TLR 174: Belated Sunrise in Japan
February 8, 2016
This is an unusual issue — almost certainly unprecedented for this publication — in that it is devoted to a single topic, namely Israel-Japan relations. However, that one topic touches on aspects of all the five areas that this newsletter seeks to cover, namely A] Regional Developments; B] Domestic Politics; C] Macro-economics; D] Corporate Affairs and E] Financial Markets – so that the normal format is actually present, albeit beneath the surface.
My starting point is the deliberate decision by the Japanese government to rapidly develop Japan’s relations with Israel. That itself begs the question as to why these relations were largely dormant in the past – and, of course, demands an answer as to what has prompted the change. The discussion therefore reviews the barren history of Israel-Japan links, moves on to identify who changed things, how and why – and traces the process by which the entire relationship has been redesigned and massively upgraded. Having brought the story up-to-date, including important developments in late January, the final section of the issue considers the prospects for this new friendship are – both the threats facing it and the opportunities stemming from it.
The reason for giving so much attention to this topic is two-fold: I believe it is extremely important and I am amazed/ shocked /horrified that it has received virtually no coverage – certainly not commensurate with its importance – in the Israeli media, let alone the international media. In a sense, this is an attempt to correct that state of affairs but, to be more modest, it is an effort to bring to the attention of my subscribers a major development in Israeli foreign and trade policy with truly enormous potential in the areas of investment, R&D co-operation and more.
The extraordinary feature of this development, which has been underway for some two years, is that it is happening in broad daylight, not behind closed doors – yet no-one is paying attention. The analysis offers suggestions as to why this is the case, but as with so much else, the importance of the topic is inversely related to the amount of publicity it gets. A more difficult analytical question is why the diplomatic breakthrough has not found expression in the trade data – but I have some interesting insights on that score.
Let me add that in preparing this issue I have not engaged in intensive research, let alone espionage. I have simply used information and data that are readily available, amplified and enhanced by talking to a few individuals who are or were actively engaged in Israel-Japan relations and whose positions, whether business or diplomatic, are all publicly known and/or officially reported. That makes this analysis well-grounded, but with no claim to be ‘authoritative’. There are many open questions and much work remains to be done – hopefully soon, by people with more resources available.
a) In plain sight, but with the volume muted
b) Short review about nothing
c) Shall two walk together…?
d) A funny thing happened on the way to Tokyo
e) Where do we go from here?
a) In plain sight, but with the volume muted
The topic of Israel-Japan relations is a major story which is happening now. It has significant geo-strategic implications, both in the Middle East and the Far East. But its potential importance for Israel is greatest in economic, business and financial terms, for a very simple reason. Despite being mired in severe socio-economic problems and facing growing strategic threats, Japan is still the third biggest national economy in the world, after the US and China (or China and the US, depending on how they are measured). It is still, more than ever, a technological powerhouse, viewed as the undisputed world leader in some important new technologies and a major player in others.
Therefore, from the point of view of a small, technology-oriented economy such as Israel, Japan is a very big deal. In some respects, the potential it offers the Israeli economy and the average Israeli hi-tech firm or start-up is greater than that of China. That is definitely true of the Israeli defence sector, which encompasses purely military products, ‘homeland security’ products and services, cyber – both offence and defence, and a variety of other services. This sector, which is the heart, backbone and much of the brains of the overall Israeli technology universe, is largely barred from or, at the least, constrained from doing business with China. But the American veto that blocks the development of Israel-China links in this area does not apply to Japan – indeed, the opposite may be true.
However, in terms of awareness, this topic of Israel-Japan relations is nowhere to be found onthe ‘agenda’ or the ‘radar screen’ of the Israel general public. The business community, by contrast, is becoming cognisant of the opportunities opening up to it – yet there is little evidence of this in the financial media. The dramatic breakthroughs that have taken place over the last two years in the relationship between the two countries have, for the most part, been visible to the naked eye, occurred in full public view and in broad daylight – but have nevertheless elicited almost no reaction. As Sherlock Holmes explained to the bemused Watson — who had never heard of Professor Moriarty and was blissfully unaware of his critical role as the criminal mastermind of London — “there’s the beauty of the thing”.
It seems to me a searing indictment of the way that the press and other media operate nowadays – everywhere, but perhaps especially in Israel – that this major foreign policy development, with all its economic, business and strategic ramifications, has remained below the media’s radar screen. That has been possible by use of ‘stealth’ weapons: if you don’t make a big noise about something, by using pro-active spokespeople, aggressive PR and a strategy aimed at attracting attention – then you will get zero publicity. The rule that ‘if it wasn’t in the media it didn’t happen’ may be a travesty of reality, but it is tragically true as far as the media themselves are concerned.
