Prime Minister Junichiro Koizumi and his Australian counterpart, John Howard, agreed Wednesday that their two nations should study the pros and cons of a bilateral free-trade agreement for about two years.

The decision to establish a government-level feasibility group to study the matter came during a meeting between the two leaders in Tokyo. Despite the agreement, which was diplomatically seen as the best offer Japan could extend to the visiting Howard, Koizumi’s lukewarm stance toward an FTA was clear in his remarks at a news conference after their meeting.

“This feasibility study will not directly lead to an FTA,” Koizumi said after the summit. “After two years of discussions, we will then talk over what to do in the next stage.”

Japan is reluctant to start FTA negotiations with Australia because Canberra is keen to have Tokyo slash or remove tariffs in the agricultural sector, which has long been a politically sensitive issue on the domestic front.

The government is reportedly planning to ask Australia in the near future to exclude the farm sector during bilateral negotiations and focus instead on promoting investment and deregulation.

But Tokyo’s relatively cool response contrasted sharply with the reaction Howard got in China, which he visited before coming to Japan. There, he and Chinese leaders agreed to launch free-trade talks.

According to Australian figures, an FTA with Japan would push up its gross domestic product by 0.7 percent in 2020 and Japan’s GDP by 0.03 percent.

During Wednesday’s meeting, Koizumi stressed the difficulties of the issue, noting that an FTA with Australia would likely have a negative impact on Japan’s relationship with the United States.

“If Japan starts talks with Australia on beef, it will immediately affect the U.S.,” Koizumi was quoted as saying by a Japanese official.

Japan was the largest importer of U.S. beef before it initiated a ban in December 2003, when the U.S. discovered its first case of bovine spongiform encephalopathy. Japan and the U.S. are still at odds over Tokyo’s 16-month-old ban on American beef.

On other issues, Koizumi again expressed his appreciation for Australia’s decision to dispatch troops to Iraq’s al-Muthanna Province, where Ground Self-Defense Force elements are carrying out reconstruction efforts, to maintain security.

Before departing on his trip to China and Japan, Howard said he visited Darwin to meet with 450 Australian troops who were training before their dispatch to Iraq.

Howard hinted that Australian troops will stay in Iraq as long as the GSDF humanitarian mission lasts in the southern city of Samawah.

Japan has been concerned about the security of its troops since the Netherlands pulled its 1,350 soldiers from the area last month. British troops have taken over local security until the Australian troops are dispatched.

Koizumi thanked Howard for his support of Japan’s bid to gain a permanent seat in the U.N. Security Council, according to the Japanese official, who added that the two leaders also agreed to begin negotiations on a bilateral social security pact in June.

Earlier Wednesday, Howard attended a lunch for Japanese business leaders in which he hailed the decades of commercial ties between the two countries.

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