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Introduction

‘The U.S.-Japan relationship is the most important bilateral relationship in the world, bar none.’    Mike Mansfield

As former US ambassador to Japan, Mike Mansfield once stated, US-Japan relations constitute the most important bilateral relationship, unique among all other bilateral relationships. The two countries are important partners, sharing such basic values and principles as freedom, democracy, rule of law, respect for human rights and the market economy.

In recent years, the two countries have maintained a favorable relationship, achieved by virtue of the relentless efforts made by related parties of the two countries, and we should not take it for granted that the relationship will automatically sustain itself without continued efforts by both sides. As the political and economic environments surrounding the US and Japan change dramatically and become more complicated every day, we need to respond to such situations with multifaceted perspectives and strategies. The most typical example here is the rising significance of the Asia-Pacific region in terms of economy, politics and security as emerging economies gain power and influence.

Amid such circumstances, the Trump administration was inaugurated in the United States in January of this year. At the US-Japan summit meeting held in February, the two nations conveyed a political message to the world that they would prioritize the US-Japan alliance, and Keidanren regards this as a significant achievement. In the joint statement (February 10, 2017), the two nations confirmed that "the unshakable U.S.-Japan Alliance is the cornerstone of peace, prosperity and freedom in the Asia-Pacific region" and "amid an increasingly difficult security environment in the Asia-Pacific region, the United States will strengthen its presence in the region, and Japan will assume larger roles and responsibilities within the alliance." This message represents the fundamental direction of their future relations, and the Japanese business community welcomes and highly recognizes such developments.

Now, based on the unshakable alliance of the two countries, we must make economic ties between Japan and the US even stronger and more resilient. And both the US and Japan must strive to establish a trade and investment relationship supported by a high standard set of rules in the Asia-Pacific region, and at the same time, undertake together to resolve various global issues and exercise their leadership to maintain and strengthen a free and open international economic order.

I. Need to achieve inclusive and sustainable economic growth of the two countries

With a view to further improving the already good economic relations between the US and Japan, it is a prerequisite that the two countries achieve inclusive and sustainable economic growth.

First, turning our eyes to the domestic economy, Japan must aim at becoming one of the most business-friendly countries by developing its business and investment environment and securing an equal footing internationally. When we turn our eyes to its external relations, it is essential that we establish an institutional framework to support companies' international business operations by promoting the formation of economic partnership agreements and investment agreements.

With regard to the development of the business and investment environment, Keidanren has sought to achieve (1) early reduction of the corporate effective tax rate, (2) implementation of measures to promote capital investment, (3) acceleration of further regulatory reform, (4) security of an affordable and stable electricity supply, (5) the government's initiatives to develop and commercialize next-generation technology, (6) maintenance and expansion of tax measures to promote R&D, and (7) further deregulation in the area of labor. We expect the Japanese government to boost its efforts toward early realization of these structural reforms. In addition, Japan should advance the active participation of women, young people and senior citizens not just in the labor market but also in society as a whole, as well as accept foreign human resources more actively in order to fuel inclusive and sustainable economic growth supported by a more diversified workforce.

For Japan with its rapidly aging society and declining birth rate, promoting globalization and incorporating the vigor of overseas markets also constitute indispensable factors to realize sustainable economic growth, along with internal structural reforms. Companies today cannot conduct business and sustain a sound growth without the free and smooth cross-border movement of people, goods, capital and services. The supply chains of Japanese firms are actually expanding globally, and the Asia-Pacific region now accounts for about 70% of all Japanese trade and investment. Therefore, the conclusion of the above-mentioned economic partnership agreements and the establishment of rules to support free and open trade and investment that covers the region are strongly required.

While the US economy is recovering moderately, the Gini coefficient has risen from about 0.3 in the 1980s to nearly 0.4 at present,^#1 and this suggests that the income gap between people who have successfully captured the globalization trend and those left behind is widening, leading to growing discontent with conventional politics and the establishment, and fueling the growing anti-globalization movement. To rectify the problem of this structural gap, it is necessary, for example, to enhance education and vocational training to raise the employability of workers in ways that respond to the needs of society. This is also expected to change the industrial structure and culminate in more active domestic investment. As well, the driving force behind the US economy lies in its active acceptance of superior human resources, technologies and capital from outside the country as important elements of economic vitality. It is desirable that the vertical and horizontal mobility long seen in US society, which is the underlying source of active incorporation from abroad, be maintained in the future. Furthermore, considering that company investment decisions are generally made from a long-term perspective, securing the transparency, stability and predictability of government policies is an essential condition to further improving the investment appetite to the US economy.

