Japan relations flourish as Tokyo remains a vital supplier of foreign investment in Australia

Japanese companies are heavily involved in the Darwin-based Inpex gas operations, above.

While Scott Morrison and Japan’s Fumio Kishida may not have been able to meet up in person this week, their proposed new defence agreement to be signed on Thursday underlines the increased opportunities for economic and trade co-operation between the two countries.

It comes at a time when Australia’s ties with Beijing – still by far its largest trading partner – have been fraying under political tensions and China investment is falling away sharply.

Japan is Australia’s third-largest trading partner although the two-way trade in goods and services with Japan is only around $66bn – significantly lower than the $200bn which Australia-China trade peaked at.

The two-way trade – which sees Australian exports of iron ore, natural gas, aluminium and beef to Japan and Australian imports of cars, machinery and electronic equipment from Japan – has fallen away during the pandemic due to declining activity on both sides.

But two trade deals involving Australia and Japan have come into force this year – the Regional Comprehensive Economic Partnership Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – which could help boost trade in new areas.

Trade Minister Dan Tehan said the CPTPP deal could see Australian exports of blue fin tuna and salmon benefit from Japanese tariffs falling to 1.9 per cent from this month.

But the real strength of the relationship is continued Japanese investment in strategic areas, at a time when investment from other sources including China and the US is dropping.

Japan is now Australia’s second-largest supplier of foreign investment after the US, a relationship which the Morrison government is keen to foster.

The latest report from the Foreign Investment Review Board, for 2019-20 shows approvals for investment from Japan increased by $7bn to $22bn, behind the $49bn from the US but well ahead of the $16bn from Singapore and $12.7bn from China.

A report being prepared by law firm Herbert Smith Freehills for release later this year on merger and acquisition deals between Japanese and Australian companies details more than 30 different projects, collaborations and joint studies struck over the past year, which the firm’s senior adviser Ian Williams says “will form the basis of a significant new investment over the next 5-10 years”.

“While there has been a dip in M & A activity inbound from Japan to Australia (largely due to travel restrictions preventing Japanese personnel from visiting Australia), Australia and Japan are closer than ever before due to their economic and diplomatic ties,” he says.

The report details many of the deals reached last year, including:

● Japan’s JERA and Yara International entering into a memorandum of understanding to pursue potential collaboration in several areas including production and development of ammonia, and optimising ammonia shipping.

● An agreement between the Inpex LNG project in the Timor Sea and the Future Energy Exports Cooperative Research Centre (FEnEx CRC) to research and develop technologies to lower the cost and carbon emissions of energy production in Australia.

● Collaboration between Japan’s ENEOS and partners such as Origin Energy to jointly explore a potential green hydrogen supply chain and NEOEN for the construction of green hydrogen between Japan and Australia.

● A memorandum of understanding between ASX-listed Technology Metals Australia and Japan’s LE System Co to assess potential application of LES’s proprietary technology to extract vanadium and other metals from the Garbage Vulnerable Point waste streams.

“Japan is now the second largest foreign direct investment and two-way trading partner to Australia,” Williams says. “Australia will continue to be a key supplier of traditional energy to Japan but the strengthened economic ties will allow Australia to become a key supplier of new energy in hydrogen and ammonia.”

Williams says the combination of closer political ties under the Quad deal between US, Australia, Japan and India are helping strengthen economic ties between Australia and Japan.

Closer ties, he says, include a new Japan-Australia partnership around transition of energy such as LNG and oil and gas to new energy, particularly in hydrogen and ammonia projects, as well as joint national government initiatives in critical minerals.

Williams describes these deals as being a “distinct third paradigm in the Japan-Australia business relationship which started with joint ventures in the 1960s, saw numerous 100 per cent acquisitions from 2007 onwards and now see a comprehensive partnership”.

As he points out, they include deals involving federal and state governments, energy and technology companies, financiers, trading houses and shipping firms.

The deals will “position Australia as the main energy supplier to Japan to 2050 and beyond”.

Post-war economic co-operation between Australia and Japan goes back to the signing of a landmark agreement on commerce in 1957 under the Menzies government. It was followed by a Japan Australia Economic Partnership which came into force in 2015 and went on to increase two-way trade by more than 30 per cent.

This has seen Japan’s big trading houses, including Mitsui, Mitsubishi, Marubeni and Sumitomo and others, embedded in the Australian economy.

Not only are they major investors in the energy, agriculture and food industries, they are also major exporters of Australian products they invest in.

Little known is the fact that they also make up three of Australia’s top 10 corporate taxpayers. Unlike takeover approaches by companies from other countries – particularly China – takeover bids and investments by Japanese companies are almost never blocked by the FIRB.

A briefing note by the Department of Foreign Affairs and Trade on Japan reflecting government policy outlines the relationship in almost glowing terms.

It describes the Australia – Japan partnership as “Australia’s closest and most mature in Asia” which it says is “fundamental to both countries’ strategic and economic interests”.

“The relationship is underpinned by a shared commitment to democracy, human rights and the rule of law, as well as common approaches to international security,” the note says.

“We also share deep and longstanding trade and investment ties, and co-operate closely on the development of regional and global trade rules.”

While investment proposals from China have generated controversy, Japanese investment has gone ahead almost under the political radar given its practical importance.

This ranges from investments in financial services such as Nippon Life buying into MLC, Japan’s Mitsubishi UFJ Trust and Banking buying Colonial First State Asset Management from CBA to the quiet support of Japanese lenders to rare earths miner Lynas.

At the top end of town is the Inpex LNG project based in Darwin while Japanese investors are also involved in the development of Sydney’s aerotropolis western Sydney around the new airport.

Both sides are clearly keen for closer ties in a new clean energy world with the encouragement of Tokyo and Canberra paving the way for more strategic deals.