There has been a big structural adjustment in the Japanese economy over the last two decades. Leading Japanese corporations have moved to establish a formidable presence internationally, especially in Asia, as they rationalised production and sought an efficient international manufacturing base through taking advantage of lower cost production locations around the region and the world. In 1990 only 11.4 per cent of Japanese electronics manufacturing output was produced offshore. By 2007 that share had risen to 45.5 per cent for electronics, and 33.2 per cent of all manufacturing output was produced offshore.

All this recommends a paradigm shift in thinking about Australia’s relationship with the Japanese economy.

The Japanese market is no longer confined to Japan itself. It is a huge international market generated by the activities of Japanese business and investors, especially via production networks in Asia. It is a market enhanced by the economic cooperation programs of the Japanese government throughout the developing world, particularly in the Asian and Pacific region.

And it is a market in which Japanese business now plays an increasingly important role from an Australian base in manufacturing, agriculture and services.

Australia’s commercial interests with Japan now extend well beyond export and import business with Japan proper. The relative share of trade with Japan itself has naturally declined alongside the growth of the other economies in Asia, including China and Southeast Asia, as Australia’s trade with other East Asian economies has grown. But the reach of the Japanese economy into the Asian region, and internationally, means that the development of Australian national and corporate commercial strategies – to realise the potential of the Japan relationship – requires a conception of it that extends beyond the home base. Many of the products of Sony, for example, are now imported from China or other parts of East Asia. Japan used to be our main export market for wool. Now the largest market is China where imports are processed not only by Japanese-invested but also Chinese enterprises for home consumption and, significantly, for export to the still large Japanese market for wool clothing.

The stock of Japanese investment in Asia amounted to A$ 180 billion out of Japan’s global investment of A$ 772 billion at end-2008. The flow of export and import trade which Japanese business generates in Asia each year was US$ 690 billion in 2008.

Procurements through Japanese corporate subsidiaries in Asia amount to A$ 1.2 trillion annually.

In addition, Japan spent A$ 11 billion (901 billion yen) in Asia on Overseas Development Assistance programs and procurement through economic cooperation programs.

Japanese business has now also established a platform for export to the region from Australia, with diversified investments across food, manufacturing as well as resources, that already delivers A$ 6 billion in Australian sales to Asian markets other than Japan.

These are all large new elements in the economic relationship with Japan beyond the A$ 51 billion export trade and A$ 20 billion import trade that Australia already does each year with Japan itself.

The potential to capitalise on these new elements in Australia’s relationship with Japan in Asia is founded on the strength and familiarity in the established bilateral trade relationship with Japan. Long commercial partnerships have already been transformed through trade into third countries. There is the infrastructure of institutional and personal commercial ties that makes doing business together elsewhere in the region an easy step to take. There is the familiarity in dealings between our governments and official agencies that facilitates commercial initiatives that require an official input. There is the history of Japanese business dealings from an Australian base – the indigenisation of Japanese corporations in Australia – that has made them an important and familiar part of the national commercial and social landscape. These are assets that Australia has in developing the potential of the relationship with Japan in Asia, beyond Japan itself.

These developments recommend a fundamental re-thinking of national and corporate strategies towards Japan, and at least five major initiatives that encompass the new realities of the relationship with Japan in Asia:

• the development of Australian-based business with Japanese corporations in Asia through mobilising capacities from both Australian and Japanese business and government agencies
• bi-national recognition and encouragement of Japanese business efforts building markets from an Australian base
• promotion of Australia as a clean, green and environmentally innovative supplier to Asia with leading partners in Japan
• a campaign supported by Australian and Japanese agencies to lift competitive Australian participation in Asian development projects funded and supported by the Japanese government
• a new approach to the negotiation of the Economic Partnership Agreement with Japan, focusing on the achievement of deep and efficient economic integration of the two economies in Asian and global markets, and serving as a model of regional integration with open participation to regional partners able and willing to comply and sign on automatically.

These are important new economic interests in the partnership with Japan in Asia that extend well beyond Japan and Australia’s economic relationship, into shared political and security interests in Asian prosperity.

The agenda is for a fresh, practical engagement with Japan in Asia. It is an agenda that naturally deepens the bilateral relationship and extends the range of mutually beneficial working relationships both countries will have in Asia.

This is an agenda that can form the core of a positive set of initiatives with the new Japanese administration at the highest levels of government.

This essay is based on a report (pdf available here) by the author to the Australian Government agency, Austrade, reviewing the Australia-Japan economic relationship in Asia. It was presented in Sydney on Wednesday, 9 September.