Global Economic Strategy

Transcription

1 Global Economic Strategy <Summary> April 2006 Ministry of Economy, Trade and Industry

2 I. Strategic Focus Why a global economic strategy now? 3 II. Progression of Globalization and East Asian Dynamism (current understanding) 6 1. Progression of Globalization 6 2. East Asian Dynamism [Center of World Growth] [Production Base] [Markets] [Investment sites] 6 III. East Asia Economic Integration and Japanese Initiative 8 1. Activities toward East Asian Economic Integration 8 2. Basic Concepts of East Asian Economic Integration 9 3. EPA Promotion Strategy Formation of East Asia [Industrial Foundation through Shared Assets] Making use of Japanese knowledge, experience and advice Economic Cooperation to Handle Local Problems East Asian Economic Integration Promotion System Preparation Enhancing Cooperation and Collaboration in the Asia-Pacific Region Regional Integration in East Asia 15 IV. Globalization of Business and Enhanced Competitiveness for Japanese Business 16 <Current Situation> Characteristics and problems of globalization of Japanese business 17 Summary of inquiries to 300 companies Japanese Business International Development Support Preparation of the Foundations for Building an International Production and Distribution Network with Japan as the Hub 21 V. Intensification of Global Competition and Creation of an Open and Attractive Nation Promotion of Direct Inward Investment Globalization of Universities / Research Institutes / Personnel Enhancement of International Competitiveness of Tourism and Services to Attract Visitors Conveying Japanese Culture and Japanese Branding 28 VI. Regional Strategy and Positive Contributions to Common Global Problems Regional Strategy Handling Common Global Problems Expanding and Deepening International Economic Systems 37 2

3 I. Strategic Focus Why a global economic strategy now? (21 st Century Globalization and the World Economy) For the world economy of today, as a result of the globalization and the IT revolution since the end of the Cold War, national boundaries have ceased to be economic barriers and the world economy as a whole is merging into a single economic area. Since the 1990s in addition to the progress of the IT revolution, there has also been an interlinked globalization of money and the physical economy. (Strategy aims) One of the striking features of the modern globalization is the remarkable rise of Asia. In addition to the highly-developed international division of operations built by Japanese companies forming a base for the development of the economies and industries of various Asian countries, the recovery of the Japanese economy has also made a large contribution to the expansion of free trade and investment in Asia. In response to globalization, the international economic system has also deepened. In 1995 the WTO was established, providing the basic rules for international trade transactions as well as a framework for resolving conflicts and disputes. There has also been the development of regional economic systems that extend beyond the boundaries of a single nation, such as NAFTA and the EU. In Asia too, since the start of the 21 st century efforts to strengthen regional integration have accelerated. In particular, due to the development of FTAs centering on the ASEAN region, the creation of free economic areas in Asia has become a realistic issue. The aims of this strategy are to answer the following three big questions: - First, considering the apparent signs of true recovery in the Japanese economy, how shall globalization trends be linked to the foundations of long-term growth? - Second, how should Japan participate in efforts to create an economic area that transcends national borders in East Asia and what are the best (and internationally acceptable) international systems for long-term for Japan? - Third, what must Japan do in order to contribute to the interests of Asia and 21 st century international society? (Strategy focus What must be done?) Based on the viewpoints discussed above, there are the following three foci for this strategy 3

4 Joint Development in Asia Economic activities in Japan are deeply embedded in the dense manufacturing network in East Asia that is a growth center in the world. In order to ensure a foundation for long-term growth in Japan, it is necessary to strengthen the growth mechanism through which growth in Asia as a whole drives continuing growth in Japan. For this it is necessary to create a Free and Open Economic Area in Asia where free trade and business activities are governed by the rule of law. The formation of [East Asia Free Trade Areas] is a current issue. Thus far, Japan has relied primarily on bilateral free trade agreements. Now, it is necessary to shift to a wide-area approach covering East Asia as a whole, once the negotiation of a Japan-ASEAN Economic Partnership Agreement is concluded. In recognition of such, this strategy makes two specific proposals in order to further the economic integration in East Asia. These are: The vision of a Comprehensive Economic Partnership in East Asia (CEPEA); and the establishment of an international organization in East Asia that serves as a policy forum and think tank that operates like the OECD (Organization for Economic Cooperation and Development). In addition to such measures taken toward achieving an [Open Asia], efforts should be made to conceptualize Japan s hands-on knowledge and experience, share and develop common standards through joint effort with other parts of Asia, and further these to make them a source of competitiveness for Japanese business a co-creation and co-development cycle with Asia. Taking Advantage of Soft Power The strength of a nation is not only found in hard power, such as economic strength and military strength. It is also found in Soft power, i.e. social values, culture, political ideology, policy appeal, and the ability to form alliances are also important national strengths. In the 21 st century, as globalization and the IT revolution progress, soft power will become even more important. The world has entered an era of competition to acquire superior, creative manpower that represents a form of intellectual soft power. In order to increase Japan s soft power, and to develop new kinds of soft power through intellectual creativity, it is fundamentally important to secure the talents of creative personnel from abroad. This will also serve to further the globalization of the Japanese people themselves. From this perspective, the [Asian People s 4

5 Fund (temporary name)] concept (Japan s version of Fulbright scholarships) is proposed to bring in new exchange students. The progress of globalization strengthens the awareness of individuals of the need to discover their own unique characteristics and, in spiritual terms, their culture. The focus of international competition is shifting from pricing and the functions of products and services to more cultural aspects such as the concept of brands, and quality. Under such circumstances, it is necessary for Japan to adopt specific methods to achieve a global economy from the standpoint of values focusing on nature, sensitivity and place (in other words, actions to make full use of nature, etc.) Traditional culture and techniques such as those relating to aesthetics and sensitivity fostered in nature and the traditional skills and knowledge used in crafting products should be redesigned (reorganized) for modern applications to establish Japanesque Modern that create new appeal and branding of Japan throughout the world. Japanese cultural values and advanced technology should be merged to create new strength for the Japanese economy. Contribution to Global Values When considering the creation of new systems for the 21 st century, Japan is a part of Asia, and should fill a role as a linchpin between the efforts to create both a new global system and a new system in Asia. As globalization proceeds, there will be greater concerns regarding the shared problems of mankind that transcend geographical boundaries, including rapidly rising prices and limitations on energy resources, and environmental problems such as climate change, atmospheric pollution, water resources and waste. In addition, there are problems that the world should work together to solve, such as poverty in developing nations, issues relating the safe use of nuclear energy, terrorism and cyber crime. In advance of other countries, Japan has already experienced a variety of problems, including pollution, urban problems, and the aging of society, and possesses state-of-the-art technologies and systems that can contribute to solve global issues such as energy conservation, environmental issues, and security. Regarding poverty in developing countries, East Asian experience where economic development has been promoted through economic dynamism generated by trade and investment can serve as a model for economic development in other parts of the world such as in Africa. From the above viewpoints, this report summarizes and presents the following four issues and policy directions that should be addressed by Japan: (1) Furthering East Asia economic 5

6 integration and Japan s initiatives, (2) Globalization and enhancement of industrial competitiveness, (3) Making Japan a more open and attractive country, and (4) Japan s regional strategies and contributions to shared global problems. 6

