Japan should actively pursue free trade agreements (FTA) with other Asian countries to reap the benefits of closer economic ties with the region, a government report said on Friday.
"Among the three regions of Asia, North America and Europe, the biggest merits can be expected through further liberalisation with Asia," the Cabinet Office's annual report on fiscal and economic conditions said.
"If Asian nations forge FTAs with countries other than Japan and Japan cannot conclude FTAs, the potential demerits for Japan would be large," it added.
Japan's exports to the Asian region have risen to above 40 percent of total exports in 2003, compared with around 30 percent in 1990.
But Japan is in danger of falling behind other Asian nations, particularly China, in forging FTAs. Progress has been slow because many areas such as agriculture are protected by government subsidies and because trade issues often involve a need to overcome bureaucratic turf battles.
Tokyo has launched FTA talks with Malaysia, Thailand and the Philippines, as well as with South Korea.
It also aims to start talks on a free trade pact with the Association of South East Asian Nations (ASEAN) by the beginning of 2005, seeking to forge a pact by 2012.
China aims to conclude a free trade pact with six ASEAN countries by 2010 and with the other four by 2015.
Japan's only FTA agreement in Asia is with Singapore.
It reached a basic agreement with Mexico in March for what would be Tokyo's second ever FTA and the first to include politially sensitive farm products.
Friday's report, submitted by Economics Minister Heizo Takenaka to the cabinet, focused on coping with globalisation and a need to revive Japan's regional economies to bolster the overall economy.