Published daily by the Lowy Institute

Economic diplomacy: Friends, rivals and diplomatic gaslighting

Money still talks in a new world of tighter security alliances when Japan and China can align against Australia on energy.

Keeping the lights on as an ambassador bids farewell (Toru Hanai/Bloomberg via Getty Images)
Keeping the lights on as an ambassador bids farewell (Toru Hanai/Bloomberg via Getty Images)

Hitting the gas

Japan’s ambassador to Australia Shingo Yamagami made himself an unexpectedly public figure in the reserved Canberra diplomatic corps with his witty social media posts about battling swooping magpies while bicycling in the bush capital.

But with Yamagami’s engaging penchant for soaking up the local culture, he may appreciate he is now ornithologically more akin to the proverbial pet shop galah – repeating messages the owners don’t want to hear.

Asked about his reputation for being a maverick on ABC Radio National this week in a round of farewell interviews ahead of a reportedly earlier than planned departure, Yamagami declared: “Australians have to get used to Japanese speaking their minds.”

And Yamagami told The Australian:

It is the right and duty of the Japanese ambassador to convey Japanese perspective to our friends in Australia. I am not here to please everybody. That is impossible.

But at a time when security interests are being elevated above economic interests in the new international relations paradigm, Yamagami’s persistent criticism of the Albanese government’s energy policies has shown that economic leverage still matters.

It is different for the diplomat in charge of nurturing Australia’s deepest Asian relationship in a time of great security uncertainty to seemingly overlook the many geo-economic and domestic political forces at work.

What is most notable about Yamagami’s unrelenting public criticism of Australia’s shift towards interventionist gas policies is the lack of public acknowledgement that Australia faces difficult trade-offs keeping South Pacific neighbours onside over climate change and maintaining some domestic manufacturing capacity through the renewable energy transition.

And they are the same Pacific countries where Australia and Japan regularly talk up development aid cooperation, including on climate change mitigation infrastructure, to ward off the Chinese push into the region. The Pacific may well wonder whether the Australian government is more concerned about keeping the lights on in Tokyo than about where to house people from shrinking islands in the region, when obviously both are important.

A recent social media sample from Yamagami (second left), meeting with Japanese gas company representatives (Twitter)

In his interviews this week, Yamagami has again strongly supported the credentials and blunt comments of the chief executive of gas company Inpex, Takayuki Ueda, before government representatives in Canberra late last month. Ueda argued Australia’s energy policies were making the world less safe both on climate change and on a rules-based order.

“On the geopolitical front, Australia’s quiet quitting of the LNG business has potentially very sinister consequences. Alarmingly, the inconvenient truth is most likely that Russia, China and Iran fill the void,” Ueda said.

Business vs diplomacy

Japanese companies deserve a lot of credit for building Australia’s resources export industry with low profile minority joint ventures in individual projects in the 1960s when wartime memories were still extant. And Japan Inc has understandable existential concerns about resources security.

But it is one thing for the head of a $60 billion relatively new gas investment off Darwin that provides 10 per cent of Japan’s gas imports to be unhappy about changing policies. It is different for the diplomat in charge of nurturing Australia’s deepest Asian relationship in a time of great security uncertainty to seemingly overlook the many geo-economic and domestic political forces at work from keeping Pacific countries onside to building a more resilient domestic manufacturing capacity in Australia to enhance supply chain reliability with Japan.

And that is demonstrated by two quite different reactions on same day as the Ueda comments.

The Chinese embassy was quick to pile on due to its shared economic interest in stable gas supplies, like Japan, by declaring: “It’s a major issue involving concerns of both of us.”

But in quite a different tone, Japan External Trade Organisation president Kazushige Nobutani said during the launch of an investment report (see below) that Japanese companies also faced similar energy regulation changes in other countries. He expressed confidence they could calmly deal with the Australian changes.

Passing lane

If there is a simple hip pocket nerve explanation for Yamagami’s outspoken criticism of Australian policies, it can be found in the way Japanese investment has clearly overwhelmed the flow of money from China that was causing so much alarm only a few years ago.

This returned importance of Japanese investment in both scale and scope undoubtedly gives the complaints of both Yamagami and Ueda some real clout in Canberra.

Japanese direct capital inflow picked up sharply in 2022 with 42 new acquisitions – almost double the level seen in the previous two pandemic affected years. Perhaps more notably, that was roughly four times the number of investments from China, which didn’t change in 2021.

The two independent private sector surveys which chart these two flows of inbound capital are unfortunately not directly comparable. But the tone of the two recently released editions does neatly capture the new zeitgeist.

The 16-year-old KPMG/University of Sydney survey of Chinese investment tentatively says:

As we recover from Covid and the Australia-China bilateral relationship stabilises, some Chinese investors may start to explore investment opportunities in Australia again.

The six-year-old survey of Japanese investment by Herbert Smith Freehills says with considerably more ebullience:

In the last 12–18 months, there has been a step change in the relationship as a result of the changes in the global geopolitical environment. It is now a closely aligned partnership with greater government and business collaboration, and more cooperation than ever before.

In contrast to the probably overstated fears of Chinese investment overtaking Japan a few years ago, Japan is now firmly established as the second largest source of cumulative foreign direct investment (FDI) after the United States at $134 billion compared with China’s $46 billion at the end of 2021. Indeed, the real symbolic passing lane was Japan overtaking the United Kingdom in 2015, although the UK still has more total investment.

The China survey shows investment more than doubled last year to US$1.42 billion as bilateral relations stabilised somewhat. Nevertheless, that is still the second lowest amount since the survey began in 2007 and compares with the record US$16 billion in 2008 and the regular US$10 billion levels around 2014 when the bilateral trade deal between Australia and China was being sealed.

Diversification dilemmas

After the diversification of Chinese investment from mining into new industries and from private sector sources that was seen a few years ago, last year there was something of a back to the future situation. The bulk of the money came from state-owned enterprise Baowu Steel Group’s $1 billion investment in an iron ore mine. More than 80 per cent of the investment was in mining.

The Japan survey doesn’t contain an overall value figure because there are so many deals with undisclosed values, but the disclosed investment is about $3.6 billion. However, the significant trend is the increasing diversity of the Japanese investment away from traditional resources and the range of new players.

And what is likely more important, the survey draws special attention to the flowering of new private and public research or business partnerships, some of which will result in future business transactions. Indeed, there were more partnerships identified at 51 than actual new investments at about 42. It says this “new paradigm” – after the traditional minority investment in resources projects and then full takeovers in recent years in diverse industries – will be a long-term new feature of the business relationship. It “will form the basis of significant new investment over the next 5–10 years, as projects are commercialised.”

This returned importance of Japanese investment in both scale and scope undoubtedly gives the complaints of both Yamagami and Ueda some real clout in Canberra, and that has been reflected in, at least, the public responses from the government.

But one of the curious features of the report in the light of Yamagami’s criticism of gas market intervention is how 15 of the new investments were energy related as the two countries step up both investment and cooperation in trying to transition from a fossil fuel-based relationship to new energy economic relationship.

Indeed, as the report says:

New energy partnerships are continuing to form, driven by Japan’s need to ensure a secure source of imported energy in a decarbonising world.

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