7 II. Globalization and East Asian Dynamism 1. Globalization and the World Economy With the progress of the IT revolution, advances in transportation and communication technology, the evolution of financial techniques, and the easing of restrictions on trade and investment, there has been a geometric increase in the international movement of people, products, money and information. Under these circumstances, businesses make strategic choices such as where to establish the bases of their business activities from a global perspective, and attempt to create optimal global value chains. On the other hand, globalization of the economy has led to the increasing flow of capital, information and technology to emerging economies such as BRICs and developing countries in East Asia, promoting economic development in these countries. For the mature economies in developed nations, this provides new business and investment opportunities. Economic globalization also drives the globalization of people, and there are increases in not only the movement of migrant workers between countries but also of people with advanced-level academic backgrounds. 2. Economic Dynamism of East Asia [Center of World Growth] [Base of World Production] [Growing Markets] [Investment Opportunities] (1) East Asia as a Center of World Growth Looking at macroeconomic growth, East Asia is a Center of World Growth with rapid growth through the mechanism of a virtuous cycle of aggressive foreign direct investment and economic growth. Share of total world GDP for various countries and regions India 153(1%) ASEAN 185(1%) South Korea 123(1%) East Asia trillion $US (19.7%) 1980 South America & Caribbean 1,279(7%) Japan 2,791 (16%) China (including Hong Kong) 227(1%) Other 2,646 15% trillion $US EU25 5,087 (29%) USA 5,128 (29%) 2003 South America & Caribbean 2,006(6%) India 544(2%) ASEAN 631(2%) South Korea 586(2%) China (including Hong Kong) 1,550 (5%) East Asia trillion $US (24.4%) Other 4,431 13% USA 10,343 (30%) trillion $US Japan 4,876 EU25 (15%) 8,561 (25%) Source [World Development Indicators] World Bank 7

8 (2) East Asia as a Global Production Base Looking at East Asia as a Global Production Base shows that there has been a large increase in the region s share of world production and in its share of exports, reflecting the progress in the establishment of manufacturing processes from advanced nations. (Of the total value of all world exports, East Asia s share grew from 14.4% in 1980 to 24.2% in 2003). Share of total world export value for various countries and regions Other 1,292 69% 年 USA 221 (12%) trillion $US Source [Direction of Trade] IMF EU25 30 (2%) ASEAN 72 (4%) China Japan South (including 130(7%) Korea Hong Kong) 17 (1%) 38 (2%) India 8 (0%) MERCOSUL 30 (2%) East Asia 266 billion $US (14.4%) Other 4,739 (63%) USA 724 (9%) trillion $US EU25 107(1%) Japan 474(6%) ASEAN 474 (6%) South Korea 193 (3%) China (including East Asia Hong Kong) trillion $US 662(9%) (24.2%) India 61 (1%) MERCOSUL 107 (1%) (3) East Asia as a Growing Market From the perspective of East Asia as a market, there has been an expansion of the scale of the region s economy as well as in its purchasing power. If growth continues and income disparities are eased, it is expected that this region will become even more attractive as a market. (4) East Asia as an Investment Opportunity As an investment site, East Asia is enjoying a rapid increase in inward investment balances. (Quadrupling in the 10-year period from , accounting for 12.6% of the world total). 8

9 ($ trillion) Trends by region in inward investment balances relative to the world Japan ASEAN10 China (inc. Hong Kong) South Korea India Other Asian regions Europe (inc. CIS) North America Latin America and Caribbean Africa Oceania World total Inward direct investment balances for main regions in 2004 North America trillion $US Europe (inc. CIS) trillion $US China (inc. Hong Kong) billion $US ASEAN billion $US Japan 97 billion $US Source: [World Investment Report] UNCTAD (year) (5) Spread of Economic Dynamism to Other Parts of the Region The economic growth dynamism of East Asia is not limited to ASEAN and China. There is also expansion in India and Australia. (The real GDP growth rate in India was 8.5% in 2003 and 6.9% in 2004). 9

10 III. Furthering East Asia Economic Integration and Two Japanese Initiatives 1. Economic Development and integration in East Asia (1) Regional integration led by economic developments growth dynamism driven by direct investment Along with the high growth in East Asia from the latter half of the 1980s there has been a rapid increase in direct investment. Japanese business has been a source of direct investment, mainly in manufacturing industry, forming a highly-developed production and distribution networks within East Asia that are like none other in the world. Closer economic ties brought about by economic developments have contributed to economic growth, giving rise to the dynamism underpinning East Asian growth, in which economic growth promotes further direct investment. Through this process, Japan, accounting for 60% of the GDP in the region, fills an important role as a primary source of direct investment, as a supplier of advanced key components, and as a base for the origin and creation of new technology. (2) Institutionalization efforts efforts for further regional integration on an East Asia-wide level and acceleration of economic tie-ups In the wake of the 1997 East Asia currency crisis, there was an increased awareness of the need for enhanced cooperation in order to avoid new crises and to support regional development. Since the first ASEAN + 3 (ASEAN 10 + Japan, China and South Korea) leaders summit the following year there has been progress on activities to further regional integration on an East Asia-wide level in areas such as the economy, currency and finance, and economic cooperation. Jump-started by the Japan-Singapore EPA in 2001, there has been an acceleration in economic tie-ups within the region, such as China/ASEAN, South Korea/ASEAN, and progress on the formation of FTA/EPA networks linking the regions in East Asia, with ASEAN as the hub of the integration. In these circumstances, in 2005 the first East Asia Summit was held, adding momentum to the economic integration of East Asia as a whole. 2. Basic Principles for furthering East Asia Economic Integration In this situation Japan is ready to take the initiative to promote East Asia economic 10

11 integration founded on the following basic principles. (1) Economic integration for the entire East Asia region creation of a seamless economic area The goal is to create a seamless economic area that covers the region with close economic ties, including ASEAN + Japan, China and South Korea, as well as India, Australia and New Zealand. (2) Creation of an efficient, mature, area-wide market economy creation of a free, fair, rule-based economic area In order to maintain economic dynamism through the expansion of free trade and investment, the goal is to provide a framework to cover a wide range of fields; not just trade, but also services, investments, trade facilitation, intellectual property and a rule-based dispute settlement mechanism. (3) Sustainable and balanced development throughout the entire region Japan will drive the growth of the entire region by playing a role as an innovation hub, achieving sustainable and balanced development through improved industrial cooperation throughout the region and by providing tailor-made assistance to meet the needs of individual countries at different levels of development. (4) Maintaining an open dynamism an economic area open to the outside Since economic growth in East Asia depends on the world economy, it is necessary to proceed with regional integration as an economic region that is open to the outside. (5) Functional cooperation For integration within the East Asia region, it is practical and effective to proceed with a multi-layered functional cooperative approach for each field separately, keeping in mind flexibility for the membership in each area, including EPAs focused on trade and investment liberalization, energy and environment agreements, and currency and financial cooperation. (6) Japan s role As the economic powerhouse in the region, accounting for 60% of the GDP of ASEAN +3, Japan should strengthen its function as the region s shock absorber while continuing to contribute to the stability of the East Asian economy. Japan s experience and knowledge as a front-runner in the building of market economy systems, as a leader in industrial technology, and as a front-runner in handling environmental and energy problems can be shared and developed through cooperative efforts with East Asia enabling Japan to actively contribute to the creation of regional systems. 11

