Australia and Japan, along with two hundred other countries, are dealing with the massive economic and health consequences of COVID19. Both Australia and Japan have relatively good results in health terms but will need to work hard and smart to see a sustained recovery for their economies.

　

There has also been turbulence in geopolitical relations, which affects trade and investment. Australia has experienced significant impacts on its exports of goods and services over and above the effects of reduced demand.

　

In this context it is worth noting the strength and resilience of the economic relationship between Australia and Japan. Although it is eclipsed in raw trade numbers by China, Japan’s contribution is much more valuable when you include investment and the lack of risk in the Australia-Japan partnership based as it is on six decades of trusted collaboration.

　

For many years I have proposed that the value of economic relationships between countries should be adjusted for risk in the same way as business decisions are made. The value of two identical expected income streams is different if they have different risk profiles.

　

Furthermore, different types of financial flows have different values. For example, foreign direct investment is a multi-decade commitment to numerous stakeholders whereas export revenue is much more fluid and transactional. In fact it is investment that creates export revenue. Portfolio investment into stocks and bonds is somewhere in between because it relies on significant institutional mechanisms of governance and regulatory structures to be transparent and trustworthy.

　

Japanese investment into Australia has been booming in recent years but receives little attention. Japanese investments have been made in a wide array of sectors, including paper, paint, banking, beverages, manufacturing, life insurance, energy, resources, advertising and recruitment.

　

Australia’s exports to Japan are about 40% of those to China, but Japan’s FDI into Australia by 2019 had reached $116 billion, which is 2.5 times as large as China’s. In addition, Japanese portfolio investment into Australia in 2019 was $90 billion, twelve times that from China.

　

According to my modeling, which uses trade, FDI and portfolio flows adjusted by weighting and country risk, Japan’s contribution to Australia is second only to the USA and about three times that of China’s.

　

These findings are very pertinent for both Australia and for Japan as the drive amongst many countries is toward a decoupling or a new coupling with other economies. The many decades of fruitful economic relationships are great foundations to find new opportunities.

　

 

Author: Manuel Panagiotopoulos

Managing Director, Australian and Japanese Economic Intelligence