Tokyo Notes

What Korea Can Teach Japan

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Tokyo Notes

What Korea Can Teach Japan

As South Korea signs a new FTA with the EU, is neighbour Japan starting to fall behind?

As market watchers tried to figure out this week whether the Bank of Japan’s surprise package of measures, including a de-facto return to its zero-interest rate policy, would be enough to have an impact on the economy, one of Japan’s neighbours was signing a deal that undoubtedly will have huge significance for its economy.

South Korea may long have been playing catch up with Japan, but not any more it seems. And we’re not just talking about the quality of South Korean products, many of which have the edge over their Japanese rivals–Seoul has just inked a deal with the EU that will finally have politicians in Tokyo pausing for thought on trade policy.

While the Japanese model of restricting import competition during its high-growth period was studiously copied with great success by its neighbour, it looks as if it’s Seoul that now has some lessons to teach when it comes to a growth policy for today’s globalized world.

The Free Trade Agreement signed by South Korea and the EU essentially scraps all import duties between the two parties. The EU describes the deal as the ‘most ambitious trade deal’ it has ever negotiated, suggesting it could double trade with South Korea over the next 20 years.

If this were a race, Japan would not just be left in the starting blocks, it would still be at the side of the track dithering over whether to compete in the first place.

But there are signs that the Democratic Party of Japan-led government is giving serious thought to the issue of a more open trade policy. Prime Minister Naoto Kan mentioned in his policy speech in the Diet last week the possibility of participating in the Trans-Pacific Partnership. That participation may well be announced when Japan hosts the 18th APEC meeting in Yokohama next month.

One member of the current cabinet who is certainly pulling at the tracksuit zipper is Foreign Minister Seiji Maehara, who on Tuesday set out his economic diplomacy concept.

He picked up on the South Korean theme, pointing out that 36 percent of Seoul’s trade was already covered by FTAs compared to the equivalent figure of 16.5 percent for Tokyo.

‘We see that the won is falling, while the yen is rising, and the percentage of imports and exports covered by free trade agreements and economic partnership agreements is twice that of Japan,’ he said. ‘Bearing all of this in mind, we can see that products made in Japan can’t possibly be expected to compete with those of South Korea.’

Meanwhile, in its editorial on Friday, Japan’s biggest business broadsheet, the Nikkei, also spoke of the extreme difficulty Japanese products will have in competing with their South Korean counterparts once the EU-South Korea FTA is up and running.

The Nikkei highlighted two points that Japan needed to learn from Seoul. First, there’s the need for regulatory reform. Adopt EU standards and, according to the Nikkei, you’ll not only have a better chance of getting all 27 EU members to agree to an FTA, you’ll also be able to trade with all those non-EU nations who also comply with them. Second, learn from Seoul’s switch from trade barriers to protect its agricultural sector to subsidies to support it, one of the key moves that facilitated the deal with the EU.

When it comes to the issue of opening up Japan’s agricultural sector, I doubt it will be as easy to solve as that.

But the point remains that if Japan wants to remain a player, it better take a closer look at what its rivals are doing.