Japan’s Future in the Balance

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Japan’s Future in the Balance

Japanese Prime Minister Yoshihiko Noda has a chance to rescue Japan’s economy with a key free trade agreement. Failure to seize it could result in terminal decline.

Yoshihiko Noda has only been Japanese prime minister for two months. But despite his short tenure, he’s already facing his toughest challenge – and it has nothing to do with recovery from the March disasters.

Like his predecessors, Noda heads a Democratic Party of Japan (DPJ) that is internally divided, largely over past campaign promises and present realities. Despite his own call for party unity, Noda chose to tackle a highly sensitive political issue that ensures the continuation of DPJ infighting: Japan’s participation in the Trans-Pacific Partnership (TPP).

Noda faces a dilemma of choosing a policy that prioritizes Japan’s broader economic interests or domestic political dynamics. Noda’s ability to make a decision on this sensitive issue and get his party to follow, all whilst preventing the DPJ from splitting, will test his leadership. The challenge is enormous, but for the sake of Japan’s broader economic interests, it would behoove Noda to exercise firm leadership by taking a stand against vested interests no matter the cost.

The TPP began in 2006 as a Free Trade Agreement (FTA) amongst Singapore, Chile, New Zealand and Brunei. By 2010, it expanded to five more, including the United States. Today, others are interested in joining. Unlike an FTA or Economic Partnership Agreement (EPA), which allow for negotiated protection of some goods and services, the TPP’s aim is to eliminate all tariffs within ten years and create a free trade zone covering the entire Asia-Pacific region, a goal proposed at the 2006 APEC summit. At the upcoming APEC meeting in Honolulu, TPP members will decide on the broad outlines for a TPP agreement so as to advance towards creating detailed rules.

Noda wants to reach a conclusion on whether Japan should participate in the TPP before the APEC meeting. This question isn’t new – Noda’s predecessor initially placed trade liberalization on his agenda as a means to grow the economy. To this end, he indicated his interest in the TPP in October 2010, and wanted to reach a decision before the November 2010 APEC meeting. However, due to strong opposition from the agriculture sector and lawmakers that represent these interests, he deferred his decision until June 2011. Because of the March disasters, this decision was further postponed and faded from the policy agenda thereafter. Shortly after becoming premier, Noda revived the debate, stating his intention to reach a decision at an early date. To this end, he ordered the formation of a DPJ project team to debate the issue. However, this team is split, indicative of the sharp divisions in both the DPJ and the government.

Although Noda, as DPJ president, has indicated his support of the TPP, his party isn’t behind him. While he is supported by some influential members, such as Policy Research Committee Chairman Seiji Maehara and former Secretary General Katsuya Okada, he faces an enormous number who oppose. Former Minister of Agriculture, Forestry and Fisheries (MAFF) Masahiko Yamada leads this opposition, having collected close to 200 signatures from likeminded DPJ members. Significantly, Yamada is a close ally of DPJ strongman Ichiro Ozawa, former party leader who currently is under criminal investigation for violating campaign finance laws, and former premier Yukio Hatoyama. Because the fault lines pit party leadership against Ozawa and his allies, the TPP magnifies existing political divisions in the DPJ.

Although Noda has attempted to unify the DPJ by putting Ozawa’s allies in his cabinet, the TPP debate has instead invited fractures. Representing the interests of the farmers, MAFF Minister Michihiko Kano has strongly and publically expressed his opposition to Noda’s interest in the TPP. He has been supported by an unlikely ally, Defense Minister Yasuo Ichikawa. This is because Ichikawa enjoyed a 25-year career as a MAFF bureaucrat prior to entering politics. Representing business interests, both home and abroad, their public statements have been countered by Minister of Economy, Trade and Industry Yukio Edano, Finance Minister Jun Azumi, and Foreign Minister Koichiro Genba. Despite all individuals being members of the same cabinet, the divide shows no sign of narrowing. Instead, they have been publically advocating their positions and recruiting party allies, bringing DPJ divisions to the cabinet level.

All of this is possible because the electoral strategy of the DPJ, like the Liberal Democratic Party (LDP) before it, depended on farmers, giving the bodies that represent farmers an inordinate amount of influence over politicians. In all of its election manifestoes in the past decade, the DPJ advocated a policy of direct income subsidies to small-scale farmers at a time the LDP was pushing structural reforms that hurt farmers. Over time, these subsidies became more generous and expanded in scope. Farmers rewarded the DPJ by giving them a parliamentary majority in 2009. In turn, it was expected the DPJ would represent their interests at the national level. 

Now those chips are being called in. Concerned about the affect tariff elimination would have on food security, food safety and agriculture survivability, the apex of Japan’s agricultural cooperative movement, Central Union of Agricultural Cooperatives (JA-Zenchu), has harnessed all its resources to oppose the TPP. With 82 trillion yen in resources and 9.57 million members, it’s a formidable actor with considerable influence through its ability to provide funds for politicians, rally votes, and lobby the government.

Opposing JA-Zenchu’s efforts is the pro-business Japan Business Federation (Keidanren). Given the sluggish Japanese economy, increased competition from China and an increasing number of FTAs/EPAs signed amongst Japan’s trading partners, Keidanren supports the TPP as a means to grow the Japanese economy. The TPP is a way for Japanese firms to benefit from the strong consumption power of the U.S. market as well as TPP members with emerging economies. Like JA-Zenchu, Keidanren pushes this view via its links with politicians and the government.  