The main reason there has been no pro-active publicity is because that’s the way the Japanese operate – everywhere, but especially in Israel, where they have no desire to make a big splash. Yet the facts speak for themselves: in terms of quantity, quality and results, the high-level visits between the two countries over the last two years is sufficient evidence to prove that something big is happening. But, as per Bob Dylan’ skewering of the press fifty years ago in ‘Ballad of a Thin Man’ – “something’s going on in here, but you don’t know what it is – do you, Mr Jones?”
b) Short review about nothing
Israel and Japan established diplomatic relations in 1952, only a few years after the establishment of the State of Israel and of the postwar, reformed Japanese state. It is worth noting that, of all the (non-European) countries that either achieved independence or were reborn in a democratic structure in the period 1945-50, only three have consistently operated as functioning democracies: Japan, India and Israel. That commonality did not prevent these three countries from having a cool and often frigid relationship for much of the time, and only very recently – for reasons that will be noted – have those relationships warmed and developed.
In the case of Japan and Israel there is another important, although little-known, commonality. In the post-war generation of reconstruction and rapid economic growth around the world, there were only two countries that, over the quarter-century ending in 1973, had the distinction of achieving a compound average annual growth rate of 10%. They were Japan and Israel. In both cases, the economic success was the result of effective government policies and hard work – neither country had any raw materials and both had to import almost all of the basic products required by their industries and homes.
Nevertheless, despite the existence of formal relations and of common economic experiences, there was virtually no substance – certainly not in the commercial sphere – to the relationship. The reason for that was simple enough: resurgent Japan needed oil to build and maintain its industry – the proximate cause of its multiple aggressions in 1941 – and it quickly became dependent on imports from the Arab Middle East. These countries – Saudi Arabia, Kuwait, Iraq, etc., although not pre-Islamic Revolutionary Iran – adopted a three-level economic boycott against Israel. Direct trade between them and Israel was forbidden (the primary boycott); trade with entities that traded with Israel was also forbidden (the secondary boycott); and pressure was to be exerted on other countries and firms to cut their links with Israel (the tertiary boycott), although this aspect was harder to enforce and often ignored.
Most Western countries made the simple calculation that, whatever their sentiments might be with regard to the Arab-Israeli conflict, their business interests required them to pay heed to the boycott, because the Arab world was much larger and richer than the fledgling Jewish state, with it few million inhabitants, mostly Holocaust survivors from Europe or refugees from countries in the Middle East and North Africa. But while the boycott was widely, if often reluctantly, observed by European companies, no non-Arab and non-Moslem country was more scrupulous in its observance than Japan and all the major Japanese corporations. In this as in everything else of importance, the Japanese corporate sector danced to the tune played by Japan’s governments and senior civil servants, first and foremost the Ministry of Trade and Industry. This callow attitude was further intensified following the 1973 oil “shokku” (the Japanese term for the abrupt quadrupling of oil prices during and after the Yom Kippur War) – in glaring contrast to the American response of outlawing compliance with the boycott by US-based companies.
An interesting exception to Japanese corporate self-imposed compliance — and one which highlights how widespread was the de facto boycott of Israel by the big Japanese companies, as well as illustrating the emerging potential of the Israeli market — is the story of Subaru. A ‘poor relative’ to the major Japanese auto companies such as Toyota, Honda et al, which had no dealings with Israel in the 1970s, Subaru discovered the Israeli market via its surprisingly successful American subsidiary. Having nothing to lose in terms of market share in the Arab world, Subaru ventured into the Israeli market and, in less than a decade, had shouldered aside the entrenched European brands, notably Volkswagen, to become the best-selling car in Israel for much of the 1980s, with its cheap, unsophisticated but reliable models snapped up by a rapidly-expanding Israeli middle-class.
Exceptions to the rule
In the other direction, Israeli companies had little success in penetrating the Japanese market. The main Israeli exports to Japan were limited to three very specific areas: a) polished diamonds, in which Israel was the global leader until the 1990s; b) chemicals from the Dead Sea area, sold by the Dead Sea Works and its subsidiaries and sister companies – all state-owned in those days; and c), shipping and haulage services, provided by Zim Shipping, also state-owned and one of the top ten global companies in its field, which developed lucrative lines across the Pacific and from Japan to Europe – with little or no connection to Israel.