In addition, implementation of various policies advocated by the Trump administration, such as regulatory reform, tax reform including lowering the corporate tax rate and reducing the income tax of the middle class, and large-scale infrastructure investment amounting to one trillion US dollars that may well stimulate companies' investment appetite, will provide a tailwind not only for the US but also the entire world economy. We expect the US government to execute these initiatives in collaboration with Congress in a speedy manner.

Externally, we are closely watching the development of international trade policies, including renegotiation of the North America Free Trade Agreement (NAFTA) in particular. Since NAFTA took effect more than 20 years ago, it has invited an enormous amount of inbound investment and brought many benefits to the US economy and its society. We hope that the expected negotiation to reform the agreement increases such effects even further. Also, to incorporate the vitality of the Asia-Pacific region into the US economy, it is necessary to create a framework of free trade and investment extending across the entire region, and we therefore expect the US government to proceed with its international trade policies based on these perspectives.

II. Initiatives toward stronger and more resilient economic relations between the two countries

Unlike in the past when we experienced harsh trade frictions, the US and Japanese economies today are closely interconnected and inseparable as important trade and investment partners. In particular, Japanese companies' direct investment in the US has steadily risen, reaching roughly 31.1 billion US dollars^#2 on an annual flow basis, the largest amount among the G20 countries, and on a stock basis (balance) about 411.0 billion US dollars,^#3 the second highest in the world, next only to the United Kingdom. As a result, Japanese affiliated companies operating in the US have created about 840,000 jobs^#4 in the US, and the employment creation effect including indirect employments estimated to be as much as 1.74 million. If we focus on manufacturers, Japanese affiliated companies hire about 380,000 people,^#5 a figure higher than other countries. In addition to employment, Japanese affiliated companies in the US also contribute to US exports, boasting around 79 billion US dollars^#6 in export value, the largest among foreign affiliated companies operating in the United States. We can clearly see that Japanese business activities have taken root all around the US, with Japanese companies constantly generating stable employment and growth in various parts of the country as good corporate citizens, and making contributions to the development of the US economy. It should be noted that many Japanese companies have provided employment assistance programs in the US by offering educational support and job training over the long term.

With the high expectations of Japanese firms in the US market, which is by far the largest and the most mature market, their operations in the US are expected to continue expanding going forward. According to a survey conducted by JETRO, Japanese companies in the US are growing their appetite to expand their operations steadily, and since 2012, more than 50% of such companies have considered making business expansion investments.^#7

Also, concerning US direct investment bound for Japan, while investment by the US is ranked top among other countries,^#8 its absolute value accounts for only 14% of Japanese direct investment in the United States. Nonetheless, US companies have begun studying how to invest directly in Japan or build strategic partnerships with Japanese companies as a foothold to access the fast-growing markets in the Asia-Pacific region. Hence we can expect to see an expansion of investments both ways.

With a view to achieving stronger and more resilient economic ties between the US and Japan based on their firm bilateral alliance, we need to identify and expand areas where the two countries can further develop, utilizing various opportunities including the newly established framework of the US-Japan economic dialogue. When the two countries' economic relations are reinforced through such cooperation, it will contribute to an even stronger and more resilient alliance between the two counties.

(1) Exercising leadership to strengthen global governance

With emerging countries searching to take initiative to define new global rules, the US and Japan, sharing common values, bear responsibility to exercise their leadership to maintain and strengthen the existing global governance, such as the United Nations, International Monetary Fund (IMF) and World Trade Organization (WTO). Furthermore, in an age of increasing globalization, issues extending beyond national borders, such as refugees, terrorism and cyberattacks, require urgent address. The US and Japan should also collaborate in tackling these kinds of issues.

(2) Establishing free and open trade and investment rules in the Asia-Pacific region

Expectations of US-Japan leadership are particularly high with respect to establishing free and open rules on trade and investment. While utilizing the outcome of the Trans-Pacific Partnership (TPP) negotiations, the two nations should press ahead with liberalization of services and investment, not to mention the liberalization of tariffed trade, and set forth twenty-first century rules on a wide variety of areas that include digital trade, intellectual property and state-owned enterprises, ultimately to realize the Free Trade Area of Asia-Pacific (FTAAP). If the US and Japan can exercise their leadership in such initiatives, it may put an end to the anti-globalization or anti-free trade movement that is gaining ground all around the world today.

