Japan and Australia - a new era of opportunity

In brief

This week's historic visit to Australia by the Japanese Prime Minister, Shinzo Abe, has been widely lauded as the beginning of a new era in the relationship between the two countries. Japan Sector Leader and Partner Tim Lester and Senior Associate Penny Alexander report on the opportunities this new 'special relationship' will bring for both Australia and Japan.

The JAEPA and the Defence Agreement

As widely reported in the media, the most significant outcomes of the Japanese Prime Minister's visit to Australia were the signing of the JAEPA and the Defence Agreement by Prime Ministers Abbott and Abe on 8 July 2014.¹ As we reported in our Focus on the JAEPA negotiations, the JAEPA will give Australian producers and exporters in various sectors a significant competitive advantage in Japan. Similarly, Japanese exporters and investors will enjoy improved access to business and investment opportunities in Australia. In particular:

• Australian exporters of beef, cheese, horticulture, wine and seafood will benefit from rapid tariff reductions, and tariffs for wool, cotton, lamb and beer will be eliminated over time;
• Australian exports of natural resources and energy, together with manufactured products, will enter Japan duty free;
• Australian service suppliers are guaranteed access to the Japanese market in financial, legal, education and telecommunications services, including access to various central government ministries and agencies, statutory authorities, state-owned enterprises and institutions;
• Australian tariffs on cars, household goods and electronic consumer goods manufactured in Japan will be phased out; and
• Japanese investment into Australia will benefit from the raised screening threshold at which private investment in non-sensitive areas will be considered by the Australian Foreign Investment Review Board (the threshold to be lifted from A$248 million to A$1,078 million).

The details of the Defence Agreement have not yet been widely publicised; however, the Australian Defence Minister, David Johnston, has reported that this Agreement will 'facilitate deeper bilateral defence science, technology and material cooperation, allowing Australia and Japan to work together more closely to identify potential areas of future research interest and mutual benefit'.²

Together, the JAEPA and the Defence Agreement signal an exciting new era for businesses in Australia and Japan, and will undoubtedly lead to significant opportunities in both countries for generations to come.

Announcements in context

When the JAEPA and the Defence Agreement are viewed in historical and regional context, the opportunities they present are a cause for cautious elation.

In recent years, Japan’s economy has undergone an important transformation under the guise of ‘Abenomics’. 'Abenomics' refers to the new economic policy platform being rolled out by Prime Minister Abe, which he has described as comprising three 'arrows': fiscal stimulus, monetary easing and structural reforms. Just as many were fearing that the increase in Japan’s consumption tax rate from 5 per cent to 8 per cent earlier this year would hurt business sentiment, the Bank of Japan’s recent Tankan Corporate Survey revealed that large companies in Japan are actually planning to increase expenditure over the coming year and raise investment by 7.4 per cent.³ Similarly, as the third 'arrow’ of Abenomics takes flight, Prime Minister Abe is embarking on labour market reforms and corporate tax reductions, in an effort to create a domestic economic structure that will continue to promote growth. The opportunities born under the JAEPA are therefore very timely; particularly the guaranteed access of service suppliers to Japan, and the reduction in the FIRB screening threshold (described above), which was previously a material barrier to entry into Australia for some Japanese businesses and investors.

Following the Great East Japan Earthquake in March 2011, which resulted in the shutdown of the country's nuclear reactors and an increased reliance on imported LNG, Japan also remains subject to a severe shortage of energy to drive its industries and satisfy household demand. These severe energy shortages are unlikely to abate in the short term, making it crucial for Japan to secure access to alternative energy reserves. The important reductions in, and abolishment of, Australian tariffs (up to as much as 11.7 per cent on certain minerals) will certainly strengthen this important bilateral trading relationship.

The historic visit by Prime Minister Abe to Perth and the Pilbara region in north-west Australia also highlighted the importance of the energy and resources sectors to the past and continued economic growth of both countries. This complementary relationship should continue to flourish on entry into force of the JAEPA, considering that 99.7 per cent of Australia's exports of resource, energy and manufacturing products will enter Japan duty free.⁴ Given Allens' extensive experience in energy and resources projects over many years, we fully expect the reduced FIRB screening thresholds will also further facilitate investment by Japanese companies in Australia's energy and resources sectors.

The infrastructure divestment and investment programs recently announced by the Australian Federal, State and Territory governments, as reported in our Focus on the 2014-2015 Government Budgets, must also be kept in mind. Many of the State-owned infrastructure assets that are expected to be ‘in play’ will, no doubt, attract the interest of Japanese investors, making the reduction in the FIRB screening threshold all the more timely. Such investors are also likely to be encouraged by the political commitment displayed by the respective nations’ Prime Ministers and the promise of a new era of economic and strategic cooperation.

Broader opportunities from the enhanced bilateral relationship

Aside from the purely economic opportunities associated with the JAEPA, the new era of this ‘special relationship’ will also give rise to important strategic benefits for both countries. Prime Minister Abbott told the Australian Parliament that the Australia-Japan relationship 'is not a partnership against anyone; it is a partnership for peace, for prosperity and for the rule of law'. The focus of the various speeches made throughout Prime Minister Abe's visit was clearly on the strength of a relationship between two trusted friends, with a positive outlook in terms of ongoing investment and opportunities. The mutual commitment of Prime Ministers Abbott and Abe to undertake alternating annual official visits to each other’s country further reinforces the perceived importance of the relationship between Tokyo and Canberra.

While this sentiment will, no doubt, require Australia’s political and diplomatic leaders to assuage the concerns of other countries in the region that are currently experiencing a more tense relationship with Japan (over such matters as disputed territory and past conduct), the medium to long-term strategic advantages and opportunities associated with strengthening the Australia–Japan relationship would certainly appear to outweigh any shorter-term tension and concern felt by our other friends in the region.

Wrap-up

The signing of the JAEPA and the Defence Agreement by Prime Ministers Abbott and Abe this week, as well as their commitment to a new 'special relationship', signals an exciting new era of opportunity for Australia and Japan. Importantly, the significance of Prime Minister Abe’s visit to Australia transcends the economic benefits that will flow to business interests in Japan and Australia – it is a milestone in the relationship between the two nations.

Please do not hesitate to get in touch with any of the people below if you wish to discuss in more detail the opportunities outlined in this Focus, or any other matters with which Allens' Japan Sector can assist.