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Investment will overshadow trade in Japan-US talks – The Japan Times

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The Japan-U.S. Trade Agreement (JUSTA), the pinnacle for modern trade policy between the two allies, is now in force.

While it’s not a comprehensive trade deal, the JUSTA will remove barriers for billions worth of traded agricultural and industrial goods. Leaders in Washington and Tokyo can rightly highlight the “win-win” benefits of the agreement. And so, over the coming year we should expect other economic issues besides trade to take the lead for future policy discussions and coordination.

Japan-U.S. trade policy will instead take a back seat in the next 10 months to issues like investment policy. Meanwhile, all eyes will be on Washington as the presidential debates and election take the spotlight. Washington will become a political and rhetorical minefield. Any substantive discussion on trade policy will be out of the question as trade continues to become a highly politicized issue. But Japan-U.S. policy coordination will still continue on a working level.

It’s good the JUSTA is essentially done with (though there are implementing procedures to go through) and negotiations are out of the way. But the election is only one reason why we shouldn’t expect any substantial progress on a comprehensive Japan-U.S. free trade agreement (FTA) in the near future.

It’s almost impossible for Congress to pass a trade deal in an election year. Even though the White House may get Congress to vote on the U.S.-Canada-Mexico Agreement, this leaves little political capital left to take up a Japan-U.S. FTA.

U.S. and Japanese trade negotiators understand these political limitations, despite their efforts to negotiate an FTA. Still, even if it wasn’t an election year, both governments are perfectly fine taking the JUSTA as it is to avoid removing barriers to traditionally protected industries or risking punitive tariffs.

There are still a number of areas where Japan-U.S. trade can become more free. The JUSTA falls short of addressing import taxes and other trade barriers on certain goods such as rice, butter, fresh poultry, grapefruits, mandarins, melons, tomatoes, strawberries and passenger vehicles, to name a few.

That’s not to say Japan-U.S. trade interests won’t completely fall by the wayside this year. Both the United States and Japan still have a keen interest in figuring out how to address trade distortions caused by large economies like China. Dealing with non-market economies through the framework of the World Trade Organization will be a top priority for the U.S., Japan and the European Union at this year’s ministerial conference in June — though they’re unlikely to reach any significant solution.

U.S. representatives are more likely to attract criticism from other WTO members than support after allowing a key feature of the WTO’s dispute system, its appellate body, to fall into limbo last year. So with trade essentially out of the way, this more or less moves investment policy into the front seat for Japan-U.S. bilateral discussions.

Investment is important on its own, given its intersection with trade and when talking about Japan-U.S. investments.

U.S. entities are the largest investor in Japan, having historically invested over $60 billion, according to the Japan External Trade Organization. Japanese entities are the second-largest investor in the U.S., having historically invested over $500 billion in U.S. industry and finance, according to the U.S. Bureau of Economic Analysis.

There’s a lot of new rules around foreign investment emerging in both Washington and Tokyo, and in Asia in general. U.S. regulators just finalized new rules that will affect how they review foreign investment and national security. The Diet just recently passed legislation to update its laws on foreign investment as well.

Much of these new rules focus on administrative concerns, like company ownership, and the legal authority governments have to review foreign investments. Other new rules focus on whether potential bad actors could get access to critical technology and information in industries sensitive to national security, with both countries having an eye toward investments from China. But as the U.S. has seen in the past, investments from our largest partners (the United Kingdom, Japan and Canada) tend to get caught up in this red tape for review just as frequently as investments from China. The same could happen for Japan and its occasional investors.

Meanwhile, China has a new foreign investment law that went into force this year that stipulates foreign investment will be treated as equally as domestic investment. Overbearing Chinese regulations on U.S. investments are one of the issues disputed in the U.S.-China trade war.

This isn’t to say U.S. and Japanese officials haven’t been communicating on these new rules at all. For the U.S., it’s the most comprehensive reform of this type of foreign investment law since 2008. Officials want to make sure they get the right mix of input from stakeholders because the last thing they want is to stifle foreign investment.

