Trade Pacts: Not Too Exciting, but This One May Be
Free-trade agreements are usually not the sort of thing that get markets excited, so should the Trans-Pacific Partnership (TPP) being negotiated by 11 countries be any different? If you're Japan, then perhaps the answer is yes.
Japan's decision to apply for membership of the free-trade group is significant because it shows that the new government led by Shinzo Abe is serious about taking concrete long-term steps to push the world's third largest economy out of rut, Japan watchers say.
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"The TPP is a long-term positive for Japan as it will open up sectors such as agriculture to become more competitive," said Moody's Analytics Senior Economist Glenn Levine.
"The near-term takeaway is that Abe is very determined to push through his coordinated economic plan to the extent that he is prepared to face down the traditional vested interests that have blocked such action before," he added.
Abe announced last week that Japan would join the TPP free-trade talks. The Japanese government anticipates that joining the TPP will drive up gross domestic product (GDP) by 0.66 percent or 3.2 trillion yen. The farm lobby fears that it will be hurt by reduced tariffs on farm products.
The pact, which includes the U.S., Canada, Australia, Singapore and New Zealand, is expected to lead to a sharp reduction in tariffs on goods and services within the group, boosting trade between them.
"There's a history of free-trade agreements being made with much fair fare and then not much comes from them," said Shane Oliver, head of investment strategy at AMP Capital in Sydney.
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"But to the extent that Japan is agreeing to weaken the influence of its farming sector, that is positive," said Oliver. "Japan has some top world companies such as Sony but domestically it's not very competitive so if they open up domestic markets, that would help reinvigorate the economy."
Ron Napier, head of research company Napier Investment Advisors, said it would be interesting to see how the TPP negotiations pan out.
"TPP is an interesting organization because you have a bunch of agricultural exporters facing one agricultural importer - Japan, so it's like watching Goldilocks surrounded by a bunch of wolves here," he said.
Abe came to power in elections in December with a pledge to revive Japan's stagnant economy and end two decades of deflation. He has pressured the central bank into adopting a more aggressive monetary policy than it has done in that past and that is expected to happen under new Bank of Japan Governor Haruhiko Kuroda.
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Beyond short-term measures or forcing a monetary policy fix, Japan watchers have argued that Abe needs to do much more if he is really serious about changing the fortunes of Japan's economy, which has suffered from falling prices and slipped in and out of recession in recent years.
Levine says that because the farming lobby, which opposes the TPP, is a big supporter of the ruling Liberal Democratic Party, it is significant that Abe is pushing ahead with Japan's membership of the group.
"He is prepared to take risks politically and economically to pursue his plan. So for that reason, this together with the other steps Japan is taking, suggests they [policymakers] have real shot at kick starting the economy," said Levine.
AMP Capital's Oliver said that while he was skeptical about whether Abe could take on the powerful farm lobby and win, there were reasons to be hopeful
"The history of trying to reform the farming sector has not been great," he said. "But then again, Abe has broken down a lot of doors so if anyone can do it, he can."
- By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC