Obama Faces Tests in Japan and Korea

Throughout the world, people have welcomed President-Elect Barack Obama. The reaction was especially enthusiastic in the Japanese city of Obama, located in Fukui prefecture, 300 miles west of Tokyo. On Nov. 5, as election returns showed the city's namesake heading toward a big victory over rival John McCain, locals celebrated by chanting the Illinois Senator's name, dancing Hawaiian-style dances, and eating specially prepared "Obama"-branded hamburgers and sweets.

In the head offices of Japanese multinationals, though, executives aren't sure whether to celebrate or not. Japan's big exporters are suffering amid slumping demand for electronics and autos and the effects of the strength of the yen. Year to date, Japan's stock market is down more than 35% and most economists expect a recession. Carmakers such as Toyota (TM) and Honda (HMC) are keen to see how a Democratic Administration handles the ailing health of the U.S. Big Three automakers amid calls for a bailout of Detroit. Despite falling sales in the U.S., Japanese automakers continue to increase market share, prompting fears of a backlash.

For all that, the early signs are positive: After the U.S. television networks announced Obama's win, Japan's benchmark Nikkei 225 stock index rose 4.5%, closing at 9,521.

America's closet ally in Asia will seek assurances from Obama on regional security issues. Japan's ruling party, the Liberal Democratic Party, will closely scrutinize changes to U.S. relations with China and the wars in Iraq and Afghanistan. Japan's Maritime Self-Defense Force is involved in a refueling mission in the Indian Ocean in support of U.S.-led antiterrorism operations in and close to Afghanistan.

Handling North Korea

With Kim Jong Il suffering serious health problems (BusinessWeek.com, 9/9/08), the Japanese will also be looking at how Obama changes U.S. policy toward North Korea. Much of the country was outraged in October when the Bush Administration removed North Korea from a list of terrorist countries (BusinessWeek.com, 10/13/08) in exchange for Pyongyang's agreement to verification measures for its nuclear activities. Families of Japanese citizens kidnapped by North Korea in the late 1970s and 1980s condemned the move, and the Japanese government was upset that it was informed of the development only 30 minutes in advance. Japan's Finance Minister, Shoichi Nakagawa, said the U.S. decision was "extremely regrettable."

Making North Korea implement its promise to dismantle its nuclear weapons program will be a major security challenge for Obama. He has called the Bush Administration's decision to remove North Korea from the terrorism blacklist a "modest step forward" but has said there must be an understanding of the consequences for North Korea if it does not follow through on its commitments. Obama's willingness to talk directly to U.S. adversaries such as Pyongyang has created some worries in Seoul that South Korea's voice in determining the fate of the Korean peninsula could weaken as there will be increasingly little room for President Lee Myung Bak's government to play a role. Lee has criticized the so-called "sunshine policy" pursued by his predecessors, Roh Moo Hyun and Kim Dae Jung, arguing the South had only prolonged the oppressive regime of Kim Jong Il without addressing his nuclear ambitions and human rights issues in the North.

Revisiting the South Korea Trade Deal?

On trade, Koreans are looking to see what Obama will do to a 2007 bilateral free trade agreement with South Korea. The trade pact with South Korea, the U.S.'s seventh-largest trading partner, is by far the biggest such deal negotiated by the Bush Administration and the largest U.S. deal since the North American Free Trade Agreement. The U.S. International Trade Commission has estimated it would increase annual U.S. exports to South Korea by between $10 billion and $11 billion and increase imports from Korea by between $6.4 billion and $6.9 billion.

The Bush Administration has said the pact will level the auto-trade playing field by eliminating South Korea's 8% tariff on U.S. auto imports and reducing regulatory barriers. In turn, the U.S. will have to eliminate a 2.5% tariff on South Korean cars. However, Obama has said he opposes the deal, which he has called "badly flawed" in its handling of U.S. car exports. He has called for the two sides to renegotiate and secure greater access to the Korean market for U.S. automakers.