Australia’s ties with Japan are flourishing

Japan's new Prime Minister Yoshihide Suga. Picture: AFP

Prime Minister Scott Morrison’s move to strike up a close relationship with Japan’s new Prime Minister Yoshide Suga at a time of increasing tensions with China could pave the way for closer economic ties with our second-biggest trading partner.

Suga’s first call from a foreign leader was reportedly from Morrison, who cancelled a planned visit to Japan in January because of the bushfires, followed by US President Donald Trump.

While the spotlight for the past decade has been the relationship with China — almost ignoring long time strong ties with Japan — the closer political ties make business and trade deals a lot easier.

Foreign Minister Marise Payne will visit Japan next month at a gathering of the four foreign ministers of the Quadrilateral Security Dialogue between Australia, Japan, India and the US.

There is speculation that Morrison could decide to visit Tokyo as well, possibly as early as November, to meet the new leader.

Australia’s two-way trade with Japan is around $90bn — still dwarfed by the $200bn two-way trade ties Australia had with China at their height last year.

But as trade tensions rise, Australian exporters to China are becoming warier due to political tensions and trade issues such as the anti-dumping investigations into barley and wine, China’s suspension of beef imports from four abattoirs this year, and new complaints from the Chinese about possible weeds or pests in Australian grain going to China.

While Australian wine companies, for example, would love to continue to sell into the Chinese market, the industry now has to deal with a potential 18-month anti-dumping investigation.

Meat producers, which had been enjoying record sales to China, are now having to respond to complaints from Chinese quarantine officials that have held up some 30 per cent of meat exports.

Australia’s major exports to Japan include natural gas (with Woodside a major supplier), a trade worth $20bn), coal ($19bn), beef ($2.3bn), copper ($1.8bn) and aluminium ($1.3bn).

On the other side, Australia’s major import from Japan are cars, a trade worth some $8bn a year, refined petroleum ($4bn) and goods vehicles ($2bn).

While much has been made of Australia’s Free Trade Agreement with China, the Japan Australia Economic Partnership (JAEPA) went into force in January 2015, which has increased two-way trade by more than 30 per cent.

Australia and Japan are both key players in the talks for a Regional Comprehensive Economic Partnership (RCEP) with countries in Asia.

More significant has been the ongoing interest of Japanese investors in Australia. The big surge in Chinese investment is over.

While foreign investment rules were tightened to increase scrutiny on bids for Australian companies by Chinese state-owned companies, there has been sensitivity over potential bids by Chinese companies for Australian healthcare companies (with references to their possession of sensitive patient data) while the federal government’s move to block the sale of the drinks and dairy business owned by Lion to a privately owned Chinese milk company was another sign that Chinese bidders are now being subject to tougher scrutiny.

In contrast, Japan investment has been quietly increasing in a range of different areas. Initially focused on the resources sector, it has been expanding into financial services, infrastructure, information and communications technology, property, food and agribusiness.

Close ties

While Australia’s foreign investment review process is proving to be much more critical of Chinese proposals — exacerbated by Beijing’s comments about its desire to assert more control over its private sector — Japanese companies have so far faced no major FIRB-linked knock-backs.

Recent deals include Nippon Paint buying Dulux, Mitsui buying 20 per cent of construction industry IT company Position Partners, Sumitomo Forestry’s 51 per cent acquisition of WA-based housing company Scott Park, Japan Pulp and Paper buying the Ball & Doggett Group packaging business, S Foods buying beef company Monbeef, and Nippon Paper buying Orora’s paperboard fibre-based packaging business.

Japanese companies have also been investing in the financial sector with Mitsubishi UFJ Trust and Banking now owning Colonial First State Global Asset Management, after buying it from CBA in a $4bn deal struck in October 2018 and rebranding it as First Sentier Investors.

Japan’s Nippon Life also has a major stake in MLC Insurance.

The report from the Foreign Investment Review Board for the 2018-19 year puts Japan as the fourth-largest source of new investment proposal approvals after the US, Canada and Singapore, with $15bn of proposals approved, ahead of $13bn from China.

Approvals from Chinese bidders were down from $24bn in 2017-18, partly as a result of an overall reduction of outbound investment from China. The report for 2019-20, due later this year, is expected to show a continued fall in new approvals from China.

Japanese investors have also signed up with the NSW government for its new aerotropolis in western Sydney including Hitachi, Mitsubishi Heavy Industries, Sumitomo Mitsui Banking and the Urban Renaissance Agency.

Japanese buyers and financiers have also played an important role in rare earth company Lynas.

A report by PricewaterhouseCoopers argues Japanese companies are ideal investors in future infrastructure projects.

“Australia’s $175bn infrastructure pipeline is the kind of offshore developed world opportunity that Japanese companies and banks have been searching for,” it argues.

With federal and state governments looking at more infrastructure projects, Japanese financiers and infrastructure-related companies could play a part.

While there is still interest from the private sector players about investing in Australia, political attitudes in Beijing and Canberra, make that increasingly difficult.

As Australia’s huge potential trade with China subsides, and new investment in Australia falls, business and investment ties with Japan have already been quietly increasing and are set to become more important in the future.

A Morrison visit to Tokyo will provided added political impetus.