	Introduction

Japan's trade policy has historically centered on multilateral negotiations and dispute resolution mechanisms. Over the past five years, Japan has shifted course somewhat by pursuing negotiations in the WTO but by also seeking free trade agreements (FTAs) and Economic Partnership Agreements (EPAs) with mostly Asian countries. An FTA is an agreement between two countries or regional groupings to eliminate tariffs and other trade barriers, while an EPA goes further by also attempting to facilitate the free movement of people and capital among the partners to an agreement. Non-members find their exports discriminated against. The pursuit of FTAs is occurring worldwide with nearly 300 estimated to be currently in effect. The United States has an extensive FTA program and agenda, and has FTAs in effect with two Asian-Pacific countries—Singapore and Australia. Europe has been pursuing a similar course for years. Now Japan is trying to catch up. But it has considerable interest in whether Japan's policy evolves in a manner that is supportive of U.S. interests in Asia—which include promoting a stable balance of power and insuring that U.S. trade and investment interests are not discriminated against in the region. These range from increasing Japan's bargaining power in WTO negotiations to helping Japan better compete with China for influence in Asia. The FTA will eliminate or reduce tariffs on industrial goods by 2015. In addition, after concluding agreements with Malaysia, the Philippines and Thailand, Japan hopes to expand those agreements (including the one with Singapore) to ASEAN as a whole. Challenges to Advancing FTA/EPA Negotiations

Japan's ability to promote its economic interests through an aggressive FTA/EPA program is constrained by protection of its agricultural sector and rigid immigration policies. Many in Japan believe that support for agricultural protection will disappear over time. Interests

Japan's FTA program, assuming the current defensive course persists, may have varied effects on U.S. interests. On the one hand, it is likely to provide a positive, yet small, boost to increasing Japan's role in the economics and political economy of East Asia. It is also likely to be favorable to bilateral trade ties as other Asian trading partners, instead of the United States, pressure Japan to open its agricultural market further. On the other hand, lack of a meaningful agricultural reform program bodes poorly for positive support from Japan in the agricultural negotiations of the Doha Round. There are also concerns that a defensive and weak FTA program pursued by Japan could allow China to play a more dominant role in the Asian economy—perhaps even creating an exclusionary Asian trading bloc. This assessment is not likely to be altered by the estimated weak impact of Japan's FTA program on growth. Beijing has concluded a partial FTA with ASEAN ahead of Japan and South Korea.
Japan's trade policy historically has centered on multilateral negotiations and dispute settlement mechanisms. Over the past five years, however, Japan has shifted course somewhat by seeking free trade agreements (FTAs) with a number of countries, mostly in Asia. An FTA is an agreement between two countries or regional groupings to eliminate or reduce tariffs and other barriers on trade in goods and services. Non-members find their exports discriminated against.
The pursuit of FTAs is occurring worldwide. The U.S. has an aggressive program and has FTAs in place with two Asian-Pacific countries—Singapore and Australia—and is negotiating one with Thailand. Europe has been pursuing a similar course for years. China and 10 members of the Association of Southeast Asian Nations (ASEAN) began implementing a partial FTA this year. Now Japan is trying to catch up.
By freeing up trade in goods and services, Japan hopes to energize its economy, as well as to better compete with China for influence in Asia—objectives that seem to support U.S. interests. However, Japan's FTA program to date has not been robust enough to have much impact. Constrained by domestic pressures to continue protection of its agricultural sector, the FTA agreements Japan now has implemented with Singapore and Mexico and is scheduled to implement next year with the Philippines, Malaysia, and Thailand are unlikely to have a significant impact on Japan's economy. Agreements with larger countries where the commercial stakes are greater, such as South Korea, Australia, and China, are either stalled or being shied away from.
Agriculture is Japan's biggest constraint on moving forward on FTAs. While some progress is being made in cutting tariffs on food items that serve small markets, highly protected rice and beef markets are not being offered for liberalization. Moreover, in the absence of a substantial farm reform program that would make liberalization of these products easier, many Japanese decision-makers hope protectionist pressures will go away over time with an aging farmer population that is shrinking and increasingly part-time.
Japan's FTA program, assuming the current cautious and defensive course persists, is likely to have varied effects on U.S. interests. On the one hand, it is likely to provide a positive, yet small, boost to increasing Japan's role in the economics and political economy of East Asia. It is also likely to be favorable to bilateral trade ties as other Asian trading partners (instead of just the United States) pressure Japan to open its agricultural market further. On the other hand, the absence of a meaningful agricultural reform bodes poorly for support from Japan in the agricultural negotiations of the Doha Round. There are also concerns that a defensive and weak FTA program could allow China to play a more dominant role in the Asian economy through its own FTA program—perhaps even creating a exclusionary Asian trading bloc. This report will be updated as events warrant.