Japan eyes free trade deal to capture Asia growth

TOKYO (Reuters): Japan looks set to commit itself to talks on a U.S.-led free trade pact at the Asia-Pacific summit in Hawaii this weekend, to help ties with the United States and tap into the region’s strong growth to revive its sluggish economy.

Prime Minister Yoshihiko Noda has signalled he is leaning toward joining the Trans-Pacific Partnership (TPP) negotiations despite fierce opposition from many in his own party and the politically powerful farming sector.

For Noda, who became Japan’s sixth premier in five years in September, the pact is the first big test whether he can take tough decisions, preserve party unity and avoid alienating the opposition, whose cooperation he needs in a divided parliament.

The TPP would in principle eliminate all tariffs within the zone, likely helping Japan’s auto and electronics exporters to better compete in the global market but hitting hard its agricultural industry, which has been protected by high tariffs on farm imports.

“This is a step that needs to be taken sooner or later if one thinks about Japan’s economic future,” Mikitaka Masuyama, professor at National Graduate Institute for Policy Studies.

“But most noticeable effects in the short term will be negative ones such as damages to the farming sector. Few would praise him for his decision.”

Free trade is expected to top the agenda of the Nov. 12-13 summit in Honolulu, where leaders will also discuss a green growth initiative, which would cut tariffs on environmental goods and services such as solar panels and wind turbines.

In an effort to appease farmers, Noda’s government last month unveiled a plan to strengthen Japan’s agriculture by consolidating typically tiny patches of farmland into bigger farms that can withstand foreign competition.

“If we give the reform enough time, Japan’s agriculture can be stronger. A growing number of wealthy consumers in Asia will be buying Japan’s high-quality farm products,” said Hisashi Yamada, chief economist at Japan Research Institute.

The TPP was launched in 2006 as an free trade initiative among Singapore, New Zealand, Chile and Brunei. In addition to the four original members and the United States, talks have also been joined by Australia, Malaysia, Peru and Vietnam.

If Tokyo joined the pact, Japan and the United States would account for more than 90 percent of the total GDP within the TPP countries.

“Some people may say this is going to be a U.S.-Japan free trade agreement in disguise. But Southeast Asian markets are the ones that will expand rapidly as we go forward,” National Graduate Institute for Policy Studies’ Masuyama said.

With its population shrinking and greying, Japan needs to look overseas for growth.

But its society is split down the middle on the trade pact. A survey by Kyodo news agency earlier this month showed 38 percent backed Japan’s participation in the pact, while 36 percent opposed it.

Its proponents say it is crucial to join the talks as soon as possible, so that Japan can better protect its interest, for example by seeking an exemption for rice, Japan’s staple diet.

“When it comes to rice, Japan cannot easily open up its market 100 percent. Just like the United States is aiming to make sugar an exception, there is a good chance that Japan can make rice an exception,” said Tomoaki Iwai, professor at Nihon University.

Japan currently imposes 778 percent tariff on imported rice to protect typically small-scaled domestic rice farmers.