford's vice president of international governmental relations, as saying that "geopolitics has gotten ahead of the trade considerations....".

And for the Japanese, a stronger economy better linked into the new global economy goes hand in hand with PM Abe's interest in re-asserting Japan's strategic presence  in Asia, both in political and military terms, better to live alongside with the reality of a powerful China.

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