Japan and the EU

26 August 2006
by eub2 -- last modified 26 August 2006

Over the past four decades, Europe and Japan have emerged together as leading world economic powers, reaching together around 40% of world gross domestic product (GDP) in 2005. Japan's GDP was EUR 3,674 billion in 2005, which represents around 12% of the world total.

Introduction

As a rich economy and major global trader and investor, Japan is a major partner for the EU. Japan is the world's second largest national economy, accounting for 2% of the world population and around one eight of world GDP. Japan is a rich country: it has the greatest savings of any nation and the largest foreign currency reserves in the world (over $840 billion in 2005).

After a decade of stagnation, the Japanese economic growth has been consolidating since 2003-2004. Official data showed that Japan's GDP grew 2.7% in 2005, after rising 2.3% in 2004 and 1.4% in 2003. Japan slipped into a mild recession in the middle of 2004 but crawled out in the last quarter. The recovery was essentially export-led, but internal demand also started to move. Many companies and major banks have restored profitability and reduced debts. According to the OECD, Japan still faces a number of serious headwinds to sustained growth, notably entrenched deflation and continued declines in bank lending and land prices. Large government budget deficits have boosted gross public debt to over 160 per cent of GDP, the highest in the OECD area.

In 2004, Japanese imports and exports of goods amounted to € 352.3 and € 421.1 billion respectively, representing 6.20% and 7.91% of the world flows.

BILATERAL TRADE RELATIONS

Trade in goods and services

There are enormous potential trade opportunities for European business in Japan. Over the period 2000-2004, EU exports in goods to Japan declined by 1.3% on average per year. However, between 2003 and 2004, EU exports grew by 5.2%. At present the trend seems to have become more stable with a growth of 0.7% in 2005.

With a share of 4.1% (2005) of the EU exports, Japan is the EU's fifth largest export market after the USA, Switzerland, Russia and China. Japan accounts for 7.36% of EU agricultural exports, 5.46%of textile, 5.39% of chemical products, 4.21% of transport materials. With a 6.2% (2005) share of the EU import market, Japan is the fourth largest source of imports into the EU after the USA, China and Russia. Imports from Japan are mainly in the sectors of machinery and transport equipment (45.1) and chemical products (15.4%). Taking into account factors such as the exchange rate and the Japanese production in China, Japan still remain overall our second trade partner after the USA.

Europe is equally a very important market for Japan. In 2004, the EU occupied rank number 3 in Japan's imports and rank number 2 in its exports. In 2004, EU imports and exports of services from and to Japan were 10.2 and 18.9 billion euro.

Investments

The trend in flows of FDI has been quite dynamic over the past 5 years, with a substantial increase of two-way investment flows in the period 1999-2000 and a moderate decrease in the following years.

Japan is a major investor in the EU. In 2003, 4.1% of EU inflows came from Japan. At the end of 2003, 5.03% of the stock of EU inward FDI came from Japan, while 0.6% of the EU outflow went to Japan. Over the past 5 years, the EU has become an important investor in Japan. At the end of 2003, 1.82% of the stock of EU outward FDI was in Japan, with a negative inflow (-0.58%) in 2003. Japan's inward FDI has soared since the mid-1990s.

Reforms in the financial, communications and distribution sectors have encouraged foreign investment into these sectors. However, foreign investment to Japan remains very low (around 2% of GDP), if compared with other developed countries.

Evolution of the Trade Relations

The trade relationship between Europe and Japan has historically been characterised by strong trade surplus in favour of Japan. Trade figures have become much more balanced recently, but Japan continues to be a country where, for specific structural features of the Japanese society and economy, doing business or invest is often particularly difficult. Like with the USA, a potential for trade disputes has existed in the past. However, the EU's economic relationship with Japan has been positively affected in the last decade by the less favourable evolution of the Japanese economy and the slowdown of economic growth. Since the early 1990's, and especially since its "financial bubble" collapsed, Japan has begun to accept that it has to make special efforts to open its economy to international competition and embark on structural reforms for its own good and for the benefit of the international community.

This new situation has brought about a much more co-operative era in the EU-Japan relationship, even if change is slow and new opportunities are often only minor. It is in the area of FDI that drastic changes have taken place. Substantial investment by European companies in the Japanese market - in particular in the telecommunications, car manufacturing, retailing and insurance sectors - have made the EU the largest source of FDI into Japan in recent years. The downside of this situation is however that these investments have been triggered mainly by a small number of "big ticket operations" and concentrated in a few "rescue" acquisitions. A higher penetration of the Japanese economic tissue by FDI, including from performing foreign small and medium enterprises (SMEs), is still to come.

Instruments for Strengthening Bilateral Partnership

Both partners have created a number of informal "dialogues" in a number of areas, in addition to ministerial meetings and Government level yearly Summits. A "Joint Declaration on Relations between the European Community and its Member States and Japan" was signed on 18 July 1991. At the 10th EU-Japan Summit held in Brussels in December 2001 a ten-year Action Plan, to reinforce EU-Japan partnership and move it from consultation to joint action, was adopted.

One of the four objectives of the plan for a stronger partnership is "the strengthening of the Economic and Trade Partnership" in bilateral relations and on the international scene, including the WTO. Since the adoption of the Action Plan, opportunities for dialogue and exchange of ideas with the Japanese counterpart have multiplied.