12 3. EPA Promotion Strategy (1) Status of EPA negotiations Japan is working on comprehensive EPAs with various countries in East Asia, not only on the liberalization of trade and services, but also covering investments, intellectual property rules and economic cooperation. For strategic fields such as automotive parts and steel, results are being obtained on the abolition of tariffs and the strengthening of investment protections. Under the Japan-Mexico EPA that is already in effect there has been a 30% increase in trade totals, demonstrating the economic impact of such efforts. In East Asia, a web of FTA networks has been built with ASEAN forming the hub, including efforts by China and South Korea. (There is already an agreement on trade in goods between China and ASEAN in effect and one between South Korea and ASEAN will go into effect this year). (2) Future EPA promotion concepts (a) Establish an EPA action plan In addition to the allocation of resources according to a clearly-defined priority ranking, it is necessary to make meticulous preparations and obtain the support of interested parties within the countries for the conducting of negotiations. To achieve this, the government should establish an action plan for EPAs to clarify the priorities of the countries and regions for negotiation, and the timing. This is also important for providing predictability for business decisions. (b) Promotion of an East Asia-wide EPA In order to create an efficient and mature market economy area throughout East Asia for furthering economic integration in the region, Japan should take the initiative to start working toward an East Asia EPA, based on the progress of bilateral EPA negotiations, once the negotiations on Japan/ASEAN comprehensive economic partnership agreement are concluded. (c) Promote EPAs emphasizing speed and quality Japan will aim to conclude high-quality, comprehensive EPAs covering not only market liberalization, but also for investment and intellectual property, By making use of a [model agreement] created by referring to EPAs that have already been concluded, simplifying and omitting the study meetings beforehand, as well as making use of strategic economic partnerships, it should be possible to obtain both speed and quality. 12

13 (d) Promote EPAs based on regional strategies It is important to have clear regional strategies with regard to the EPA partner countries, and to conduct EPA negotiations with a clear understanding of the objectives to be achieved. For example, from the perspective of ensuring a stable supply of natural resources, EPA negotiations should be conducted with the aim to strengthen relationships over a broad range of areas with resource-rich countries. (3) The vision of a Comprehensive Economic Partnership Agreement in East Asia (CEPEA) In order to achieve an efficient, mature market economy area for East Asia as a whole, and for Japan to lead the economic integration of East Asia, Japan should advocate the start of negotiations toward a Comprehensive Economic Partnership Agreement in East Asia (CEPEA). The initial members should include ASEAN, which is one of the key organizations for regional cooperation in East Asia, Japan, China and South Korea, together with India, Australia and New Zealand, which are currently engaged in negotiations on FTAs/EPAs with ASEAN, for a total of 16 countries. The content of the agreement should be comprehensive and of high quality, covering not only trade in goods but also investment rules, trade in services, intellectual property and economic cooperation, reflecting the fact that growth in East Asia has been driven by foreign direct investment. With regard to the timing for starting the negotiations, since all the FTA/EPA negotiations centered on ASEAN are likely to be concluded in 2007, the year 2008 appears to be a likely prospect. The economic impact of CEPEA will be a GDP increase of about 25 trillion yen for the 16 countries as a whole (Japan about 5 trillion yen, ASEAN about 6.7 trillion yen) (estimate). 13

14 (Reference) East Asia-wide EPA Roadmap Timing ASEAN China / South Korea India / Australia So far Bilateral agreements Japan/Singapore (In Force) To be revised in 2007 Japan/Malaysia (Signed) To enter into force in summer 2006 Japan/Thailand (agreed) To enter into force within 2006 Japan/Philippines (agreed) To be signed in summer 2006 Region-wide Agreements Japan - ASEAN Japan /China investment agreement Now in discussions to enter negotiations Japan/South Korea EPA [Negotiations halted since 2004] Japan/India joint study From 05 Japan/ Australia joint study From 05 From 2006 Japan/Indonesia To reach an agreement by middle of 2006 Japan/Vietnam. Aiming for early start to negotiations Japan/Brunei. Aiming for early start to negotiations Negotiations April 2005 March 2007 Start negotiations Re-open negotiations Explore EPA negotiations 2006 to 2007 Explore feasibility of EPA negotiations from 2007 From 2008 * 2010 Bogor Declaration target year (developed nations) APEC Japan Explore Japan/China/South Korea EPA CEPEA(Comprehensive Economic Aiming 日 中 for 韓 high-level EPAを 検 討 Partnership Agreement in East Asia) agreement 東 アジアの that 範 となる ハイレ will serve as a Planned for 16 member nations, including model ベルな for 協 East 定 を Asia 目 指 す ASEAN, Japan, China, South Korea, India, Australia and New Zealand In addition to elimination of tariffs, includes areas such as investment rules, intellectual property and economic cooperation 4. Sharing Japan s knowledge and experience and adding the voices of foreign investors In order to advance industrial development in East Asia as a whole and make the production network within the region more efficient, in addition to economic liberalization through EPAs, etc., it would be helpful to share, with other Asian countries, Japan s experiences and know-how that have successfully supported Japanese economic development, including industrial policies, business regulations and practices. In order to develop a business friendly environment within the region to attract foreign direct investment, it is necessary to listen to the voices of foreign direct investors such as those Japanese manufacturing industries that have contributed to the creation of production networks within the region, and to develop mechanisms to drive and direct the efforts and policies to provide a competitive environment within each country in the region. (1) Formation of Asian Standards Conceptualizing Japanese knowledge and experience, such as regulations, business practices and know-how; IT skill standards, small- and medium-sized enterprise (SME) policies, energy conservation and recycling methods, and sharing them with East Asia will not only improve the economic infrastructure in East Asia as a whole but also improve the business environment 14

15 for Japanese businesses and serve to further advance economic integration. (2) Providing business friendly environments addressing the voices of foreign direct investors. East Asian production networks have been developed and driven by foreign direct investment such as Japanese manufacturing industries. It would be useful to survey investor evaluations of business environments in each ASEAN country and have dialogues between private investors and the ASEAN Secretariat on how to improve business environments in the region. 5. Japanese Economic Cooperation to address the individual needs of ASEAN, China, and India Thus far Japan has provided a total of US$121 billion of ODA to the East Asia region (36% of the total world ODA to the East Asia region), making a large contribution to the development of human resources, the advancement of industry, and the provision of industrial infrastructure within the East Asia region. In the future, from the viewpoint of promoting the economic integration of East Asia, Japan should strategically provide economic cooperation based on the concepts of (a) contributing to the deepening and broadening of regional economic integration, (b) realizing the interests both for Japan and the recipient countries (cooperation that is more appreciated by the recipient country), and (c) providing cooperation to address the individual needs of ASEAN, China, and India. <Important Issues in Each Region> ASEAN: To support ASEAN integration; assistance for standardization of business regulations and practices, assistance for training of industry personnel, provision of ASEAN-wide infrastructure, and support for CLM economy takeoff China: To support the transition to a market economy; assistance toward WTO agreement compliance, both in terms of introduction of regulations and their enforcement, including competition law, intellectual property, and corporate governance, as well as support for energy conservation and environmental efforts. India: To support the preparation of the nation s industrial basis; development of infrastructure, promotion of SMEs, and business matching. 15