These export areas sufficed, in the absence of serious Japanese export activity to Israel, to make Israel one of the few countries in the world that ran a consistent trade surplus with Japan in the heyday of the Japanese economic miracle and boom. Japanese exports to Israel, such as they were, comprised primarily industrial machinery and consumer electronics.
To round out the picture, I will add that in the late 1980’s/ early 1990s, as the Israeli technology revolution began to pick up steam, two of the first generation of Israeli technology success stories – namely Scitex, which pioneered and dominated computerized printing and graphics, and Orbotech (later Orbot), which made control systems for printed circuit board makers – did, succeed in penetrating the Japanese market and establishing a dominant presence in their niches. So, too, did Iscar – the Israeli machine-tools company which, remarkably, succeeded in selling machine tools to the Japanese, the world-leaders in that field.
But all of these – from diamonds to machine tools – were special cases, exceptions that remained just that, rather than harbingers of wider change. Thus, on the 40th anniversary of Israel-Japan relations in 1992, the voluntary but near-total boycott of Israel by corporate Japan remained in place. Meanwhile, however, the world had entered a period of massive upheaval, globally and in the Middle East — which eventually impacted Japan, too.
The collapse of the USSR changed the world and ended the Cold War. In tandem with that mega-event, came the First Gulf War in early 1991, in which the Iraqi army was destroyed and with it, the ‘Eastern Front’ of Arab states confronting Israel. Together with the 1982 peace treaty with Egypt, this signaled the end of the conventional Arab military threat to Israel. The US was now in a hegemonic position, especially in the Middle East, allowing it to launch a major diplomatic initiative aimed at resolving the Arab-Israeli and Israeli-Palestinian conflicts.
As a consequences of these events there was a change in attitude toward Israel on the part of both China and India – leading to their recognition of Israel and the establishment of diplomatic relations in 1992 – as well as a decision by the countries of the GCC (Gulf Co-operation Council) in 1993, to cease enforcing the secondary and tertiary tiers of the Arab boycott. Nevertheless, as late as 1993, there had been no change in the attitude and policy of the Japanese government, nor in the (lack of) activity on the part of Japanese corporations.
Enthusiasm and disappointment
Only after the breakthrough in Israeli-Palestinian relations in Oslo in 1993, and the subsequent agreements reached under American auspices, notably the Paris agreements of 1994, did Tokyo wake up to the new reality – but even then, not for long.
The period 1994-1996 marked a new era, brief but very significant, in Japanese attitudes to the Middle East in general and towards Israel in particular. Infected by the euphoria of those years, when it seemed that peaceful co-existence and socio-economic development were the new agenda in the region, Japan became excited and involved. The Japanese government invited Israeli Prime Minister Yitzhak Rabin to visit Japan, which he did directly after receiving the Nobel Peace Prize in Olso – and that visit generated some important agreements.
In the commercial sphere, major Japanese companies sent senior representatives to Israel for the first time and many considered establishing regional management centers in the more congenial environment of Israel, whence to oversee their planned expansion into regional development. Their thinking at that time was that the Israeli market per se was still too small to interest them, but the opportunities that seemed to be emerging in major infrastructure projects across the region and in the hoped-for development of joint industrial zones (JIZ) in Egypt, Jordan and the Palestinian Authority, were ideal for the capabilities of the big Japanese conglomerates.
In practice, unfortunately, the euphoria proved unfounded and soon faded. Terror attacks by Palestinian extremist groups, deep-seated suspicions on both sides and Rabin’s assassination in November 1995 sent the diplomatic process into reverse and quickly chilled the enthusiasm of foreign businessmen. Japanese companies that had actually established offices in Israel wound them down and then closed them entirely during the second intifada of 2000-2004. What remained was the opening of the Israeli market to Japanese exporters, with Japanese private cars, trucks and other kinds of vehicles rapidly achieving dominant market shares – but many of these imports came from Japanese-owned plants in Europe and thus hardly represented a direct commitment to the Israeli market.
In the regional context, Japan assumed a leading position in terms of its support – ideological, diplomatic and, above all, financial – of the establishment of a Palestinian state. In the 20 years following 1994, Japan contributed almost $12bn in support of the Palestinian Authority, second only to the US in absolute size. Japan has a maintained a diplomatic mission in Ramallah headed by a charge d’affaires who has the rank and status of an ambassador. The Japanese were also very actively involved in the establishment of two industrial zones, one in the Jericho area, which has been particularly successful, and the other in the Beit She’an / Jordan Valley area. With respect to Israel, however, official Japan was disappointed in every sense, so that to a large degree, bilateral relations went into hibernation after 1996.
c) Can two walk together, except they be agreed? (Amos 3:3)
I cite the King James translation of the verse in Amos, because it is so well known. However, a more accurate translation of the original Hebrew might be “except they hold conference”. In the diplomatic context, as well as that of bilateral relations, that is usually the case – and certainly in the case of Israel-Japan. The easiest and perhaps the best way to trace that relationship over the last 20+ years – when, finally, there was a relationship with sufficient substance to warrant meetings – is via the meetings between prime ministers and other senior persona.
