What the TPP Process Means to Japan

The government of Prime Minister Abe Shinzō has enjoyed almost uncannily smooth sailing during its first 100 days. It now appears that the economy may have bottomed out last fall, and the Cabinet Office upgraded its assessment of the nation’s economic health in each of its first three monthly reports this year. In its 2013 budget proposal, the government forecast real growth of 2.5% for the fiscal year beginning in April, the most optimistic estimate in years.

On the diplomatic front, Abe scored an important success in his talks with US President Barack Obama in Washington last February. At his first summit with Obama, Abe was expected to do little more than shake hands and convey his good intentions, but he managed to come away with a joint statement that smoothed the way for his first major policy coup: a decision to join the US-led negotiations for a Trans-Pacific Partnership, Washington’s ambitious Asia-Pacific regional integration initiative.

The decision defied media predictions that the prime minister would steer clear of controversial issues until after the House of Councillors election scheduled for July. It also defied fierce domestic opposition from the farm lobby and other forces—opposition that had succeeded in derailing the previous administration’s drive to take part in the TPP process. But contesting the will of a prime minister with a 70% approval rating is no easy matter. The leadership of the ruling Liberal Democratic Party managed to quell mutinous rumblings within its ranks, and the administration proceeded to secure the individual and collective approval of the current parties to the negotiations.

Calling the TPP a key component of the nation’s long-term strategy, Abe has placed Japanese involvement in the negotiations high on his administration’s economic and diplomatic agenda. In the following, I hope to illuminate the rationale for this important decision.

No Small-Government Conservative

In the December 2012 general election, LDP President Abe Shinzō campaigned on the promise of a bold expansionary monetary policy to break free from the deflationary cycle that has gripped Japan for years. His ideas, quickly dubbed “Abenomics” by the media, had a fresh appeal to voters, and they helped propel the LDP to victory over the Democratic Party of Japan. The markets responded quickly to the prospect of monetary easing. The yen’s value fell, Japanese stocks rose, and things suddenly began to look up for the Japanese economy.

In the West, some may find it baffling that a supposed conservative like Abe would embrace such activist and expansionary policies, but in Japanese party politics, the label “conservative” (hoshu) is by no means synonymous with a commitment to small government and laissez-faire policies. Indeed, until the administration of Koizumi Jun’ichirō (2001–2006), most LDP governments had embraced expansionary fiscal policies in the tradition of the Rikken Seiyūkai (Friends of Constitutional Government), which dominated party politics in prewar Japan. The “progressive” (kakushin) opposition parties were more inclined to advocate belt tightening. In Japan, therefore, few people see any ideological contradiction between Abe’s reputation as a foreign policy hawk and his dovish tendencies on the financial front.

Two Arrows Hit Their Mark

In late December 2012, the newly formed Abe cabinet issued its own definition of Abenomics as a strategy composed of three prongs, or “arrows”: (1) aggressive monetary policy, (2) a flexible fiscal policy, and (3) a growth strategy that encourages private-sector investment. As a result, Abenomics is used by some in the narrow sense of an aggressive expansionary monetary policy designed to conquer deflation, and by others in the broader sense that includes the second two “arrows” of fiscal policy and economic growth driven by the private sector.

The Abe cabinet has already shot the first two arrows, and they seem to have hit their mark.

Where monetary easing is concerned, the Bank of Japan adopted an aggressive policy to “double the monetary base” at its early April monetary policy meeting, the first such meeting under newly appointed Governor Kuroda Haruhiko. Some have warned that by abandoning the cautious, incremental monetary policies of the past in favor of a massive, concentrated infusion of resources, Kuroda runs the risk of fueling another asset bubble. But the markets were pleasantly surprised by the BOJ commitment, as evidenced by continued increases in stock prices and further depreciation of the yen.

In terms of fiscal policy, the Abe administration has gotten off to a strong start with its ¥13 trillion supplementary budget for fiscal 2012, which the Diet passed at the end of February. The inclusion of ¥5 trillion from Japanese Government Bond issues in the revenue column is a sign that the prime minister and his advisors have a good working relationship with the Ministry of Finance. The supplementary budget allocated funds for spending on public works over a period of 15 months beginning in January 2013, and since only a tiny percentage of that had been spent by the end of March, we can expect most of the infusion to take place during fiscal 2013, thereby boosting gross domestic product for the current year.

Trade as a Key to Growth

Questions remain, however, about the third prong of Abenomics—“a growth strategy that encourages private investment”—and this is doubtless the most important element over the long run, since it pertains to the real economy. “Growth strategy” is a conveniently vague buzzword (much like Koizumi's “structural reform”), but when one gets down to specifics, one usually finds an emphasis on tax incentives and other fiscal measures targeting “growth sectors.” In essence, the government attempts to identify the economy’s winners and losers—a highly questionable approach for an industrialized market economy like Japan.

A more promising approach is growth through free trade. And this is why Japan’s participation in the TPP negotiations promises to be a linchpin of Abe’s economic revitalization strategy.

For years analysts have argued that Japan has undermined its own competitiveness by failing to keep up with trends in international trade policy, particularly the spread of regional and bilateral free trade agreements. For a country whose rapidly aging and dwindling population precludes vigorous growth in domestic demand, expanded foreign trade and investment are essential to sustainable growth.

