With U.S. President-elect Donald Trump pledging to kill the Trans-Pacific Partnership trade deal, Prime Minister Shinzo Abe’s pro-growth Abenomics campaign is on the ropes.
Many analysts say that whether or not the TPP is saved, Abe’s job remains unchanged: continue working to bolster free trade with other major economies, such as China, Europe and the United States.
Abenomics is comprised the “three arrows” of drastic monetary easing by the Bank of Japan, fiscal expansion and a focus on growth. The enactment of the free trade pact is one of the main pillars of the third arrow as exports are a key driver of Japan’s economy.
The death of the trade agreement would deal a heavy blow to Abe’s government. But with two core players in free trade promotion — the United States and Britain after the Brexit vote — undergoing a significant political transition, “Japan now has a chance of increasing its influence in the world,” said Hisashi Yamada, chief economist at the Japan Research Institute.
“The Abe administration has become the most stable government in major developed countries,” Yamada said, adding Abe “needs to manage the government with unflagging resolve toward creating a model free-market economy where free trade is promoted without creating significant income gaps.”
Even before the rise of Trump, the effects of the first and second arrows of Abenomics had shown signs of missing the target.
The BOJ has apparently exhausted its accommodative monetary policy options. In September, the central bank decided to shift its policy target to government-bond yield curves from quantitative easing amid fears that its aggressive bond buying has started to gum up the market.
Japan’s fiscal health is already the worst among major industrialized economies, with public debt at more than 200 percent of nominal gross domestic product due largely to swelling social security expenses against a backdrop of an aging society.
“We hope that the TPP will expand free trade and help boost Japanese exports. We still want to move ahead with the TPP, as monetary and fiscal policies alone cannot put Japan’s economy on a sustainable growth path,” a Foreign Ministry official said.
To enter into force, the TPP requires ratification by nations accounting for 85 percent of the combined GDP of Japan and 11 other member countries in the Asia-Pacific region. Without ratification by the United States, which represents over 60 percent of the trade bloc’s GDP, the pact is dead in the water.
Trump has vowed to pull the United States out of what he calls the “job-killing” deal as soon as he takes office on Jan. 20, echoing his well-worn slogan of “America First.”
“To be frank, I recognize that (the TPP) has hit difficult circumstances,” Abe told a session of a special Upper House committee deliberating on the pact earlier this month.
Abe held informal talks with Trump, which were closed to the media, in New York last week, becoming the first foreign leader to meet face to face with the next U.S. president. Neither man has disclosed whether they talked about the TPP during the meeting.
In a video message released Monday, Trump said: “On trade I am going to issue a notification of intent to withdraw from the Trans-Pacific Partnership, a potential disaster for our country.”
But the TPP is not the only tool to prop up Japan’s export-oriented economy, economists say.
“The Japanese government is hoping to leverage the TPP to expand trade and increase overseas investment. However, Japan will likely continue to gear up ties with Asia, Russia and Europe in line with existing policies even if the TPP is revoked,” said Daiju Aoki, an economist at UBS Group AG.
“There are hopes that Asian deregulation can allow companies in areas such as food, retailing and banking to expand operations overseas,” Aoki added.
In recent years, Japan has been trying to accelerate talks on the Regional Comprehensive Economic Partnership — a trade deal among the 10-member Association of Southeast Asian Nations plus Australia, China, India, Japan, New Zealand and South Korea.
Tokyo is also aiming to reach a broad agreement with the European Union on free trade by the end of this year.
Even Trump has indicated the possibility of proceeding with bilateral trade talks with other countries including Japan.
Political commentator Norio Toyoshima said regardless of the TPP’s prospects, Abe’s government should “not stop seeking overseas market development” for Japan’s economic growth.
Some political experts emphasize the importance of free trade for Japan from the viewpoint of spurring reforms in fragile and regulated sectors at home, on which they say the Abenomics pro-growth third arrow depends.
Jun Iio, a professor of politics at the National Graduate Institute for Policy Studies in Tokyo, points to the need to use trade to help Japanese businesses do the heavy lifting.
“To expand free trade, it is essential to strengthen long-protected industries in Japan, such as agriculture, which are expected to be exposed to intense international competition,” he said.