Working together for Brazil’s resource-driven economy and Japan’s technology-driven economy

A change of government and a major policy shift in South America’s resource-diverse powerhouse

As a leading nation in both South America and the Global South, Brazil is also in the limelight due to its 2024 G20 presidency. With a population of about 215 million and GDP of some USD2 trillion, the country ranks among the world’s top 10 economies. Its vast territory boasts a diversity of quality mineral resources, as well as petroleum, and it is the world’s second-largest producer of bioethanol, following the U.S.

In May 2024, Prime Minister KISHIDA visited Brazil—the first time in eight years for a sitting Japanese premier—and had a summit meeting with President Lula. The two leaders reaffirmed the importance of bilateral relations as strategic and global partners.

Over the past few years, the Brazilian economy has faced headwinds such as soaring power costs and crop failures due to a historic drought, and inflated import prices due to depreciation of the Brazilian real against the U.S. dollar. However, driven mainly by the mining, agriculture, livestock, and service industries, real GDP growth was 4.6 percent in 2021 (lifted by a post-pandemic rebound), 2.9 percent in 2022, and 2.9 percent in 2023, surpassing pre-pandemic growth rates.

Regarding the recent economic situation in Brazil, ISHIKAWA Noriyuki, who headed the JBIC Representative Office in Rio de Janeiro for nearly five years until April 2024, notes that “Recently there has been damage from floods and storms caused by extreme weather, and there is still some lack of transparency concerning President Lula's policy direction, but I think we can say that the situation is basically steady.”

President Bolsonaro was in power in Brazil when ISHIKAWA took up his post in 2019, but in January 2023, the reins of government were taken over by an administration led by President Lula, who assumed the presidency for the third time. The Bolsonaro administration advocated for small government, was very pro-businesses, moved to privatize state-owned enterprises, and reform social security and reduce government spending in order to cut the budget deficit. The policies of the current administration are a complete change of direction, aiming for a return to big government, halting privatization plans and expanding the role of state-owned companies.

In addition, with reducing inequality a top priority, the Lula administration is focusing on initiatives such as reviewing minimum wages, strengthening social security, and revising spending caps, a sharp policy shift to a willingness to take fiscal stimulus measures. In April 2024, the government also dropped the goal of achieving a primary balance surplus by 2025.

“In his address at COP27 (27th session of the Conference of the Parties to the Framework Convention on Climate Change) in November 2022, immediately prior to his inauguration, President Lula stated that ‘Brazil is back’ in the international community’s fight against climate change. His position of taking the lead in placing importance on environmental measures was welcomed by the leaders of the West and other countries, and this became the international debut for his policy of omnidirectional diplomacy.”

China expanding its presence and soft power through cultural projects

The Lula administration is actively promoting its stance of omnidirectional diplomacy and is strengthening its ties with emerging economies. One notable change is the growing presence of China. China is Brazil's largest trading partner, ranking number one in both imports and exports, and Brazil is China's largest trading partner in Latin America.

Adding to this momentum is Brazil’s state-owned oil company Petrobras selling some of its interests in offshore oil fields to its Chinese counterpart China National Offshore Oil Corporation (CNOOC), and announcing a partnership with China Petrochemical Corp. (Sinopec) in areas including oil exploration and research. ISHIKAWA points out that although there were not that many Chinese expats in the past, their numbers have increased in recent years.

“In the past, Asians were rare on the streets of Rio de Janeiro, but recently we have been seeing more Chinese. There is also a large number of Chinese companies such as state-owned oil company and state-owned bank in the building where the JBIC representative office is located. I have the impression that organizations that used to send just a few representatives have expanded their staff to 20 to 30 people. At international conferences held in Brazil, there has been an increase in occasions where simultaneous interpretation is provided in Chinese, in addition to English and Portuguese.”

China is also growing more prominent in culture and the arts. For example, the logos of Chinese companies now regularly appear as exhibition sponsors at museums in Rio de Janeiro. And there are an increasing number of music concerts sponsored by Chinese companies held at the municipal theater and a naval fort, both of which are historical buildings.

“Such concerts are a little unusual in that, after bossa nova or Brazilian pop, Chinese performers play Chinese music on traditional instruments such as the erhu, or perform Chinese dances in traditional dress."

As Brazil marks the 50th anniversary of diplomatic relations with China in 2024, the leaders of both countries intend to strengthen their strategic partnership as important trading nations. On the other hand, there is a persistent wariness in Brazil around a shift toward China. “That’s why China came up with the strategy to improve its image in Brazil using culture and the arts," explains ISHIKAWA.

A long history that built trust in Japan, and diversification of mineral resource development

Brazil has deep historical ties with Japan, home to the world’s largest Japanese diaspora, said to number more than 3 million. After the first emigration ship to Brazil, Kasato Maru, crossed the Pacific in 1908, many Japanese followed, employed as farmers on coffee plantations and other farms.

In the 1950s, with the birth of numerous national public-private projects between Japan and Brazil in fields including steelmaking, aluminum production, and agriculture, more Japanese companies began expanding their operations to Brazil. Japan’s contributions to Brazil’s nation-building are also widely recognized in the country.

