Exclusive insight into the anticipated effects of the Trans-Pacific Partnership (TPP) and the opportunities, particularly for Japanese trade, by Hiroyuki Ishige, Chairman & CEO of the Japan External Trade Organization (JETRO), reveals the scope of its potential to open up a raft of new avenues for business.
Vital to the success of Abenomics, how would you gauge the trust and confidence, from both Japan and the world, in the Japanese economy at the moment?
Since the Abenomics economic policy was instituted, the economic indices have improved considerably. There has been growth in the GDP. Sometimes it goes into the negative but for the most part it has been positive. In particular, improvement was seen in the area of ordinary income. Statistics have been recorded since the 1970s, but the numbers recently seen have been the highest to date.
At the same time, the business sentiment of corporations has improved. This has been the conclusion based on research by the Bank of Japan. The ratio of foreign investors who own shares in Japan has risen. And in 2014 the stock of direct investment into Japan has, for the first time, exceeded 20 trillion yen. Meanwhile, the number of tourists to Japan is about to exceed 20 million visitors a year, which has happened in a very short span of time.
I feel the trust and confidence of foreign companies in Japan is in the process of improving. But I do feel we are not doing enough to properly convey our recent economic improvements to the people of the world.
That is why we have asked Prime Minister Abe to participate in our business forums that JETRO organizes overseas, and he has taken part in 21 of these forums. Four forums in particular – two in New York, one in London and one in LA – were focused on investment into Japan, at which the Prime Minister gave a policy speech.
This is something that was realized for the first time with Prime Minister Abe. Previous prime ministers have never made speeches with the aim of increasing direct investment into Japan. This was quite a different situation compared to how European leaders came to Japan in the 70s, and particularly in the 80s, to encourage Japanese corporations to invest abroad.
Four years ago, when I was appointed to this post, I thought that attracting overseas corporations to Japan would be a very important part of my job, and so this was where I intended to focus my efforts. But at the time, I received reactions – both internally and externally – that it was not advisable to do so, as this would be a very difficult task.
It took about two years to get the ball rolling, during the first year of the Abe administration. A year and a half ago we were able to have this theme taken up at a ministerial-level conference, with the attendance of four ministers: Minister of State for Economic and Fiscal Policy Akira Amari; Minister for Foreign Affairs Fumio Kishida; Minister of Economy, Trade and Industry Toshimitsu Motegi; and Minister of State for Regulatory Reform Tomomi Inada. This past April, the Prime Minister also participated in this ministerial meeting.
This is a sentiment that a lot of our interviewees here in Japan have echoed. Japanese businessmen are saying they need to be more vocal, more assertive in promoting and highlighting the expertise of Japanese business in various sectors. How is JETRO helping to improve this and are you giving the private sector a platform to speak out on behalf of the country at your various seminars?
To answer your question, one of the things that JETRO does is indeed to organize business seminars like I mentioned earlier, which include the participation of the Prime Minister, but we conduct many more types of seminars. For example, some focus on the competitiveness of the Japanese manufacturing sector and highlight its advantages. Many of these are held in the American Midwest.
In particular, after the 2011 Great East Japan Earthquake, when the supply chain was suspended, we visited various overseas locations to explain how the situation would be quickly resolved. As a case in point, it was widely believed that manufacturing plants of the automotive semiconductor industry, which were heavily hit by the earthquake, would take at least half a year to recover. But in reality, they managed to recover within only three months.
Regarding another large element of our job, our clients actually consist more of SMEs than large corporations, and a lot of these SMEs are not used to doing business overseas. So we organize business missions to offer opportunities for these SMEs to do presentations in front of foreign corporations to communicate their strengths and to help them find partners.
Although many of them have cutting-edge technologies, as a whole Japanese SMEs do not have much experience operating abroad. For example, I believe that the number of Japanese companies operating internationally is only one-tenth of the number of German companies. We’re not necessarily making these efforts to create new jobs overseas, rather we believe that Japanese companies will be able to increase their productivity by expanding their operations to overseas locations. A main part of our job is to provide objective, unbiased and accurate information to assist these SMEs in successfully operating abroad.
Clearly the TPP will have a significant impact on Japanese-American relations, but are there any sectors where you can highlight that would be particularly substantial?
I can think of two areas. The first is that the ratification of the TPP will create incentives for companies in these economies to make supply chains more efficient, and that the resulting increase in competition among supply chains will benefit the 12 TPP members. This should have a positive effect on, particularly, the parts and material industries. Most particularly for the automotive and, in the future, the aircraft industries.
The second area is agricultural export and trade. Of course, the US is a major supplier of agricultural products to Japan, so we expect to have a stable supply from the country. We also expect that this new development will open up new opportunities for Japanese agricultural businesses as well, as the overseas market becomes more attractive as an export market. For about 10 years JETRO has been working to increase exports of Japanese food products, but initially these exports were mainly processed foods. About three and a half years ago, we started to also engage in increasing the exports of primary agricultural and fishery products.
We’ve also seen an increase in technology exchange because of the TPP. For example, deals to possibly export Shinkansen technology to America. The US Secretary of Transport was recently here meeting with his Japanese counterpart. Is the TPP also an opportunity for Japan to increase it’s soft power and influence around the world through these types of exchanges?
In my opinion, the TPP as a treaty itself does not include any stipulations that encourage exchange of technology directly between companies of member countries. But I believe that by Japan becoming a member of the TPP, the business and economic legal systems within Japan will more closely conform with those of other countries, and this should facilitate corporate exchange between all 12 members.
