The big win­ner from the TPP deal

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

Af­ter a tough sum­mer with lit­tle to cheer about, in­vestors fi­nally got some good news on Mon­day. Af­ter five years of ne­go­ti­a­tions, cul­mi­nat­ing in six days of round-the-clock talks in At­lanta, the US, Ja­pan and ten other Pa­cific Rim economies fi­nally struck a deal on the Trans-Pa­cific Part­ner­ship. If rat­i­fied by the sig­na­to­ries’ par­lia­ments, the TPP will be the big­gest lib­er­al­i­sa­tion of global trade since China’s en­try into the WTO, and the largest mul­ti­lat­eral trade agree­ment since 1994 when Nafta took ef­fect and the Uruguay Round brought agri­cul­ture, tex­tiles, ser­vices and in­tel­lec­tual prop­erty rights into the global trade regime. That makes the TPP a very big deal.

But even if the pact passes the US Congress — which is by no means cer­tain — it is un­likely to have the mo­men­tous im­pact of those ear­lier deals for one sim­ple rea­son: it leaves out the world’s largest trad­ing econ­omy, China. Whether be­cause the US de­signed the TPP as a coun­ter­weight to grow­ing Chi­nese in­flu­ence (which US of­fi­cials deny), or be­cause in­clud­ing China would have de­layed the agree­ment by years, the omis­sion means Mon­day’s agree­ment rates two cheers rather than three.

Nev­er­the­less, there will still be clear win­ners among the 12 mem­ber coun­tries. Small economies and those with high ini­tial trade bar­ri­ers should gain the most in rel­a­tive terms (think Viet­nam). How­ever, the great­est ab­so­lute gains are likely to ac­crue to Ja­pan. The TPP is by far the most sig­nif­i­cant trade lib­er­al­i­sa­tion deal Ja­pan has ever struck, and prom­ises to ad­vance key do­mes­tic struc­tural re­forms just as the eco­nomic agenda of Prime Min­is­ter Shinzo Abe ap­pears to have got bogged down.

Re­cently, in­vestors have started to lose faith in Ja­pan’s re­form pro­gramme. As the China-led slow­down has damped global ac­tiv­ity and threat­ened to push Ja­pan into a tech­ni­cal re­ces­sion, for­eign­ers have turned net sellers of Ja­panese stocks for six con­sec­u­tive weeks, the long­est such streak since the sum­mer of 2012. At the same time, the pas­sage of Abe’s con­tro­ver­sial de­fense acts has eroded much of the prime min­is­ter’s po­lit­i­cal cap­i­tal, which means the lack of progress this year to­wards draw­ing up and im­ple­ment­ing the next round of do­mes­tic mar­ket re­forms has raised se­ri­ous doubts about whether Ja­pan can suc­cess­fully re­flate its way out of what could end up to be the coun­try’s fifth tech­ni­cal re­ces­sion in ten years.

In the face of these con­cerns, the Bank of Ja­pan is tak­ing flack for sit­ting on its hands as the econ­omy has de­te­ri­o­rated. To be fair, how­ever, the cen­tral bank is re­luc­tant to ease fur­ther while food in­fla­tion, which di­rectly af­fects con­sumers, con­tin­ues to run high, while it also wants to re­tain am­mu­ni­tion should global de­mand get even worse. The truth, even if the BoJ does not ad­mit it openly, is that quan­ti­ta­tive eas­ing (QE) has proved to have lit­tle re­fla­tion­ary ef­fect, ex­cept by weak­en­ing the yen, and at this point ad­di­tional cur­rency weak­ness would only dam­age global trade and in­dus­trial pro­duc­tion fur­ther.

Against this gloomy back­drop, the TPP of­fers real hope. With the gov­ern­ment’s cred­i­bil­ity hing­ing on its abil­ity to “do some­thing” to get Ja­pan back onto a growth track, and the BoJ con­strained by the risk that fur­ther mon­e­tary eas­ing may do more harm than good, the mar­ket open­ing mea­sures re­quired by TPP mem­ber­ship prom­ise to be just the cat­a­lyst re­quired to kick-start the struc­tural re­forms Tokyo needs to de­liver re­newed growth. By dis­man­tling an­ti­quated, high cost bar­ri­ers within Ja­pan’s econ­omy, and es­pe­cially in its huge ser­vice sec­tor, TPP mem­ber­ship will en­cour­age pro­duc­tiv­ity-en­hanc­ing in­vest­ment—from for­eign as well as do­mes­tic play­ers.

Ac­cord­ing to the latest com­pa­ra­ble data, the stock of for­eign di­rect in­vest­ment in Ja­pan amounts to just 6% of GDP, com­pared with 17% in the US, 22% in China, and 72% in Europe.

Of course, the eco­nomic ben­e­fits of the TPP will take a long while to ma­te­ri­alise. How­ever, the tim­ing of the agree­ment could hardly be more for­tu­itous.

With Up­per House elec­tions nine months away, the agree­ment comes at the right time to re­sus­ci­tate sen­ti­ment in the eq­uity mar­ket, which has been the en­gine of Prime Min­is­ter Abe’s ap­proval rat­ings. Such a pos­i­tive im­pact on as­set mar­kets will take some of the pres­sure to act off the BoJ, leav­ing it free to hold more bal­anced in­ter­nal dis­cus­sions about the mer­its and de­mer­its of fur­ther mon­e­tary eas­ing, which will hope­fully lead to a more ra­tio­nal pol­icy de­ci­sion, al­low­ing the cen­tral bank to set re­al­is­tic eco­nomic fore­casts later this month with­out jeop­ar­dis­ing ei­ther in­fla­tion ex­pec­ta­tions or cor­po­rate sen­ti­ment.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.