Asia’s forgotten giant: the sun rises again in Japan

For nearly half a century, Japan was Australia’s number one trading partner. It is still number two. But you wouldn’t know that from much of what you read.

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Yet Japan is not the difficult place to do business frequently portrayed and the new free-trade agreement with Australia has opened up huge opportunities for local companies, according to experts on both regions.

"[Japan] carries an undeserved reputation as a difficult place to do business."
Leonie Muldoon, Senior trade commissioner, Austrade

“[Japan] carries an undeserved reputation as difficult” says Leonie Muldoon, the senior trade commissioner at Austrade in Tokyo and Japan.

“The World Bank Index would not rate it as such and indeed ranks it as significantly easier than doing business in China or South-East Asian countries.” 

ANZ Japan chief executive Peter Davis says Japan is not hard - just different. 

“Many companies struggle to come to term with the differences,” he says. “These include language, culture, management style, corporate structures, diversity and work practices.” 

According to both experts, the areas of greatest potential for increased trade post-FTA, especially for Australians in Japan, include agribusiness, food and beverages, financial services, education and high-quality consumer goods. 

Speaking at a Women in Global Business function at ANZ’s headquarters in Melbourne, Muldoon described the world’s third-largest economy as the “forgotten gem” of Asia. 

The FTA between Japan and Australia, which Muldoon believes is “without precedence”, was signed by the two countries in July. Australia’s trade with Japan totalled $70.8 billion for the 2013 financial year, according to official data. 

Under the agreement, more than 97 per cent of Australian exports will receive preferential treatment in Japan by the time the agreement is fully implemented. 

Davis told BlueNotes the exercise of putting it together has already served to re-energise general business discussions between the two countries. 

“The fact everyone has been focused on completing the economic partnership agreement both from a government and business perspective means people have been engaging more than they have been in the past” he says. 

The Japanese economy lagged in the years following the global financial crisis, falling behind the inexorable rise of near-neighbour China. Since then, thanks to the economic revitalisation program dubbed ‘Abenomics’ led by PM Shinzo Abe, the country has bounced back through six consecutive quarters of economic growth.   

“Developed Asia, or North Asia, is a stable group of low-risk customers,” Muldoon says. “The recently signed partnership agreements really give Australian business a window of competitive advantage.”  

Japan’s size lends itself to many potential openings. With an economy far bigger than some European countries considered powerhouses, Muldoon says Japan’s population of 127 million are “utterly committed to buying stuff.”  

“That means there are significant opportunities, from commodities to the nichest of niche products,” she says.  

Ample opportunity 

Davis says the most obvious increase in trade flows that would be seen as a result of an FTA would be around resources and agribusiness. 

“The big opportunities are primarily from within the agricultural industry, so exports from Australia into Japan,” he says. “Number one is beef… tariffs will be reduced over time to make that more compelling.” 

Such investment opportunities, Davis says, will go both ways across Asia. 

“If I had to pick out one particular change I’ve seen since the signing of the agreement between the two prime ministers,” he says, “It would be the very substantial increase in appetite from major Japanese companies looking for agricultural investments in Australia.” 

The Australian wine sector is also likely to benefit from the agreement. Before the deal, Australian wine was at a distinct disadvantage in Japan, Davis says. 

“It’s interesting to note that when Chile entered into a similar-style agreement with Japan on wine, they had a four-fold increase in their wine exports over the next eight years,” he points out.

The new arrangements present a massive opportunity for Australian food and beverage producers in general, Muldoon argues. 

Japan is the world’s second-largest retail market and its appetite for imported food is “insatiable”, she says. Sixty-one per cent of all food consumed in Japan is imported. 

“Japan is Australia’s second-largest food and export market and it’s an opportunity that continues to grow,” Muldoon says. 

Davis says the importation of processed food in Australia and Japan has historically been reasonably limited. 

“I think there’s a very significant opportunity to expand those processed food products under the new arrangements as well,” he says, adding there is good work being done, particularly in Victoria, to broaden the suite of Australian products being offered in Japan. 

“I think this is a really great opportunity for the value-added food products to find a home in the Japanese market,” Davis says. 

Sitting in deposits 

Japan is a country with a very low credit default rate which should come as welcome news for the financial services sector, another industry Muldoon says Japan offers fertile ground. 

“Japan has around $20 trillion in investable funds, the second largest pool of wealth in the world,” she says. “Japan’s rapidly ageing population has meant that those funds need to be placed into higher-yielding investments.” 

According to Muldoon, 21 per cent of Japanese-held financial assets are currently managed by asset management firms with the majority “basically sitting in bank deposits and government bonds.” 

“So this is really a big opportunity for sophisticated and internationally competitive Australian fund management firms,” she says. 

Davis said the economic partnership agreement provides some pretty specific provisions around financial services, providing room for Australian banks, including ANZ. 

“[The deal] will ensure that ANZ as a bank has very good access and the ability to undertake all different types of businesses we would like to undertake within the Japanese market,” he says. 

Skills demand 

Muldoon argues education groups should also be lining up to get involved in Japan. The Abe government has set some big education targets as it pushes to meet a demand for skills. 

“Japanese company’s offshored a long time ago in search of growth opportunities, particularly in South East Asia,” Muldoon said. “They now need a workforce that can support those operations in that market.” 

“The need is really significant and very immediate. As Japan pushes into Asia, this is a significant opportunity for Australian education institutions.” 

The high level of wealth in Japan offers big potential for Australian business in high-quality consumer goods. Japanese citizens are 10 times more affluent than those in China, according to Muldoon, and 46 times more affluent than India’s. 

“It’s a market that has $1.8 million millionaire households,” she says. “They are customers with big spending power.” 

Japanese consumers love products that are new and exotic, Muldoon says, and will keep things of high quality. 

“The rising affluent populations of Tokyo, Osaka and Nagoya demand premium products and the concentration in these three major centres mean that you have a financial viable base for a whole raft of niche products,” she says. “They want products that are new to market, that are unique and are special.” 

Ripe for the picking 

Of course, the impact of Japanese economy is not entirely limited to Japan.  According to Muldoon, Japan is the largest source of direct foreign investment into South-East Asia. 

“When you’re thinking about connecting with Japanese businesses, don’t just think of onshore in Japan,” she says. “Think of the businesses and supply chains that they control across South-East Asia.” 

Davis says the biggest challenge for any company attempting to make the most of Japan’s opportunities is doing so without losing whatever it is that makes them successful elsewhere. 

“It is not the hardest place I have worked,” he says. ”Just the most different and it takes time to understand the differences.” 

And those opportunities are not limited just to the few sectors mentioned - Japan is a big market and it can support almost any product. 

“Japan is ripe for the picking,” Muldoon says.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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