Japan’s economic turmoil may provide an opening for the U.S.

Akio Kon/BLOOMBERG - A worker walks past container trucks at a shipping terminal in Yokohama City, Kanagawa Prefecture, Japan, on Feb. 20, 2013. Japan's trade deficit swelled to a record $17.4 billion in January on energy imports and a weaker yen, highlighting one cost of Prime Minister Shinzo Abe's policies that are driving down the currency.

Japan’s economic troubles may be pushing the country toward free-trade negotiations with the United States, a goal long sought by American officials who see it as a potential boon to two of the world’s industrial giants and to the U.S. presence in Asia.

Japan’s new prime minister, Shinzo Abe, meets with President Obama on Friday for their first face-to-face talks since Abe took office last year and launched an ambitious program to revive his country’s stalled economy.

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Much about Abe’s plan is undefined, but it is already controversial. An expected monetary easing has prompted major nations to warn Japan against any moves aimed at devaluing the yen. Proposals for new government stimulus spending have led the International Monetary Fund to caution that those efforts should be short-lived and quickly give way to a taming of the government’s seemingly runaway debt.

What Abe calls the “third arrow” of his plan involves reviving growth in an economy that is aging and, since the 2011 Fukushima nuclear complex disaster, confronts both rising energy costs and a potential migration of its industrial base to places less prone to tsunamis and earthquakes. Those pressures, U.S. and Japanese
officials and analysts say, have built momentum behind the idea of Japan joining the 11-nation Trans-Pacific Partnership negotiations — a politically controversial step in which Abe would have to open several highly regulated local markets in return for the prospect of new investment, cheaper food prices and a potential energy lifeline in the form of natural gas imported from the United States. Nations that have signed a free-trade agreement with the United States have easier access to its energy exports.

“Everybody was thinking about TPP as a battle between the big companies that want to export versus farmers,” who are politically influential and protected from outside competition, Motoshige Itoh, a Tokyo University economics professor and Abe adviser, said at a recent seminar at the Peterson Institute for International Economics. “But increasing numbers of Japanese recognize it is much bigger” and could have implications for the country’s future energy supplies and the success of its industries.

Abe, in an interview with The Washington Post, said he considered the talks with Obama “important” in determining “whether or not Japan’s participation in the TPP will have a positive effect on the national interests of Japan.”

Trade will be just one part of a dense agenda for Friday’s meeting. Japan is a critical U.S. ally — central to the administration’s effort to counter China with a “pivot” to Asia, and important in the battle to counter the nuclear ambitions of North Korea and Iran. The United States’ fourth-largest trading partner, Japan is a major buyer of U.S. government debt, and its $250 billion of foreign investment in the United States includes several large auto plants.

But the country’s economic stagnation — deflation, demographic decline and a collapse of investment — threatens to weaken its influence. One of the 20th century’s defining economic successes, Japan’s industrial might once stoked the sort of anxiety in the United States that today is directed toward China — with national champions such as Toyota and Honda challenging Detroit and Japanese investors snapping up landmark U.S. real estate. Japan’s $6 trillion economy has been eclipsed by China as the world’s second largest, and its once-leading role in consumer innovation — remember the Sony Walkman? — arguably has been surrendered to the Apples and Samsungs of the world.

The worry in the United States and elsewhere is no longer about Japanese dominance. Instead, it’s more about the implications if the country slides into irrelevance.

“It is still a very large economy. For the U.S. it is important. . . . In the region it is key,” said Jerry Schiff, Japan mission chief for the IMF. But “under a not very optimistic scenario it may become not very important at all.”

The country’s recent economic performance has compounded those concerns. The 2011 tsunami and nuclear crisis highlighted Japan’s vulnerability and the fragility of the global supply chain it helps fuel. When plants in Japan shut down because of electricity shortages, facilities around the world had to cut production because of Japan’s importance as a source of high-end parts and supplies.

Although reconstruction led to a brief rebound in economic growth, the country quickly slipped back into recession. Its world-leading level of government debt has always seemed to defy gravity — with low interest rates despite its size — but many analysts feel that some of Japan’s built-in protections against a debt crisis are being lost. It ran a rare trade deficit in 2011 and needs its banks to shift from buying government bonds to investing in the economy. Even a small rise in the country’s borrowing costs, according to a recent presentation by an IMF official, could make its debt load unsustainable — with unpredictable implications if the world financial system suddenly loses what has been a safe-haven investment.

Those considerable problems framed Abe’s plan — a set of ideas that has been given its own moniker, “Abenomics” — and will frame the talks with the Obama administration.

For Obama, the incentives are just as great to pull Japan into the TPP’s orbit. Peterson Institute trade expert Jeffrey Schott estimated that the 11 nations currently discussing the agreement comprise about 30 percent of global economic output. Adding Japan and possibly South Korea could bring that to 40 percent — a potentially potent force for setting trade standards that other nations, including China and India, might feel compelled to adopt.

With similar talks underway between the United States and the European Union, the administration hopes it can shape global intellectual property, Internet commerce and other policies in ways that work to the advantage of U.S. companies.

Japan’s economy is in many ways relatively open — with low average tariffs, for example. But its trade surplus with the United States is large and persistent, second only to China’s last year at $76 billion. Some markets seem virtually closed to U.S. companies, if not by law then by long-standing custom. The Japanese, for example, don’t buy many American cars: the United States imported nearly $30 billion in passenger cars from Japan in 2012; Japan, whose 127 million people make it about one-third the size of the United States, imported only $600 million in American-made passenger cars.

Those patterns may not change much under a free-trade accord: As in South Korea, where hometown favorites such as Hyundai dominate the market, it’s unlikely that imports will ever dislodge Toyota, Mazda and others from their hold on local consumers.

But U.S. officials have said they want some upfront concessions from Japan before agreeing to let Tokyo join the TPP talks. In advance of Abe’s visit, Japan lifted restrictions on imports of U.S. beef, for example.

Joining the TPP would force Japan to open other parts of its economy as well — health care, financial services and agriculture among them. It would also, in dramatic fashion, up the economic and geopolitical importance of the TPP talks.

 
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