Finance, Trade

Japanese banks’ appetite for economic partnership agreements

Japanese banks’ appetite for economic partnership agreements

When viewed through the lens of trade deals negotiated with the Association of Southeast Asian Nations (ASEAN), Australia, and the Trans-Pacific Partnership (TPP), Japan has shown recent willingness to engage in global free trade. However, is there any indication that these deals are striking a chord where it matters most, with Japan’s services sector, which comprises 70% of its economic activity?

Japan has been a long-term supporter of multilateral trade mechanisms (Patton 2011). The main reason for this support is its caution against discriminatory trade arrangements that would impact its export-oriented industrial sectors (Yoshimatsu 2012). As such, Japan’s long-held view has been that its best interests were served through multilateral World Trade Organization (WTO) processes. Only since the 2000s has it turned its attention to bilateral and regional agreements (Sasaki 2012).

Japan’s late entry into the economic partnership agreement (EPA) game contributed to its early trade agreements being limited in coverage and timid in ambition. Japan’s approach with countries like Singapore, Mexico, and Malaysia appeared to be based on five main characteristics: bilateral rather than regional, developing countries as partners, modest trade and investment coverage, protection of sensitive sectors, and the inclusion of economic cooperation elements (Pekkanen, Solís, and Katada 2007).

Joining the TPP negotiations in 2010 signaled a policy direction change for Japan, because in the TPP Japan was not the larger, wealthier partner able to effectively control agreement negotiations (Kim 2013). The conclusion of the 7-year trade negotiations with Australia in 2014 also indicated further Japanese willingness to be comprehensive in its trade commitments.

In particular, the starkest of changes between Japan’s early trade deals and its latest ones are in the services area. In its early deals, Japan doused criticism of modest trade access by promoting, and providing finance for, various technical transfers to its developing nation partners (Tamura 2007). More recently, however, the liberalization of investment and trade in services as well as improved rules for electronic commerce and government procurement are specifically included in Japan’s international trade arrangements. Services outcomes have come into focus.

The reason for this focus might be the relative strength of Japan’s main services sector, the banking industry. The 2008 global financial crisis, which resulted in the largest corporate failures in history, barely scratched the Japanese financial services sector. Japan had already suffered its “lost decade” of stagnation and corporate failures following the asset bubble in the 1990s, and strict conditions imposed in two waves of subsequent banking reform in 1996 and 2002 meant that Japan’s major banks to that point had been referred to as “dull” (The Economist 2011, p. 2).

Yet, it was the Japanese banks’ lack of interest in mezzanine and other derivative products that gave them an advantage during the global financial crisis. In late 2008 and for the first time since the Japanese asset price bubble burst in 1991, Japanese companies took major stakes in European and American banks and financial services companies (Montgomery and Takahashi 2011). Also, the Japanese banks’ share of global syndicated loans moved up from 6% in 2007 to 14% in 2012 (Dvorak and Fukase 2013).

Therefore, the question to ask becomes, was the re-emergence of the Japanese banks as a globally significant force connected to the timing of the government’s changes in its approach to EPAs? Are the now stronger Japanese banks lobbying for more services access in EPA negotiations? The answer is, well, maybe.

Unlike the agriculture sector, Japan’s banking sector rarely comments on EPAs. Indeed, one point that differentiated Japan’s early approach to free trade negotiations from other advanced nations was that Japan did not appear interested in pushing for mandatory obligations on financial services (Katada and Solís 2008). Japan’s approach stood out as peculiar given that finance was among the main benefits sought by Japan’s earliest free trade agreement partners. Moreover, the direct link between investment outflows from a home country’s banks (in the form of foreign direct investment) and inflows into free trade agreement partner countries indicates that Japanese banks themselves could be expected to have a direct commercial interest in the outcomes of EPA negotiations (Poelhekke 2012).

Looking more closely at the specifics of the early trade deals, Japan’s first completed EPA, with Singapore, was the subject of active lobbying by Japan’s leading business group, Keidanren, to include financial services liberalization in the agreement. However, by the time Japan’s second EPA was negotiated with Mexico, there was a full exemption for financial services, which was rare among EPAs (Fink and Molinuevo 2008).