As already noted, the story begins with Yitzhak Rabin’s visit to Japan in 1994, at the invitation of Japanese Premier Murayama. This first-ever visit by an Israeli leader was one to which the Japanese attached great importance, as they clearly indicated through various symbolic and ceremonial signals, notably by their decision to host Rabin in the Akatuka Imperial Guesthouse.
The visit was focused on political and diplomatic issues connected to the peace process, which was then in full bloom – but Rabin was accompanied by a large and very senior delegation of business and financial leaders. Two take-aways from this aspect of the visit are noteworthy, in light of later developments. One is the signing of a financial memorandum, whereby the Tokyo and Tel Aviv Stock Exchanges agreed to co-operate on mutual recognition and development. In practice nothing came of this, because the sorry state of the Japanese financial markets in the 1990s – in sharp contrast to the Nasdaq and the slew of Nasdaq-wannabes then flourishing in Europe, which were falling over each other to attract Israeli technology companies – meant that the Japanese had little to offer the Israelis.
No less surprising, but in the opposite direction, was the comment by the CEO of one of Israel’s largest defence companies, that “we have nothing to do here”. This reflected the Israelis’ discovery that the Japanese military/ defence industries – unlike the country’s ‘self-defence’ forces – were large, sophisticated and world-class, with little obvious need for Israeli products or know-how.
It is ironic, in light of recent developments, to note that the person who did more than anyone to put Israel-Japan relations back in the freezer was Binyamin Netanyahu. His first stint as premier, in 1996-99, is widely regarded as a failure in many respects – but few people remember his singular contribution to scuppering the budding bilateral relationship with Japan.
Soon after his upset victory over Shimon Peres in the May 1996 election, and apparently as part of an effort to build his international image, Netanyahu extracted a grudging invitation from Japan, where he arrived with his Finance Minister, Ya’acov Ne’eman and another large business delegation. However, the euphoric atmosphere that had marked Rabin’s visit was entirely absent, and Netanyahu gutted the visit with one inauspicious – indeed, downright idiotic — sentence. Incredibly, this came not in an unguarded moment or an off-the-cuff remark, but rather in a carefully-prepared speech to a very large assembly of Japanese dignitaries, drawn mainly from the corporate sector.
Seeking to make the case for enhanced Israeli-Japanese co-operation and partnership in economic and business activities, Netanyahu told his disbelieving audience “we have the brains, you have the money – let’s join forces”.
In the late 1990s, along with the peace process on which it had based its regional strategy, Japan faded from the Middle Eastern scene. The second intifada seemed to extinguish all hope of further progress, but the policy of unilateral withdrawal, initiated by Ariel Sharon in 2005 with the Israeli pull-out from the Gaza Strip, offered the possibility that this conclusion was premature. Following the election victory of Kadima, the new party created by Sharon and led after his stroke by Ehud Olmert, there was a renewed expectation of — and certainly an intention toward – a revived diplomatic effort to achieve a negotiated settlement.
Against this background, Japanese Prime Minister Koizumi visited Israel in July 2006, only to be inadvertently caught up in war rather than peace and to participate in one of the more remarkable moments of Israel-Japan relations. During Koizumi’s meeting with Olmert, the latter was informed of the Hezbollah cross-border raid in which two Israeli soldiers were kidnapped (they were severely wounded or already dead when they were seized). Olmert, who had already succeeded in establishing excellent personal “chemistry” with Koizumi (as he did with most people), invited the Japanese premier to sit in on the emergency Israeli Cabinet meeting which he convened in the wake of this incident – and which set in motion the Israeli response which developed into the Second Lebanon War of July-August 2006.
The strong personal bond forged between the two leaders led Koizumi to invite Olmert to visit Japan (Olmert had already been there a few years earlier, as Minister of Industry and Trade). Olmert, like Netanyahu previously and subsequently, was not accorded the royal treatment lavished on Rabin, but the visit was neither marred by stupid words or deeds nor, on the other hand, was it marked by any new breakthroughs. In retrospect, it may be said to have kept the relationship warm during a generally cool period.
