Australia-Japan Relations for the New Decade

Address by the Secretary, Dr Ashton Calvert to the Australia Japan Business Cooperation Committee

Perth, Tuesday 13 May 2003

Consul-General Shidara, Hugh Morgan, Chris Renwick and other distinguished members of the AJBCC, Ladies and Gentlemen

It is a great pleasure to have the opportunity to speak to you today.

The Australia Japan Business Cooperation Committee has for over forty years played a vital role in forging and strengthening economic links between our country and Japan.

The relationship has benefited enormously from the AJBCC's leadership in invigorating and enhancing economic and trade cooperation. A large number of Australia's leading companies - including those represented here today - have participated actively in this process. I look forward to the Committee's continued contribution to the success of our bilateral relations.

Ladies and gentlemen
Over the past decade we have all witnessed a sea-change in international perceptions of Japan. We are all now very familiar with the economic problems that have beset Japan since the early 1990s. Most of you will also be familiar with the political structures in Japan, and the difficulties any Japanese leadership faces in effecting change and reform. The media, in particular, has contributed to a perception of Japanese malaise - of a Japan in seemingly inexorable decline - with inevitable and often exaggerated comparisons with a rising China. This perception carries with it the risk of a misperception of Japan's role and future - and of misplaced policies on the part of governments, and missed opportunities and poor decisions on the part of business. I think, therefore, that it is worth putting into better perspective Japan's role and influence in international affairs, and the state of Australia-Japan relations.

Japan remains a very important country - globally, in the region, and for Australia. Japan's economy is still the second largest in the world, and will be for some time. It is around 50 percent larger than the next largest economy, Germany. Japan's economy is far larger than other regional economies, accounting for almost two-thirds of East Asian GDP. Indeed, if disaggregated, four of Japan's seven economic regions would feature among East Asia's largest five economies. The Japan-US alliance makes a fundamental contribution to the security and stability of the Asia-Pacific region. Japan's military, while structured for self-defence and heavily dependent on the United States, is formidable, and retains a sizeable edge in capability in East Asia. Japan also remains an active and leading player in major international institutions, including the UN, the WTO and the IMF, and is the only Asian member of the G8.

Ladies and gentlemen
As I stated at the outset, perceptions of economic influence and power - even where they risk being misperceptions - can be very important. This is as much the case in the political and strategic calculations of nation states as it is in decisions by capital and equity markets, and in business and consumer confidence indices. There is no question that the image and prestige of Japan, primarily as a result of its economic problems, has declined - particularly in comparison with the steady rise of China. China has major assets - its huge land mass and population, its enormous market potential and the growing skills of its workforce. It has grown at an average of around 7 per cent per year for the past ten years. Skilful diplomacy - making the most of these assets - combined with a sophisticated calculation of its own interests, has rightly brought China considerable success. All this means that China is closing the gap with Japan.

But economics is not a zero-sum game, and increased opportunities in China do not mean diminished opportunities in Japan. Furthermore, trade and investment linkages between Japan and China themselves are growing strongly, and a deepening process of interdependence is well underway between these two important economies. Similarly, in Australia's approach towards North Asia we are not in a position of having to choose between Japan and China. We enjoy now and will work to maintain in the future excellent relations with both major powers.

At this stage, Japan's economy is around 3.2 times the size of China's. And even at current growth rates - where Japan's growth is less than one per cent, and China's is over 7 per cent - China's GDP would not catch up to Japan's until around 2019. Even then, there would still be large differences in per capita GDP, consumer purchasing power, infrastructure development, and the maturity and flexibility of markets. But, as you will appreciate all too well, we also have to recognise that Japan is grappling with the challenges of far-reaching economic and political change. Japan's most respected and astute commentators will tell you that Japan has low growth potential for the next few years. While growth was higher than predicted in the first quarter, growth for this calendar year is still expected to be just under one per cent.

The reform effort clearly needs greater momentum. Japanese banks remain heavily burdened with debt. Estimates of the total value of non-performing loans range upwards from 11 per cent of gross domestic product. Private-sector analysts will often argue that the figure is much higher.

Incremental progress is being made on reducing the Government's presence in sectors that we would see as being the role of the private sector - for example, the public financial institutions that compete unfairly with private banks and insurance companies. Japan's services sector remains protected, under-developed and inefficient, with productivity levels well below that of other developed countries.

