I believe it (the deal) will herald a new era of economic ties between our two countries

Singapore's prime minister Goh Chock Tong

Under the agreement, Singaporean businesses should gain access to Japan's lucrative services market, worth some $6 trillion a year.

Japan's service sector is regarded by many businessmen in the region as one of the most difficult markets for foreign companies to penetrate due to a range of institutional and bureaucratic obstacles.

"Singaporean investors will be treated just like a domestic Japanese company," said a Singapore trade official.

"What's crucial," he added, "is that under the agreement Singapore-based companies which invest in Japan will be allowed to transfer their investment in-and-out of Japan as they like."

Opening doors

Singaporean businesses are cautiously optimistic that this new deal will also encourage other foreign investors to take a fresh look at the Japanese market.

"The new deal may also encourage other international firms who want get a toe-hold in the Japanese market to consider opening offices or strengthening their presence in Singapore as part of their growth strategy," said a senior Singaporean economic analyst.

The trade pact also includes an agreement to promote tourism between the two countries. The countries' two key shopping belts - Tokyo's Ginza and Singapore's Orchard Road - have been twinned as part of the joint promotion deal.

The two countries agreed to promote tourism

"I believe it (the deal) will herald a new era of economic ties between our two countries," Singapore's prime minister Goh Chock Tong told the visiting Japanese leader. "It will anchor Japan's presence in ASEAN."

Analysts point out that signing free trade agreements is no easy task for Japan, give the strong domestic opposition to them from farmers and other protected industries.

A new look

But while agriculture accounts for a negligeable proportion of Japan-Singapore trade, that's not the case with the rest of Asia.

Agreeing a free trade arrangement with other South East Asia countries, or ASEAN as a whole will be far more complicated.

Japan has been forced to look seriously at free trade arrangements after China appeared to have seized the initiative with the proposed China-ASEAN free trade agreement.

This has led Japan to hurriedly cobble together proposals for its own free trade agreement with ASEAN.

These have been discussed during Mr Koizumi's current lightning trip to five of the most important South East Asia capitals.

Interlinked trade blocs

Mr Koizumi has been exploring the possibility of a larger East Asian economic community, including China and South Korea, which could be extended to include Australia, New Zealand and the United States.

Tokyo's Ginza district

This is something Singapore' Prime Minister Goh Chok Tong is likely to support.

"What we fear most is that the world will be split into three economic blocs -- FTAA, EU and East Asia -- in the long term," said Goh Chok Tong.

Instead, Singapore wants to ensure that there are trading and economic linkages between three blocks.

"That's why Singapore has strongly supported APEC (Asia Pacific Economic Community) and the Asia-Europe meetings (ASEM)," said Melina Nathan a senior analyst with Singapore's Institute for Defence and Stretch Studies.

China growth fears

Meanwhile, both Japan and Singapore are anxious to find ways of furthering Asia's economic integration. China, Japan and South Korea are to meet shortly to discuss ways of developing a free trade area in North East Asia.

That is likely to be more of a model for how the two parts of Asia move towards a pan-continental free trade agreement.

But Japan's biggest concern is that it is going to miss out economically and politically as China's role in the region grows.

Already there is little doubt that the countries of South East Asia see the region's prosperity and stability as tied to that of Beijing rather than Tokyo.

Government officials concede privately that this is even Singapore's longer-term strategic view.

"The issue," according to a senior Singaporean official, "is to find ways to ensure that China doesn't just swallow up the region."

And it appears that many in the Singapore government think liberalising trade and increasing economic integration, within and without the region, is the best way of doing that.