New Japanese Prime Minister Shinzo Abe has big economic ambitions for his country -- and it may require a slap to its largest regional trading partner.
BEIJING - "This is the last chance for Japan, along with America, to set up a brand new economic rim..."
These were the words chosen by Japanese Prime Minister Shinzo Abe, on March 15, to announce that Japan would actively participate in negotiations for a new agreement of the Trans-Pacific Partnership (TPP), and take up its "central position" in the world economy.
Abe called the negotiations on the Partnership the "prelude to the Asia-Pacific Century."
The TPP is a free trade agreement centered on America. Apart from the United States, 10 other countries, Canada, Mexico, Peru, Chile, Vietnam, Malaysia, Singapore, Brunei, Australia, and New Zealand have all made it clear that they will join this trade agreement.
Put together, the GDP of these 12 countries would make up to 38.2% of the worldwide economy.
In order to reach agreement, the member states have been engaged in protracted negotiations in 21 different areas, including the abolition of agricultural and industrial tariffs, the determination of product origins, simplified customs procedures, food safety, unified industrial specifications, relevant responses to import surpluses, non-differentiated interior and exterior governmental regulations, protection of property rights, international financial services rulemaking, as well as technical support to developing countries, and much more.
First of all, on a domestic level, Japan's joining of the TPP implies that the country is set to promote industry and abandon agriculture. Japan has been stubbornly protecting its farmers through tariffs for a long time now. Among them, the import tariff for its staple food of rice is 778%, butter 360%, sugar 328%, barley 256% and wheat 252%.
However, there are only 1.7 million Japanese farmers still planting these crops. And these farmers are on average 66 years old. This is probably the reason why Abe has resolutely decided to discard farming. Abe, we can say, has decided to "walk towards the storm."
Internationally, Abe has made the choice of "Propping Up America, Putting Aside China." Let's use a metaphor. TPP is a gamble in which America is the bookmaker. All gamblers wish to get rich overnight, however the winner is always the bookmaker. In the Japan-U.S. summit held in late February, while proposing Japan's participation in the TPP, Abe was also obliged to open Japan's automotive and insurance market to the United States.
Though Abe confidently stated that "The historical significance of Japan's participation in the TPP will be commented on by later generations," he in fact is very likely to bear the infamy of being a traitor.
Except for the Philippines, most East Asian countries' largest trade partner is China, not America. This applies to Japan too. In 2011, China accounted for 19.7% of Japan's exports, while 15.3% found their way to the United States. For imports, it's 21.5% coming from China and only 8.7% from America. Thus if Japan really wishes to carry out its industrial rejuvenation, it should restore friendly relations with China and sign the Sino-Japan Free Trade Agreement before joining the TPP.
However, regrettably, if anyone in Japan currently dares to advocate cooperation with China, he is begging for abuse. The top two bestsellers at the Maruzen Bookstore in the biggest business district of Tokyo are China Is Over and The End of China's Rise. The former is written by Mitsuharu Kumagai, a prominent economist at the Daiwa Research Institute consulting firm. The latter is written by Tsugami Toshiya, an equally renowned economist as well as the former head of the Northeast Asia division of Japan's Ministry of Economy, Trade and Industry.
Last week, I spoke with both Kumagai and Tsugami.
Mr. Kumagai pointed out, "From now on, Japanese enterprises ought to seriously take into account whether the country it's dealing with is pro-Japan or anti-Japan. In other words, countries such as India and other Southeast Asian countries are pro-Japan, so Japanese enterprises should transfer their businesses to these countries. In addition, even if Sino-Japan relations turn to the worst, Japan's GDP will drop only 0.2%, therefore there is absolutely nothing that Japan has to worry about."
Tsugami said: "China's GDP surpassed that of Japan in 2010. But this is already China's limit. We'll never see the day that China overtakes America. Moreover, according to various data, not only is China unable to overtake the United States, but it's actually going to stay in a dramatic stage of stagnation."
Such "China pessimism" is the current mainstream view in Japan. This atmosphere is the strong wind that is pushing Japan and Prime Minister Abe to join the TPP.
The new "Abenomics"
Recently, "Abenomics" has become a buzzword in Japan. Since he took office, Abe has set up numerous conferences including the Japan Economic Revitalization Headquarters, The Economy and Finance consultative meeting, and the Industrial Competitiveness Conference. He is stepping forward steadily to implement his so-called Abenomics.
Overall his approach revolves around three main axes – a bold financial policy, a mobile fiscal policy and a development strategy that appeals to private investment. It includes, apart from joining the TPP, setting inflation targets at 2%, dealing with the depreciating yen and appreciating U.S. dollar, and large scale public investment.
Kouichi Hamada, Japanese government's economics and finance advisor as well as Professor Emeritus of Yale University, is the "Father of Abenomics". Abe accepted his recommendation and promoted Haruhiko Kuroda, former President of the Asian Development Bank, as the governor of the Bank of Japan.
Meanwhile, thanks to his consistent advocating of setting the 2% inflation target, Japan's stock market has picked up recently. The depreciation of the yen with respect to the dollar is moving forward. In the past three months, the ratio of dollar to yen has dropped from one dollar to 84.5 yen, before Abe took office, to 95.7 yen. This represents a depreciation of 13%.
I also interviewed Hamada. This is already the third time I've talked to him since Abes' government came to power. My question was: "Will the rapid depreciation of the yen relative to the dollar have any negative economic impact on Japan's neighboring countries like China and South East Asia?"
"Each country has to be responsible of its own financial policy," Hamada said. "It is a mistake for the neighboring countries to join together making Japan their target."
Nevertheless, hastily provoking a depreciation of the yen-to-dollar ratio will be a blow to America’s export industries. President Barack Obama, who has committed himself in public to “doubling exports,” is not going to allow this situation to occur. “Prime Minister Abe and President Obama have already exchanged their views on this very question on February 22,” Hamada said.
A friend who has been working in Washington D.C. as a journalist for the past 25 years, noted something about the recent Japan-U.S. summit. "There was an atmosphere of secret agreement between two states. The biggest goal currently for Abe is to win the election of the Senate in July, thus truly becoming Japan’s supreme ruler. To this end, he had to promote the depreciation of the yen, to increase exports, and to advocate reviving the Japanese economy to the people at home. Abe pleaded with President Obama to temporarily allow the depreciation of yen until the election in July."
This journalist said that in return Abe agreed "on the spot" that Japan would join the TPP.
If these facts are all true, then the current managed appearance that "Japan’s economy is gradually recovering" will last only until this coming July. That is to say the Abenomics is somewhat fugitive.
For the moment, almost all Japanese are intoxicated by the beautiful prospectives that Abenomics has promised, just like appreciating the arrival of the cherry blossoms. But we should remember that the enchanting cherry blossoms of the Japanese archipelago last only two weeks. However gorgeous, it will soon drop to the ground and litter the landscape -- and it will be up to us Japanese to clean up the remains.