As we all know, Japan faces severe long-term demographic challenges, especially because of its ageing population. Provisional figures show that by the end of 2003, twenty-seven percent of the Japanese population will be beyond retirement age, with the workforce falling to under half the population, at 49 per cent. The total population is expected to decline from 2007. The hardest decisions on reforming Japan's overburdened pension and medical insurance schemes are yet to be taken. It is clear that Japan is struggling with the inflexibilities of its ageing population, established development model and political system. Many in Japan are now questioning whether the country's political system enables it adequately to address today's challenges.

Japan's consensus-style politics, so important in the post-war period to Japan's economic and social development, nevertheless makes it extremely difficult for any leadership to push through fundamental change. In effect, powerful constituents are able to block change with relative ease, but reformers are largely unable to coalesce in sufficient strength to carry through necessary changes. Compared with the system we know here in Australia or in Britain or the United States, in Japan political power and authority are diffused and so often is responsibility. Whether Japan is able to harness its strengths to arrest the perception of decline will depend on reform of the Japanese economy, and of the political process in Japan.

But much of the negativity around the outlook for Japan assumes that it will never overcome the economic problems of the past decade, and that it has no assets to field in projecting its power and influence. That is by no means the case, and one message I would like to leave with you is that we should recognise that Japan remains a major global economic power, with significant underlying strengths such as large foreign currency reserves, high savings and a highly skilled labour force.

And change is taking place in Japan. Prime Minister Koizumi has made a start, and there is now widespread recognition in his government, and more widely, of the need for far-reaching reform. Economic and financial sector reform and restructuring, though uneven and - many argue - insufficient, have begun to take effect. At least we can say that these tasks are now firmly on the national agenda. Prime Minister Koizumi has established beachheads of reform in many areas; in fiscal policy; financial policy; deregulation of industry; and in reform of public corporations. He is also changing the way economic policy is determined within the government, which could improve prospects for reform. Parts of Japan's export sector, the major buyer of Australia's resources, remain world class. These include well known names such as Toyota and Canon. Independent of government reform, this sector is changing the way it does business - in the way it makes decisions; in its relationships with suppliers; and how it uses its labour force.

Japan is also becoming more open to foreign direct investment which is a major catalyst for industrial restructuring and changing business practices. Japan is putting more emphasis on attracting inward tourism, another sign of its acceptance of the need to open its economy. The economic rewards of change for Japan are large. McKinsey's have estimated that, if Japan were to undertake necessary reforms, its growth rate could be as high as four per cent per annum. But the agenda for reform is enormous, and as I have already mentioned, resistance from vested interests is fierce. This translates into Japan's external economic policies as well. Japan's politically powerful - although economically inconsequential - farming lobby, for example, makes it extremely difficult for Japan to exercise leadership in international trade diplomacy, least of all in agriculture. Multilaterally, Japan has dragged its feet in the Doha Round of global trade negotiations at the WTO, especially on agriculture. Rather than seek ways to advance the progress made in the Uruguay round, Japan's agricultural lobby wants to wind back what little opening up it had agreed earlier. Regionally, as I have described, similar vested interests have impeded Japan's willingness to engage regional economies on trade and investment liberalisation. As a result, although Japan has commenced discussions on FTAs with Thailand, Korea, the Philippines and Malaysia it is restricted in what it can realistically achieve.

Where does all this leave Australia? While the United States is now Australia's biggest two-way trading partner if goods and services are counted together, Japan is still our largest merchandise trading partner. And Japan has long been, and is likely to remain for a considerable period, our largest export market. In 2002, Japan accounted for 19 percent of total merchandise exports - or $22.2 billion - almost double that of our next largest export market, the United States. Around 60 per cent of these exports are mineral and energy resources. Japan is our largest market for coal, iron ore and LNG. And it is from here, in Western Australia, that the greatest contribution to our resource exports to Japan has taken place. Japan is our second-largest source of imports, valued at $15.7 billion last year, or 12 per cent of total imports. In contrast to our overall trade relations, however, the Australia-Japan investment relationship is relatively weak Australian total foreign direct investment to Japan as at June 2000 (the latest available year) was the strikingly low figure of $340 million, compared to FDI to the United States of $90 billion, and to the UK of $40 billion. And while Japan remains our third-largest source of foreign direct investment, investing a total of $19 billion in Australia as at June 2002, foreign direct investment flows to Australia in recent years have been insignificant.

While our export performance in resources remains strong, we are not doing as well as we should be in services trade beyond tourism or trade in products of newer industries. Bilaterally, we have put great store in our current effort to reinvigorate the economic relationship through a new trade and economic arrangement with Japan. We have made no secret of Australia's long-term interest in negotiating a comprehensive free-trade agreement with Japan, assuming some future Japanese Government would be willing to do so.
Such an initiative would generate considerable benefits for both countries. But much to Australia's regret, Japan is not yet ready to engage seriously in a discussion on the liberalisation of agricultural trade.