Still, although the banks are long-term contributors to Keidanren, it is not clear how the Japanese banks themselves have engaged with EPA negotiations. What is clear, however, is that the banks should have motivation to support trade outcomes. For example, the concentration of the Japanese export sector results in a small number of very large multinational firms conducting a large amount of trade: these large firms remain directly connected to their home banks (Volz and Fujimura 2009). The large Japanese exporting firms are dependent on both the trade finance and the export- and investment-related information provided by Japanese banks (Inui et al. 2013). This direct connection to the traded economy would appear to be sufficient incentive for the banks to support initiatives that lead to more trade and investment.

Further, the banks remain affected by slow growth in the Japanese domestic market. Even though there is an increasingly competitive international banking environment, expanding overseas is one of the few paths to growth left for the Japanese banks (EIU 2012).

In summary, the literature reveals little about how contemporary Japanese banks integrate EPAs into their commercial considerations. However, there appears to be a prima facie motivation for the banks to do so. Therefore, because of the size of major Japanese banks and the importance of the services sector to Japan’s future growth, how Japanese banks work with EPAs is a field that appears to justify further research.
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References:

Dvorak, P., and A. Fukase. 2013. Japanese Banks Becoming Big Lenders in Europe, U.S.  The Wall Street Journal Europe, 31 January. p. 3.
The Economist. 2011. Don’t Sit on Your Hands: Banking Can Be Too Timid as Well as Too Adventurous. Special report.
Economist Intelligence Unit (EIU). 2012. Financial Services Industry Report: Japan.
Fink, C., and M. Molinuevo. 2008. East Asian Free Trade Agreements in Services: Key Architectural Elements. Journal of International Economic Law 11(2): 263–311.
Inui, T., K. Ito, D. Miyakawa, and K. Shoji. 2013. Firms’ Export Behavior and the Role of Banks’ Overseas Information. Tokyo, Japan: Economic and Social Research Institute, Cabinet Office, Government of Japan.
Katada, S., and M. Solís. 2008. Under Pressure: Japan’s Regional Response to Regional Uncertainty. In V. Aggarwal, M. Koo, S. Lee, and C. Moon, eds. Northeast Asia: Ripe for Integration? Springer Science and Business Media. pp. 109–147.
Kim, J. 2013. Japan and the Trans-Pacific Partnership (TPP): Rule Setter or Follower? Journal of Asia-Pacific Studies (Waseda University) 21: 193–203.
Montgomery, H., and Y. Takahashi. 2011. The Japanese Big Bang: The Effects of “Free, Fair and Global.” The Journal of Social Science 72: 49–71.
Patton, J. 2011. Comprehensive Economic Partnership Agreements. Journal of Management Policy and Practice 12(1): 36–48.
Pekkanen, S., M. Solís, and S. Katada. 2007. Trading Gains for Control: International Trade Forums and Japanese Economic Diplomacy. International Studies Quarterly 51(4): 945–970.
Poelhekke, S. 2012. Bank Intermediation of Foreign Direct Investment. Amsterdam: De Nederlandsche Bank (The Dutch Central Bank).
Sasaki, H. 2012. Relationships between Agricultural Policies and Environmental Effects in Japan: An Environmental-Economic Integrated Model Approach. Special Issue: External Cost of Farming Activities: Economic Evaluation, Risk Considerations and Environmental Repercussions. Food Economics 9(1-2): 36–52.
Tamura, A. 2007. Japan Emerges from Its Trade Shell. Far Eastern Economic Review 170(4): 47–50.
Volz, U., and M. Fujimura. 2009. The Political Economy of Japanese Monetary and Exchange Rate Policy. Economic Review 1(1): 3–46.
Yoshimatsu, H. 2012. Political Leaders’ Preferences and Trade Policy: Comparing FTA Politics in Japan and South Korea. Asian Politics & Policy 4(2): 193–212.
Photo: By Kentin (Own work) [CC BY-SA 4.0], via Wikimedia Commons

Garth Taylor

About the Author

Garth Taylor is a former Australian Trade Commissioner who has recently completed his doctorate studies on Japanese banks’ decision-making.
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