(3) Cooperating in infrastructure investment

One specific area of cooperation where the two nations' business communities are expecting concrete results is the infrastructure investment touted by the Trump administration. To generate a win-win result in this area, the two governments and private companies should collaborate, bringing together their wisdom and expertise, and take advantage of their cutting-edge technologies to promote various infrastructure projects across the US in the fields of power grids, high speed railways and smart-city projects, and also advance initiatives to promote infrastructure investment in third countries.

(4) Cooperating in generating innovation

The US and Japan can cooperate in a wide range of areas to generate innovation by making use of the latest technologies, such as IoT (Internet of Things) and AI, in addition to infrastructure, energy and cyber security. For example, it may be beneficial for the US and Japan to deepen their dialogue with respect to developing a global environment that can contribute to the realization of Society 5.0 advocated by Japan, taking the practices of the U.S.-Japan Policy Cooperation Dialogue on the Internet Economy (IED) and the EU-Japan Sector-to-Sector Meeting as good examples.

(5) Cooperating in solving social issues

It may also be effective if the US and Japan can work together to tackle their respective social issues. For example, to realize an inclusive economic society where everyone can play an active role, the two nations can work toward effective solutions, using their own knowledge and experience to solve such problems as how to respond to the declining birth rate and aging society, how to facilitate more women to actively engage in society, and how to promote more active participation of people with disabilities in society.

III. Initiatives by Keidanren

A strong US-Japan partnership is not only indispensable for security and economic development of the two countries but also serves as a foundation for peace and prosperity in the Asia-Pacific region. To make this foundation even stronger and more resilient, it is important that the business communities of the two nations share a common recognition of the above issues, and collaborate in prompting their respective governments to take concrete actions. In light of this, the joint declaration adopted at the G7 Business Summit meeting (B7 Summit) held in Rome last month, attended by Keidanren and the U.S. Chamber of Commerce, highlights the common recognition of the business communities in the two countries for the time being. It is essential that we work to materialize this declaration and build further discussion on this as a foundation.

The Japanese business community and companies can play a significant role in such an initiative. As mentioned earlier, Japanese firms have contributed greatly to the US economy through investment and employment, and the two countries' interaction and communication generated from such activities are precious assets that can lead to a bright future for both. Going forward, Keidanren will continue engaging proactively with related officials in the US and Japan, so that Japanese companies can continue to participate and contribute to the US economy as good corporate citizens.

Furthermore, Keidanren will hold active dialogues in the US, at both federal and state levels, through such means as the dispatch of its mission, opinion exchanges with leading US figures visiting Japan, and collaboration with US business organizations. Keidanren will also disseminate information strategically to broaden understanding of how Japanese firms make tangible contributions to the US economy.

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1. Based on "Income Distribution and Poverty" of the OECD. The Gini coefficient sets disposable income (after tax) as the standard.
2. Based on the Bureau of Economic Analysis (BEA), US Department of Commerce (2015).
3. Based on the Bureau of Economic Analysis (BEA), US Department of Commerce (2015).
4. Based on the Bureau of Economic Analysis (BEA), US Department of Commerce (2014). "Japanese affiliated companies" mean subsidiaries whose majority shares are owned by Japanese firms. When including companies with 10% or more of their shares owned by Japanese firms (minority share), the number of employees increases to over 900,000. The estimate on indirect employment effect is calculated by the secretariat of Keidanren, based on the Japanese affiliates including minority share.
5. Based on the Bureau of Economic Analysis (BEA), US Department of Commerce (2014).
6. Based on the Bureau of Economic Analysis (BEA), US Department of Commerce (2014).
7. According to the "Survey of Japanese Companies Operating in the US" conducted by JETRO, since 2012, the ratio of companies expecting to expand their business in the next one to two years has been 57.1%, 60.1%, 60.3%, 56.7% and 53.4% for all coverage and has exceeded the 50% mark in all years.
8. Based on "Trade Statistics of the World and Japan" by JETRO (Japan External Trade Organization).