Economic woes provide opening for White House

Obama could get market-opening concessions if Abe sees need to join TPP

by Howard Schneider

The Washington Post

Japan’s economic troubles may be pushing the country toward free-trade negotiations with the United States, a goal long-sought by officials in Washington who see it as a potential boon to two of the world’s industrial giants and to the U.S. presence in Asia.

New Prime Minister Shinzo Abe was to meet with President Barack Obama later Friday for their first official talks since Abe took office in December and embarked on an ambitious program to revive the country’s stalled economy.

Much about Abe’s plan remains undefined, but it is already controversial. Further anticipated monetary easing has prompted major nations to warn Tokyo against any moves aimed at devaluing the yen, though details are also pending on his nominee as the new governor of the Bank of Japan.

Meanwhile, Abe’s proposals for new government stimulus have led the International Monetary Fund to caution that such measures should be short-lived and quickly give way to a taming of Japan’s seemingly runaway debt.

What Abe calls the “third arrow” of his plan involves reviving growth in an economy that is aging and, since the 2011 Fukushima nuclear disaster started, must confront both rising energy costs and a potential migration of its industrial base to places less prone to tsunami, earthquakes and other natural calamities.

These pressures, U.S. and Japanese officials and analysts say, have built momentum behind Japan’s joining the 11-nation Trans-Pacific Partnership free-trade bloc, a politically controversial step in which Abe would have to open up several highly regulated local markets in return for the prospect of new investment, cheaper food prices and a potential energy lifeline — natural gas imported from the United States. Countries that have a free-trade agreement in place with the United States have easier access to its energy exports.

“Everybody was thinking about the TPP as a battle between the big companies that want to export versus farmers,” an influential constituency in Japan protected from outside competition, Motoshige Itoh, an adviser to Abe and a University of Tokyo economics professor, said at a recent seminar at the Peterson Institute for International Economics in Washington.

“But increasing numbers of Japanese recognize (the TPP issue) is much bigger” and could have implications for the country’s future energy supplies and the survival of its industrial base, Itoh added.

In an interview, Abe said he considered the talks with Obama “important” in determining “whether or not Japan’s participation in the TPP will have a positive effect on the national interests of Japan.”

Trade was set to be just one part of a dense agenda for Friday’s meeting. Tokyo is a critical ally for Washington and central to the Obama administration’s effort to counter China with a strategic “pivot” of its military power to Asia, as well as to help contain the nuclear threat of North Korea.

Japan is also America’s fourth-largest trading partner and a major buyer of U.S. government debt. Further, its $250 billion worth of foreign investment in the United States includes several automobile assembly plants.

But Japan’s economic stagnation — deflation, demographic decline and a collapse of investment — threatens to weaken its influence.

One of the 20th century’s defining economic successes, Japan’s industrial might once stoked the sort of anxiety in the United States that today is directed toward China, with national champions such as Toyota Motor Corp. and Honda Motor Co. challenging Detroit and Japanese investors snapping up landmark U.S. real estate. But Japan’s $6 trillion economy has now been eclipsed by China as the world’s second-largest, and its once leading role in consumer innovation — remember the Sony Walkman? — arguably has been surrendered to the Apples and Samsungs of the world.

The worry in the United States and elsewhere is no longer about Japanese dominance but the implications if the country slides into irrelevance.

“It is still a very large economy. For the U.S., it is important. . . . In the region it is key,” said Jerry Schiff, Japan mission chief for the IMF. “(But) under a not very optimistic scenario it may become not very important at all.”

The country’s recent economic performance has compounded those concerns. The 2011 quake-tsunami and ensuing nuclear crisis highlighted Japan’s geologic vulnerability and, consequently, the fragility of the global supply chain it helps fuel. When its manufacturing plants had to shut down because of electricity shortages, facilities around the world were forced to cut output because of Japan’s importance as a source of high-end parts and supplies.

Although reconstruction saw a brief rebound in economic growth, the country quickly slipped back into recession.

Its world-leading level of government debt has always seemed to defy gravity — with low interest rates, despite its size — but many analysts feel that some of Japan’s built-in protections against a debt crisis are being lost. It ran a rare trade deficit in 2011 and needs its banks to shift from buying government bonds to investing in the economy.

Even a small rise in the country’s borrowing costs, according to a recent presentation by an IMF official, could make Japan’s debt load unsustainable — with unpredictable implications if the global financial system suddenly loses what has traditionally been considered a safe haven investment.

These substantial problems framed Abe’s policy plan — a set of ideas that has been given its own moniker, “Abenomics” — and will frame his talks with the Obama administration.

For Obama, the incentives to pull Japan into the TPP’s orbit are just as great. Peterson institute trade expert Jeffrey Schott estimated that the 11 nations currently discussing the agreement comprise about 30 percent of global economic output. Adding Japan, and possibly South Korea, could raise that to 40 percent — a potent force for setting trade standards that other nations, including China and India, might feel compelled to adopt.

With similar talks under way between the United States and the European Union, Washington hopes it can shape global intellectual property, Internet commerce and other policies in ways that work to the advantage of U.S. companies.

Japan’s economy is in many ways relatively open, with low average tariffs for instance. But its trade surplus with the United States is large and persistent, second only to China last year at $76 billion.

Some markets seem virtually closed to U.S. companies, if not by law than by long-standing custom. Japanese, for example, don’t buy many American cars: The United States imported nearly $30 billion in cars from Japan in 2012, whereas Japan, whose 127 million people make it about one-third the size of the U.S., imported only $600 million worth of American-made cars.

These patterns likely wouldn’t change under a free-trade agreement. But joining the TPP would force Japan to open its health care, financial, agricultural and other markets — which remain under tight regulation — to overseas rivals for the first time. It would also, in dramatic fashion, up the economic and geopolitical importance of the ongoing TPP discussions.

“The addition of Japan will make a big deal a really big deal,” the Peterson institute’s Schott said.