All change: The Abe era, 2013-?
The breakthrough, May 2014
The period since Shinzo Abe regained the premiership in December 2012 (he had previously held it in 2006/07, becoming the first Japanese premier to regain the post since 1948) is viewed as marking a new era in Japan, because of the policies that Abe has championed in almost every key area of government. In the area of foreign policy, it is abundantly clear that Abe represents a sharp break with the postwar pacifist tradition and his ultimately successful efforts to reinterpret the Japanese constitutional constraint on deploying Japanese ‘self-defence forces’ overseas is perhaps the most overt expression of this approach.
The revolution that the Abe government has wrought in the narrow area of Japanese relations with Israel must be seen in this wider context of Japanese politics and policies. Although Abe has found Netanyahu a willing partner, it is essential to note that the strategic initiative for the change that has taken place and is still underway has come from the Japanese side and its roots have to be sought in the Far East rather than the Middle East.
By way of background, and without getting involved in arguments raging in academic and policy-analysis circles as to Abe’s motives, the following issues can be identified as relevant, although their ranking and relative weight are the subject of debate:
- Domestically, Abe has a clear agenda of reviving Japanese patriotism and nationalist feeling, although this has raised fears both at home and abroad of a return to the kind of aggressive and militaristic nationalism that was dominant until 1945. However, between that and passive pacifism there is considerable leeway for change, which is what Abe and his supporters say they are engaged in.
- Regionally, Japan is focused on two threats, both nearby and both growing. The smaller, but arguably more acute one is that posed by the wild and unpredictable North Korean regime, which has the capability of firing missiles at Japan and also of exploding atomic bombs. The possibility that North Korea will eventually succeed in marrying these two capabilities is, unsurprisingly, Japan’s number one nightmare. But beyond North Korea looms China, which has made clear its aim of achieving hegemony in the region and is steadily expanding its military capability.
- Globally, Japan remains under the American umbrella. The US is bound by treaty to come to Japan’s aid in case of attack, and Japan can draw further encouragement from the American ‘pivot to Asia’, which puts East Asia at the top of the US geo-strategic agenda. However, in light of the trends in American foreign policy in the Obama period and the increasingly strident isolationist tendencies that characterise elements of both major parties in the US, the Japanese – like all American allies around the world – are concerned about the reliability of the US guarantee in the future.
- In a different global context, the Japanese are well aware of the shifting trends in energy sources. They remain dependent on fossil fuels and their attempt to reduce this via nuclear power seems to have blown up at Fukushima – but the short- and long-term trends in energy production seem to favour consumers rather than producers. These factors, as well as the lessons of recent years, from the invasion of Iraq through the ‘Arab Spring’ and the deal with Iran, have required a rethinking of the traditional attitude toward the Gulf Arab states and, by extension, to the Middle East as a whole.
All of these strands, and probably others as well, seem to be bound up in the decision by Abe and his advisers to upgrade Japan’s relationship with Israel and put it on an entirely new footing. This decision has been implemented via a series of high-level meetings which, unlike the earlier ones noted above, have been replete with substance, action items and follow-up so that they have collectively ushered in a new era in Japan-Israel relations.
The process began with an invitation to Netanyahu to visit Japan in May 2014 – a visit which was as important and successful as his previous visit in 1997 was inauspicious and unsuccessful. Much of the groundwork for what was to follow was laid during this visit, and it is instructive to go back and read the official joint statement issued at the end of that Abe-Netanyahu meeting (http://www.mofa.go.jp/me_a/me1/il/page3e_000173.html). Two remarkable features of this document are well worth highlighting.
The first is the glaring contrast, in tone and substance, between this statement and the long list of official Japanese pronouncements on Israel and the Middle East during the years preceding Abe’s second term — which mostly expressed veiled diplomatic criticism of and complaints about Israel and its actions, often focused on settlement-building in the West Bank, as well as relating to the involvement of Japan in various aspects of the diplomatic process vis-à-vis the Palestinians. During the Abe period, there is considerable lip service being paid to the diplomatic and other aspects of regional relations, but these have become marginal compared to a long list of action items in the purely bilateral field. The second feature is the number of these bilateral initiatives and, especially, the speed and intensity with which they are being pursued on both sides.
That first meeting in May 2014 seems to have established a strong personal relationship between Abe and Netanyahu, that has developed over subsequent meetings and is a key element of the overall bilateral relationship — over and above the very real national interests which both sides are pursuing.
