Japan looks for greater global economic role

* SIMON FREEMANTLE and JEREMY STEVENS | Friday November 12, 2010 00:00

Yet, domestic economic anxieties are exerting pressure - forcing a realignment of Tokyo's global priorities towards fast-growing emerging market nodes of prosperity.

Out of Japan's reinvigorated relations within the emerging world, China has presented the most immediate and substantial nourishment. Between 2001 and 2008,  Japanese exports to China rose by over 300%. In 2009, Japanese exports to China outpaced those to the US for the first time in Japan's modern economic history.

Meanwhile, Japan's FDI stock in China has increased six-fold since 2000.

In addition to China, Japan is attempting to deepen commercial ties in other key emerging economies throughout Asia, Latin America and Africa.

In Africa, Japan's developmental role is entrenched, with aid forming a core component of bilateral assistance. In 2008, Japan extended over US$1.5 bn in ODA (Overseas Development Assistance) to Africa, 23% of total Japanese aid to developing countries.

Japan has a long and unprecedentedly benign relationship with Africa. Sure, BRIC (Brazil, Russia, India and China)-African engagements have grabbed headlines (and rightly so). However, Japan has not been inactive. As a result, Japan-Africa trade roughly doubled between 2001 and 2009.

Yet, Africa sits at the margins of outward Japanese FDI. In 2008, Africa soaked up only 1.1% of Japan's total outward FDI flows and, in 2009, Africa accounted for only 0.7% of Japan's overall FDI stock.

In general, the BRICs have two clear contemporary advantages over Japan in Africa. Firstly, the BRICs have a deeper understanding of operating within challenging emerging market environments and are more adept at providing solutions to Africa's rising and cost-conscious consumer population. Secondly, BRIC enterprises are given superior support from their respective governments in securing deeper access to African markets.

Engaging with these challenges must be a central objective for Japan. Clearly, Africa stands to benefit from the nature, depth and philosophy of cooperation with Japan.

For Japan, a more ambitious engagement of Africa would be appropriate, incorporating the natural desire to appease with a clear objective to link developmental and commercial objectives into a more pointed and compelling offering for African economies.

At the end of the second quarter this year, China overtook Japan to become the world's second-largest economy in United States (US) dollar terms. This shift reflects the growing emerging south and the formation of a multipolar, but positive-sum world. Japan's global relevance is changing and evolving. While it is clear that Japan faces intense domestic economic anxieties, having recognisably underperformed since the end of the 1980s, assertions related to Tokyo's irreversibly diminishing economic and geo-political global authority are premature and sensationalist.

In truth, Japan remains a global economic powerhouse, its role on the international stage subordinated more by its unwillingness to exert undue authority, it's passiveness in the face of global structural change, than by its own real wavering significance. To be sure, Japan remains the world's fourth largest exporter of goods and services and the fourth largest source of outbound foreign direct investment (FDI) on the globe, making Japan a shareholder in nodes of growth throughout the advanced and developing world. Japan is also a prominent member of the Group of 8 (G8) and the more recently formed Group of 20 (G20), and has played a formidable role in the shaping of international commercial agendas for the past half century.

Yet, as this paper has regularly asserted, global growth since the turn of the century has been driven by dynamic and nimble emerging markets. Core advanced economies, the mainstay of Japan's economic prowess since the end of the Second World War (WW2), continue to lag the pace of the advance of the developing world.

The shift towards a multi-polar world economy has been accelerated by the global economic downturn, with muted recoveries in core advanced economies overshadowed by a relatively rapid and structurally meaningful recuperation within leading emerging markets. These developments have been marked by an increase in activity from advanced economies throughout the developing world, as well as by a meaningful expansion of intra-emerging market trade and investment, indicated powerfully by the tremendous swelling of BRIC-Africa commercial ties since 2000.

Japan has, like its advanced world peers, engaged in this process of reorienting its economic strategy to incorporate these new avenues of growth. As such, it is evident that emerging markets are becoming more prominent in Japan's outbound economic cocktail. China has become foremost in this outward reorientation, while a host of other emerging markets throughout Asia, Latin America and, increasingly Africa, are becoming identifiable nodes of future growth for Japanese private and public actors.

However, despite its long and almost unprecedentedly benign history in Africa (this year Japan celebrates a century of official relations with South Africa) Japan is lagging its advanced and emerging market competitors in reengaging the continent to imbue contemporary ties with a more pragmatic and mutually-enhancing texture. To be sure, Japan's somewhat amorphous role in Africa is exerting pressure on Tokyo's competitiveness on the continent, particularly in light of intensified activity across Africa's burgeoning consumer markets from the BRIC nations.

This paper looks to unpack the extent and nature of contemporary Japan-Africa ties, identifying latent strengths and crucial weaknesses in Tokyo's contemporary engagement of Africa's emerging champions.

For a variety of reasons, the Japanese economy has clearly underperformed for the past two decades. After swelling by an average of 3.8% each year during the 1980s, Japan's real economic growth more than halved twice: first to an average annual growth rate of 1.47% during the 1990s; and, second, to an annual real growth rate of 0.85% from 2000 through to 2009. Relative to advanced economic peers, Japan has expanded by more than 1.5 percentage points (ppts) slower each year than the advanced economies.

Having contracted by 0.7% in 2008 and a staggering 5.3% in 2009, Japan is expected to benefit from favourable base effects and the improved global economic landscape. However, while economic growth is anticipated to breach 1.5% in 2010, it is expected to decelerate to around 1% in 2011 and 2012. In fact, the Japanese economy is only expected to grow by around 1% per annum (p.a.) over the next five years, a forecast which is accompanied by serious downside risks relating to sovereign debt vulnerabilities.

Japan has a highly skilled workforce, which reflects in the country's strong competitive advantage in high value-add manufacturing and services sectors - particularly in electronics and heavy engineering - where Japanese brands dominate global markets. For decades, growing exports have been the cornerstone of Japan's prosperity.

For instance, while GDP has increased 1.7 times since 1990, exports have tripled. Quite clearly, Japan has successfully externalised its economy

Japan's relations with Africa differ from the BRIC economies in the sense that, as an advanced economy and an economic powerhouse of the 20th century, Japan has deeply entrenched developmental interests across the world, including with the African continent. As a member of the OECD-DAC committee4, Japan's recent history of providing ODA to African states is fairly robust.

While Asia is the largest recipient of Japanese ODA, Africa is securely in second position, reflecting the importance of the continent in Japanese foreign affairs.

Not unlike its advanced world peers (and some emerging markets), Japan sees bilateral assistance as a means to lock vital partnerships throughout the developing world in order to secure deeper commercial avenues for its expansive multinational corporations. Moreover, the provision of loans and grants, which fall under the banner of ODA, are often channelled towards infrastructure projects in which Japanese contractors and suppliers may secure access. As such, grants constitute the bulk of Japanese aid to Africa. Given its formal engagement within the international donors' community, Japan's aid efforts are, arguably, more cohesive with international priorities than other non-traditional donor countries, such as the BRICs. Advanced economies have expressed frustration at the non-traditional donors? independent development agendas, which, at times, clash with an agreed developing world strategy to ensure aid effectiveness -

* Simon Freemantle and Jeremy Stevens are Standard Bank analysts