At the last EU-Japan Summit in Tokyo, on 22 June 2004, Japan and the EU reconfirmed the importance of forging a solid strategic partnership. In the economic area, noting that economic relations between Japan and the EU are thriving, they recognised the need to strength trade and bilateral investment links further to help spread prosperity more widely. With this objective, they endorsed a Cooperation Framework aimed at promoting two-way investment via concrete actions in areas such as establishment of new regulations; regulatory transparency; standards and conformity assessment; facilitation of conditions for foreign residents. Additionally, they recognised the value of continuing the current Intellectual Property Rights dialogue, including in the area of Geographical Indications, and presented a joint initiative to promote protection and encourage enforcement of Intellectual Property Rights in Asia. They also noted the importance of continuing the cooperative dialogue on government procurement and on Private Finance Initiatives and Public Private Partnerships.

In the context of the 2005 Summit, which took place in Luxembourg on 2 May, there was satisfaction with the steady growth in economic interaction. PM Koizumi restated Japan’s willingness to boost inflow of foreign investment. It was also decided to continue with the ongoing bilateral co-operation on Intellectual Property Rights (IPR) and government procurement. The final declaration also included a rather bold statement on the Doha Development Agenda. At the 2006 Summit, which took place in Tokyo on 24 April, President Barroso and PM Koizumi confirmed their intention to boost inflow of foreign investment and to strengthen cooperation in fields such as intellectual property.

Another major pillar of bilateral EU-Japan relations is the two-way Regulatory Reform Dialogue aimed at reducing the number of unnecessary and obstructive regulations which hamper trade and foreign investment. Since 1995, the EU and Japan have participated actively in each other's regulatory reform efforts through dialogue and exchange of reform proposals. Over the last ten years, the EU has submitted a wide-range of regulatory reform proposals aiming at improving the climate for doing business and helping increase economic growth in Japan. Despite the complexities of administrative and economic reform in Japan, several EU proposals have been positively received by the Japanese government.

Given the importance of their partnership, it is both EU and Japan's global interests that trade flows in both directions are healthy and prosperous. Since 1979 the European Commission has encouraged European enterprises' efforts to penetrate the Japanese market and given them concrete assistance through the EXPROM programme (Relex promotion programmes).

CO-OPERATION IN MULTILATERAL FORA

The EU and Japan have strong bilateral trade and investment links and, as global players, they have a common interest in the health of the world trading system. Bilateral co-operation has therefore naturally developed on multilateral trade issues, notably in the context of the WTO.

The EU and Japan launched a bilateral consultation process in 1998 to achieve common positions on issues relating to WTO negotiations. This dialogue has been particularly productive and has enabled both sides to identify a substantial number of areas of common interest. Since then, the two partners have maintained close relationships and drawn lessons, toward a successful conclusion of the ambitious multilateral trade Round agreed in November 2001 at the Fourth WTO Ministerial Conference in Doha, Qatar.

The EU and Japan continue to believe that a successful conclusion of this round may be beneficial to all WTO members. At the latest EU-Japan Summit in Tokyo, they recognised that the current multilateral, rule-based, trading system under the WTO remains the most effective and legitimate means to manage and expand trade relations between countries; and reiterated the importance of achieving progress in the Doha Development Agenda.

BILATERAL AGREEMENTS

Two important agreements have been finalised between the EU and Japan.

1. The EU-Japan Mutual Recognition Agreement which entered into force on 1 January 2002, permits acceptance of conformity assessment conducted in one Party according to the regulations of the other in four product areas (telecommunications terminal equipment and radio equipment, electrical products, Good Laboratory Practices for chemicals and Good Manufacturing Practices for pharmaceutical), an important step in facilitating market access.

2. An Agreement on Co-operation on Anti-competitive Activities was adopted by the EU Council on 16 June 2003. This agreement should facilitate both trade and investment by securing a level-playing field between in- and outsiders.

RELATIONS WITH THE BUSINESS COMMUNITY

In a world of increasing interdependence, neither partner can pursue its interests effectively without listening carefully to the needs of their business communities. It was for this purpose that the EU-Japan Business Dialogue Round Table was established in 1999 by merging two previous dialogues. By voicing the joint views of both business communities, the Round Table significantly contributes to the identification of mutually-beneficial initiatives and keeps close track of the progress achieved by both the European and the Japanese administrations. While much has already been done, the continuing reinforcement of the trade relationship between Europe and Japan is in the interests of the industry on both sides.

FUTURE PROSPECTS

Clearly, macroeconomic developments in Japan and Europe constitute an important explanation for changes in trade and services flows over the last years. However, the fact that Japan's trade and current account surpluses have remained high since 1995, even when the economy was growing, is a reflection in part of continuing market access problems for foreign firms in Japan. There have been ups and downs, but the trend over the past ten years cannot be said to have improved much. To enable EU companies to invest freely in Japan, structural obstacles to investment on the Japanese market should be removed. This would be in the interest of improving market access, but also in Japan's own interest at a time when many companies are seeking to tap into foreign sources of capital through partnerships or take-overs.

The EU and Japan intend to intensify their dialogue on investment so as to allow respective industries to fully benefit from the improvement of regulatory frameworks and promotion schemes in the EU and Japan. To improve market access in Japan, the EU has worked bilaterally at all levels, notably through the Regulatory Reform Dialogue, which has produced to date a number of concrete results. The EU would like to see more rapid and comprehensive progress in Japan, with a substantial impact, in order to achieve more balanced trade flows. Both partners and their economic agents have to be inventive in creating more business opportunities, tie-ups and inter-penetration.

After having started dialogues in a number of areas of common interest, the EU wishes to make this co-operation more effective. Co-operation on themes of global or bilateral interest should lead to concrete results, such as establishing joint initiatives and/or taking specific measures in specific areas of common interest such as investment facilitation, intellectual property rights (including geographical indications), government procurement, aerospace, and so on.

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