This point is worth a brief digression, to highlight the similarities between three leaders who, while representing countries which are geographically distant and seemingly have little in common, have nevertheless ‘found each other’ and discovered that they share remarkably similar outlooks. Their views and attitudes towards nationalism in general, the core values and traditions of their own nations, how to preserve and defend those traditions and values and – in contra-distinction – their discomfort with the attitudes and values of the Obama Administration and much of the EU leadership, are remarkably congruent. These leaders are Israel’s Netanyahu, who was the first of the three to reach the top post in his country and has been in power longest; Japan’s Abe, who has regained power and is now determined to pursue his ‘revisionist’ agenda; and India’s Narendra Modi, who has overturned the traditional Indian policy positions towards both Japan and Israel – but who is much the newest of the three in the top job. They are all benefiting domestically from having weak Social Democratic opposition, but the common themes colouring their foreign policies point to a much deeper development at the global level – an idea worth analyzing in depth, but one that goes far beyond the purview of this newsletter.
The follow-up, 2014-2016
Netanyahu’s visit to Japan in May 2014 was quickly followed by the visit to Israel in early July 2014 of Japan’s Minster of Economy, Trade and Industry (METI). The significance of this being the first visit to Israel by a holder of this portfolio was totally lost on the Israeli media. Since Japanese premiers and foreign ministers had visited over the years, and since the Israeli media had (and still have) no inkling as to the importance of METI in the Japanese economy and in government-corporate links, they simply assumed that this ministry is just another middle-ranking government post, as it is in Israel and Europe. Consequently, although Toshimitsu Motegi, the Japanese Minister, came with a delegation of Japanese senior executives, met with his Israeli counterpart (then-Economy Minister Naftali Bennett) and signed a Memorandum of Cooperation (MOC) between the two ministries — and did all these things in full public view, with handshakes, speeches, etc. all duly recorded for posterity — the historic import of these events was ignored. To be precise, it was unappreciated and buried on inside pages — which was just fine with the Japanese.
As an example of the kind of practical spin-offs that these prime ministerial and ministerial meetings generated, here is one item of bureaucratese: “Based on the MOC, (between the two ministries, see above, PL) the New Energy and Industrial Technology Development Organization (NEDO) and the Israel Industry Center for R&D (MATIMOP) concluded a Memorandum of Understanding (MOU), and determined specific approaches concerning implementation of support measures that include joint R&D between Japanese and Israeli companies. This calls for new projects, examination of applicants for such projects, and providing subsides…”
And here is its first substantive outcome: “On July 2015, three joint Industrial R&D projects were approved for funding by NEDO and MATIMOP/OCS as below…”
The speed with which these processes moved forward is exemplified by the fact that Abe himself came to Israel in November 2014 which, of course, generated another joint statement — this time noting things that had already happened, were happening and were planned to happen and, in addition, expanding, intensifying and spurring on the whole process. The two leaders met again a year later, at the Global Climate Conference in Paris in December 2015. Here they found time in their hectic schedules to spend forty minutes together — of which it is safe to say that few, if any, of those minutes were spent discussing global warming.
By late 2015, Israel-Japan relations were on a quite different plane. How far they had come, in the business world rather than in ‘mere’ diplomacy and inter-government activities, was on public display again, this time in both Tel Aviv and Tokyo, in late January 2016. The occasion was “CyberTech 2016”, an expo/ conference designed to display Israeli prowess in the rapidly-growing cyber sector. For those who looked closely — really, anyone whose eyes were open — one of the prime exhibits was the burgeoning Israel-Japan relationship. This was evident in the fact that there was a Japanese pavilion, supported by the Japanese government via the Japanese embassy in Tel Aviv, at which a slew of Japanese companies strutted their wares. All this was widely reported in the Japanese press and, whilst I am unable to read and assess the Japanese-language items, the following item from the Japan Times is apparently a fair representative of the prominence and positive tone of the Japanese coverage of this event:
Japan boasts booth at Israel cybersecurity event
- JAN 27, 2016
TEL AVIV – Japan opened a booth for the first time at a large-scale trade exhibition for cybersecurity technologies that kicked off in Tel Aviv on Tuesday for a two-day run.
Japanese companies are aiming to cooperate with Israeli firms with cutting-edge cybersecurity technologies ahead of the 2020 Tokyo Olympics and Paralympics.
An increasing number of Japanese companies are interested in Israel as the two countries have been strengthening their cooperation in the field of cybersecurity since Israeli Prime Minister Benjamin Netanyahu visited Japan in May 2014.
Six Japanese companies, including Dai Nippon Printing Co. and Murata Manufacturing Co., are taking part in the Cybertech 2016 exhibition.