“Brazil as a whole is very pro-Japanese, to the point that there is even a Portuguese phrase, 'Japonês garantido' (‘Japanese guaranteed,’ which expresses a high level of trust in Japanese products and Japanese people). Respect for Japan is very high, even now," says ISHIKAWA. In September 2023, Japan granted Brazilian citizens visa exemptions for short-term stays. And Brazil's visa waiver for Japanese citizens is also being continued, which is expected to promote visits between the countries and boost cultural and economic exchanges.

Since the 1950s, JBIC has been supporting large projects not only in the resources and energy sector, including iron ore, deep-sea oil field development, aluminum, and pulp and paper, but also in the infrastructure sector, such as the construction of freight railways, subways, and expressways. Support has also been provided for exports and investments by Japanese companies developing business in Brazil in sectors including manufacturing and service industries.

“In terms of mineral resources, as long as the steel industry continues to be a pillar of Japan’s economy, Brazil will remain a vital supplier of raw materials for the sector. In recent years, decarbonization of the steelmaking process in Japan has become an urgent issue, further increasing Brazil’s importance as a supplier of high quality and rare, low-carbon raw materials for steel that contribute to the reduction of carbon emissions,” says ISHIKAWA.

For many years, the image of Brazil's mineral resource development was that its core strategy was a focus on iron ore, but it is now diversifying with initiatives including active exploration of lithium deposits, centered on the thriving mining industry in the southeastern state of Minas Gerais. For Japan, as well, Brazil’s importance is growing from the perspective of strengthening supply chain resilience by diversifying supply sources of critical minerals.

Brazil has abundant mineral resources, ranking first in the world in niobium production, holding an overwhelming share of more than 90 percent of global reserves. Brazil also ranks second in the world in production of tantalite and iron ore, and while it ranks ninth in terms of production of kaolinite, it holds more than 20 percent of the world's reserves.

Utilizing Japanese technology in the environmental sector and the obstacle of “Custo Brasil"

Nevertheless, the number of Japanese companies in Brazil has been hovering at about 700 over the past decade, with sluggish growth in new market entries. ISHIKAWA points out that there are several factors behind this:

“First, the deep-rooted issue of so-called ‘Custo Brasil,’ the costs and inefficiencies of doing business in Brazil, which include the complicated tax system, underdeveloped infrastructure, and labor costs. It is a high-inflation country, with a policy interest rate of over 10 percent at the moment, as well as volatile exchange rate fluctuations. Japanese companies have not fully mapped out strategies on how to position Brazil in their supply chains. My impression is that there are still many companies that regard Brazil as just a source of natural resources and agricultural products.”

Of course, Brazil’s government has not been sitting idly by. From around the start of OECD accession talks in 2022, it has been working hard on tax and administrative reforms, amending the constitution in December 2023 to simplify the tax system and lighten tax burdens on corporate activities.

As this amendment had been discussed repeatedly without progress since the 1990s, it was lauded in industrial circles as a game-changer. This tax reform also led the S&P Global Ratings agency to upgrade its credit score on Brazil’s long-term sovereign debt from “BB-“ to “BB.”

There are great business opportunities for Japanese companies in the areas of climate change countermeasures and renewable energy, which the Lula administration is focusing on, according to ISHIKAWA.

“How serious President Lula is about this can be seen in his role in the Belém Declaration of August 2023, which was adopted by the eight countries of the Amazon region as a common framework to protect the Amazon rainforest and halt its destruction.”

COP30, which is scheduled to be hosted by Brazil in November 2025, will also be held in Belém, the capital of the northern state of Pará, where the declaration was signed. When Prime Minister KISHIDA visited Brazil, there was a focus on promotion of cooperation between Japan and Brazil for comprehensive carbon neutrality as it relates to the environment, climate change, and sustainable development, as part of the lead-up to COP30.

Brazil has a history of producing bioethanol from sugarcane as a national policy that dates back to the 1970s. In recent years, production technology for second-generation bioethanol made from the sugarcane bagasse waste product has also been established. With applications developed for its use in sustainable aviation fuel (SAF), which does not use fossil fuels, business opportunities are being pursued for its use in decarbonizing the aviation industry.

A pilot project has also been launched for the production of green hydrogen, a next-generation energy source, utilizing Brazil’s abundant renewable energies. Centering on Western companies that are closely watching this region as a base for exports to European market, there are moves underway to accelerate alliances with local companies.

Brazil also has high potential in terms of carbon credit (carbon emission rights). Carbon credits generated by forest conservation and afforestation projects are already actively traded on the voluntary carbon market (where companies and individuals voluntarily purchase carbon credits to achieve carbon neutrality), making commercialization of forest and environmental conservation possible.

Deliberations on a bill to regulate the carbon credit market are also underway, and new business opportunities will emerge in the runup to COP30 next year. ISHIKAWA also strongly senses that Japanese companies are gearing up to embark on new activities in this field.

“As we already have an idea of what we need to do, we are now in the process of discussing the specifics by involving local partners. Japan and Brazil have a relationship of trust that has been nurtured for over half a century. How should Japan’s cutting-edge, innovative technologies be deployed to tackle social issues and the decarbonization shift in Brazil? JBIC also wishes to take the lead in providing active support here.”

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