Noda’s decision to tackle the sensitive issue of TPP participation forces him to take sides in a party already fractured. If he pushes too hard, he risks losing his party’s confidence and could fall to a no-confidence vote if one is submitted. Worse, his decision could split the DPJ along its existing fault lines. Yet, failure to act could have wider implications on Japan’s economic future because Japan wouldn’t be able to enjoy the benefits of TPP membership.

Consider first the fact that the TPP is expected to become an Asia-Pacific FTA. According to a recent publication by the Brookings Institution, current TPP members represent 26 percent of global GDP and 17 percent of global trade. Because the share of TPP members’ global GDP and trade are only expected to grow, their increased global importance will mean the economic rules and systems established by TPP members could become this century’s global standards. As such, it’s essential for Japan to participate in the rule-making efforts to ensure the inclusion of rules that are advantageous to Japanese firms. If the rules are decided without Japanese input, there will be no opportunity to negotiate them at a later date if it decides to join.

The TPP is also advantageous for Japan because of Japanese firms’ declining competitiveness, stemming largely from a lack of FTAs/EPAs. For example, South Korea conducts 36 percent of its trade with countries it has FTAs/EPAs, while the Japanese figure is 18 percent. Moreover, Seoul is in negotiations for additional FTAs/EPAs with economies that it conducts a further 25 percent of its trade. The number for Japan, in contrast, is 19 percent. Due to this discrepancy, Japanese firms have to compete with other economies under adverse conditions in other markets. The recent passage of the South Korea-US FTA is a case in point, enabling South Korea to further rival Japan in industries that Japanese firms once led, such as automobiles. To avoid trade discrimination not only in the U.S. market, but in other TPP markets, Japan needs to join the TPP. When you factor in Japan’s high corporate tax rates and a historically high yen, Japanese firms’ competitive edge is further eroded. If Japan fails to join, Japanese firms will face increasing difficulties throughout the region, especially as more countries join the TPP. The net result will be a dual shrinking and hollowing out of the Japanese economy.  

TPP membership is also a means to strengthen Japan’s agricultural sector. Japanese agriculture suffers from three challenges. First, it’s inefficient, dominated by small plots. For example, in 2010 commercial farms managed an average of 1.96 hectares. Because small plots lead to high costs, and high costs make it difficult to compete with cheaper imports, Japanese agricultural goods are fiercely protected. The best example is rice. Rice farmers are currently protected by a 778 percent tariff imposed on imported rice. Second, Japanese farmers are old and growing older. In 2005, the average age was 63.4. In 2010, this rose to 65.8. This year, 61 percent of farmers are aged 65 years or older. Third, the number of farmers is shrinking. In 2005, there were 3.2 million farmers. This year it fell to 2.6 million. Given all three challenges, without meaningful reforms the prospects for future agricultural growth are bleak. This is where the TPP is important.

Because entrenched vested interests make it difficult for politicians to reform the sector, TPP membership could help initiate the necessary reforms to revitalize Japan’s agriculture in the long-term. Specifically, imports competing equally with Japanese products would force Japanese farms to be more efficient in allocating production factors. It’s true that many farmers will lose their livelihoods with liberalization. However, the number and severity can be mitigated with smart policies. For example, as part of the rule-making process, Tokyo can ask TPP members for a phased tariff reduction over 10 years. Domestically, it could provide financial incentives for farmers to operate on larger plots (i.e. 20 to 30 hectares). Enabling a smaller number of farmers to take advantage of increasing returns, this could make farmers internationally competitive both at home and overseas. Finally, it could apply existing antimonopoly laws against JA-Zenchu to empower farmers to engage in direct market access without having to rely on the JA-Zenchu distribution system. In the end, TPP membership will mean a smaller agricultural sector that is stronger and more capable of competing with foreign counterparts both domestically and abroad.

Finally, TPP participation is economically necessary because Japan needs new markets. Japan has an enormous demographic challenge in that its population is both shrinking and aging at a rapid rate. By 2050, it is expected its population will be about 95 million, a drop of nearly 32 million people compared to today. Similarly, the percentage of the population aged 65 years or older is expected to rise from 23 percent in 2010 to 39.6 percent by 2050. Together, Japanese firms will face tremendous difficulties by only targeting the domestic market. In order to grow, they will need to focus on overseas markets that are big and/or growing. TPP participation enables Japanese firms to increase their exports in such markets, effectively opening up new trade opportunities overseas and thus providing a means for Japan to boost its economic prowess and secure a future of long-term growth.

Faced with a dilemma of his own political survivability and/or the implosion of the DPJ on one hand and long-term economic growth prospects on the other, Noda needs to exercise leadership and prioritize TPP participation over vested political interests. His party has never been considered pro-business, but if he fails to join the TPP, the DPJ may forever be painted with an anti-business brush and a party incapable of understanding Japan’s economic interests. Worse, a no-vote could single-handedly jeopardize the future of the Japanese economy. Noda’s decision is not easy, but making that choice is exactly what a leader is expected to do. 

Jeffrey W. Hornung is associate professor at the Asia-Pacific Center for Security Studies in Honolulu. The views expressed in this article are those of the author and do not reflect the official policy or position of APCSS, the U.S. Pacific Command, the U.S. Department of Defense, or the U.S. government.