Japan has been Australia’s closest and most consistent partner in Asia since the 1980s. Each country views the bilateral trade, investment and diplomatic relationship as vital to its national interest and both countries also appreciate their important role in Asia and have a shared desire to see it prosper. The changing regional environment means that the bilateral relationship is more important than ever.

Global, and regional, trade patterns have been impacted in relatively quick succession by the effects of the global financial crisis (known as the Lehman Shock in Japan), the US-China trade war, COVID-19 pandemic and the Russian invasion of Ukraine. As a result, supply chains have stagnated, and investment growth – which drives much of supply chain activity – has also decreased meaning that many countries (Australia and Japan included) are now less focused on trade liberalisation than perhaps twenty years ago.

Many countries have had cause to review the resilience of their supply and logistical systems and, in some cases, take steps to better equip supply chains by diversifying or identifying alternative trading relationships so as to ensure supply in a higher-risk environment. More than ever trade decisions are being based upon factors that extend beyond pure economic efficiency.

Given an increasingly uncertain and difficult international environment, the pendulum has shifted decisively from an era in which economic considerations were foremost, where liberalisation through regional and global architecture was the focus, to an environment where geopolitical risks are afforded a more prominent focus. There is a new impetus to give more weight to strategic considerations such as concentration of risk in single markets, exposure to the risk of economic coercion, and resilience and security of supply chains rather than merely economic efficiency.

The policy challenge for managing opportunities and constraints created by the increasing role of geopolitics will be to see that mechanisms exist to discourage reliance upon economic nationalism and protectionism and bilateralism. Keeping regional markets open and growing should be the objective of Japanese and Australian trade and investment policies and efforts at a multilateral, regional and bilateral level.

Close economic, political, and diplomatic ties

Australia and Japan have a long history of trade with roots going back to the second half of the 19th century (coal was the first recorded traded commodity from Australia to Japan in 1865).¹ The relationship has evolved with two-way trade now valued at $82.4 billion,² making Japan Australia’s third-largest trading partner and second-largest export destination in 2021 ($62.1 billion representing (13.4 per cent of total exports).³ Australia remains the single largest supplier both of industrial raw materials and energy (which is vital to Japan given that 88 per cent of Japan’s energy comes from imported fossil fuels).

Japan ranks second behind only the United States in terms of the stock of foreign direct investment (FDI) into Australia ($258.7 billion, 6.3 per cent of total FDI),⁴ an investment relationship which underpinned the establishment of Australia’s now world-class natural resources sector. While Australian FDI into Japan has increased over the past 20 years, it remains relatively small.

For context of the scale, Australia’s two-way trade with Japan exceeds Australia’s combined two-way trade with the Republic of Korea ($48.5 billion) and India ($27.6 billion).

Today, the partnership between Australia and Japan has never been closer and stronger but there are challenges ahead for both countries in further developing the relationship. Social and economic changes and a dramatically changing regional landscape mean that the countries cannot take their strong and long-lasting relationship for granted.

Both countries need to manage an increasingly diverse relationship under more challenging conditions of energy supply and cost, decarbonisation, rapid technological advancement, a changing global economic system and an environment of shifting international power structures. In a world where the relationship between the United States and China is expected to continue to be challenging, Australia and Japan will need to figure out how to influence regional dynamics so as to protect their own interests. Given these interests are largely shared, and the two nations have developed long-standing co-operation on regional governance issues, they should be looking to work even more closely together.

Regional institutional framework

The Australia-Japan relationship is not conducted in isolation and is, increasingly, part of a much wider regional and global economic network.

Australia and Japan have historically shared an interest in liberalising global trade, equitable frameworks, multilateralism and transparency. Both countries have worked for decades to remove barriers to trade (formal and informal) in order to enhance the relationship and to increase liberalisation of trade in Asia. Japan opened up its agriculture markets for the first time in the Japan–Australia Economic Partnership Agreement (JAEPA), albeit only gradually.

Since the disappointment of the World Trade Organisation (WTO) Doha Development Round (Doha Round), Japan and Australia’s response with respect to trade, economic and strategic cooperation throughout Asia has been to continue working together to develop architecture through numerous bilateral free trade agreements⁵ and regional and multilateral platforms. An overview of the most notable regional / multilateral platforms in Asia is set out in the Schedule.

In the process of developing closer economic ties in Asia, and Japan’s and Australia’s (to a much lesser extent) aid programs have often worked in parallel with private sector interests. Both countries have been conscientious in searching for effective solutions to regional issues and have collaborated (including through regional / multilateral platforms) to keep markets open and improve access in the Asian region to vaccines, enhance standards for infrastructure, combat the climate crisis, facilitate the development of emerging technologies, ensure the sustainable use of outer space, standardise rules on trade practices such as investment and e-commerce, and promote supply chain efficiency.

