Japan - Why Japan should join TPP

Japan needs to establish a more open free trade system and strengthen its relationship with other economies

JAPAN needs to take a long-term view of the prospective gains to be had from membership of the Trans-Pacific Partnership (TPP) instead of 'insisting on short-term benefits' and Japanese business needs to take a similar long-term view in adapting to the strong yen, says Yasuchika Hasegawa chairman of the Japan Association of Corporate Executives or Keizai Doyukai.

Less well known outside of Japan perhaps than the Federation of Business Organisations (Keidanren), the Keizai Doyukai nevertheless speaks with the considerable authority of some 1,300 top executives from 900 leading Japanese corporations that make up its membership. Membership is individual rather than corporate.

In a recent interview with The Business Times, Mr Hasegawa also stressed the need for Japan to adapt its business model in the light of supply-chain interruptions caused by natural disasters in Japan and elsewhere, and by electric power shortages in Japan.

As president and CEO of Takeda Chemical Industries and of Takeda Pharmaceutical - both of which are globally active corporations - Mr Hasegawa has had long and first-hand experience of a range of issues that affect not only Japan and rest of Asia but also the wider world of business.

Q: Why are Japanese businessmen lobbying so hard for Japan to join the Trans-Pacific Partnership (TPP)?

A: 'Japan developed its own economy through productivity improvement and strong trade through its international competitive edge,' Mr Hasegawa responds. 'However, the world is undergoing a massive transformation and the rules are rapidly changing as the world economy becomes more borderless.'

Furthermore, while the global population continues to grow (and will continue to do so until around 2080), the world population is ageing, especially in developed countries, and in this respect Japan is a global leader. For Japan to realise sustainable economic growth, it needs to establish a more open free trade system and strengthen its relationship with other economies, such as emerging market countries, and to show a new model for ageing countries.

'The Japanese government hopes to realise the FTAAP (Free Trade Area of the Asia-Pacific) by 2020, and participation in the TPP could be the first step to toward this goal. Moreover, if the FTAAP and the Japan-EU EIA (Economy Integration Agreement) could be realised, that would cover 80-90 per cent of total Japanese trade, and would become a strong platform to sustain 2-3 per cent (annual) economic growth in Japan.

'Participation in the TPP gives the Japanese export industry a strong competitive advantage through the ability to contribute to rule-making negotiations. Furthermore, it could allow us to send a strong message within Japan and abroad that Japan is willing to open the country and establish a disciplined and sophisticated free-trade system.

'Our association supports this strategy and looks forward to opportunities to cooperate with relevant bodies to realise it. For example, we anticipate the possibility of Japan building a more competitive agriculture industry capable of exporting their products by securing a sufficient transition period until the abolition of tax transfers and taking appropriate countermeasures.

'For a better strategy for economic partnership, we may be able to focus on drawing a blueprint for Japan (covering) 10-20 years while expanding the Japanese free-trade system and without insisting on short-term benefits.'

Q: What about the impact of the strong yen on Japanese business, and what would the Keizai Doyukai like the government to do about it?

A: This is a particular problem, he acknowledges. 'As a result of the survey about currency rate expectations conducted at the Keizai Doyukai in December 2011, about 60 per cent of respondents expect a range of 75-80 yen per dollar as at June 2012, indicating continued challenges for Japanese exports.

'The strong yen works against the Japanese export industry, while also shifting a large amount of manufacturing capacity to emerging markets. The Japanese government and the central bank from time to time intervene with the currency exchange.

'Additional monetary supply could mitigate risks from sharp exchange rate fluctuations, however, it would not be the best solution. Rather, the Japanese government should promote deregulation to transform the mechanisms of existing industry, create new business and create new jobs outside of the export industry - as the strong yen has caused the loss of many job opportunities through the off-shoring of manufacturing plants to other countries.

'In addition, the government is responsible for strengthening Japan's competitiveness and encouraging foreign direct investment for internal job creation.