16 6. Creation of an Economic Research Institute for ASEAN and East Asia Intellectual inputs are necessary to promote ASEAN economic integration beyond trade liberalization and economic integration beyond ASEAN+3. Recognizing this perspective, Japan proposes to create a research institute that will conduct and support research and analysis projects on ASEAN economic integration as well as wider regional economic integration. 7. Enhancing Cooperation and Collaboration in the Asia-Pacific Region APEC s membership covers nearly all of East Asia. For the promotion of the economic integration of East Asia, APEC will become increasingly important as a venue for open dialogs with countries in other regions, such as the USA, Canada and Russia. Japan will host an APEC Leaders Meeting in 2010, the target year of Bogor Goals, by when the developed economies in APEC are supposed to achieve trade and investment liberalization. Japan should play an active role to activate APEC as a policy forum, while promoting the economic integration of East Asia in such a way as to contribute to the Bogor Goals. In addition, the strengthening of trans-pacific cooperation between Japan, the US, and South Korea is also important. 8. Regional Integration in East Asia In December 2005 the 1 st East Asia Summit was held. The member countries concluded that the East Asia Summit could play a significant role in community building in this region and declared the East Asia Summit will be an open, inclusive, transparent and outward-looking forum in the chairman s statement. At the ASEAN+3 Heads of State Summit held at the same time, the realization of an East Asia Community was given the priority as a long-term goal. Unlike the unification of Europe, which has proceeded in a centralized, systematic fashion driven by the idea of One Europe, economic development in East Asia faces different circumstances, including diversity in social values, cultures, religions, and political systems, as well as gaps between rich and poor. It is necessary to harness this diversity to bring forth development dynamism. Therefore, in East Asia, there should not be a centralized approach; instead, there should be a multi-level, multi-faceted approach with functional collaboration in a variety of fields. 16

17 IV. The Globalization of Business and Enhancing the Competitiveness of Japanese Industry <Current Conditions> Since the mid 1980s, against the backdrop of a strong yen, Japanese enterprises have expanded their operations in the East Asia region. Even during the lost decade of the 1990s, Japanese business developed its international division of labor to a high degree, and this has been a source of competitive strength. While this kind of overseas expansion of Japanese business was sometimes associated with concern for domestic hollowing out (of industry), in fact this period saw creation of a profit-making framework overseas, particularly in East Asia. Furthermore, the service industry and SMEs also actively pursued development abroad, and many companies have succeeded in expanding their business opportunities. <Trends in number of foreign subsidiaries of Japanese businesses, by region> Through the 1990s Japanese business expanded actively, especially in East Asia 8,000 Total for all regions (right axis) 7,000 (companies) (companies) 16,000 14,000 6,000 Asia 12,000 5,000 East Asia 10,000 4,000 3,000 North America 8,000 6,000 2,000 1,000 Europe 4,000 2, (fiscal year) Source: Overseas Business Activities of Japanese Companies, Ministry of Economy, Trade and Industry 17

18 (%) <Ratio of foreign sales to total sales of Japanese businesses> Since the 1990s Japanese business have expanded the proportion of overseas sales. The growth in East Asia is especially noteworthy North America (%) All overseas regions (right axis) Asia EU Other regions (fiscal year) Note: Computed as (Sales in each region overseas) / (Domestic headquarters sales + Foreign sales in all regions) x 100. Source: Overseas Business Activities of Japanese Companies, Ministry of Economy, Trade and Industry Since the 1990s, European and American business has efficiently made large-scale use of the advantages of globalization (optimized division of functions, including R&D and human resources), and industry competitiveness has increased in strategic fields like IT and biotech. Businesses in India, China, and the Republic of Korea are also taking advantage of the merits of globalization, with many companies enjoying rapid growth. In the midst of this harsh competitive environment, there is still a lot of room for Japanese companies to make use of the advantages of a global economy. In addition to supporting the international development of Japanese business, there is a need for policies to make Japan the center of creation and dissemination of critical leading-edge technology, and the ideas and know-how for high-added-value products. 1. Characteristics and issues in the globalization of Japanese business -Summary of interviews with 300 companies- Discussions on the characteristics and issues of their global operations were held with approximately 300 SMEs in the manufacturing and service industries. The results are summarized here. (1) Strengthening competitiveness through multi-faceted global development Successful companies accurately analyze and understand their own strengths, as well as the 18

19 advantages of the destination regions and countries, from the viewpoint of making maximum use of the unique characteristics of their products. These companies have created an ideal mixture of such strategic strengths. Formation of production and distribution chains in optimal locations, tapping markets in the destination areas, brand strategies, collaboration with local businesses and local educational institutions, and alliances with foreign-capital companies are important challenges. (2) Realizing a shift in domestic business structure through globalization Companies making effective progress in the international division of operations use this as a lever to drastically transform their domestic business frameworks and establish a relatively superior position in the country. There are also successful subcontractor companies that make use of technical capabilities to create new businesses or enter international markets and establish independent operations. (3) Issues to be overcome by companies in order to deal with globalization It is necessary to overcome problems such as overdependence on the domestic market, pursuit of Japanese-style operations abroad, the lack of global personnel management, and the lack of strategies for technology, intellectual property and standards. Considering the maturity of the domestic market, as well as intense competition from European and American companies and the rise of local companies in East Asia, there is a danger of losing comparative advantages if businesses settle only for profits from the domestic market. (4) Diversified regional strategy Many companies regard China as a strategic market. On the other hand, there are efforts to expand manufacturing bases to China + 1 in ASEAN countries like Vietnam, in order to disperse the risks of doing business in China. Interest in India by companies is also increasing. (5) International development of SMEs (potential for new business opportunities) Since the 1990s, Japan s manufacturing industry has been advancing into East Asia. In the midst of the changes in affiliate and sub-contractor relationships in Japan, an increasing number of SMEs are looking to advance into East Asia in order to overcome the current difficult circumstances. There are also global-niche SMEs performing well in the world market. For SMEs advancing into East Asia, rapidly-growing local companies in East Asia are 19

20 becoming powerful rivals. For SMEs trying to develop business abroad, the lack of information, personnel, and capital is a hindrance. <Policy Issues> 2. Support for the International Development of Japanese Companies In order to strengthen the international competitiveness of Japanese business and take advantage of globalization, with a particular focus on growth in East Asia, efforts should be made to create the environment described below. (1) Improvements to the investment and business environment in overseas markets (a) Clarification of the government s Action Plan for EPA/investment agreements Governmental dissemination of information In order to improve the predictability of companies international business strategy plans, the government will clarify its Action Plan regarding EPA and investment agreements. (b) Improvements to investment and business environment Emphasis on EPAs, economic cooperation In order to improve legal systems in each country in East Asia, and to ensure appropriate implementation and transparency of those systems, in addition to measures implemented in EPA negotiations, a mechanism will be devised for public and private sharing of information and the use of flexible bilateral government consultations ( safe harbor function). With regard to development of core infrastructure for the manufacturing base (both hard and soft [human resources development, creation of systems and business environments] aspects), public/private partnership schemes and economic cooperation should be promoted more strategically based on the state of industry development in each country. (c) Establishment of an Investment & Business Environment Development Plan for each Country and Market Government and industry should work together to build a mechanism for sharing information, collect information on the investment and business environments in major countries, and perform evaluation and analysis for overseas development in each major industry. (2) Enhancing the environment for international expansion of SMEs (a) Development of an information infrastructure 20