Our diplomatic and strategic ties have enjoyed unwavering domestic support regardless of internal leadership and political changes. Most recently, new Japanese Prime Minister Kishida’s planned visit to Australia to meet Prime Minister Morrison would have been his first overseas bilateral visit, had it not been cancelled due to the COVID-19 situation in Japan. The meeting nevertheless proceeded virtually, with the two leaders formally signing the Reciprocal Access Agreement (RAA). This defence and security pact reaffirms the fundamental and enduring importance of the bilateral partnership, facilitates cooperative activities between the two countries’ defence forces and was accompanied by announcements on further bilateral collaboration on cyber and critical technologies, AI, critical minerals and supply chain resilience.

The importance of Australia’s relationship with Japan was exemplified by Prime Minister Albanese and Foreign Minister Wong attending Quad meetings in Tokyo within 48 hours of being elected in May 2022; followed three weeks later by Deputy Prime Minister and Defence Minister Richard Marles.

There is now an unparalleled degree of intra-regional trade interdependence and this is also apparent in terms of investment. This has yielded very positive results for both countries albeit the lessons of the Asian economic crisis at the end of the 20th century and the global financial crisis are a stark reminder that any significant disruption in one economic system will have flow-over impacts. Regional and global cooperation can help countries manage those disruptions although it is the case that the challenges to be addressed in the present climate are much different to that which existed during the aforementioned economic crises and regionalism will likely take a different shape moving forward.

Barriers and impediments to FDI

While existing barriers and impediments do not prohibit trade and investment, there does still exist factors which limit opportunities between the two countries. This is especially the case in relation to FDI.

The FDI regime in Australia has been in a constant state of flux and has become increasingly confusing even to the leading advisers – a plain English version of the Foreign Acquisitions and Takeovers Act and associated Regulations is well overdue.

Since its inception in 1976 the Foreign Investment Review Board’s (FIRB) function has been as an advisory body (to the Treasurer) tasked with overseeing the pre-investment screening process. Changes to policy settings affecting Treasury’s Foreign Investment Division in 2019 has meant that FIRB’s role has evolved into that of a policy body and a regulator that monitors a proponent’s fulfilment of conditions attached to investment approvals and the overall lifecycle of the investment. Market participants have on occasion raised concerns with the lack of transparency of FIRB decision-making processes. There are no appeals, no precedent and numerous different thresholds. At times when the FIRB’s workload is high and a decision cannot be made within the 40-day statutory period there are requests to withdraw applications and resubmit, which can be hard to explain to foreign investors wanting certainty of process.

FDI in Australian critical infrastructure (e.g. energy, communications, water, transport) is subject to an increasingly complex regulatory framework. The Department of Home Affairs (via the Critical Infrastructure Centre) now monitors all investment in critical infrastructure under Security of Critical Infrastructure legislation which is still being formulated. FIRB continues to assess foreign investment proposals for Australia’s critical infrastructure where they meet relevant review thresholds and it is expected that coordination between FIRB and Home Affairs will take some time to work through any inefficiencies and/or double handling. Australia’s evolving approach is similar to that of many other countries concerned about national security risks and will mean that FDI in critical infrastructure will continue to face increasing scrutiny for the foreseeable future across the Asian region.

And although the Japanese Government implemented the Inward Investment Promotion Program in 2010, Japan’s inward stock of FDI is still constrained by regulatory and administrative barriers and, in some sectors, adversarial attitudes to foreign investment.

Japan’s enduring commitment to Asia

Japan has for many years occupied a dominant place in Asia, where its economy is the second largest behind China. Japan has a substantial capacity to influence regional affairs, trade and investment flows and the Japanese Government has long been committed to increasing economic and trade ties to underpin and strength those diplomatic ties.

Japan’s Official Development Assistance (ODA) program commenced in 1954 after signing The Colombo Plan and, during calendar year 2021, it provided over US$17.6 billion in bilateral (grants, loans and technical cooperation) and multilateral aid (through international organisations).⁶ Japan has also made significant contribution through international agencies and led the establishment of the Asia Development Bank (ADB) in 1966. The ADB has since undertaken a central role in addressing regional challenges including the 1970s OPEC oil crisis; the 1990s Asian economic crisis; and various natural disasters in the 2000s.

Japanese foreign aid has remained closely coordinated with, and connected to, other Japanese commercial interests. From the late 1980s, Japanese companies took an increasing interest in direct investment and expanding trade in Asia and as at 2021 Japan was the largest investor in the Asian region (including Oceania) with US$655.35 billion invested.⁷ At the close of the first quarter 2022, Japanese mega-banks (Mitsubishi UFJ, Sumitomo Mitsui and Mizuho) ranked 1st, 2nd and 4th, respectively for project finance in Asia. Japan has played a key role in expanding Asia’s productive capacity in recent decades and boosting the inflow of technology, know-how and human resource development where it is most required.

