Today’s global economy is increasingly focused on Asia, and rightfully so. According to the IMF, in 2013 Asia will lead the world in economic growth by expanding 5.7 percent overall and 7.2 percent in emerging Asia. Asia’s importance is particularly true for the United States, with the region receiving 60 percent of U.S. exports and contains six of the ten fastest growing U.S. export markets. Public opinion complements this perspective, with polls since 2011 showing that Americans identify Asia as the most important region to U.S. interests.
In the minds of many, Asia’s economic ‘coming of age’ is best symbolized by China’s emergence as the number two economy after the U.S. Frequently lost in the mix, however, has been former number two and current number three, Japan. Once the economic envy of Asia, the Japan of the 1990s and the 2000s fell on hard times relative to the halcyon days of the 1980s bubble economy. Amidst these struggles has emerged an image of Japan’s economy as structurally and culturally limited, with Japanese businesses unwilling to pursue the rewards and face the risks of the global marketplace and the Japanese government incapable of setting the stage for such an economic revolution.
It is this economic history that makes Tokyo’s recent embrace of the Trans-Pacific Partnership (TPP) – part of the Abe administration’s economic revitalization plan dubbed “Abenomics” – both exciting and nerve-wracking. With Japan notorious for burdensome, foreign competitor-limiting regulations of everything from retail to healthcare, membership in TPP would ostensibly eliminate barriers to trade that hold back investors from Japan, while removing barriers to Japanese investment abroad. This move has received much applause from international observers, with Japan experts Matthew Goodman and Michael Green of the Center for Strategic and International Studies (CSIS) describing TPP as “the most consequential element of Prime Minister Shinzo Abe’s strategy to revive the Japanese economy.”
Several conservative estimates suggest that Japan’s economy will be about 2.5 percent larger in 2025 with TPP than it would be without it. These estimates, however, leave medium-term productivity growth and capital investment returns static and potentially underreport TPP’s economic impact. If Japan is able to negotiate agreements in line with World Trade Organization norms, both of these items should rise much more quickly over the next decade, doubling gains to the Japanese economy to nearly 6 percent of GDP over ten years.
The potential benefits for the global marketplace extend beyond Japan. With Japan’s investment in the U.S. economy – $289.5 billion in 2011, the most recent year for which data is available – second only to the U.K.’s, Japan’s participation in TPP would promote even steadier and stronger investment in the U.S. Furthermore, Japan’s membership in the TPP is also expected to help accelerate job creation throughout the Americas, particularly in Mexico, Chile and Peru.
But while Abe and other proponents have painted TPP as a potential last chance for Japan to remain an economic power in Asia, others see TPP as precipitating Japan’s downfall. For over two years, successive administrations of the Democratic Party of Japan (DPJ) were unable to decide on Japan’s TPP participation given the determined opposition of the agricultural lobby, a divided parliament, and the lack of party cohesion on the issue. Abe still faces outspoken opposition to his structural reform plans within his own Liberal Democratic Party (LDP), with Japan’s agriculture lobby, an important supporter of the LDP, remaining a particularly formidable challenge. Furthermore, although investors have not given up hope that Abenomics’ collection of aggressive fiscal and monetary expansionary policies will end deflation and two decades of economic stagnation, a note of caution has crept in since Tokyo stock exchange share prices began to slide on May 23rd after months of heady gains.
Despite these challenges, the developments of the past several months may just be what Tokyo and TPP need. Business groups have come out strongly in support of TPP entry, and opinion polls show that a majority of Japanese voters support TPP as well. Abe, having paid little attention to the economy during his first stint in office, is fired up by TPP: his approval rating has rocketed above 70 percent, largely on the back of Abenomics. The Abe administration’s ability to pass TPP is buoyed by the electoral dominance of the LDP, limiting the chances of defection by party members and leaving the agricultural lobby’s anti-TPP crusade bereft of strong championship. While a ratification showdown is still possible, the LDP’s demands for continued protection of five agricultural commodities – rice, wheat, sugar, dairy and beef – could serve to soften the political blow.
In his February 2013 speech at CSIS, Prime Minister Abe declared, “I am back, and so is Japan.” To prove to the world and its investors that Japan is back, the government must prove the long-term sustainability of Japan’s current short term growth; without success in joining TPP, the chance of Abenomics succeeding will be substantially diminished. Abe’s words may elicit initial skepticism for Japan watchers, with only Prime Minister Junichiro Koizumi’s financial and postal reforms of a decade ago standing out as meaningful in Japan’s history of attempts at economic revitalization. This time, however, the stars appear to have aligned to make the prospects for lasting reform real, both in the TPP’s potential impact and Japan’s political environment. Through Abe and Tokyo’s passing of the TPP courage test, the Japanese economy may come to be viewed as a rising sun yet again.