Last January, the government launched the Industrial Competitiveness Council, which is scheduled to issue its recommendations for a new growth strategy some time in June. Its members include one distinguished business leader who sees participation in the TPP as a means of “switching the Japanese economy over to a new operating system.” He is hopeful that that the negotiation process will spur regulatory reform in sectors where it is long overdue.

Defending a Hopeless Status Quo

Until recently, Japanese proponents of a regional free trade agreement seemed to be swimming against a powerful tide of anti-TPP public opinion. Indeed, opposition from the farm and health-care lobbies was so strident that it blocked action by the previous administration.

During the March 2012 US-Asia Business Summit in Tokyo, Wendy Cutler, assistant U.S. trade representative for Japan, Korea and APEC affairs, explained in no uncertain terms that the TPP “is not about forcing Japan or any other country to privatize its healthcare system. It is not about requiring countries to allow for private service providers of healthcare, including for so-called ‘mixed’ medical services.” In fact, there is no direct connection between the TPP and health care. Yet organizations like the Japan Medical Association—already insecure about the viability of Japan’s universal health insurance system—have continued to use such alarmist accusations to campaign against the TPP.

The same can be said of the farm lobby’s opposition. The agriculture sector is hypersensitive to perceived threats at a time when the aging of Japan’s farm population makes the industry’s future uncertain. But Japanese agriculture is not going solve such problems by hunkering down and defending the status quo. What it needs are bold steps to modernize the industry. Increasing the scale of farming, encouraging investment from nonagricultural businesses, and promoting Japanese farm exports are some examples. Lowering or eliminating tariffs would doubtless expose many Japanese farm products to tough international competition, but this is precisely why participation in the TPP process has the potential to spur innovation in areas that have resisted it so far.

Reframing the Debate

On the other side, one often hears claims to the effect that membership in the TPP will boost economic growth by x percentage points. Unfortunately, in my experience as an economist, I have found that analyses of this sort can be made to produce almost any result one desires.

In the end, this argument over whether Japan would gain more or lose more from membership in a TPP is as pointless as it is unproductive. Firstly, the agreement is still under negotiation, and there is no way to know how the negotiations will turn out unless we give them a chance. Secondly, how one views the balance of gains and losses inevitably varies according to one’s perspective. Thirdly, those sectors that feel threatened by a change will always be more vocal than those that stand to gain. This is why we have heard a great deal from industries that oppose Japan’s participation but relatively little from those that want Japan to enter into the negotiations.

Rather than continue this futile debate over the relative advantages and disadvantages of an agreement that is still purely hypothetical, we need to shift the discussion to a more meaningful footing by asking ourselves some fundamental questions about the purpose of such an agreement and our own reasons for taking part. Both sides have neglected these key questions, with the pro-TPP camp repeating that everything will be fine, and the anti-TPP camp spouting dire warnings about areas that might not be fine. And so the discussion has continued, fruitlessly.

Why Japan Should Be Part of the Process

There are three basic reasons for Japan to take part in the TPP process.

The first is to avoid falling further behind in the race to conclude FTAs, and to play a part in determining the rules governing international trade. Since multilateral trade negotiations under the Doha Round of the World Trade Organization broke down, governments around the world have been vying to conclude bilateral and regional FTAs. Japan has fallen behind, and the TPP represents a valuable opportunity for it to catch up. It also represents an important experiment in multilateral rule-making in such areas as trade, investment, intellectual property rights, labor, and the environment—an undertaking that Japan would be foolish to boycott.

The second reason for Japan to take part is to advance the process of Asia-Pacific regional economic integration. The TPP process is one of the most credible pathways toward the longer-term goal of a Free Trade Area for the Asia-Pacific region. It is also likely to spur competing efforts to conclude smaller-scale regional agreements, such as an FTA among Japan, China, and South Korea and a Regional Comprehensive Economic Partnership in Southeast Asia.

The third rationale for participation is to accelerate much needed domestic reforms. The problems facing Japan's farm sector will not go away even if we close our eyes to the TPP. It is high time we got to work on modernization measures that should have been pursued under the Uruguay round of multilateral trade negotiations (1986–94).

Working with Washington

People on both sides of the debate are inclined to exaggerate the immediate impact of the TPP. It does not portend the second (or third) opening of Japan, and it certainly does not augur a second US occupation. It is simply one among many frameworks for negotiating the rules of international trade. Even if US motives include the strategic aim of containing Chinese power in the region, it is wrong to suggest that this is the agreement’s primary purpose.

For Japan, the anticipated benefits are quite simply those to be gained by working to promote free trade and Asia-Pacific regional integration.

The world’s industrially developed nations are facing difficult structural problems—the ongoing sovereign debt crisis in Europe is a prime example. Until these problems are resolved—which is unlikely to happen any time soon—the industrial world must do what it can to support and foster the vitality of Asia’s rapidly growing economies. Prime Minister Abe recognizes that Japan in particular needs to tap into that vitality via increased trade and investment.

The prime minister also realizes that Japan must step up to the plate and act as “a leading promoter of rules,” as he noted in his speech at the Center for Strategic and International Studies in Washington, DC, this past February. Any rules developed through the cooperative efforts of the United States, the world’s largest economy, and Japan, the third-largest, are bound to command respect from the rest of the international community. Ideally, at some point we will be able to welcome China, the second-largest economy, into the process as well. Such a TPP would truly deserve to be called a key part of the nation’s long-term strategy.

(Originally written in Japanese on April 15, 2013)