Diplomatic and trade relationships between Japan and Turkey have continuously developed since the 19th century. Despite these longstanding links, the economic relationship between the two states did not evolve sufficiently until late twentieth century.

In the 1980’s, a consortium involving Japanese firms constructed the Fatih Sultan Mehmet Bridge. The bridge is the second connecting the Asian to the European continent, crossing the Bosphorus in Istanbul. Japanese firms began to make partnerships with Turkish conglomerates and Japanese banks provided loans for investments in Turkey. More recently, the political and economic relations between Japan and Turkey have taken grater strides forward. Some of the largest construction projects have been tendered to major Japanese companies. Direct investment from Japan to Turkey and the trade volume between the two countries has considerably increased, and Japan and Turkey have begun the negotiations to execute a Free Trade or Economic Partnership Agreement (the “EPA”) to further develop the economic relationship between the two nations.

The economic relation between Japan and Turkey is threefold; the bilateral trade of goods, the direct investment flow from each country to the other and the construction/infrastructure projects handled in each country by the other’s companies.

Bilateral Trade

The trade volume between Japan and Turkey was USD862 billion in 2013 and Turkey’s export to Japan was USD 409.3million.  Turkey mainly exports fishery, agricultural, and textile products to Japan whereas Japan exports industrial products such as automobiles, construction machinery, etc. to Turkey. The fact that these Turkish exports mainly consist of lower-priced products whereas Japan’s exports consists predominantly of high-end and higher-priced finished goods, is one of the key  reasons behind the yawning trade gap.

However, it can also be said that both Turkey and Japan are not using their respective trade platforms to their full potential. There are other notable areas where one country can meet the demands of the other. It is also a fact that the volume of the products currently being exported from one country to the other can increase considerably if the trade conditions between the two countries are opened up and many restrictions removed. One of the main objectives of the EPA will be to ameliorate the trade between Japan and Turkey by making it possible for both states to benefit from each other fully.

Direct Investment

So far direct investment has been a one way street from Japan to Turkey. Turkish companies and individuals have not made any direct investment in Japan whereas investment from Japan to Turkey has amounted to approximately USD1.4 billion in 2013.

The lack of investment from Turkey to Japan should not come as a surprise to many readers and there are numerous reasons for the imbalance. Crucially, the lack of required capital from Turkish investors although this has changed as the economy has driven ahead in the last 10 years and Turkish investors have recently increased their outbound positions. However, Japan is one of the most developed economies in the world, with fierce market competition and high rate of consumer and business loyalty, it has not been high on the list of new markets for Turkish investors in their outbound investments despite the considerable interest Japanese investors have shown in the Turkish market.

Even the geo-political concerns on the situation in Iraq and Syria, have not dissuaded many Japanese companies from making direct investments in Turkey in 2013. For example, Sumitomo Rubber Industries formed a joint venture with Petlas to invest USD500 million in central Anatolia. The Bank of Tokyo Mitsubishi obtained a license from the Banking Regulatory Authority to engage in banking activities in Turkey with a starting capital of USD300million, and Panasonic entered into an SPA to acquire 90% of Viko, a Turkish wiring device producer with a purchase price around USD460million

Given  the acceleration of the economic and political relations between Japan and Turkey, the negotiations of the EPA, the stability of the consumption in the Japanese market, the increase of consumption and wealth in the Turkish market and in the markets neighbouring Turkey, we must assume and  expect more Japanese direct investment in Turkey.

Major Projects

Japanese firms have been tendered with major construction and infrastructure projects recently. The Marmaray project, which involved a massive undersea tunnel linking the Asian continent to the European continent under the Bosphorus, was built by a consortium involving Japanese companies and the total value of the project was around USD3.5 billion

The second nuclear power project of Turkey which will be built in Sinop, has been awarded to a consortium between Mitsubishi Heavy Industries and Itochu Corporation and French GDF Suez, with a the total project value of around USD22 billion. The Izmit Bridge Project, which will be the world’s fourth longest suspension bridge, will be built by the consortium between IHI and Itochu. Turkey is in the midst of a construction boom and there are further major construction projects planned such as the bridge project in Canakkale. It wouldn’t be of any surprise if Japanese companies take a significant role.

The EPA, negotiated between Japan and Turkey, aims to strengthen all three parts of the economic relationship. In that context, it will not be just a free trade agreement but a bilateral agreement lifting the barriers to the trade of goods and services and serving also to incentivize direct investment from one country to the other, with the aim of eventually making the companies from each country the preferred candidates for future major projects.

There is no doubt that there is a huge potential for growth in trade between Japan and Turkey. Both countries have different values that can be beneficial for the other. The EPA will be a concrete sign of the willingness of both to turn this potential into reality. Once realized, the development of the economic relation between Japan and Turkey, will be beneficial for the companies making international trades, direct investments and handling the major projects and also for all other parties and the employees involved in this economic relationship and eventually the consumers in both Japan and Turkey.

Posted by Ozan Karaduman

Ozan is a managing associate in Corporate and Commercial Department, Energy & Natural Resources Practice Group and TMT Practice Group of Gün + Partners.

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