For Japanese officials, and more importantly Japanese companies, it’s also about making sure that when the U.S. establishes a new whitelist of “excepted foreign states,” where a few countries will see some relief from these new rules, Japan manages to get on the list. But that decision may not be made for another two years.

Other types of investments in Asia are as likely to be in focus this year as well. Just a few months ago, the U.S., Japan and Australia introduced what’s called the Blue Dot Network, an effort that piggybacks on previous investment agreements backed by Japan, the U.S. and Australia to make sure development projects in the Indo-Pacific are high-quality.

Chinese investments abroad, either as a part of its “Belt and Road” initiative or in technologies related to the Made in China 2025 plan, will continue to be the focus for U.S. and Japanese efforts in 2020, too.

Trade will re-emerge as a leading issue in the U.S. as Congress takes up the renewal of America’s leading trade law in 2021. Until then, expect investment to lead the policy discussion and coordination for U.S. and Japanese officials.

Riley Walters is a policy analyst with the Asian Studies Center at the Heritage Foundation.

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Oil rises as investors focus on OPEC+ decision amid growing Omicron fears

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Oil prices rose on Thursday, recouping the previous day’s losses, as investors adjusted positions ahead of an OPEC+ decision over supply policy, but gains were capped amid fears the Omicron coronavirus variant will hurt fuel demand.

Brent crude futures rose 85 cents, or 1.2%, to $69.72 by 0402 GMT, having eased 0.5% in the previous session.

U.S. West Texas Intermediate (WTI) crude futures gained 85 cents, or 1.3%, to $66.42 a barrel, after a 0.9% drop on Wednesday.

“Investors unwound their positions ahead of the OPEC+ decision as oil prices have declined so fast and so much over the past week,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.

Global oil prices have lost more than $10 a barrel since last Thursday, when news of Omicron shook investors.

“Market will be watching closely the producer group’s decision as well as comments from some of key members after the meeting to suggest their future policy,” Ueno said.

The Organization of the Petroleum Exporting Countries and its allies, together known as OPEC+, will likely decide on Thursday whether to release more oil into the market as previously planned or restrain supply.

Since August, the group has been adding an additional 400,000 barrels per day (bpd) of output to global supply each month, as it gradually winds down record cuts agreed in 2020.

The new variant, though, has complicated the decision-making process, with some observers speculating OPEC+ could pause those additions in January in an attempt to slow supply growth.

“Oil prices climbed as some investors anticipate that OPEC+ will decide to maintain the current supply levels in January to cushion any damage on demand from the Omicron spread,” said Toshitaka Tazawa, an analyst at Fujitomi Securities Co Ltd.

Fears over the impact of the Omicron variant of the coronavirus rose after the first case was reported in the United States, and Japan’s central bank has warned of economic pain as countries respond with tighter containment measures.

U.S. Deputy Energy Secretary David Turk said President Joe Biden’s administration could adjust the timing of its planned release of strategic crude oil stockpiles if global energy prices drop substantially.

Gains in oil markets on Thursday were capped as the U.S. weekly inventory data showed U.S. crude stocks fell less than expected last week, while gasoline and distillate inventories rose much more than expected as demand weakened. [EIA/S]

Crude inventories fell by 910,000 barrels in the week to Nov. 26, the Energy Information Administration (EIA) said, compared with analyst expectations in a Reuters poll for a drop of 1.2 million barrels.

(Reporting by Yuka Obayashi; Editing by Tom Hogue)

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Toronto market hits 7-week low on Omicron uncertainty

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Canada‘s main stock index fell on Wednesday to its lowest level in over seven weeks as the United States reported its first case of the Omicron variant that investors fear could impede economic recovery, with the index giving back its earlier gains.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 195.39 points, or 0.95%, at 20,464.60, its lowest closing level since Oct. 12.

