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FOCUS: Trump's scrapping of TPP complicates Japan's trade, growth options

U.S. President Donald Trump's resolve to kill the Trans-Pacific
Partnership trade deal has knocked out a pillar of Japan's growth
strategy, but analysts say the country's best chance at overcoming
the setback lies in tapping into the business-oriented mind of Trump
himself.

Prime Minister Shinzo Abe's administration has held up the boost
to exports and investment promised by the TPP -- which includes
Japan, the United States and 10 other Pacific Rim nations but
excludes China -- as a key driver of Japan's long-term growth.

While Trump eschewed explicit mention of the pact in his
inaugural address Friday, the trade policy section on the revamped
White House website made clear that the new administration's
"strategy starts by withdrawing from the Trans-Pacific Partnership."

Under its current terms, the pact is doomed without ratification
by the United States, which on its own accounts for over 60 percent
of the signatories' total GDP.

Japan completed its domestic procedures to ratify the pact hours
prior to the inauguration. Abe has signaled his government will keep
appealing to the Trump administration in hopes the United States will
walk back its decision to withdraw.

Indeed, Japan's first step should be to review the terms of the
TPP in an attempt to bring the United States back on board, said
Satoshi Osanai, senior economist at the Daiwa Institute of Research.
The TPP is not just an economic deal, but a strategic
achievement by Japan and the United States to put themselves --
instead of China -- at the forefront of regional rule-making on
trade, and Japan should fight to hold on to those gains, Osanai said.

"If that fails, Japan needs to put energy into negotiating a
bilateral pact with the United States, while as a second option
pursuing a mega-FTA like the TPP without U.S. participation," he
said. Trump has said he is open to negotiating bilateral deals.

In a policy speech Friday, Abe listed as priorities both
bringing the TPP into force and concluding negotiations on the
Regional Comprehensive Economic Partnership -- a potential mega-deal
in which the largest economy is not the United States but China.

But Japan should exhaust its U.S.-inclusive trade options first
before putting its weight behind RCEP or a trilateral deal with China
and South Korea, Osanai said.

"These deals are less about immediate gains and more about
long-term effects on Japan's growth, and there is little clarity
about the geopolitical risks that (Japanese trade) could be heavily
exposed to with China at the center of its strategy," he said.

Assuming a bilateral deal with the United States is on the
cards, Japan needs to mount a charm offensive toward the Trump
administration to persuade the president to drop his "outdated" view
of the Japan-U.S. trade relationship, Osanai said.

"Trump seems to have some misunderstandings about the way Japan
is now, likely based on memories from the asset bubble era of the
1980s, when he would have personally witnessed Japanese firms
swooping in to buy up U.S. real estate assets," Osanai said.

"While Trump has lumped Japan in with China in his speeches,
these days the United States' biggest trade deficit is overwhelmingly
with China, while the deficit with Japan has changed little since the
mid-1990s," he said.

The Abe administration may opt to get those facts through to
Trump by leveraging both political and corporate networks, including
by citing Toyota Motor Corp.'s contributions to jobs in Indiana,
where Vice President Mike Pence was governor until early this month.

The effort could call on business heavyweights like SoftBank
Group Corp. Chief Executive Officer Masayoshi Son. The head of the
telecommunications giant pledged to invest $50 billion in the United
States at a meeting with Trump in New York last month.

At the same time, Trump's presidency is a wake-up call for Japan
to accelerate structural reforms and make its agricultural sector
competitive enough to survive the import tariff cuts U.S. negotiators
are expected to demand.

In his Friday policy speech, Abe said his government will submit
to the Diet a bill to reform the agriculture sector by stripping
privileges from a politically powerful farming lobby.

The Abe administration has repeatedly pledged to pursue such
reforms as the "third arrow" of the antideflationary "Abenomics"
strategy. Analysts have warned that the first two arrows -- drastic
monetary easing by the Bank of Japan and hefty fiscal expansion --
are reaching the limit of their effectiveness.

Although the failure of the TPP would be a political blow to the
Abe administration, the prime minister will maintain support from
Japan's business community thanks to other policies on corporate tax
and labor regulation reform, said Hideki Matsumura, senior economist
at the Japan Research Institute.

For now, Japan needs to stay flexible in order to respond to
whatever Trump proposes as a replacement for the TPP, and also pay
attention to how his position on China evolves, Matsumura said.

U.S. media reported during Trump's election campaign that he had
proposed slapping a 45 percent tariff on all Chinese imports.

"A trade war between the United States and China would be a big
negative for Japan -- consider the many transactions that come down
to exporting Japanese goods to China and those goods then going from
China to the United States," Matsumura said.

Following informal talks in New York shortly after Trump's
election victory in November, Abe and Trump are tipped to meet again
in the United States in the coming weeks. (Jan. 21)