`Australia and Asia's Megamarket' : Challenge and Opportunity in Australia-Japan Relations

`Australia and Asia's Megamarket' : Challenge and Opportunity in Australia-Japan Relations

Address by The Hon Alexander Downer, MP, Minister for Foreign Affairs, , to launch the EAAU study "A New Japan? Change in Asia's Megamarket", Melbourne, 11 June 1997.

Introduction

It is a great pleasure to launch another excellent report produced by the East Asia Analytical Unit (EAAU) of the Department of Foreign Affairs and Trade - A New Japan ? Change in Asia's Megamarket.

The report has special significance because it comes at a time when we are marking the anniversaries of several influential events in the history of Australia-Japan relations.

Last year, we commemorated the 100th anniversary of the commencement of formal diplomatic relations in 1896, and the 20th anniversary of the 1976 Basic Treaty of Friendship and Cooperation. This year is the 40th anniversary of the landmark 1957 Agreement on Commerce and the first post-war exchange of Prime Ministerial visits - by Prime Ministers Menzies and Kishi. We are also marking the 35th anniversary of the Australia-Japan Business Cooperation Committee, and 30 years of holding annual talks between the Australian and Japanese Foreign Ministries.

As this impressive set of anniversaries clearly demonstrates, the strength of the modern Australia-Japan relationship is founded on over four decades of mutually beneficial cooperation. These various bilateral arrangements, particularly the 1957 Agreement on Commerce, have played a major role in underpinning the enormous increases in prosperity that both countries have experienced since the 1950s.

This new EAAU report focuses on the major issues confronting Japan, its options for the future and the implications for Australia. In particular, it canvasses the challenges and opportunities facing Australian business. Three main themes emerge from the report's analysis:

first, Japan will remain a major player globally and in the Asia Pacific region;
second, Japan is undertaking reforms which will revitalise its economy, although this will be a slow process;
and third, and most importantly, the many new opportunities arising from the changes in the Japanese market make the time ripe for Australian firms to take up the unprecedented opportunities.

But before I outline the report's significant findings in more detail, I want to say a few words about the extraordinary Australia-Japan relationship, and how it epitomises Australia's long term commitment to the region.

Australia and Japan - A Dynamic Partnership

Australia's highest foreign and trade policy priority is closer engagement with the Asia Pacific. In making this priority a reality, there is a justifiable focus on the many significant and emerging economies of the region.

But, as Australia engages more and more with the immediate region, we should not lose sight of our relationship with Japan, nor fail to recognise the fundamental part played by Japan in Australia's prosperity in the past half century, and the equally important role Japan will play in our common future in the region.

For more than 40 years, Japan has been Australia's largest export market. Today, Japan remains by far Australia's largest trading partner and is also our third largest source of foreign investment. Japan buys one fifth of our merchandise exports, supplies nearly one sixth of our merchandise imports and, in the increasingly important services trade sector, provides one fifth of the tourists coming to Australia each year.

The Australian Bureau of Statistics estimates that our exports to Japan create - directly and indirectly - over 345,000 jobs - an extraordinary figure. This means that approximately 4.3 per cent of total employment in Australia depends either directly or indirectly on exports to Japan. Moreover, a survey recently released by the Japanese Embassy indicates that Japanese companies investing in Australia directly and indirectly employ more than 300,000 people.

While the employment flowing from Australia's exports to Japan and the employment generated by Japanese companies in Australia overlap to a significant extent - meaning that the figures cannot simply be added - the two figures do provide a graphic illustration of just how important Japan is for Australia. Clearly this is a point that Pauline Hanson and other dissonant voices in our society need to focus on: if as a country we telegraph racist sentiments to our region, not only will it reflect poorly on us morally, but it will threaten tens of thousands of jobs.

There is no better example of the paramount importance of Australia's engagement with the region than our dynamic partnership with Japan. It shows clearly that Australia cannot afford to be narrow-minded, insular or protectionist. We cannot afford to cut ourselves off from the competitive and entrepreneurial forces that are driving innovation and wealth-creation in every economy across the region and the globe.

Most assuredly, Australia is with the Asia Pacific for the long term, just as every country in the region looks to Australia for a constructive contribution to our common regional destiny.