21 In addition to solidly supporting the collection of information before venturing abroad, a system to establish (in the destination country) a single location providing comprehensive advice on legal system, taxes, labor, etc. should be developed. (b) Support for hiring and training of personnel In addition to continuing with efforts to ensure the smooth procurement of executive personnel, government support for hosting trainees in Japan should be strengthened in a focused manner in order to deal with the lack of technical personnel in local areas. (c) Fostering an environment with diverse capital procurement options In order to secure facilities investment capital and operating capital abroad, the expansion and strengthening of measures, including flexible implementation of current support systems, should be implemented. (d) Promotion of improvements to legal systems in various countries in East Asia Inadequate systems related to fraudulent trading, such as bill collection, etc., and on the use of intellectual property in various countries in East Asia, are a serious obstacle for SMEs. Efforts should be made to improve these systems through bilateral government consultations. (e) Support for international brand development Support should be strengthened to enable SMEs of the local region to establish branding in world markets by highlighting unique local resources, such as techniques, know-how, tradition and culture. (3) Focused strengthening of international standardization activities In order to conduct international business in the global market, it is extremely important to have international standards. In Western countries and China the government and private sector are working together to address this strategically. In Japan, as well, it is necessary to move forward in the three related areas of technology, intellectual property, and standards. For standards, in particular, the government and private sector should work together to dramatically strengthen the system. (a) Dramatically strengthen the efforts of business and government (promotion of these activities as a national strategy) Measures should be taken to promote awareness and enhance corporate systems, such as having each company establishing an executive officer for international standardization activities (CSSO: Chief Standards Strategy Officer). Until now, individual ministries and agencies have implemented standardization policies for the fields under their jurisdictions, but there should be an investigation into how to conduct these activities in a strategic and integrated manner for the nation as a whole. Efforts should be made to enhance ties between government and the private sector, and to share information with top company management. 21

22 (b) Strengthen support for international standardization activities (unified promotion with R&D) Efforts should be made to implement unified promotion of standardization through government R&D projects, as well as support and guidance for international standards development that makes use of the R&D capabilities of the National Institute of Advanced Industrial Science and Technology. Emphasis should be made on advancements in strategic fields such as nanotechnology and fuel cells, and the role of the International Standardization Support Center should be strengthened. (c) Training and utilization of personnel A mechanism should be developed to make use of highly-experienced personnel as international standardization experts, and successive generations of personnel should be trained, including people in East Asia. (d) Build standards partnerships in East Asia Japan should become a strategic partner with East Asia on international standardization and strengthen alliances and promote technical cooperation with East Asia. (e) Deal with independent standards Independent standards established by particular countries for enhancing industrial competitiveness and environmental protection should be handled in accordance with WTO rules. 3. Preparation of the Foundation for Creating an International Production and Distribution Network with Japan as the Hub In order to link increased competitiveness through the international development of companies with enhancements to the competitive strength of domestic industry and the country as a whole, the government will work to create an environment that allows Japan to become the hub of an international production and distribution network, establishing domestic bases for high-value-added business activities. (1) Prepare foundations related to technology and capital Efforts should be made to achieve a global cycle of [continuous creation of innovation within Japan] [turning a profit on investments abroad based on innovation created within Japan] [appropriate redistribution and reinvestment domestically of profits from abroad]. 22

23 (a) Enhancing the innovation environment in Japan The investment environment in Japan should be enhanced to take advantage of its position as a world-class business concentration and the world s cutting-edge market, and encourage both Japanese businesses and foreign-capital enterprises to establish bases of operation for high-value-added projects. To encourage innovation it is necessary to have internationally competitive industrial clusters, and superior universities and research facilities. In addition to large corporations, the existence of SMEs possessing basic technology for creating superior products is also essential. For this reason, efforts should be made to foster core production technologies of SMEs. (b) Appropriate protection of intellectual property in response to the needs of global business operations In order to prevent the unauthorized disclosure of technology to businesses abroad when establishing overseas production bases, efforts should be made to promote greater awareness and understanding of guidelines for handling trade secrets and guidelines for preventing unauthorized disclosure of technology, and to strengthen protective measures. In comparison to the West, the percentage of foreign patent applications from Japan is low (about 20%). In addition to promoting greater awareness of patent applications among businesses in order to increase this number, efforts should be made to improve the speed and convenience of obtaining patent rights abroad. Steps should be taken to strengthen countermeasures against counterfeits and piracy, such as preparation and stronger enforcement of intellectual property management systems in various countries in East Asia, and realization of a Counterfeit and Piracy Prevention Agreement (provisional name). (c) Creation of an environment for appropriate domestic distribution of profits from abroad Creation of an environment that promotes appropriate investment within Japan, and smooth redistribution within Japan, of companies foreign profits should be done both inside and outside Japan. Efforts should be made to ease and simplify the stringent capital transfer restrictions of various East Asia countries, as well as the complicated reporting procedures under the Foreign Exchange Law in Japan. The international taxation system on profits from subsidiary companies abroad and the high effective corporate tax rates in Japan relative to international rates should be reviewed so as not to obstruct the domestic redistribution of profits earned abroad, lower the attractiveness of establishing a business base within Japan, or adversely affect international competitiveness. 23

24 (2) Strengthening international logistics functions As economic globalization intensifies, international distribution functions become increasingly important for the competitiveness of both business and the nation (role as a supply base for high- value-added products). Since Japan has been lagging behind Western companies and East Asian countries in this area, there is an urgent need to strengthen international distribution competitiveness. (a) Drastically improving supply chain management efficiency (use of IC tags) In order to drastically improve labor-saving and efficiency in goods distribution work, the government and industry should work together to introduce and promote the widespread use of electronic tags, or radio frequency identification (RFID) systems. (b) Advancement and improvement of efficiency in operation of seaports and airports Through the introduction of IC tags, etc., a significant improvement should be made in the advancement and efficiency of various types of work, starting with import and export customs procedures. (c) Strengthening airport performance Further efforts should be made regarding preparation and utilization of international hub airports, including the re-expansion of Haneda Airport and measures for late-night and early-morning international cargo flights. (d) Strengthening seaport performance In addition to the Super Central ports, efforts should be made to prepare and enhance the seaport bases that handle the quasi-domestic distribution for East Asia between Japan and China and Korea. (e) Create systems to strengthen international competitiveness with government and the private sector (international distribution competitiveness enhancement partnership) With collaboration between the relevant ministries and industry, including the manufacturing industry, systems should be established to flexibly resolve problems and issues related to increased competitiveness for international goods distribution (international distribution competitiveness enhancement partnership). 24

25 V. Intensification of Global Competition and Creation of an Open and Attractive Nation As globalization progresses, competition between countries, regions, and industrial clusters has increased, leading to greater competition for talented personnel, transcending national boundaries. From the standpoint of surviving global competition, it is necessary to open up the country, make it more attractive, and bring in talented personnel and businesses from around the world, in order to create new vitality and value. It is important for universities, research agencies and creative personnel to be competitive on a world level, and for Japan to disseminate the Japanese culture, values and lifestyle to the outside world in order for both Japanese soft and hard (economic/industrial) power to gain a competitive edge in the global market. 1. Promotion of inward FDI (Foreign Direct Investment) Inward FDI has been steadily increasing in recent years. However, the ratio of inward FDI to GDP remains at low levels, compared to the ratio in other developed countries. Trends in inward FDI stock (unit: trillion yen) Trend in total direct inward investment (Unit: trillion yen) Current target to double investment level [Source] Ministry of Finance and Bank of Japan Foreign asset liability totals statistics. 40 Inward FDI stocks 34.3 as a percentage of GDP Japan USA UK Germany France EU 25