In March 2022, Prime Minister Kishida announced that Japan will invest US$42 billion (5 trillion yen) in India over the next five years to boost bilateral trade between the countries. To date, most of Japan’s investment in India has been in the automobile, electrical equipment, telecommunications, chemical, insurance and pharmaceutical sectors. Japan has also supported infrastructure development in India for some time, including a high-speed rail project.8 Japan is the second largest Asian investor in China and that bilateral and economic relationship remains a major factor in broader regional prosperity.

Conversely, Australia has not invested heavily in Asia but has sold minerals and energy and purchased finished goods with regional partners. The boards of Australian corporations have strongly favoured investments in the United States and the United Kingdom, which may be a reflection of the limited number of senior executives and directors with experience working in Asia.

Beyond the Bilateral – New Energy transition and critical minerals opportunities in Asia

Japan and Australia have an opportunity to be leaders in regional initiatives to deal with energy transition, energy security and decarbonisation. Japan has historically relied on Australia as a stable and secure source of mineral resources and energy supply. Australia supplies around two-thirds of Japan’s key industrial materials (iron ore, coking coal, copper and alumina), and close to one-third of its entire energy needs (LNG and thermal coal). It has often been said that such reliance sits uneasily with Japan’s policy to diversify its suppliers,¹⁰ yet Australian companies are fully aware of the importance of maintaining and enhancing their reputation of reliability. The recent conflict between Ukraine and Russia has exacerbated concerns in Asia about the stability of supply, mix of fuel sources (LNG, coal, oil, uranium and renewables) and the affordability of energy.

Australia’s abundance of renewable energy sources, and historic status as a stable and reliable energy producer and exporter, is a strong foundation as an energy supplier to Asia which is committed to decarbonisation.

Japan’s ongoing energy transition will be propelled by its commitment to net zero emissions by 2050, and the announcement for Japan’s emissions reductions target to be further reduced from a 26 per cent cut to 46 per cent between 2013 and 2030. This is driving a re-think of corporate strategy, and a further shift in investment priorities. As Japan explores various technology options and in particular, hydrogen and ammonia as fuel sources, Japanese companies are involved in supply chain-related projects with countries around Asia, including Australia.

In response, the Australian Government has positioned hydrogen as an energy export market that will, in time, seek to replace the carbon-intensive LNG and coal markets. Global demand for hydrogen exported from Australia is expected to be more than $50 billion by 2050 and it is therefore more important now than ever that the appropriate standards / systems are developed to help with the safe and effective scale-up of the technology.

Japan and Australia (and other stakeholders, including Korea) should continue to collaborate to develop the infrastructure / framework that will enable an international hydrogen market to flourish in Asia. Japan and Australia will be instrumental in the development and adoption of international hydrogen standards in relation to production, storage and handling, measurement, transport, transmission and distribution of hydrogen (in pure form or blended).

This opportunity is not limited to trade in hydrogen and ammonia but also extends to other renewable energy sources and ‘critical minerals’.¹¹ Critical minerals are essential for the transition away from fossil fuels to cleaner energy technologies. Many countries have also identified critical minerals as necessary for technology products and application in high-tech, defence and a range of other industries including the digital economy.

Critical minerals offer a different and distinct set of challenges to traditional energy sources, but their increasing importance in a decarbonising energy system requires policy makers to work collaboratively to promote sustainable development practices and identify standards to ensure a level playing field across the region.

Australia is a leading producer of many of these critical minerals and it can be expected that Japan will continue to invest in these products – particularly battery materials and high-powered magnets – which are essential to energy storage in the New Energy transition.

In September 2021, the Australian Government established a $2 billion loan facility for Australian critical minerals projects, to assist with some of the financial hurdles associated with development projects. This was strongly supported by the Japanese Government. The Japanese Government is looking to collaborate with State Governments to establish a strong supply chain in critical minerals for better vertical integration, such as in areas of domestic lithium refining, manufacturing of vanadium batteries, graphite anodes, and refining of rare earth elements.

Australia and Japan, alongside other countries, have agreed to map out supply chains for key products and critical minerals, as well as draw up new regulations that will fast-track projects and provide greater offtake agreement certainty.

Third Paradigm of Investment - New Energy Partnerships

Japanese-Australian new energy partnerships are rapidly growing in number, particularly those focussed on the production and transport of hydrogen and ammonia for both the domestic market and export. There are now close to 50 new energy partnerships with regular new announcements, including alliances, collaborations, joint feasibility studies and memoranda of understanding.

As project feasibility is uncertain, and these new energy technologies are largely unproven in large scale production, many Japanese companies are adopting a portfolio approach to their investment in Australian-based new energy projects. This involves participating in multiple partnerships/projects located in different Australian states, with different counterparties, technologies, and even differing products. This also has the consequence of a much more people-intensive era in the bilateral relationship that places at a premium Australia’s ability to do business with Japan and the extent of cross-cultural skills in both workforces.