The Report's Key Findings - Challenges and Opportunities

I want to turn now to the EAAU report's key findings, including the implications for Australia.

In the first place, the report provides a very useful reminder of Japan's enormous economic significance - globally and regionally.

As the world's second largest economy, with a GDP of USD 5 trillion in 1995 (compared to the United States' GDP of USD 7 trillion), Japan accounts for around 18 percent of world GDP, and over 70 percent of East Asian GDP. Japan is the world's third largest trading nation after the US and Germany and - with a current account surplus amounting to a massive USD 70 million, and foreign assets exceeding USD 800 billion - it is a leading source of investment in the world economy.

Japan's post-war economic recovery and remarkable record of growth have been described as an `economic miracle'. Though it touches briefly on the debate surrounding the reasons for this impressive economic achievement, the report's real starting point is the present. In the 1990s, Japan faces a new set of economic circumstances and challenges which require new approaches to sustain a level of growth sufficient to improve living standards further in the 21st century.

In recent years, there has been a tendency in Australia to discern from Japan's prolonged recession the beginning of a decline in Japan's economic significance in the world. But, in 1996, Japan's GDP grew 3.6 percent, and its potential growth rate remains around 2.5 percent. Put simply, this means Japan is still able to add the equivalent of two-thirds of the Indonesian economy, or one-fifth of the whole Chinese economy, to the world economy every year.

As the EAAU report points out, however, in the longer term Japan could face a steady decline in its potential growth rate to one percent by 2015, unless it takes bold action to hasten structural reform and deregulation, and thus boost productivity growth. The prospect of a lower potential growth rate may well trigger Japanese resolve to embrace the path of reform more fully. Many other factors are driving the growing acceptance in Japan of the need for change. These include:

a recent prolonged recession;
a strong yen appreciation in the decade to 1995, which forced companies to undertake drastic efficiency measures;
the possibility of renewed yen appreciation and consequent renewed pressure on Japanese manufacturers and retailers;
domestic pressure for deregulation from export-oriented sectors which are increasingly reluctant to bear the cost of protected inward-looking sectors;
strengthening global competitive forces;
continued external pressure, especially from the United States, for further and faster liberalisation; and
the 1993 split of the Liberal Democratic Party (LDP) and the shake-up of the political scene, which has led to stronger debate over economic reform policies.

As a result of these factors, change is evident in Japan in several areas, including rapid import penetration, a more positive attitude towards foreign goods, and improved market access - for example, consumers now find Australian rice on supermarket shelves in Japan. Another important example is the gradual liberalisation in the financial sector, with foreign firms - including Australian firms - establishing a stronger presence and winning market share.

We are also seeing flatter, more streamlined distribution networks in Japan, with a greater focus on consumers, more direct importing by major retail chains, and active importing by all players. The Japanese Government is making a significant effort to reduce prices in specific areas such as housing, which is leading to greater use of imported housing materials and foreign-made kit-houses, with notable Australian successes.

These welcome changes offer major opportunities for Australia. For example, Japan's import and investment patterns are evolving towards more sophisticated goods and services, offering Australian suppliers new opportunities, not only for exporters of high-valued-added goods, but also for providers of such services as research and development, information technology and logistics. A more streamlined distribution system offers exporters more direct access to end-users - saving time and money. And financial sector reforms provide new opportunities in pension fund management and insurance, as well as in other niche segments

I should also say that, in Japan's regions, good infrastructure and increasingly outward-looking policies - coupled with Australian and Japanese Government assistance - means that exporters and investors have attractive alternatives to the congested Tokyo gateway. The sheer size of Japan's eight regional markets is often under-appreciated. The Kanto, Kansai and Chubu regions, centring on Tokyo, Osaka and Nagoya respectively, are the three largest economies in East Asia when Japan as a whole is excluded. In that context, Austrade's six offices in Japan are an invaluable resource for companies taking their first steps into regional Japan.

But, at the same time, many challenges remain - for Japan and Australia.

While much reform is under way, the task facing Japan is enormous. The current LDP Government in Japan was elected in late 1996 on a mandate of broad economic and governmental reform. Prime Minister Hashimoto has set a number of major targets, with six priority areas for reform, including: economic restructuring through bold deregulation; far-reaching financial system liberalisation; major reform of government administration; and fiscal reconstruction to cut budget deficits. If the targets set under these and other reform programs are realised in the early years of the next century as planned, Japan will find itself in a much more competitive position.

