But its sophisticated manufacturing output still dominates many markets, its unemployment is relatively low and its technological ability is world-class. Now, Japan could be turning the corner, driven by ‘Abenomics’, the stimulus policies of Prime Minister Shinzo Abe that have seen markets rise, the yen fall and confidence build.
For Australia, the effect of these changes is particularly significant: Japan is our second-largest trading partner. Now the Japan–Australia Economic Partnership Agreement (JAEPA), which came into force on 15 January 2015, has the potential to let Australian business join the Abenomics party.
JAEPA benefits
The JAEPA deal, in outline, looks like this:
■ Australia becomes the first major producer to get privileged access to the highly protected Japanese food markets, with cuts to – or removal of – duties on beef, wine, dairy, grains and seafood.
■ There are some small gains for Australian resources and manufactured exports.
■ There are significant improvements in market access for Australian service providers and investors.
■ Japanese investors get a serious leg up locally, with unregulated deal limits pushed up from $248 million to $1.078 billion.
■ Remaining tariffs on Japanese imports will be wound back.
Agricultural exports to Japan total about $4 billion, with beef alone accounting for $1.4 billion. While that may seem small among $49 billion in total export receipts, it should grow significantly as a result of the new trade deal, yielding benefits to Australian business and the overall economy.
Indeed, agricultural investment trends emerging prior to JAEPA look like game changers according to David Williams, principal of agriculturally focused investment bank Kidder Williams. “We’re doing a lot of work with Japanese companies inbound into Australia,” says Williams. “They’re buying into food industries like dairy, grain, red meat and aquaculture.”
Some of this investment uses the traditional Japanese trading company model, where groups like Mitsubishi and Mitsui joint-venture in resource developments and trade part of the output into Japan and other Asian markets. Williams points to Mitsubishi’s 24 per cent investment in Murray Goulburn’s Tasmanian milk plant and a similar move by Itochu into Gippslandbased Burra Foods. Both deals put capital into the businesses “and they want offtake [of milk products], which they put into Japan or other Asian markets,” says Williams.
Services opportunity
There will be benefits to Australia from many areas, but according to Sir Rod Eddington, president of the Australia Japan Business Co-operation Committee (AJBCC), the area to watch is services.
Leader of the AJBCC for seven years and Japanese resident in the mid-1980s, Sir Rod pushed for a service emphasis in JAEPA and says “that’s where the future lies, without trying to diminish the continued importance of resources and agriculture. I was delighted to see a strong services chapter in the final agreement.”
Why services are the big sleeper in JAEPA becomes obvious once you look at the figures. Last financial year, two-way trade between Australia and Japan topped $72.2 billion. But $67.5 billion of that was in goods and only $4.7 billion was accounted for by services. Of that, Australian service exports totalled only $2.005 billion. That paints the classic stereotypical picture of the Australian ‘farm and quarry’ relationship with one of the world’s most sophisticated economies.
The services picture is even more dismal when you look closer and find over one-third of the services total ($744 million) came from the pockets of Japanese tourists in Australia. So, for the agreement to have big effect, services trade needs to start taking up the slack.
Signs JAEPA is causing a structural earthquake in the services sector emerged just a month after it came into force. Soon-to-be- privatised Japan Post bid $6.5 billion for Australian logistics giant Toll Holdings, which has operations throughout Asia and in 50 countries worldwide.
“They’re not buying into Toll just for Australian opportunities,” says Sir Rod. “They want to acquire Toll’s human capital and its businesses across Asia.”
Those sorts of relationships could be developed right across the service sector as a result of JAEPA, and education is one area of significant opportunity.
Leonie Muldoon, Australia’s trade commissioner in Japan, says: “Japanese higher education is internationalising and looking for partners in new ways of operating, like pan-Asian campuses and joint degrees.” Australian universities, she says, are well placed to be part of that development.
Many believe the low-hanging fruit for Australia in the services business is funds management. Much of Japan’s massive savings pool has been locked into low yield investments since the 1990s’ bust, and the new agreement gives Australia’s highly developed investment industry the chance to turn a serious dollar for Japanese investors.
NAB’s general manager, Japan, Kohei Tsushima says Australian superannuation expertise could be exported to Japan and that Australia is “well positioned to provide Japan with expert advice on possible privatisations of Japanese infrastructure, such as airports and toll roads”.
Already, finance groups like NAB, Macquarie, Lend Lease and ANZ have a foothold in Japan.
Bridging the gap
JAEPA provides significant opportunities for companies providing legal, accounting, engineering and architectural services to set up shop in Japan, but a significant cultural change will have to come first.
“Japan has been pretty much closed to us, with only about 100 Australian companies having offices there, while over 3,000 have offices in China,” says economist Tim Harcourt, a former Austrade executive who now teaches international business at The University of New South Wales (UNSW).
Muldoon says there have been some interesting developments in recent times, with retailers Muji and Uniqlo setting up in Australia and Japanese advertising company Dentsu buying a local operator.
But Australian business must follow suit and make serious efforts in Japan for JAEPA to deliver on its promise. “It’s nice to have market access, but at the end of the day, it’s how you go in the market that really matters,” says Harcourt. If things go well, he adds, “I believe JAEPA could bring Australia $39 billion in benefits over a decade, with real gains in services.”
