The Parliament of the Commonwealth of Australia JAPAN’S ECONOMY IMPLICATIONS FOR AUSTRALIA REPORT 1 OF THE SENATE FOREIGN AFFAIRS, DEFENCE AND TRADE REFERENCES COMMITTEE AUGUST 2000 © Commonwealth of Australia ISBN 0 642 71056 2 This document is produced from camera-ready copy by the Senate Foreign Affairs, Defence and Trade References Committee Secretariat, and printed by the Senate Printing Unit, Parliament House, Canberra. ii MEMBERSHIP OF THE COMMITTEE Current Senator John Hogg, ALP, QLD (Chair) Members Senator Sandy Macdonald, NPA, NSW (Deputy Chair) (to 30.6.99 and from 1.7.99) Senator Vicki Bourne, AD, NSW (from 12.5.99) Senator Ross Lightfoot, LP, WA Senator John Quirke, ALP, SA Senator Sue West, ALP, NSW Current Senator the Hon Eric Abetz, LP, Tas Participating Members Senator the Hon Nick Bolkus, ALP, SA Senator the Hon Ron Boswell, NPA, Qld Senator Bob Brown, TG, TAS Senator Paul Calvert, LP, TAS (from 24.8.99) Senator Grant Chapman, LP, SA (from 24.8.99) Senator the Hon Peter Cook, ALP, WA (from 3.12.98) Senator Helen Coonan, LP, NSW (from 24.8.99) Senator Winston Crane, LP, WA (from 24.8.99) Senator Alan Eggleston, LP, WA (from 9.12.98) Senator the Hon John Faulkner, ALP, NSW Senator Alan Ferguson, LP, SA (from 24.8.99) Senator Jeannie Ferris, LP, SA (from 24.8.99) Senator Michael Forshaw, ALP, NSW Senator Brenda Gibbs, ALP, Qld (from 3.12.98) Senator the Hon Brian Gibson, LP, TAS (from 24.8.99) Senator Brian Harradine, Ind, TAS Senator Steve Hutchins, ALP, NSW (from 23.9.1999) Senator Susan Knowles, LP, WA (from 24.8.99) Senator Brett Mason, LP, QLD (from 24.8.99) Senator Julian McGauran, NPA, Vic (from 3.12.98) Senator Shayne Murphy, ALP, TAS (from 20.10.99) Senator Marise Payne, LP, NSW (from 24.8.99) Senator Tsebin Tchen, LP, VIC (from 24.8.99) Senator John Tierney, LP, NSW (from 24.8.99) Senator John Watson, LP, TAS (from 24.8.99) iii Former Senator Alan Eggleston, LP, WA (to 3.12.98) Members Senator Brenda Gibbs, ALP, QLD (to 3.12.98) Senator Sandy Macdonald, NPA, NSW (to 30.6.99) Senator John Woodley, AD, QLD (to 12.5.99) Senator the Hon David Brownhill, NPA, NSW(1.7.99 to 14.4.00) Former Senator the Hon David Brownhill, NPA, NSW (to 30.6.99) Participating Members Senator Mal Colston, Ind, Qld (to 30.6.99) Senator Dee Margetts, GWA, WA (to 30.6.99) Secretariat Mr Paul Barsdell, Secretary Dr Kathleen Dermody, Principal Research Officer Mr Robert King, Principal Research Officer Ms Pamela Corrigan, Research Officer Ms Laurie Cassidy, Executive Assistant The Senate Parliament House Canberra ACT 2600 iv TERMS OF REFERENCE That the following matter be referred to the Senate Foreign Affairs, Defence and Trade References Committee for inquiry and report to the Senate: (1) Examination of developments in contemporary Japan with respect to: (a) contemporary economic conditions, including: (i) the impact of low and expected continuing low growth; (ii) the effect of the Asian currency crisis; (iii) blockages to economic efficiency and areas of reform in the domestic economy; and (iv) trading patterns and the significance of Japan’s growing trade surplus in its relations with its leading trading partners; (b) contemporary political changes, including: (i) the changes in the major political parties, the emergence of new parties and the electoral and structural changes that are occurring; (ii) the political significance and power of land-holders and farmers in influencing social and economic progress; and (iii) Japan’s view of itself in the world and its role in the Asian region; (c) significant contemporary changes in Japanese society; (2) examination of the implications of the above matter for Australia. v CONTENTS Membership of the Committee iii Secretariat iv Terms of reference v Table of contents vii Abbreviations and acronyms xi Recommendations xiii CHAPTER 1 Introduction 1 Map—Asia Pacific region 5 Map—Japan 6 CHAPTER 2 Australia and Japan—Natural Partners 7 CHAPTER 3 Japan—On the threshold of a new millennium 11 Postwar Japan 11 1980s—bubble economy 12 1990—collapse of the bubble economy 13 The Reform Packages of 1996—economic, financial and fiscal 20 1997—the Japanese economy heads for recession 29 1998—the Obuchi Cabinet for Economic Revival 37 1999—hint of recovery 43 CHAPTER 4 Japan—On the edge of change 47 The Japanese economy 47 Stimulus packages 49 The push and pull for reform 70 Reform in the face of opposition 80 The momentum of change 86 vii CHAPTER 5 Australia and Japan—A trading tradition 89 A cautious beginning 89 Toward the Australia-Japan Agreement on Commerce 93 Japan becomes Australia’s major trading partner 98 Conclusion 110 CHAPTER 6 Japan’s economic woes and Australia’s prospects 113 Statistical overview of Australia’s trade with Japan from 1990 113 Minerals and energy exports to Japan 118 Agricultural exports to Japan 134 Export of services to Japan 151 CHAPTER 7 Recession, reform and