Monday got off to a good start on the other side of the Pacific, as the Japanese stock market opened the week with a solid gain to follow up on its rise late last week. The Nikkei 225 (NIKKEIINDICES:^NI225) climbed 280 points to finish above the 18,000 mark as it tried to put a terrible third quarter behind it, and many market commentators pointed to apparent progress in negotiations over the Trans-Pacific Partnership as driving gains. Yet as much attention as the TPP has gotten lately, the trade pact by itself won't end Japan's long-standing economic struggles.
Why investors are excited about the TPP
The bullish argument favoring a free-trade area around the Pacific Rim is fairly simple: opening markets could spur greater economic activity that in turn could help pull Japan's economy back to a healthier trajectory. One interesting thing about the TPP is that despite the importance of trade between Japan and the U.S., the two countries haven't successfully negotiated an overarching trade pact of their own. As a result, the inclusion of Japan in the agreement is a key element that makes the deal more valuable for the U.S. and the pact's other members, which include Canada and Mexico in North America, Peru and Chile in South America, and key Asian nations like Malaysia, Australia, Singapore, New Zealand, and Vietnam.
Yet there are a number of things that the TPP wouldn't immediately do. Perhaps the most important is that China isn't a party to the negotiations, and so markets throughout Asia would still have to deal with the impact that China has had in numerous areas. Even given its recent slowdown, China still has an impressively high growth rate compared to more mature economies like Japan, and getting the Chinese into the TPP or a similar trade pact in the long run could make a much larger difference both for Japanese stocks and for their U.S. counterparts.
In addition, the TPP has raised political tensions from a number of corners. On one hand, the North American Free Trade Agreement has given Canada and Mexico a substantial advantage in trade with the U.S., and extending favorable treatment to Japan could threaten Canada's and Mexico's interests. At the same time, some of the pro-business provisions of the pact have raised the ire of governments that would see their ability to regulate and police foreign corporations operating within their borders.
Putting on a good show
At this point, though, Japanese Prime Minister Shinzo Abe will take any economic victory that he can get. With economists expecting Japan to fall into recession again once third-quarter GDP numbers are available, Abe's attempts to jump-start business activity have had only mixed success at best. Positive news could help bolster the Nikkei in the short run, but Abe and the Japanese government can only do so much, and eventually the companies that make up the Japanese stock market will need to pull their own weight to carry the Nikkei higher.