Experts See Narrow Window Of Opportunity For Japan TPP Breakthrough

Experts this week held out the possibility that Japan and the U.S. could still reach a breakthrough agreement by the end of September that would ultimately allow Japan to enter the ongoing Trans-Pacific Partnership (TPP) negotiations. However, they conceded that a variety of political factors make the likelihood of such a breakthrough unclear, and agreed that Prime Minister Yoshihiko Noda is still unable to fully focus his attention on the issue of TPP entry.

Early this week, the lower house of the Japanese Diet approved a controversial bill to double the consumption tax. Passage was possible due to a political deal that Noda, a member of the ruling Democratic Party of Japan (DPJ), had previously struck with members of the Liberal Democratic Party (LDP) and the New Komeito Party, under which both of those parties agreed to support the measure.

Noda had put the consumption tax ahead of TPP in his list of political priorities, and observers had previously said that the consumption tax issue must first be settled before he can turn to TPP. But even now with the bill passed through the lower house, experts said that the political situation in Tokyo remains up in the air, saying it is far from clear that the prime minister, who supports joining TPP, can put real political weight behind that issue in the near term.

The most optimistic scenario is that Japan and the U.S. may be able to reach an understanding under which the U.S. would agree to support Japan's bid to join the TPP by sometime around September, which would likely lead to other TPP partners supporting its bid as well. Observers are eying a breakthrough in September because there are several "action-forcing events" that month at which a high-level announcement could be made.

For instance, TPP leaders will likely meet to discuss the ongoing talks on the sidelines of the Asia-Pacific Economic Cooperation (APEC) forum leaders summit in early September. On the other hand, President Obama will not attend that summit because of the demands of his fall campaigning schedule, which may make it less likely that a major TPP announcement takes place at that time.

Another possible venue is the United Nations General Assembly meeting near the end of September in New York. According to Matthew Goodman, the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies (CSIS), that is a more likely time for Obama and Noda to meet in person and forge a significant step forward on TPP. The president's travel schedule to the UN has not yet been publicly released.

But experts agreed that even that optimistic possibility is complicated by the fact that the UN meeting will take place less than two months before the U.S. presidential election. In an interview, Goodman conceded that it is "difficult" to envision Obama announcing that Japan is joining the TPP talks that close to the elections, especially as this could spark a fierce reaction from U.S. auto companies, which oppose Japan's participation, as well as many in Congress.

At the same time, Goodman said it is his "strong sense" that the White House recognizes the importance of adding Japan to the ongoing talks, and would like to do so at some point. The key, he argued, is for Japan to agree to some "confidence building measures" in advance in key areas like the automotive sector, which would enable the White House to go to Congress with a credible argument that Japan has shown it is serious about joining TPP.

Goodman speculated that, if everything were to fall into place, Noda could announce his firm intention to seek to join the TPP talks at the UN meeting. Obama, in turn, could welcome that commitment, and both leaders could then instruct their negotiators to redouble efforts to make it happen. This could be characterized as a step forward, as Japan has not yet declared its actual desire to join the talks, only its interest in that possibility.

If Obama won a second term in office, he could then announce that his administration supports Japan coming into the talks sometime after the elections are over, Goodman speculated. This could allow Japan to join the talks early next year, only a matter of months after Canada and Mexico join the talks. Some Japanese officials have conveyed an interest in "catching up" with Canada and Mexico, which were invited to join last week (Inside U.S. Trade, June 22).

While Canada and Mexico were invited to join last week, they will not participate in a formal TPP round until December at the earliest. The reason is that new TPP entrants must wait for U.S. domestic procedures to play out before joining, including a 90-day period for consultations between the Obama administration and Congress. If TPP partners supported Japan joining at the APEC summit, it may also be able to attend the December TPP round.

But observers said that this is all highly speculative for the moment, especially as the political situation in Japan remains unstable and it is uncertain whether and when Noda will be able to turn his full attention to forging a domestic consensus on TPP. Despite the deal on raising the consumption tax, Noda remains embroiled in domestic political machinations and is, in some respects, still fighting for his political survival.

The DPJ party, headed by Noda, is in power because it has forged a ruling coalition in the lower chamber of the Diet that controls a majority of seats. However, its majority coalition is now being challenged by a group of DPJ "rebels" led by Ichiro Ozawa, who opposes both the consumption tax hike and the notion that Japan should join the TPP. Ozawa has threatened to defect from the DPJ to form his own party, and take many of his DPJ followers with him.

If Ozawa does orchestrate such a defection, and if at least 54 DPJ members follow him, that means the DPJ would no longer have a majority coalition in the lower chamber. This could pose serious problems for Noda. For instance, the Ozawa-led group and the LDP could then muscle through a "no confidence" motion in the lower chamber, which the DPJ would be powerless to stop if it no longer had a majority coalition of supporters.

If such a motion were to pass, Noda would be forced to either dissolve his cabinet, with the hope that this would satisfy his Diet opponents, or else call new elections and hope that the DPJ regains the upper hand.

Observers this week said it is still unclear whether this scenario would play out, but worried that the consumption tax vote numbers appeared to indicate that Ozawa does have a large number of supporters. Several pointed out that a total of 57 DPJ members opposed the consumption tax hike, and 16 abstained from voting. While that does not necessarily mean that at least 54 DPJ members would defect with Ozawa, it is not a good sign, Goodman said.

But experts stressed that it is still not clear whether a mass defection will take place and, even if it does, whether the LDP opponents would want to support a "no confidence" motion in the first place. One Japanese business source pointed out that the public is generally dissatisfied with both the DPJ and the LDP for agreeing to double the consumption tax, and argued that both parties may fare poorly if elections were held in the near term.

Even if the political situation in Tokyo remains fairly calm in the coming months, it is still unclear how soon Noda will be able to focus on TPP. Some observers argue that while the upper house of the Diet is expected to pass the consumption tax hike sometime this summer, it may take months to do so. They question whether Noda would really push hard on TPP until he is assured that his signature bill has passed through both houses.

But more optimistic observers argue that Noda has long been clear that he wants to raise the consumption tax, bring nuclear reactors back online in Japan, and then turn to measures to boost Japan's economic performance, including possible inclusion in the TPP talks. He is steadily plowing through this list of priorities, and it would be unwise to underestimate his ability to continue onto his third priority area, they said.

The consumption tax is moving, and Noda has engineered an agreement under which two reactors will be reactivated following the 2011 disaster in Japan, setting a precedent for more to follow. This means that, in the coming weeks and months, Noda may be able to start revisiting the issue of whether his party can agree to join TPP in earnest, even though many agricultural interests in Japan and members of the Diet oppose doing so.

But overall, observers stressed that more time is needed to see how the political situation is going to play out. "It is still possible that Noda will be gone in a month," one U.S. business source warned.

Source: insidetrade.com