The article is longer, but the message is clear.
All of this is unprecedented, but the truly rub-my-eyes-in-disbelief aspect of the conference was that the closing plenary session on the first day included His Excellency, Ambassador Koji Tomita on the rostrum. Technically, he is ambassador-designate, not yet having ‘presented his credentials’ to Israeli President Reuven Rivlin, but that merely accentuates the “in-your-face” nature of his participation — not merely unprecedented, but hitherto entirely unthinkable for a Japanese government official, let alone an ambassador.
Another message from Japan was delivered a few days before the conference opened, when Sony announced the purchase of an Israeli chip company, Altair Semiconductors, for $212mn. This additional evidence that Israel is now “kosher” for Japanese companies doubtless provided a further spur to the Japanese firms at CyberTech to pursue Israeli investments and joint ventures of their own, although in fairness it must be said that Dai Nippon and Murata have long had Israeli exposure of one sort or another — but many Japanese firms that have never thought of doing business in Israel will have read the news reports and drawn the relevant conclusions.
d) A funny thing happened on the way to Tokyo
So, in many important aspects, “it’s all happening”. Yet, in terms of hard numbers, there is no evidence of any substantive change in Israel-Japan trade. In other words — so far, at least — there may be interest, even excitement, and there are clearly some investments being made — but actual trade flows are largely unaffected.
Here are the data for the last five years on Israeli trade with Japan, from the Central Bureau of Statistics (CBS), that being a reasonable assessment period covering both the pre-Abe (2011-12) and Abe (2013-15) periods. But it also happens to be the case that 2011 saw the highest volume of trade, in both directions, of any year this century and hence, most likely, ever.
|Year||Exports ($mn)||Imports ($mn)|
Beyond the fact that 2011 was a strong year, the table shows that the volume of trade is volatile — it should be remembered that the data are in dollars, while the value of the yen has swung dramatically in these years — but, above all, it DOES NOT show any apparent impact from the developments discussed above.
One possible explanation is to simply add — ‘yet’. In other words, the process that is under way has not yet crystallised into significantly greater trade flows, but these will come, after more companies make more visits and sign more deals, etc. That is plausible and there must surely be a fair amount of truth in it.
However, there are other explanations, which may well be complementary to the “be patient, give it time” option. The first is the shocking possibility — make that fact — that the Israeli trade data are inaccurate, as the following graph indicates:
This graph is based on Japanese government data and shows the same thing as the previous table, namely trade between Japan and Israel, from the Japanese viewpoint. You would expect that Israeli imports would be more-or-less the same as Japanese exports (slight differences are likely because of timing and other issues), and the same would apply to Israeli exports and Japanese imports. The balance of trade between the two countries would be much the same, just reversed — a surplus for one would be a deficit, of much the same amount, for the other.
However, you would be quite wrong. The data never actually match, but whereas they used to be vaguely in line — for example, in 2011 both sets of data agreed that Japan had a large trade surplus with Israel, but there was a $400mn discrepancy as to how big that was — for the last three years, they have been totally out of line: both countries say they are running a deficit versus the other one. Here are the data, using the previous table, but with the opposing versions of the trade balance added:
|Year||Exports ($mn)||Imports ($mn)||Balance (Israel)||Balance (Japan)|
Mathematicians, accountants and even economists will agree that it is impossible for two countries to both have trade deficits with each other. The solution to this anomaly lies — as usual — in the definitions of measurement. Israeli exports are recorded on the basis of the country to which they are sent. Japanese imports, however, are recorded on the basis of country of origin. Thus, for example, if Israeli exports intended for Japan are shipped to Singapore, Hong Kong or wherever, and then trans-shipped to Yokohama, they are not registered as exports to Japan, whereas the Japanese import documents correctly identify the goods arriving from, say, Hong Kong, as being of Israeli origin.
Two very important conclusions arrive from this ‘revelation’, which I have on the authority of a senior Israeli trade diplomat. The first is that, as the Japanese data show very clearly, something significant has happened in the last three years — the Abe period — in terms of a sharp rise in Israeli exports to Japan/ Japanese imports from Israel. On the other hand, even the Japanese data don’t show any rise in Japanese exports/ Israeli imports.
However, it is important to stress that even this rise does not change the overall picture, which is that bilateral trade is negligible, both in absolute terms and as a percentage of both countries’ imports and exports. Israeli data show imports from Japan are less than 2% of total imports and exports to Japan are a little over 1% of total exports. In the Japanese data, Israel is barely a blip — in the peak year of 2011, Japanese exports to Israel were 0.3% of the total, while Japanese imports from Israel struggle to reach 0.2% of the country’s total imports.
