As Economy Slows, Japan’s Noda Backs Free Trade Deals

Japan’s prime minister throws his support behind freer trade as the economy contracts.

Economic data released on Monday has raised fears of Japan falling into recession again. It would be the Asian country’s third since 2008.

Prior to the release, Prime Minister Yoshihiko Noda announced that he planned to pursue passage of the Trans Pacific Partnership, a multilateral free-trade pact between American and Asian nations, as well as a free-trade agreement with neighboring China and South Korea.

Noda’s support of these trade deals is speculated to be a last-ditch effort to lift the ruling Democratic Party of Japan’s sagging public approval ratings before calling lower house elections in December. He would then be able to follow through on his pledge to the opposition Liberal Democratic Party of calling elections “soon” as well as hope to generate some enthusiasm from the public.

A similar strategy succeeded in 2005 when Prime Minister Junichiro Koizumi committed to privatizing the country’s bloated postal system which the public had long supported and viewed as an increasingly corrupt and inefficient behemoth. Koizumi’s gambit worked when he won a surprise election victory as he took on the mantle of reformer.

The Trans Pacific Partnership has been controversial, mainly due to opposition from Japan’s farmers who fear they will be not be able to compete with low cost agricultural goods from poorer countries. The Liberal Democrats have come out against the trade deal because it demands the elimination of all tariffs.

The pressure on Noda to do something to change the dynamic for his party ahead of elections was underscored on Monday when Japan reported that its economy shrank .9 percent between July and September, implying an annualized decline of 3.5 percent. The results were the weakest since a tsunami and earthquake struck Japan early last year.

The weakness in the third quarter comes from falling exports, down 5 percent, as trade with China suffered due to the island spat in the East China Sea as well as a slowdown in exports to Europe. The yen has strengthened but domestic consumption and business investment have stalled.

Economists expect continued weakness until the end of this year before an improvement by the second quarter of 2013. These forecasts are premised on an increase in trade with resurgent American and Chinese economies, however. The central bank is also expected to loosen monetary policy further following its actions in September and October to expand its monthly asset purchases program.

If relations continue to deteriorate between China and Japan over their islands dispute, which Japan refers to as Senkaku and China as the Diaoyu Islands, it is likely that Japanese companies will continue to find it difficult to do business in the country. For the past few months, Japanese companies have been forced to curtail or even cease operations in the face of widespread anti-Japanese protests and boycotts on the mainland. Many demonstrators, some egged on by the government no doubt, decried what they saw as Japan’s unlawful nationalization of Chinese territory.

The Noda government’s purchase of the islands from their private Japanese owner in September has inflamed nationalist passions and resulted in a breakdown in relations with China. The sensitivities surrounding the Communist Party’s leadership turnover occurring this week in Beijing has only made the breach that much more intense.

Expectations for a return to normalcy in Sino-Japanese relations by early next year, resulting in a strong rebound in exports to China, may therefore be premature. The visceral reaction ignited by this dispute in both countries, but especially by the Chinese public which still harbors deep resentment of Japan’s occupation and wartime atrocities, could result in bilateral relations getting worse before improving to a stable footing. The Bank of Japan would then come under renewed pressure from lawmakers to loosen monetary policy further in order to stimulate the economy.