'I believe a strong yen may be a good chance to globalise many Japanese industries and companies through cross-border M&A. In addition, private sector currency purchases for M&A deals could help offset the higher yen, because recently these deals are quite large. In fact, Japanese companies paid six trillion yen (S$93.5 billion) for cross-border M&A in 2011.'

Q: Given the strong yen, how can Japanese business counter competition from South Korea and elsewhere?

A: 'Korean companies overcame the Asian financial crisis by thoroughly restructuring and terminating non-profitable businesses, making a stronger foundation for domestic business, and expanding their businesses globally. Their success factors are strong leadership of top management and precise marketing research in countries of operation.

'Now, Japanese companies face six major challenges, such as a strong yen and higher corporate taxes, however, we have many advantages and strengths in product development due to numerous advanced industries that have strong development capability for material and product components, as well as for advanced technology.

' We can learn how to face tough challenges from Korean companies, and together with a better free-trade system and new business creation through innovation in collaborating with government, bureaucrats, academia and private sector as one Japan, it is possible to overcome our challenges. This is our best chance to revitalise our competitive edge in business.

'Asia is now the fastest growing region in the world, and China, Korea and Japan are major contributors to the region. We could create a strong partnership with China and Korea to guide further Asian growth through free-trade and collaboration.'

Q: What about supply-chain interruptions and power shortages of the kind Japan has experienced over the past year? How can industry cope with those?

A: 'Supply-chain interruptions and power shortages from the Great East Japan earthquake and additional supply-chain interruptions from the flood in Thailand have presented many business challenges. At the same time, they have caused us to reconsider the risks of over-emphasising the western efficiency-first management style and strict Japan-origin supply-chain management, as well as the risks of over-confidence in the face of limited power supply.

'Every company should regularly share risk management plans for supply chains with their customers and suppliers, and should revisit their business models with consideration for Japanese companies' strengths in customer-orientation, high quality products and manufacturing, in order to prevent further problems in the future.

'Japan overcame the oil crisis in the 1970s and established itself as one of the top energy-efficient countries through our focus on advanced technology. Further development in energy saving and energy generation technologies could be a great driver for future innovation and business productivity in Japan.'

Q: What are the prospects in general for Japan's economy in 2012?

A: 'Japan has had some difficult times in recent years, he said 'but 2012 will clearly be a bounce-back year because of special procurement demand related to recovery and restoration from the March 11, 2011 Great East Japan earthquake and Tsunami. The Japanese government has appropriated a sizable budget focused on revitalising affected regions. Japan's growth rate in the second half of 2012 might be slightly decreased as demand from special procurement becomes more moderate.'

One option to restore long term growth in the Japanese economy, he suggests, 'would be for Japanese corporations to further contribute to emerging market growth through their technology and expertise and then bring back the benefits of their efforts to Japan and stimulate domestic consumption and investment.

However, this requires Japanese companies to take risks and act boldly to face various challenges.'

Q: And the global economy?

A: 'The US economy will continue to grow moderately in 2012, and it will take at least 2-3 years to overcome the European financial crisis,' he says. 'This continuing wave of negative market drivers has also gradually affected investment flows to emerging markets. However, the positive momentum of growth in the emerging markets will remain, and they are still likely to lead global economic growth.'

Q: Finally, what about the impact of the eurozone crisis on Japan?

A: 'With the hyper-connectivity of the global economy, a possible collapse of the euro would have a serious impact on public finance as well as Japanese business. Japan especially shares the same public finance risk, because it has an even larger debt-to-GDP - although it is mostly held by domestic institutional investors and banks. We need to be mindful to improve our public finance situation. For business, a higher yen against the euro hurts exports and decreases investment not only to the EU but also to emerging markets, which in turn could shrink global economic growth as well.'

ANTHONY ROWLEY

TOKYO CORRESPONDENT

The Business Times

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