26 In particular, as Japan faces the problems of declining economic growth and a decrease in domestic savings due to having an aging society with fewer children, it becomes even more important to actively promote economic vitalization through the introduction of technology and know-how through investment from overseas. As a direct investment destination, Japan is attractive for its large, leading-edge consumer market and superior technical ability. On the other hand, foreign companies have pointed out factors hindering investment, including high costs and complicated regulations and procedures, as well as a need to further develop the M&A environment. Furthermore, viewed by region, investment in major metropolitan areas accounts for the vast majority of investment. The hindrances to investment in other areas are not only troublesome government regulations and procedures, but also include difficulties in securing necessary personnel, and difficulties in finding trading partners and affiliates. It has also been pointed out that in the midst of active solicitation for foreign capital by various Asian countries, there is a limit to the attraction efforts local governments can implement on their own. In the future, the government will work to achieve new targets to further promote inward FDI (FDI stock in Japan to double to 5% of GDP by 2010). In addition, it is important to investigate and implement policies that focus on improving the quality of the investment climate, including revitalization of regional economies in Japan, strengthening of bases of innovation, introduction of new products and services, and improving Japan s position as the gateway to East Asia. The following programs will be implemented in conjunction with various other measures to increase Japan s appeal and international competitiveness, and review and implementation of the Program for Promotion of Foreign Direct Investment in Japan currently implemented by the government. (1) Enhanced support for motivated regions In order to further support deregulation efforts in motivated areas for attracting investment, investigation will be carried out on methods such as making greater use of Special Zones for Structural Reform. Increased support will be provided to foreign businesses through JETRO promotion of business matching support and region-to-region initiatives, as well as tie-ups between JETRO and the local governments. (2) Further improvement to the investment environment In order to facilitate cross-border M&A activity, progress will be made in developing the 26

27 necessary framework to smoothly implement triangular reorganization systems. Efforts will be made to facilitate and accelerate investment procedures. (3) Strengthening PR and dissemination of information, both domestically and abroad In order to publicize to the outside world the appeal and welcoming approach of Japan as a site for investment, in addition to implementation of top sales and the dispatch of people on investment missions, there should also be efforts to raise domestic awareness of the importance of inward FDI. 2. Globalization of Universities / Research Institutes / Personnel In the midst of increasingly rigorous competition for brainpower on a global scale, Japan still tends to be closed and isolated, lagging somewhat in the competition. Superior personnel from East Asia (researchers, exchange students) are bypassing Japan and heading to Europe and the USA. In order for Japan to attract talented personnel from all over the world, it is necessary to support an expansion of scholarship funds and employment opportunities for foreign students, along with efforts to enrich higher education institutions that can compete on a global level. As society ages and produces fewer children, in addition to ensuring a high-quality domestic labor force, it is necessary to increase the introduction of talented technical and skilled labor from overseas in order for Japan to take the initiative in realizing East Asia-wide human resources development. (1) Formation of education and research bases that are open to the world, and globalization of the Japanese people (a) Formation of education and research bases that are open to the world Japanese universities and graduate schools should improve the quality of their educational services in order to attract talented people from abroad (for cutting-edge fields like biotechnology and IT, they should work in collaboration with industry to develop internationally viable skill standards and programs, and they should strengthen ties and exchanges with universities throughout East Asia). Efforts will be made to create an environment of easier access for people from abroad, such as accepting international baccalaureate degrees as an entrance qualification to university, and expanding educational services offered in English. 27

28 (2) Securing and utilizing talented foreign students (a) The Young Asian Leaders Development Fund concept In addition to increasing the number of talented people from East Asia coming to Japan to study and conduct research, the dispatch of young people from Japan to East Asia should be promoted to foster interaction between members of the younger generation (Young Asian Leaders Development Fund concept). Furthermore, increased opportunities should be provided for foreign students to participate in Japanese business after graduation. (b) Expansion of venues for foreign student activity In order to attract talented students to study in Japan, it is necessary to offer an appealing career path after graduation. In order to expand employment opportunities for foreign students, government, academia, and industry should cooperate to provide support for internships for foreign students. (3) Expanding entry of talented technical and skilled labor (a) Revising the definition of high-level personnel Consideration should be given to revising the rules for workers permitted to enter the country as specialists/technical field workers by establishing new residency qualifications for the social welfare field and preparing technical certifications for the manufacturing field. (b) Establish a mutual recognition system of certification throughout East Asia In addition to the current Information Technology Engineers Examination, mutual recognition systems for engineering certifications in manufacturing fields, as well as nursing and care-worker qualifications, should be established to realize a human resources development system throughout East Asia. (c) Training and internship system expansion The current Industrial Training System and Technical Internship Program for foreign workers (3 years) should be expanded, and consideration should be given to establishing an advanced skill training and internship system (about 2 years) that allows a participant to achieve an even higher level of technique and skill. 3. Enhancement of International Competitiveness of Tourism and Visitor-Attraction Services About 6.14 million foreign people visited Japan in 2005, which is only 35% of the number of visitors from Japan to other places abroad. This is below levels in other East Asian countries. There is also stagnation in the attraction of business visitors, such as for international conferences. 28

29 Given the ripple effects on a wide range of industries, expansion of Japan s soft power, and the globalization of Japan through acceptance of foreign people, it is necessary to strengthen international competitiveness in the areas of tourism and visitor attraction services. (1) Advertising the appeal of Japan The appeal of Japan, including its history, tradition, cutting-edge technology, safety, and welcoming spirit, should be effectively conveyed to people in foreign countries and actively utilized to the fullest extent in order to attract foreign travelers. Measures will be further promoted to actively encourage the use of Japanese sites as television and movie locations for overseas productions, with collaboration between the content and tourism industries (examples: Fuyu no Sonata (South Korea), Love Letters (Otaru, Japan)). (2) Forming internationally-competitive sites to attract tourists and visitors (town development) In order to create internationally-competitive sites to attract tourists and visitors, support will be provided for efforts of local governments that take advantage of local strengths and characteristics, such as those involving town development that incorporates Japanese tradition in conjunction with convention, retail, and entertainment functions, and medical tourism in areas with concentrations of state-of-the art medical facilities (including utilization of the Special Zones for Structural Reform). Access from airports should be improved, and airports themselves should be made easier to use in order to increase the competitiveness of cities and greatly expand the appeal for international conferences. (3) Preparation of foreigner-friendly tourism and visitor-attraction systems Measures should be promoted to provide information in many languages using IT, and to train multilingual personnel. (4) Training high-level specialists Local producers should be trained to develop regions that appeal not only to domestic travelers, but also to travelers from abroad. 4. Conveying Japanese Culture and Japanese Branding to the World In addition to the technical ability to make high-quality products, Japanese values and 29

30 style, including safety, cleanliness, environmental consciousness, attention to detail, convenience, and cordiality, are highly regarded in the world. There is also focus on new Japanese appeal ( Japan Cool ), such as cuisine, comics, and fashion. As the branding strategy of both Japanese companies and the country itself, Japanese style and values should be conveyed to the world, leading to a synergy between Japan s soft and hard power (economic and industrial capability). (1) Further conveying the Japan Brand and fostering soft power (a) International development of content In order to promote the international development of Japan s content industry (its proportion of overseas business is only 1.9%, while that for the U.S. industry is 17.8%), government support should be provided through expansion of the international content market, promotion of international joint production, and the building of cooperative relationships with various countries in East Asia. (b) Expand Japanese language study overseas Language is a foundation of culture. In order to promote an understanding of Japanese culture, it is important to spread the Japanese language abroad. Furthermore, there is increasing demand for Japanese language skills abroad as Japanese companies become more international. Therefore, it is necessary for both government agencies and companies venturing abroad to vigorously promote Japanese language studies overseas. (2) Synergistic expansion of soft power and hard power (industrial competitiveness) (a) Fusion/merger of product manufacturing and soft power Support should be provided for the creation and international development of new industries combining the production of goods and content (fusion of devices and content). For the fashion industry, creative industrial clusters that promote the fusion of sensibility and technology should be developed, so as to prepare the bases for moving into international markets. By combining traditional Japanese culture, advanced technical capability, and product appeal, a New Japanese Style should be actively conveyed. (b) Improve product competitiveness through content publicity It is necessary to devise ways of taking strategic advantage of the publicity impact of content for example, exporting a television drama in association with foreign market entry (advertising, sales promotion) of a manufacturing business. 30

