Fear of falling behind has a funny way of focusing the mind sometimes. Policy choices once seen as toxic become increasingly palatable to leaders when they are considered against national security. So it goes for Japan as it seeks to maintain its position in Asia and finally kickstart its perennially stalled economy in the face of a rapidly growing China.
Prime Minister Shinzō Abe announced on Friday that Japan will be joining talks to become part of a new free-trade area in the Pacific led by the United States. If Japan succeeds in joining the trade pact, it would be nothing short of a sea change for the Asian country’s domestic policy because it will need to structurally reform its economy and open its market to foreign competitors.
Trade has always been the lifeline to the island nation and what made it such a success story in the region. Indeed, Japanese officials recognize that increased trade will lift the economy out of its doldrums.
However, Japan has not kept pace with participating in free-trade areas like other advanced economies because its politicians refused to challenge entrenched domestic interests. According to news agency Reuters, citing government figures, Japan’s share of trade from free-trade areas was only 19 percent in 2011 versus 38 percent for the United States, 35 percent for South Korea and 32 percent in the European Union.
When the Liberal Democratic Party won the lower house elections in December, giving Abe a second stint as prime minister, the Japanese leader put into effect his three legged strategy to revitalize the economy. He announced a new fiscal policy approach of increasing domestic spending in public works projects. He strong armed the Bank of Japan into easing its monetary policy and raising the inflation target from 1 to 2 percent. Which left the third leg — trade.
The ten nation Trans Pacific Partnership is currently in its sixteenth round of negotiations, with the latest session taking place in Singapore. The pact is envisioned as a “high quality” trading bloc with broader open trade, intellectual property protections strengthened and greater access for the financial and insurance service sectors, among others.
The genesis behind the grouping was to present an alternative to the Chinese model, or “Beijing Consensus,” which resulted in the dominance of state-owned enterprises.
The trade area also represented the economic side of the Obama Administration’s “pivot” to Asia. Some leaders in Asia were concerned that the United States were relying too much on the military to signal its commitment to the region. Thus, the free-trade area was a vehicle President Barack Obama could use to emphasize the economic side of his policy. By seeking to increase the quality of trade relations in Asia, his administration puts the onus on China to reform its commercial practices if it wants to participate.
With Abe’s announcement, the negotiations may receive a boost that helps wrap up talks by the end of the year, as hoped for, or turn out to be a hindrance by having to incorporate Japan into the process. Either way, it is a coup for the Obama Administration. Because without Japan, Asia’s second largest economy, the grouping was viewed as incomplete.
By joining the Pacific free-trade pact, Abe will be confronting the very entrenched political interests that have resisted structural reforms in the past. Japanese political leaders acknowledged that the economy was in urgent need of reform to shake off its stubborn deflation but avoided challenging domestic interests for fear of the political repercussions.
Should he succeed in also opening Japan’s labor markets, Abe will have accomplished a political victory that has bedeviled Japanese prime ministers for years. And, with upper house elections expected in July, his ruling Liberal Democratic Party would be in a prime position to consolidate its hold on power over the opposition Democratic Party of Japan.
Abe is well positioned to pull this off. His public approval ratings have soared to 70 percent. This is largely a result of the positive public response to his economic policies, also known as “Abenomics,” which since December has weakened the yen by some 15 percent against the dollar, helping exports, and seen the stock market rally over 25 percent.
The Japanese government has also argued that joining the trade area will boost economic growth .5 percent per year.
After three decades of economic stagnation, what has prompted the urgency in Japan’s leaders? The answer is China. Japan’s neighbor, competitor and sometimes enemy has passed it to become the second largest economy in the world and is openly talking of returning to its historical position as the regional power. This would come at the expense of Japan. China’s economy is growing annually by 7 percent and its military budget is increasing over 10 percent.
The Senkaku Islands in the East China Sea, which Japan has had administrative control over since 1895, and which China also claims, risks degenerating into an armed conflict. Both sides risk miscalculation as they have upped the stakes by using naval vessels and combat jets in tit for tat games to assert sovereignty over the islands. It is not hard to imagine someone making a mistake and sinking a ship or shooting down a plane. If that happens, nationalist passions will force leaders in either country to avenge their losses.
Japan has said it will protect its sovereignty and insists that there is no question as to their ownership. China responds that the islands are its historical territory. All this is enflaming passion in both countries and affecting the economic relationship.
For Abe’s government, the fear of a conflict breaking out with China has trumped the previous hesitations of Japanese administrations to confront its domestic political interests. In order for Japan to recover economically and support a more robust military force, Abe is throwing caution to the wind. As such, the stars are aligned for him to achieve a significant political victory that will reverberate in Japan for years to come.