Brazil, Japan try to boost relations with Koizumi visit

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Brazil, Japan Try To Boost Relations With Koizumi Visit

14 September 2004

By Gerald Jeffris

BRASILIA —Japan’s Prime Minister Junichiro Koizumi arrived for his first visit to Brazil Tuesday to make what authorities from both countries hope will be a lasting impression.

Koizumi, on the first leg of a three-country trip that will also include Mexico and the U.S., started the trip Tuesday in Brazil’s leading industrial state of Sao Paulo and plans Wednesday to outline a "plan of action" to renew relations with Latin America. He will conclude the visit at a lunchtime meeting with President Luiz Inacio Lula da Silva Thursday.

With the first visit of a Japanese prime minister in eight years, Brazilian and Japanese authorities hope to re- establish a strong relationship between their countries after it was tested with the emerging market crises in the 1990s and Japan’s own economic troubles during the last decade.

"Both countries are keen on re-invigorating a traditionally good relationship that has been rattled over recent years by factors here and in Japan," said Jose de Freitas Mascarenhas, President of the Brazil-Japan Economics Committee at Brazil’s National Confederation of Industry, or CNI. "Koizumi’s visit is very important because it sends a signal to Japanese investors that their government is seeking to strengthen ties."

With nearly one million citizens of Japanese descent, Brazil has one of the largest Japanese communities outside of Japan, and the emphasis the prime minister is placing on Brazil was clear in his remarks before leaving on the trip.

"Many Japanese businesses and Japanese people are flourishing in Latin America," Koizumi said. "We will have to continue strengthening our relations with Latin America, centering on Brazil."

Koizumi is accompanied by members of the Japanese Business Federation, a fact that has fueled speculation that Japan will be using the trip to seek a bilateral free trade agreement with Brazil.

Japanese officials Tuesday denied that such an accord was in the works, although Brazilian observers have yet to rule it out.

"A free trade accord is not yet on the table, but it’s something the Brazilian business community believes should be proposed," noted CNI’s Mascarenhas.

Brazil, meanwhile, has a two-fold agenda that includes attracting increased Japanese investment and boosting exports to Japan.

"We have a desire to attract Japanese investment and I think with the stabilization of the Brazilian economy, this will help with the re-establishment of Japanese business here," Brazilian Foreign Minister Celso Amorim had said ahead of Koizumi’s visit.

Brazil has seen overall foreign direct investment decline from nearly $30 billion in the 1990s to about $12 billion expected this year, a fact economists say could bring increased pressure from inflation as local industry reaches full capacity amid an incipient economic recovery here.

Brazil’s economy grew 4.2% in the first half, though some observers fear inflation, already pressing 7% annually, could spiral beyond government targets if domestic output falls short of demand.

Analysts note investment from Japan has fallen off in recent years as Japanese investors were shaken by the 1997/98 Asian financial crisis and decided to stick mainly to investments in their own back yard.

"In the 1990’s the Japanese were very, very interested in China and the total investment effort was directed there," noted Teiji Sakurai, director at the Japanese Chamber of Commerce and Industry in Sao Paulo.

Last year showed an improvement for Brazil, however, after Mitsui paid $830 million to increase it stake in local iron ore producer Companhia Vale do Rio Doce (RIO), known as CVRD.

Total Japanese foreign direct investment in Brazil last year rose to $1.3 billion from $500 million in 2002.

Japan is currently deeply invested in manufacturing, the steel sector, pulp and paper, and automobiles, though analysts say it could consider diversifying investments given Brazil’s current cycle of economic growth.

One area that looks especially promising to Japanese companies is Brazil’s food and agribusiness sector, which accounts for nearly 40% of the country’s gross domestic product.

Further, the Japanese may take aim at increased sales of industrial machinery as Brazil is keen to overhaul its industrial park and retool for increased exports. Observers note Brazil has reinforced tax breaks for imported capital goods to that end.

Meanwhile, one area the Brazilians hope to promote during the visit is increased trade in sugar-based ethanol.

"Japan needs reliable sources of fuel and we think we can be a partner in this area," noted Foreign Minister Amorim.

Japan’s parliament is studying increasing the mixture of ethanol to 3% in gasoline, a move that could raise the country’s ethanol consumption by 1.8 billion liters annually.

Brazil is the world’s largest ethanol supplier, producing 14.4 billion liters annually.

While the Brazilians dream big over this and other prospects, the Japanese appear to prefer a more cautious, long-term approach.

"Brazil is a big market and we’re trying to attract the attention of Japanese companies to investment opportunities here," said Japanese Chamber of Commerce’s Sakurai. "Still, the cost of doing business in Brazil remains a big problem. Japanese and other foreign investors find a complicated tax system, high taxes, high interest rates, bureaucratic labor procedures and security problems."

Though Brazilians recognize the need for improvement in these areas, they remain optimistic for negotiating new trade deals based on the two economies’ complementarity and historical ties.

And Koizumi, they sense, appears eager to lift his country’s profile here after Brazilian President Luiz Inacio Lula da Silva skipped Japan during a special five-day trade mission to Asia in May.

"We know that, philosophically, nothing is approved quickly in Japan," CNI’s Mascarenhas said. "But Japan has seen that Brazil is negotiating with several regions, and they recognize that they can’t stay away if they want to defend their interests here."

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