opportunities 163 Changes in the Japanese market place 164 The Japanese economy—reform, restructuring and opportunities 173 Value-adding in Australia 192 Japan’s foreign investment in Australia 199 Map—East Asian hemisphere 206 CHAPTER 8 Japan’s Relations with its leading trading partners 207 Japan’s place in Asia 207 The Asian economic crisis 209 The Japan-United States trade relationship 220 The China-Japan trade relationship 225 CHAPTER 9 Understanding and partnership 229 Commitment to deepening the Australia-Japan relationship 229 Role of government 238 Role of business 241 viii APPENDICES Appendix 1 List of Submissions 245 Appendix 2 List of Witnesses who appeared before the Committee at public hearings 249 Appendix 3 Agreement on Commerce between Australia and Japan, 1957 257 Appendix 4 Submission of the Australian Government to the Japanese Government on the Deregulation Promotion Program 271 ix CHAPTER 1 INTRODUCTION Establishment of the inquiry 1.1 Over many decades, Australia and Japan have forged a close and mutually beneficial friendship. In 1957, they signed a Commerce Agreement, which laid solid foundations on which both countries have built a fruitful and deepening partnership. Twenty years on, the Prime Ministers of Australia and Japan, wishing to place their relations on an even closer and more concrete basis, signed a treaty of friendship. 1.2 Both countries also appreciate their important role in the Asia Pacific region and have a shared desire to see the region prosper. For many years, Australian and Japanese political leaders, academics and business people have worked together with those from the developing nations in the region to foster economic cooperation and to facilitate social progress throughout the Pacific. 1.3 Today, the partnership between Australia and Japan still stands firm but there are challenges ahead for both countries in further developing their relationship. Social and economic changes in Japan, the Asian economic crisis and a dramatically changing global landscape mean that Australia and Japan cannot take their strong and long-lasting relationship for granted. The time is ripe for a review of Australia’s relationship with Japan. 1.4 On 31 March 1998, the Senate referred the following matter to the Senate Foreign Affairs, Defence and Trade References Committee for inquiry and report by February 1999: (1) Examination of developments in contemporary Japan with respect to: (a) contemporary economic conditions, including: (i) the impact of low and expected continuing low growth; (ii) the effect of the Asian currency crisis; (iii) blockages to economic efficiency and areas of reform in the domestic economy; and (iv) trading patterns and the significance of Japan’s growing trade surplus in its relations with its leading trading partners; (b) contemporary political changes, including: 2 (i) the changes in the major political parties, the emergence of new parties and the electoral and structural changes that are occurring; (ii) the political significance and power of land-holders and farmers in influencing social and economic progress; and (iii) Japan’s view of itself in the world and its role in the Asian region; (c) significant contemporary changes in Japanese society; (2) examination of the implications of the above matter for Australia. The reporting date was subsequently extended to 17 August 2000. Conduct of the inquiry 1.5 The Committee advertised the inquiry in all Australian capital cities and in the Australian Financial Review on 8 April 1998 and in the Australian on 11 April 1998. The advertisement called for written submissions to be lodged by 12 June 1998. In addition, the Committee wrote to parties with interests or particular expertise in Japanese affairs drawing attention to the inquiry and inviting submissions. In all, the Committee received 64 submissions, details of which are listed in Appendix 1. All of the written submissions were made public documents. 1.6 Public hearings were held in Canberra, Melbourne, Perth, Sydney and Brisbane over a period of seven months from February to September 1999. Witnesses were drawn from federal and state government departments, Australian and Japanese businesses, journalism and academia. Details of these hearings together with a witness list are contained in Appendix 2. His Excellency, Mr Masaji Takahashi, Ambassador of Japan, and Mr Kiyokazu Ota, Minister, Embassy of Japan, kindly accepted the Committee’s invitation to appear before it on 30 August 1999. This hearing took place in camera. The Structure of the report 1.7 Because of the wide-ranging nature of the inquiry, the Committee decided that the report would be divided into two separate parts. This report—Japan’s Economy: Implications for Australia—forms Part One and deals specifically with the contemporary economic developments in Japan and their implications for Australia.