Wall Street also closed lower as the U.S. Centers for Disease Control and Prevention said the country had detected its first case of the new COVID-19 variant, which is rapidly becoming dominant in South Africa less than four weeks after being detected there and has spread to other countries.

It might take longer than expected for supply chain disruptions to abate, “especially if we have renewed shutdowns in Asia,” said Kevin Headland, senior investment strategist, Manulife Investment Management.

Still, Headland does not expect the new variant to lead to an economic recession or a bear market for stocks in 2022, saying: “Reaction to headline news provides opportunities for those that have a longer-term timeframe to add in the equity markets.”

The TSX will add to its recent record high over the coming year as the domestic economic recovery helps underpin corporate earnings, but gains are expected to slow from 2020’s breakneck pace, a Reuters poll found.

The technology sector fell 2.7%, while energy ended 1.9% lower as oil was unable to sustain an earlier rally. U.S. crude oil futures settled 0.9% lower at $65.57 a barrel

The materials group, which includes precious and base metals miners and fertilizer companies, lost 2.2%.

Financials were a bright spot, advancing 0.4%, helped by gains for Bank of Nova Scotia as some analysts raised their target price on the stock.

Bombardier Inc was among the biggest decliners. Its shares sank 10.4%.

 

(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Peter Cooney)

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Canada’s TSX to extend record-setting rally; pace of gains to slow: Reuters poll

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Canada‘s main stock index will add to its recent record high over the coming year as the domestic economic recovery helps underpin corporate earnings, but gains are expected to slow from 2020’s breakneck pace, a Reuters poll found.

The median prediction of 26 portfolio managers and strategists was for the S&P/TSX Composite index to rise 9.1% to 22,540 by the end of 2022.

That’s a move that would eclipse last month’s record high of 21,796.16 and compares with an August forecast of 22,000. It was then expected to edge up to 23,150 by the middle of 2023.

The index had advanced 18.5% since the start of the year, putting it on track for its second biggest gain since 2009.

“We think the economy and markets will continue to progress further into the mid-cycle phase next year,” said Angelo Kourkafas, investment strategist at Edward Jones. “We are past the strongest point of the cycle, but there is plenty of runway ahead, especially from an economic standpoint.”

Canada‘s economy https://www.reuters.com/world/americas/canadian-economy-posts-annualized-gain-54-q3-october-gdp-seen-up-08-2021-11-30 grew at an annualized rate of 5.4% in the third quarter, beating analyst expectations, and growth most likely accelerated in October on a manufacturing rebound.

“Banks can continue to benefit from an improving economy and reducing loan loss provisions and resource companies can benefit from higher commodity prices,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.

Combined, the financial services and resource sectors account for 55% of the Toronto market’s valuation.

Nearly all participants that answered a separate question on the outlook for corporate earnings expected earnings to improve. But the pace of growth could slow.

“We expect a decelerating pace of (earnings) growth,” said Chhad Aul, chief investment officer & head of multi-asset solutions at SLGI Asset Management Inc. “In particular, we expect the recent strong earnings growth in the energy sector to begin to moderate.”

The price of oil, a key driver of energy sector earnings, has tumbled 24% since October, pressured by rising coronavirus cases in Europe and the detection of the possibly vaccine-resistant Omicron variant.

Another risk to the outlook could be a reduction in policy support, say investors.

With inflation climbing, the Bank of Canada https://www.reuters.com/world/americas/bank-canada-signals-it-could-hike-rates-sooner-than-expected-2021-10-27 has signaled it could begin hiking interest rates as soon as April and the Federal Reserve https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30 is mulling whether to wrap up tapering of bond purchases a few months sooner.

“The key is the pace of both fiscal and monetary policy normalization,” said Ben Jang, a portfolio manager at Nicola Wealth. “This process will likely lead to more volatility in markets, potentially returning to an environment where we will see drawdowns of more than 10%.”

Asked if a correction was likely over the coming six months, nearly all respondents said yes.

 

(Reporting by Fergal Smith; polling by Mumal Rathore and Milounee Purohit; editing by David Evans)

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