This summer the European Union and Japan signed a free trade agreement that is potentially game-changing.
The signature of this agreement was hailed by the President of the European Commission Jean-Claude Juncker and Japan’s Minister for Economic Revitalisation, Toshimitsu Motegi, as a vote of confidence for multilateralism.
However, the signature of the Japan-EU Free Trade Agreement (JEFTA) was an otherwise low-key event. The deal was perhaps overshadowed by the US withdrawal from the Trans-Pacific Trade Agreement and President Trump‘s of an “America First” policy that favours bilateral and more asymmetrical trade agreements.
Perhaps surprisingly, there was little of the controversy surrounding either the Transatlantic Trade and Investment Partnership (TTIP) with the US or the successful Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. However, the impact of this agreement cannot be underestimated.
The EU exports to Japan over €58bn worth of goods, or just under €87bn if one adds services. Some sectors have a high degree of integration. The strategic alliance between Renault, Nissan and Mitsubishi or the takeover of the Financial Times by Nikkei (2015) are some of the more high-profile cases of corporate integration. But, this may be the beginning of a much deeper economic linkage.
Therefore, the little media coverage of this potentially game-changing deal is not justified. One of the challenges at hand is cultural. Not many Europeans speak Japanese or can speak with confidence about Japanese culture. New Europe sought out one of them.
Maurizio Raffone is a finance veteran with over 20 years of capital markets experience across London, Milan, but ended up in Tokyo. After graduating with an MA from Cambridge University, Maurizio worked for financial institutions such as Credit Suisse, Deutsche Bank and UniCredit. Asia gradually became his market expertise. He began working on credit derivatives for Deutsche Bank and moved on to Dresdner Kleinwort (now Commerzbank), based in Tokyo.
He now runs Finetiq’s advisory and consulting activities from Tokyo, supporting international FinTech companies’ efforts to enter the Japanese market. His sector will certainly feel the impact of the EU-Japan agreement. But, how is it for a European in Japan?
New Europe (NE): After five years of negotiations in August 2018 the EU finalised negotiations for a trade agreement with Japan. EU firms export over €58bn in goods and €28bn in services to Japan every year. How much room for growth is there? Is this trade agreement a game changer?
Maurizio Raffone (MR). Japan’s economic growth has been remarkably resilient in the last few years, and the relaxation of trade barriers with the EU will certainly benefit trade flows.
Financial service companies are going to enjoy greater access and a level playing field in the Japanese domestic market. For example, the EU-Japan economic partnership agreement provides fair access to public procurement for EU financial institutions.
Although it will take time for European companies to make strides in the Japanese market, it is a unique opportunity coupled particularly given the trade tensions in other parts of the world.
NE: Japan is a consolidated economy with global corporations. How much room is there for smaller European companies to enter Japan and in which sectors? What European products and services you feel would sell well in Japan?
MR. European companies have global competencies in many industries. Clearly, agricultural products will be the main winner of this agreement, thanks to tangible reductions in tariffs. However, I believe agile small and medium-sized European enterprises can find a fertile market in Japan, particularly in the area of technology solutions for the service industry.
For example, a start-up spun off from Universita di Calabria, GiPStech, now works with NTT Data in rolling out indoor GPS at airports and other locations.
So, although Japan is technologically very advanced in manufacturing and industrial sectors, it lacks behind in applying the latest technologies in its service sector, financial services included and that’s where European companies can make an impact.
NE: Japan is ageing, perhaps faster than Europe. How is Japan dealing with the challenge and what can Europe learn?
MR. The clear focus is on tangible productivity improvements: grannies are building iPhone apps and trading Bitcoin in Japan!
The office of the Prime Minister published in late 2017 a three-year plan to address the growing social issues Japan faces, first and foremost its ageing population. The plan has three strategies: one focusing on social policies aiming at empowering human resources, such as childcare services to increase women’s participation in the workforce. The second strategy revolves around the increasing use of the latest technology, such as artificial intelligence and blockchain, and the third strategy prioritises developments in certain key industries.
These policies are carried out in collaboration with the private sector, for example via business acceleration programs and grants, and I would think the EU could adopt a similarly public-private approach to maximise the effectiveness and impact of such policies.
Japan is notoriously closed to immigration and seeks to find technology-intensive solutions to its productivity crisis. Several political movements in Europe see Japan as a model. As a European immigrant in Japan, to what extent do you see Japan as a warning and to what extent a model for Europe.
The Japanese concept of Uchi-Soto (insiders vs outsiders) is somewhat unique given the country’s homogenous population, history and island status.
For Japanese people, finding your own place within a group is crucial for determining one’s identity. As such, it’d be hard for Europeans to replicate Japan’s strict approach to immigration. My own immigration experience was very straightforward and transparent. I am also glad to see initiatives by the Japanese government to provide more visas for foreign start-up founders and skilled workers.
NE. You are Italian. Japan has a 250% debt to GDP ratio. Italy has a 130% debt-to-GDP ratio. The majority of this debt in Italy and Japan is owned by domestic investors. Do you feel the fear of Italy’s debt is exaggerated?
MR. Italian domestic investors own about 70% of the debt while that figure in Japan is around 90%. That’s a big difference and makes Italian debt more vulnerable to market sentiment.
Having said that, Italy’s fiscal policy is actually much stricter than Japan which, due to Abenomics, has been running deficits in the 4 to 5% range for the last three years. I think investors don’t fear Italy’s debt but may be less trusting of its government.
NE. You belong to an extremely small pool of Europeans with knowledge of Japan. Do we have enough human capital to take advantage of the opportunities ahead? Given Japanese investment in Pharmaceuticals, the auto industry and finance in London, do you feel Brexit will have an effect on how much we can benefit from this new relationship?
MR. Despite Tokyo boasting a huge number of Italian restaurants serving Japanized pasta and pseudo-French bakeries, I do think that Europe is under-represented in terms of investment, human capital and political clout in Japan compared with, for example, the US.
On the back of the recent trade agreement, it would be ideal to see a coordinated European approach to support academic, cultural and business exchanges to ensure EU individuals and firms can make the most of Japan’s newly opened market.
With regards to Brexit, for example, financial services alone accounted for over £4.5bn of British exports to Japan in 2016. This represents a profitable opportunity for EU companies to take advantage of in the coming years. Japanese companies with investment in Britain are beyond frustrated by the lack of clarity over Brexit and, knowing the Japanese need for clear rules and processes I believe they would be very amenable towards more stable partners.