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Pacific trade agreement boosts Abe's drive to recharge Japan

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Prime Minister Shinzo Abe's efforts to push through structural changes to recharge Japan's economy got a boost as negotiators reached a deal on a Pacific trade pact that would create the world's biggest regional trade zone.

[TOKYO] Prime Minister Shinzo Abe's efforts to push through structural changes to recharge Japan's economy got a boost as negotiators reached a deal on a Pacific trade pact that would create the world's biggest regional trade zone.

The Trans-Pacific Partnership, if ratified by lawmakers in the 12 member nations, gives Mr Abe more ammunition to fight opposition in the agriculture sector while widening Japan's market for exports of cars and auto parts. Attracting overseas investment and expanding exports through structural shifts and deregulation are key to Mr Abe's growth plans, as the nation is burdened with a shrinking and aging population.

"This is a good start for Mr Abe at a time when he has just shifted his focus to the economic agenda" after passing bills to strengthen the role of Japan's military, said Junichi Sugawara, a senior research officer at Mizuho Research Institute in Tokyo. "The agreement will become a driving force for Mr Abe's administration." After final talks in Atlanta, an agreement was announced Monday on the Trans-Pacific Partnership, a pact more than five years in the making designed to boost commerce among nations that produce 40 per cent of global economic output. The deal was announced before elections in Canada later this month, and the US and Japan next year, which would have complicated passage of the agreement in those countries.

Mr Abe came into office in December 2012 touting a three- pronged economic revival plan - unprecedented monetary easing, flexible fiscal policy and broad regulatory changes - to counteract the deflation that has dogged Japan for more than a decade. While his policies have weakened the yen, lifted stock prices and increased corporate profits, the economy has sputtered with contractions in four of the 10 quarters since he became prime minister.

Under a new programme known as Abenomics 2.0 announced on Sept. 24, the prime minister's goal is to boost the economy to 600 trillion yen (S$7.1 trillion), up about 20 per cent from its current level. He hasn't elaborated on how he'll achieve this target, or by when.

"There's no way to rebuild Japan's economy other than boosting productivity, so the TPP is an important tool for Abe's growth strategy," said Hiroaki Muto, chief economist at Tokai Tokyo Research Center Co. in Tokyo. "The broad agreement will heighten expectations that structural reforms in agriculture and other areas will progress." Expanding exports through the Pacific trade pact would boost the world's third-largest economy. The TPP would increase Japan's gross domestic product by 3.2 trillion yen, or 0.66 percentage points, according to a government estimate.

Pushing through changes in Japan's agricultural policy won't be simple for Mr Abe. Farmers have urged the government to protect the so-called five sensitive items - rice, wheat, pork and beef (which count as one), sugar and dairy products - and a parliamentary resolution to protect these areas was adopted in 2013. Abe also won't want to upset farmers as they have backed his ruling party in the past.

"Abe took power saying he wouldn't join in the TPP talks if he doesn't protect the key items, so farmers have a deep sense of betrayal," said Tetsuro Shimizu, general manager at Norinchukin Research Institute in Tokyo, the research arm of the JA Group, an influential farm association. "With or without a TPP agreement, Abe's administration will lose support from farmers." Negotiators for the 12 nations reached agreement after resolving sticking points on intellectual property rights for pharmaceutical drugs and market access on dairy products.

The agreement would benefit Japanese auto and parts makers because it reduces shipment costs to the US, Japan's biggest export market for autos. By contrast, few Japanese buy American cars - the two biggest US automakers, General Motors Co and Ford Motor Co, don't even plan to exhibit vehicles at the Tokyo Motor Show later this month.

In the auto industry "expectations are bigger for rule- making such as international standards and intellectual property in developing nations than they are for tariffs," Fumihiko Ike, chairman of the Japan Automobile Manufacturers Association, told reporters in Tokyo last week. "I expect the TPP to play a large role as rule-making is standardised." The trade deal also may bolster other trade negotiations involving Japan, according to Mizuho Research's Sugawara.

The government wants to raise the proportion of trade covered by such pacts to 70 per cent by 2018 from 18.9 per cent in 2012. The ratio stood at 22.3 per cent as of June.

BLOOMBERG