31 (c) Ripple effects of soft power and international development of the service industry Japanese values and style, such as high-quality, safety, and cleanliness will have a ripple effect in East Asia. Therefore, support should be provided for the international development of service industries incorporating these kinds of characteristics. 31

32 VI. Regional Strategy and Positive Contributions to the Common Global Agenda As the global economy continues to develop, there is increased multipolarity among major participants with a large impact on world economic activity. The USA and Europe have conventionally led the world economy, but there are now new players emerging as a result of economic growth in newly-industrializing countries (BRIC), the increasing influence of lesser-developed nations like those in Africa, and increased bargaining power of resource-exporting countries. In such circumstances, there is a need to develop strategic partnerships relative to the role and position of each country and region. However, the unfolding of a global economy also brings out many structural problems, such as increased consumption and rising prices for resources and energy, worsening environmental conditions, safety and security concerns like terrorism and infectious disease, and poverty. There is a need for Japan to take a leadership role, and make use of national skills and strengths to work on resolving these shared problems. 1. Regional Strategies (1) United States The United States is by far the largest country characterized by adherence to the basic principles of freedom, democracy, and a market economy. Not only does the U.S. have an overwhelming influence on international economic rules related to business activities, such as the WTO, but it also possesses unrivaled hard and soft power, attracting talented workers from throughout the world, being the focus of the Internet, and maintaining a military force with a wealth of practical experience and remarkable logistical capabilities. The combined economies of the U.S. and Japan account for about 40% of the world total. With regard to trade and foreign investment, these are economic giants, occupying the top positions. In the Asia-Pacific region, where there is still instability, the alliance between Japan and the U.S. is extremely important for the stability and development of society and the economy in Asia and the world. In light of the various environmental changes in Japan, the U.S., and the world, even with the formation of international economic rules, both Japan and the U.S. should engage in higher-level cooperation to address new issues such as the success of the WTO Doha Round and secure trade. Furthermore, even if problems like energy, environmental problems, poverty, 32

33 and development problems are being addressed on a global scale, it is still necessary for the two nations to work together and approach these problems strategically. Even in East Asia policy, such as the economic integration of East Asia, the rules formed for East Asia should be based on a Japan-U.S. relationship that provides a foundation for stable development in the regions concerned, and reflect the higher-level economic connections between Japan and the U.S. through active utilization of APEC. (2) European Union (EU) The deepening and enlargement of the European Union (EU), through measures such as the adoption of a common currency, introduction of common agricultural/diplomatic/security policies, and an increased number of member nations, has been continuing. The EU now accounts for about 30% of total world GDP, and is the only entity that compares with the U.S., while sharing the basic values of democracy and a market economy. Although there are various areas of disagreement, the close relationship between the U.S. and the EU continues, and it has a powerful influence on the formation of international rules, such as WTO negotiations. In addition, in areas such as environmental measures, and various rule and standardization policies, EU rules have a significant ripple effect in other regions. Recently, relations have been strengthened with China, where there is currently remarkable economic development. In addition to plans to strengthen ties with Russia with regard to energy supplies, there is also movement toward stronger economic ties with India. In light of the recent emergence of China and Russia, and the circumstances accompanying the development of a global economy, such as the growing international importance of energy and environment problems, it is necessary to plan for new strategic development of the Japan-EU relationship, including a cooperative relationship between Japan and the EU on East Asia policy. (3) China Since adoption of the policy of openness and reform in 1978, and especially since around 2000, China has experienced remarkable economic growth driven by the aggressive usage of foreign investment, combined with participation in WTO. China has taken an active approach toward ASEAN, including economic cooperation with ASEAN countries and concluding an FTA with ASEAN, supported by economic growth. As a result of these activities, China s presence in the East Asian region has increased dramatically. 33

34 However, there are a number of risks surrounding future sustainable growth of the Chinese economy, such as the problem of income disparities, excess production, and over-investment. Furthermore, the rapid increase in energy demand has an effect on the world energy supply and demand, and environmental problems. For Japan, China has enormous weight in terms of both trade and investment, but in the developing market economy in China there are still a variety of problems, including obscure legal systems and intellectual property infringement. In the future, Japan s assistance to China should focus on China s effort toward a robust market economy through support for improvements in the business environment, and resolution of issues such as energy/environment problems. (4) Republic of Korea (South Korea) As a market economy country in East Asia, the Republic of Korea holds the number 2 position in market power based on GDP. The ROK and Japan are the only OECD (Organization for Economic Cooperation and Development) signatories in East Asia. South Korea is actively developing its commerce and trade policy, including basic agreement on an FTA with ASEAN in December 2005, and continuing discussions toward concluding FTAs with the U.S. and other countries. With shared values of democracy and market economies, and as neighbors with a large economic influence in East Asia, it will be necessary for Japan and ROK to work together and take the lead in developing better economic integration in East Asia. To achieve this it is important to quickly reopen the currently-stalled Japan-ROK FTA negotiations. (5) India As a result of economic liberalization since 1991 India has continued to enjoy high growth rates averaging 6% annually. As one of the BRIC economies, India is attracting world attention recently. Not only economically, but also politically, there is increased interaction with the USA, Europe and China. India is emerging as an important player in the economic integration of East Asia, including progress on FTAs with Singapore and Thailand, the strengthening of economic relationships with ASEAN countries, and participation in the 2005 East Asia summit India is an attractive future market, with a population in excess of 1 billion and an abundance of skilled personnel, particularly in the math and science areas. India s software 34

35 industry continues to be a foundation of economic development, and it is expected that there will be significant growth in the future in the fields of biotechnology and medical products. The Japan-India economic relationship is still small in scale, with total trade standing at about 500 billion yen (1/30 th of trade between Japan and China); direct investment from Japan to India is about 10 billion yen (1/50 th of that between Japan and China). However, the interest of Japanese business is rapidly increasing, and there is an urgent need to strengthen economic ties between the two countries. Particular issues are development of the environment to enable Japanese SMEs to push into India, and preparation of the investment business environment, including industrial infrastructure and tax systems. From the viewpoint of promoting economic integration in East Asia, it is important for Japan to build a strategic alliance with India, as the world s largest democratic country. (6) Australia, New Zealand Australia and New Zealand have experienced steady economic growth, and continue to actively pursue negotiations on FTAs with various ASEAN countries, with the aim of strengthening economic relationships with East Asia. Both countries are looking at participating in the economic integration of East Asia, and participated in the 1 st East Asia Summit in For Japan, Australia and New Zealand are among the most important trade partners, mainly for imports of raw materials and food. In particular, Australia has a wealth of mineral resources, and is third in the world in steel production, second in the world in lead production, and second in the world in the production of uranium ore. In the context of intense world competition for natural resources, from a long-term perspective it is important to strengthen ties with Australia and New Zealand. Since Australia and New Zealand have common features with Japan in terms of shared concepts of democracy and the market economy, as well as their alliance with the USA, it is important for Japan to continue to strengthen economic relationships with these countries, bearing in mind the need for their cooperation in future East Asian economic integration. (7) Middle East The importance of Middle East countries has increased in recent years, not only from the perspective of energy security, but also in terms of a market with significant growth. With the accumulated wealth from increased energy prices, there are notable efforts to develop social infrastructure, including education, finance, information, and health care. 35