Regarding investment in particular, when allowing a foreign corporation to enter their market, there are some countries that require the transfer of technology into their local industry – this is called a performance requirement. Under the TPP, it has been stipulated that this requirement cannot be made, so corporations can more securely invest in other countries.
Where do you see the most potential for SMEs and how are you focusing your energy in this?
There are many, but taking the example of the automotive industry that I mentioned earlier, I believe that the trade of manufactured parts will be invigorated by the TPP and that manufacturing bases abroad may increase. It’s also possible that with the improvement in the business environment in Japan, more overseas companies may begin operating in Japan, while Japanese companies may base more of their manufacturing plants at home. What I can say is that all of the TPP countries, not just Japan, will receive benefits relative to the rest of the world, in that there will be regulatory improvements that will facilitate business for their companies. For example, it would make procurement of parts smoother. A critical role of JETRO is to provide accurate information about all this to Japanese companies in order for them to make appropriate and sound decisions.
Another example is when Japanese towels are exported to the US. At the moment they are subject to 9.1% trade tariffs, but after five years these tariffs will be eliminated. In Japan, there are companies producing very high quality, almost luxury quality towels, called “Eco Towels”. The reason why they’re called Eco Towels is because the electricity used in the plants that produce these towels are fully generated from renewable energy.
Possibly the elimination of tariffs will encourage more export in these fields of regional traditional crafts and design products. Another example is the elimination of tariffs foreseen for eyeglass frames produced in Japan. Sabae City in Fukui is well known globally for its eyewear industry. The issue is that, in Japan, labor wages are high so export is only viable for high quality and high-end products.
In this day and age, although the domestic market for such high quality goods is small, if you look towards the markets of the 12 TPP member countries, and the 40% of the world’s GDP involved in the TPP, this creates a very large market for exports. This will have a great impact on us as well as on the other countries participating in the treaty.
I just brought up various traditional sectors but this is also applicable to media content like manga or anime. I believe that there will be increased exports of these kinds of content to overseas markets and this will open opportunities.
Although it is not a TPP member, I’d like to give an example from France. In France, solid curry paste is selling very well. Why is that? It’s because French viewers have seen characters in manga and anime eating these curries and they want to try and taste it themselves. Manga can bring about this kind of effect, and I expect that we may see similar effects within the TPP member countries as well.
I believe that the TPP will stimulate the companies of member countries to be even more creative and come up with smart ways of doing business. The TPP will not only improve bilateral relations between Japan and the US, but among all the TPP countries. And as Minister Amari said, our economic relationship with these countries is entering a new stage. Although there is the issue of ratification by the various legislative bodies.
Are you confident in Japan Inc’s ability to capitalize on this economic opportunity and beat out competitors in other countries, such as in Vietnam, in Laos, in Cambodia, in all these countries?
Of course there is no question that the TPP will elevate the economic activity within the member nations, but a recent phenomenon that’s also happening is countries like Thailand, Indonesia, Korea, the Philippines and Taiwan are also showing interest in joining the TPP. So once the TPP is ratified and becomes ready to accept new member countries, I believe the Asia-Pacific region will create a movement towards this direction.
Some people have said that the TPP is a counterweight to China’s increasing influence in the Asia-Pacific region. Do you think this is true and do you anticipate that China will be involved in the TPP in the coming years?
Yes, a lot of the people who are specialized in international relations and politics may see the TPP through a geopolitical perspective, but I personally think that the TPP should be considered as an economic treaty and not as a security issue, although it is often described as you mentioned.
I believe that unless the countries involved in the TPP can share basic common values about the necessity for free trade, the free flow of capital or free movement of persons, it will be difficult for any country to join the TPP. This is also the spirit of the WTO, although the WTO does not refer to the movement of people, but movement of things and information.
It is said, and I agree, that the level of liberalization of trade and investment that’s being expected of TPP member nations is quite high. And so it is a question of whether it’s something that China would be willing to accept. Also, the rules within the TPP on state-owned enterprises are such that I think it’s going to be a large challenge for China to accept them in terms of their own state-owned companies.
One of your vital roles is to head international trade delegations around the world. How important is the personal touch to creating sustainable, economic partnerships? Do you often encourage these leaders to come to Japan and see for themselves the opportunities that exist here?
Certainly. The trade and investment results we see in figures are built up from each individual agreement and contract between companies or people. There must be mutual understanding between each of the business partners in order for that number to be achieved. Based on the belief that global trade and investment should be invigorated, I feel that we should create and offer more opportunities for business people to meet each other. When we organize overseas business missions, I always insist on how vital it is to match the businesses and match the people and help them develop a network, person to person.
I feel that Japanese businesses, including leading global companies, must make efforts to step up this activity even further. We will probably be seeing more M&As happening frequently in the future – Japanese companies acquiring overseas companies or vice versa. Under such circumstances, it makes a huge difference whether the business people involved in these partnerships and transactions are already acquainted or not, especially in terms of saving time and making decisions.
In the past few years if you look at the companies that have been very successful, there’s a common characteristic in that the CEOs themselves – and probably also their staff members – have a vast network. If they’re acquainted with the people they’re going to work with, they can make appropriate decisions in a short span of time. Even with small companies I sometimes meet CEOs with very effective networks and I feel very impressed when I meet them.
How would you like global leaders to perceive Japan?
I should point out the fact that Japan is considered a high-cost country, very expensive, and a very difficult country to enter into. But this perception is not true at all. If you compare the housing costs, and office costs, between Tokyo and Singapore or Hong Kong, the cost in Tokyo is less than the rest. That would be my final message. Japan is not what it may seem; the business environment has greatly improved. If you are interested in doing business in Japan, we advise you to come and see the country for yourself, and please, “Talk to JETRO first.”