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Japan presents an untapped business opportunity for Canada

With the Trans-Pacific Partnership agreement seemingly dead, renewing bilateral free-trade negotiations with Japan should be a priority for Canada.

Kiyoshi Ota/Bloomberg

With the apparent death of the Trans-Pacific Partnership (TPP), Canada should be examining other Asia-Pacific trade and investment opportunities. Japan ought to be a top priority, but Canada's trade and investment relationship is stagnant. After an absence of 25 years, I recently had a chance to return to Japan. I was reminded that it is a large, wealthy, fascinating market with rising per capita incomes, but also structural issues.

Japan's economy has been through two tough decades. Beginning with a property market crash in the early 1990s, it has experienced deflationary forces, limited growth and recurring periods of recession. Fiscal and monetary policy were misaligned for more than two decades – too much deficit spending, not enough monetary stimulus – which didn't create the right conditions for even modest sustained growth.

Japan's public debt burden is shockingly high after decades of fiscal deficits. Gross public debt is more than 220 per cent of GDP, and net public debt is 120 per cent of GDP, second only to Greece. Interest payments on the debt now exceed health-care spending in the national budget. Yet surprisingly to me, there seemed to be little concern about the public debt burden among thought-leaders I met in Japan, or the public; they bravely assume the debt burden will be addressed slowly over many years (and decades) to come. The next generation can pay for the fiscal excesses of the current one.

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Comprehensive economic policy reform, called Abenomics (after Prime Minister Shinzo Abe), was introduced in 2012 in an effort to kick-start the Japanese economy. It was based on three pillars: aggressive monetary stimulus, finally; continued fiscal stimulus (which we would not advise); and most important, structural reform to unlock innovation and new forms of activity. However, Abenomics has produced only modest results and remains incomplete. Economic growth is sluggish, although deflation may be climbing to an end thanks to significant continuing monetary expansion. Much-needed micro-economic reforms, notably to labour markets, haven't gone far enough to make an impact.

Japan is also the oldest country on Earth. Its population base of 127 million is now shrinking by about a million people annually. The fertility rate of 1.4 children per female is low, but there is little apparent public appetite to use immigration to fill the holes in the labour market.

Yet because the Japanese economy is growing even modestly, real per capita incomes are rising. The Japanese are unabashedly conspicuous consumers, so Japan is a great market for high-end consumer brands. In Osaka, we saw a Lamborghini club of a dozen very expensive vehicles assembled for a Sunday morning drive.

How is Canadian business doing in Japan? Canadian exports to Japan have been essentially flat since 2000, and Canadian investment in Japan has actually declined marginally. Why? The reasons are complex. As just discussed, underlying demand growth has been weak. Next, Canada-Japan trade policy has stalled. Despite earlier discussions, Canada does not have a free-trade deal with Japan; both countries focused on the TPP as a way to improve access to their respective markets. TPP now looks to be dead, so there is an urgent need to develop a plan B for Canadian trade policy, especially in Asia. Renewing bilateral free-trade negotiations with Japan should be a priority in that plan.

Business in Asia is built by establishing long-term relationships. Yet a decade ago, Canada cut its trade representation in some key Japanese cities outside Tokyo, in what now appears to be a penny-wise, but pound-foolish decision. Small fiscal savings were achieved, but at a potentially high economic and business cost in terms of trade and investment opportunities in Japan that were never advanced. Without Canadian trade development on the ground outside Tokyo, it will be hard for Canadian business to build long-term relationships with Japanese business counterparts. It is noteworthy that over the same period, Japanese exports to Canada have kept growing at a solid pace, and Japanese FDI in Canada has accelerated.

The death watch on TPP gives Canada a new chance to kick-start its trade and investment with Japan. These decisions are within our control. Bilateral free-trade negotiations could be restarted, and Canada could rebuild its trade and investment development profile on the ground. Japan still offers a good source of potential growth for Canadian exports and Canadian direct investment abroad, but Canada will have to change its game in order to achieve better results.

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About the Author

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada. More

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