36 In this context, it is important to progress from the current simple trade relationship based on resources to a multi-faceted, multi-layered relationship that includes promotion of investment by Japanese business, promotion of industrial cooperation, and support for education and the development of human resources. FTAs/EPAs with various GCC (Gulf Cooperation Council) countries should also be considered. (8) Russia Russia has risen from the confusion of the 1990s and achieved an economic growth rate of 6% to 7% in recent years, aided in part by sharp increases in resource prices. Its GDP is 15 th in the world. Russia is the number 2 producer of petroleum in the world, and the number 1 producer of natural gas. The country is blessed with resources and has the second largest reserves of coal in the world. For Japan, Russia is important as a source of resources. In addition, the stability of the Russian economy is a major issue from the perspective of stability in the Far East. As a result of the buoyant Russian economy of recent years there has been an increase in companies showing interest in doing business with Russia. Contributing to the diversification of the Russian economy and preparation of the business environment will contribute to improving the stability of the Russian economy, and also help to increase opportunities for Japanese business. (9) Central Asia, Caucasus Central Asia and the Caucasus is a region blessed with natural resources, including natural gas, petroleum, uranium, and non-ferrous metals. It is also geographically and politically important due to shared borders with China, Russia, Iran, etc. Politically, many of the countries maintain conservative systems. Since the series of terrorist attacks on the United States, the relationship to the U.S. has become more intense. However, recently there are movements to strengthen relationships with Russia and China, including the construction of frameworks like the Shanghai Cooperation Organization. In addition, the world is paying close attention to the region s energy resources, including efforts to obtain resources by China, Russia, and the West. Upstream development for petroleum is progressing in Central Asia and the Caucasus. Since Japan relies on the Middle East for more than 90% of its crude oil imports, it is important to strengthen ties with the region in order to diversify petroleum supply sources and energy sources in general. It is important to contribute to the strengthening of resource development 36

37 and the development of industry as a whole through support of education for industrial personnel and of mining development involving Japanese business (Kazakhstan uranium mine projects, etc.). (10) Brazil Brazil is number 14 in the world in GDP terms, and is the largest economy in South America. As one of the BRIC economies, continued growth is expected in the future. Brazil also acts as a representative for the group of developing countries at venues such as WTO negotiations. Brazil is blessed with natural resources, being number 2 in the world in production of iron ore. For Japan, Brazil is both an attractive export and investment destination, and is an important trade partner for mineral resources like iron ore, and for ensuring a stable supply of agricultural products. (11) Lesser-developed countries, such as Africa Economic growth in lesser-developed countries, such as those in Africa, offers new opportunities for growth in Asian countries, including Japan, China and India. Furthermore, growth will contribute to world security, as well as political security in those regions. In WTO negotiations, etc., these nations are increasing their presence in the international community as a group, due to their large number. Japan will support improvements in industrial capability for lesser-developed countries, including Africa, through the One Village, One Product Campaign, etc. 2. Contribution to the Common Global Agenda (1) Challenges for the Energy Sector and the Environment The development of international economic rules, such as the WTO, and the economic growth of developing countries in accordance with these rules, invite increases in world energy demand and energy price hikes, creating threats to the development of the world economy. In addition, the problems that face all of mankind are intensified, including climate change and atmospheric pollution, as well as nuclear non-proliferation. Accompanying the changes in energy markets, various countries are working to develop new national energy strategies. In particular, there is a flurry of geopolitical activity in the 37

38 Eurasian continent, consisting of China and India where energy demand is increasing rapidly, and energy-supplying countries like Russia, Central Asia and the Middle East. At the same time, there is an expansion of various initiatives by multilateral forums like G8, IEA, and the UN in recognition of global-scale problems surrounding energy and the environment. In a global economy, with deeper levels of mutual dependence, the problems of energy and the environment are not problems that can be handled by Japan alone. It is necessary to actively contribute to Asia-wide and worldwide solutions. Japan possesses rich knowledge on energy conservation and energy/environmental technology. Therefore, to complement approaches to global environmental problems like the Kyoto Protocol, Japan should step forward as a leader working with major energy consuming countries like the United States, which has not signed the Kyoto Protocol, and China and India, for whom there are no reduction targets in the Kyoto Protocol, and should provide technology solutions through an Asia-Pacific Partnership on Green Development and Climate (APP). In addition, in order to deal with limits on fossil fuel resources and global environmental problems, there are active efforts to increase the use of nuclear power production on a global scale, so Japan should also actively contribute simultaneously to pursuit of expansion of nuclear power generation and nuclear nonproliferation. On the other hand, Japan should work to strengthen multilateral relationships and promote bilateral negotiations with energy resource exporting countries, including conclusion of EPAs, technical cooperation and cultural exchanges. Furthermore, within the East Asia region Japan should contribute to eliminating the fragility of various Asian countries regarding energy supply and demand by improving cooperation in energy and environmental fields, as well as in nuclear power production and safety, through technical transfers and dissemination of Japan s advanced energy and environmental technologies. This will also help increase business opportunities for Japanese businesses. (2) Poverty/Development Challenges To achieve the Millennium Development Goals proposed by the UN general assembly in 2000, there is a need for developed nations and international agencies, as well as developing countries, to strive to their utmost. Japan should utilize its strength as the only major developed nation to experience rebuilding from complete destruction after a war, and providing 38

39 development assistance for developing countries mainly in East Asia, and should make a major contribution to resolving the problems of poverty and development. In this process, it is extremely important to include coaching aimed at achieving independence and self-reliance of developing countries via specific support measures. The Development Initiative issued by Prime Minister Koizumi in 2005 at the WTO Ministerial Conference in Hong Kong emphasizes the importance of realizing a virtuous cycle of development and free trade for growth in developing countries, and declares support for improving the abilities of developing countries in the fields of production, transportation, distribution, and sales. As a more concrete measure, the experience from the One Village, One Product program that was successful in Southeast Asia will be applied to developing countries in Africa. To resolve problems of poverty and development it is important to build a worldwide strategy and carry out specific measures to systematize and disseminate successful experiences in Japan and Asia, like the One Village, One Product program, in a coherent manner. Japan must actively contribute to all of these efforts. 3. Challenges for Expanding and Deepening Ties in International Economic Systems Japan enjoys the advantages of a multilateral trade system. From the perspective of continuing to strengthen reliability of the WTO system that plays a central role in the foundation of Japan s trade system, it is crucial for Japan to take on the role of facilitating agreement in the WTO Doha Development Agenda that is currently being negotiated. There are many areas that do not have WTO rules, such as investment and competition, or for which there are questions even about the creation of rules, such as trade and the environment, trade and labor, and secure trade. Japan must participate in and contribute to the international discussions on addressing these new issues. On the other hand, as globalization progresses, new problems related to economic activity and dealings will arise (ensuring the autonomous development of cyberspace, achieving both security and facilitation of trade and investment, etc.). For these new issues, as well, Japan should work with the United States and Europe and actively contribute to the creation of rules. 39