Australia also faces the overriding imperative of making its economy as competitive and productive as possible. And we are making good progress. The Government is pursuing an economic reform agenda designed to push aside remaining inflexible and inefficient work and business practices, reform the labour market, reduce the burden of regulation and paperwork for business, and improve efficiency in infrastructure services.

The EAAU report makes a major contribution to Australia's understanding of Japan, including Japan's role in our economic growth and prosperity. While the large number of Australians studying Japanese is integral to a better Australian knowledge and awareness of Japan, the broader Australian community - especially the private sector - needs to know more about the changes occurring in Japan and their implications.

I think it is fair to say that one of the biggest challenges facing us is to encourage Australians to expand business ties with Japan. Much of this has to do with perceptions in Australia that Japan is a more difficult and complex market than many others in the region. And yet Japan's tariff and non-tariff barriers are often lower and less distorting than those of the European Union or the United States. Moreover, substantial liberalisation has taken place in Japan over the past decade, and many foreign companies have found significant success and profitability in Japan.

At the same time, it is true that excessive regulation, lack of transparency and abuse of bureaucratic discretionary power can hinder new market entrants. The Australian Government will continue to urge Japan to reduce those barriers. We are taking a practical approach in our effort to facilitate market entry for Australian companies - this includes seeking mutual recognition of each other's labelling and other standards, and encouraging Japan to adopt international standards and norms wherever possible.

In the area of services trade, innovative strategies reaching a broad cross-section of the Japanese market are needed to ensure that Australia becomes a major destination for Japanese tourists. Last year, just 5 percent of the 17 million Japanese who travelled abroad came to Australia. So considerable scope exists for growth, though cheaper destinations will continue to pose strong competition for Australia.

Education is another very important services trade which has significant growth potential. I am sure the numerous schools and universities represented here today will agree with me about the attractiveness of the Japanese market. Currently, Japanese make up just one sixth of overseas students in Australia.

Finally, we must not overlook the importance of Japanese investment in Australia. Of Australia's total stock of foreign direct investment - AUD 129 billion as at 30 June 1995 - Japan accounted for 14 percent (AUD 19 billion), compared to the United States' 27 percent and the United Kingdom's 24 percent. Japan's direct investment is most prominent in finance and insurance, followed by property, business services and mining.

The report shows a trend since the late 1980s away from sometimes speculative real estate deals towards longer-term manufacturing ventures, which now account for 15 percent of Japanese investment here. As I mentioned earlier, Japanese companies directly employ tens of thousands of Australians and source a significant proportion of their inputs locally. Their exports from Australia - including to Japan - are well in excess of their imports, and their manufacturing activities are increasingly export-oriented.

All of this means that Australian companies looking for partners in this country - as well as in Japan - could do much worse than considering a strategic alliance with a Japanese company.

Conclusion

In conclusion, our relationship with Japan - in all its many dimensions - remains of the highest importance to Australia. In many ways, it is an exemplar of the kind of partnership we would like to foster in all our important country-to-country links across the region and beyond.

I believe suggestions from some commentators that Australia is becoming complacent about its ties with Japan are well wide of the mark. The Government remains strongly committed to making the bilateral partnership even stronger and more diverse through practical and mutually beneficial cooperation.

But the Government cannot and should not do it alone. A considerable number of Australian companies have shown the way forward by forging long standing business ties with Japan - others have more recent but equally productive links. However, as I mentioned earlier, many Australian companies continue to regard Japan as too formidable and difficult a market.

The East Asia Analytical Unit is a primary tool for the Government's Asia-related analysis and planning. It regularly produces high quality reports on emerging economic trends in East Asia, examining what these mean for Australian business, government and the community in general, and how we might better take advantage of them.

The Unit's latest report on Japan does all of this, and more. It reveals that ongoing and highly significant changes are making the Japanese market more accessible, and that new, attractive opportunities are emerging.

I congratulate the EAAU on this report.

I strongly encourage Australian companies and firms from all sectors of our economy to read the report closely and take its important conclusions to heart.