Nonetheless, the Government is committed to looking at all possible options that might be available to strengthen the bilateral relationship, so that it continues to generate substantial benefits to Australia. We are advocating a trade and economic framework arrangement which comprises a strong facilitation package and sets a long-term goal of comprehensive trade and investment liberalisation, and a work program to achieve this. The support of the AJBCC to date has been key in getting us to where we are. Continued business support to achieve our objective will be critical and I should like here to acknowledge especially the work of Hugh Morgan and others in the AJBCC who have supported these endeavours. We will continue to advocate an ambitious outcome that reflects the scale of the relationship and its enduring importance to both countries.

Ladies and gentlemen
Under the leadership of Prime Minister Koizumi, there has been an increased effort by Japan to make a greater contribution to regional and international security. Australia welcomes these moves. Japan's forthright response to the 11 September 2001 terrorist attacks reinforced our common interests in our respective security alliances with the United States, as has Japan's firm support for coalition operations against Iraq. Not surprisingly, the Bush Administration warmly appreciates the willingness of Prime Minister Koizumi to show leadership in the international security area. Japan has shown a greater willingness to contribute to peacekeeping operations - such as the remarkable sight of Japanese and Australian military personnel working together for stability in East Timor. Australia's security links with Japan are becoming more important, as the constitutional and political constraints on Japan's security policies are gradually loosened. We have strengthened our security cooperation with Japan, including through improved and more regular security dialogue and military-to-military talks.

Japan and Australia are also working together with third countries in the East Asian region to address common security threats, such as international terrorism. Both governments have appointed Ambassadors for Counter-Terrorism to bring focus and priority to this important work. And recently we have begun, with Japan and the United States, a trilateral dialogue on security-related issues in the Asia-Pacific region.
This more forward strategic posture on the part of Japan reflects its desire to broaden its security role and contribution in the region. This is a significant development - especially given the current situation on the Korean peninsula, and the threatening posture of North Korea toward Japan. The Government has welcomed the responsible and constructive reaction of Japan towards North Korea.

Ladies and gentlemen
Japan's strength, role and influence - in the region and globally - are matters of first-order importance for Australia. We have a vital interest in a prosperous and engaged Japan, together with a strong and outward-looking Japan-US alliance. We support Japan's playing a larger leadership role in the region - and we think regional stability would benefit as a result. Australia enjoys a close and distinctive relationship with Japan which dates back more than a hundred years. We share similar values and aspirations, for ourselves, for our neighbours in the region, and globally. We have close political ties, reflected in last year's visit to Australia by Prime Minister Koizumi, during which he and Prime Minister Howard agreed to strengthen security cooperation, and to explore all options for deeper economic linkages between Australia and Japan. We are both US allies in the same region, who support a strong and enduring US strategic presence as a force for stability and security in the Asia-Pacific. We have become intimately linked over the past fifty years in a strategic economic relationship, particularly in energy and resources, but also in food and other sectors. Last year over 715,000 Japanese short-term visitors came to Australia, an increase of 6 per cent over the previous year. The size of the Japanese economy, the changes taking place and its long-term prospects - despite the disappointing performance over the past decade and the challenges its faces - mean there are still major opportunities for Australian business.

Ours is a relationship that has flourished in broad areas of activity - not just in business and diplomacy, but also in cultural exchange and people-to-people links. The Australia-Japan conference process, which began in Sydney in 2001 and continued in Tokyo last November, demonstrated the strength of our relationship and our mutual commitment to ensuring it remains vigorous and progressive. It is a process in which I know the Business Cooperation Committee retains a keen interest and involvement - a commitment I would encourage you to maintain.

Ladies and gentlemen
In concluding, I note that Australia's White Paper on Foreign and Trade Policy, Advancing the National Interest, which was released last February stated that: No other country in Asia will supplant Japan's importance to Australia's prosperity for at least another decade. It is a statement that recognises Japan's continuing importance to Australia. And it is a statement that also recognises the dynamic of change - in Japan, and in the region, that may over time affect the nature and degree of Japan's importance. Japan has the assets and capacity to remain a cornerstone of global and regional prosperity and stability. But how well Japan plays this role will depend very much on how seriously its political and business leadership apply themselves to the processes of ongoing reform.

It is certainly in Australia's interests that they rise to this responsibility.

Thank you.