These data can be looked at in two ways: viewed optimistically, they show the enormous potential available, especially from the Israeli point of view. But, realistically, they also underline that even a manifold increase in trade volumes will not make either country an important trading partner of the other.
The other conclusion stemming from the Israeli data is that my long-standing contention, that Israeli trade data by country, which are religiously published every month by the CBS, are useless and actually misleading — is correct. That is personally satisfying, but more important is the practical relevance for analysts: trade data by country can illustrate trends, but the actual hard numbers are almost meaningless.
e) Where do we go from here?
Let’s sum up and look ahead.
After decades of inactivity, false starts and frustrated hopes, Israel and Japan are now engaged in a major, concerted effort to create a serious bilateral relationship.
This effort was initiated by the Japanese government, under Prime Minister Shinzo Abe, and found an enthusiastic partner in the governments led by Binyamin Netanyahu. Premiers and ministers are prominent in promoting this initiative, but the spadework is being done by diplomats on both sides, who are laying the groundwork for other groups – scientists and researchers, businessmen and investors, but also artists and performers engaged in cultural activities, and even chefs and restaurateurs – to visit, establish and develop contacts and thereby create a multi-faceted and vibrant relationship.
This process got under way in 2014 and is advancing very rapidly, both relative to bilateral relationships in general and to the typically gradual and measured pace of Japanese activity. The unusual speed reflects the importance both sides attach to the process as well as the intensity of their commitment to it.
Nevertheless, there is little evidence to date of a surge in bilateral trade, or even of large-scale investments or joint ventures. This is to be expected, because whereas promoting a theatre troupe or a culinary event is relatively straightforward, identifying business partners or investment targets, negotiating – and overcoming the significant cultural barriers separating Israeli and Japanese business norms – signing and executing large deals is perforce a lengthy and complex undertaking. All the signs are that things are moving in the right direction, but the business side of the relationship must be allowed to develop at its own pace.
Furthermore, while the two sides are new to each other, neither was ‘born yesterday’. Each is already engaged in a range of activities, with a web of existing relationships, into which the new relationship must integrate – so that integration has to be a gradual process.
The critical sector of defence and military industries provides an excellent example of the complexities involved. Both Israel and Japan are established, important global players in this sector. In some areas they are already rivals, in others they have established strategic relationships with other global players – Japan with France, for instance — so that the opportunities for co-operation are offset, or at least tempered, by considerations of actual or potential competition. Finding scope for co-operation whilst balancing issues of competition is possible – the companies involved do it all the time – but it is a delicate and hence gradual operation.
At the political level, the two outstanding features of this budding friendship are its bilateral nature – it has been largely detached from the regional context which governed Japanese relations with Israel in the past – and the fact that it is driven from the top. The latter feature begs the question as to what will happen when Abe steps down or is replaced. True, he has decisively broken the pattern of very brief premierships that had characterised Japanese politics for some years before him – but sooner or later, he will go. Will the opening to Israel go with him? Is it dependent on him and his strategic approach?
Everyone I have spoken to on this subject believes that the opening and the move to a broader and deeper relationship with Israel is irreversible. That is because beyond Abe’s personal involvement and efforts, there are deep-seated Japanese national interests at work and a fundamental change is underway in Japanese foreign and defence policy. Future premiers may have different priorities, but the basic orientation – toward a stronger, more independent and confident defence posture – is unlikely to change. Israel, as I noted at the outset, is just one element within this wider change.
From the Israeli point of view, the opportunity to develop trade and investment links with Japan is, in many respects, the missing link in its global economic activity. It also represents another component within the country’s ‘pivot to Asia’, which is based on the assessment that the long-term growth prospects of the Far Eastern and South Asian economies are far better than those of Europe — while the Asians do not carry the ideological and ethnic baggage that weighs on Israel’s relationship with many European countries and the EU as a whole.
In this context, Japan offers far greater potential – especially for rapidly-growing sectors in the Israeli economy, such as aerospace and nanotechnology – than any single European country, or even most of them combined. Whether this potential can and will be realised remains to be seen, but for the first time it has become a realistic option, rather than a theoretical desire.
The rapid development of Israel’s relationship with India, which took off only from 1999 onwards, illustrates how a positive alignment of interests can spur very rapid progress from a very low starting point. Whether something similar happens to the Israel-Japan relationship will be a key item on the agenda of Israel’s corporate sector over the second half of this decade.