Hence, the new energy partnerships involve more Japanese and Australian parties working collectively at a project level than ever seen before, to bring together the required technology, financing and logistics supply chain infrastructure to make a project a reality. Also notable and new is the significant support available in the form of grants, concessional funding and credit support from the Japanese, Australian Federal and State Governments and numerous government agencies in both countries.

These partnerships are a distinct third paradigm in the Japan-Australia business relationship which started (firstly) with finance and joint venture arrangements in agriculture, minerals and energy in the 1960s and evolved with (secondly) numerous 100 per cent or majority acquisitions of a variety of domestic businesses from 2007. It appears likely that the partnership model is here to stay and will form the basis of significant new investment over the next 5-10 years, as projects are commercialised.

It is through these partnerships that Australia and Japan are likely to look beyond developments and opportunities in merchandise trade (physical goods and commodities). Services, ideas, data, information and R&D are increasingly setting the tone of global trade and Australia, in particular, should look to further expand its contribution to Asia beyond the supply of raw materials and energy.

The opportunity is for Japan and Australia to work in partnership to export stable and cost-competitive new energy and decarbonisation technology to Asia to assist build geopolitical stability.

Conclusions

Japan and Australia have developed an enviable trade and investment relationship within the framework of wider trade liberalisation in the Asian region. The sheer size and breadth of the bilateral economic relationship, and the trust and long-standing co-operation flowing from this relationship should equip Japan and Australia to lead broader economic co-operation in Asia to help overcome some of the present challenges created by a more uncertain economic and geopolitical environment.

As emerging areas of major trade and investment, the new energy transition, including hydrogen and ‘critical minerals’ present new territory for rule-making and standard setting at a regional level in which both Australia and Japan have vital, aligned interests, and the standing to be key players. Accordingly, it represents a unique opportunity to advance the economic relationship and lead regional initiatives.

I would like to thank Richard Andrews (CEO, Australia Japan Business Co-operation Committee) and Dr Shiro Armstrong (Director, Australia-Japan Research Centre, The Australian National University) for their considerable assistance in preparing this paper.

Ian Williams is an Asia Society Australia-Japan Fellow.

^{1 Alan Rix, Coming to Terms: the politics of Australia’s trade with Japan 1945–57, Allen & Unwin, Sydney, 1986, p. 20; and Peter Robinson, Towards a Total Partnership: a View of Australian-Japanese Trade Relations, 1977, p. 13.}

^{2 Australian Bureau of Statistics; International Trade in Goods and Services, Australia (Table 14a, 14b).}

^{3 Australian Bureau of Statistics; International Trade in Goods and Services, Australia (Table 14a).}

^{4 Australian Bureau of Statistics; International Investment Position, Australia: Supplementary Statistics 2021, Table 2.}

^{5 Australia currently has bilateral free trade agreements / economic partnership agreements with 8 Asian countries and Japan has 10.}

^{6 OECD Development Assistance Committee (DAC) statistics as at 12 April 2022.}

^{7 Japanese External Trade Organisation, FDI Stock (Based on International Investment Position (net)).}

^{8 Japan was selected to build the Mumbai–Ahmedabad High Speed Rail Corridor (MAHSR corridor), an under-construction high-speed rail line connecting India's economic hub Mumbai with the city of Ahmedabad.}

^{9 Chinese FDI figures combine investment from Hong Kong, Macau and Taiwan (considered as part of China).}

^{10 Saburo Okita, ‘Japan’s High Dependence on Natural Resources Imports and its Policy Implications’, Japan Economic Research Centre, Australia-Japan Economic Relations Research Project, April 1975, p. 11.}

^{11 Critical minerals include: rare-earth elements (REE), gallium (Ga), indium (In), tungsten (W), platinum-group elements (PGE) including platinum (Pt) and palladium (Pd), cobalt (Co), niobium (Nb), magnesium (Mg), molybdenum (Mo), antimony (Sb), lithium (Li), vanadium (V), nickel (Ni), tantalum (Ta), tellurium (Te), chromium (Cr) and manganese (Mn).}

^{12 Association of Southeast Asian Nations (ASEAN).}

^{13 An extension of the ASEAN + 3 forum.}

^{14 Including Australia, Brunei, Fiji, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Republic of Korea, Singapore, Thailand, Vietnam and the United States.}

^{15 The four pillars relate to: Fair and Resilient Trade; Supply Chain Resiliency; Clean Energy, Decarbonisation and Infrastructure; and Taxation and Anti-Corruption.}

Australia-Japan: Stepping up a special strategic relationship in Asia has received grant funding from the Australia-Japan Foundation of the Department of Foreign Affairs and Trade. This project is undertaken in partnership with Asia Society Japan.