After taking daring economic measures to drag Japan out of recession, Prime Minister Shinzo Abe may be on the verge of another breakthrough: a meeting with Chinese President Xi Jinping next week at the Asia Pacific Economic Cooperation (APEC) gathering in Beijing. During the past year tensions have escalated between Japan and China over islands in the East China Sea (known in Japan as the Senkaku islands and in China as the Diaoyu islands). Diplomatic ties between the two countries have been frozen since 2012 when Japan purchased the islands, and Abe has also come under criticism in China for his 2013 visit to the Yasukuni Shrine to Japan’s war dead, which includes World War II war criminals. He sat down in his office this week with the Post’s Lally Weymouth to discuss the economy, ties with China and whether he trusts President Barack Obama. Excerpts:

Q: I’d like to ask your reaction to the Bank of Japan’s surprise announcement [that it would continue the stimulus] and also to the news that your government’s pension fund would invest more of its money in domestic and international equities. Do you believe these actions will stimulate the economy?

A: Our government has made the economy our priority in order to have it lifted from the deflation which has continued for more than 15 years. As a first arrow, the Bank of Japan came up with a 2 percent price stability target. Based on that, aggressive monetary policy has been promoted. As a result , the notion that deflation will continue has been dispelled. As for the concrete monetary policy methods that can be employed, it is entirely up to the Bank of Japan. In that context, I trust Governor [Haruhiko] Kuroda very much.

As for the Government Pension Investment Fund [the largest pension fund in the world], this is the result of discussions I had with people I asked to review the portfolio. Our duty is to make sure the pensioners will regularly get the benefits for their pensions. Secondly, the portfolio is now shifting from an environment dominated by deflation to one not dominated by deflation. Accordingly, we had to review the portfolio. The third is to minimize risk. Those three things have been taken into consideration as well reviewing the entire international trend in pension management. Having done all that, we announced that changes will be made in the GPIF portfolio.

Q: There is a lot of speculation about whether you will raise the consumption tax in December. Do you think the economy has recovered enough to do this? It was recently raised 3 percent and polls show a further increase is very unpopular.

A: Hiking the consumption tax is needed to make sure a good and firm social security system can be handed over to the next generation. That is why we implemented the first round of the consumption tax this year - a 3 percent hike was made this year in July. Our thinking is to raise it once again next year, up to 10 percent, now that the economic environment is no longer [in] a deflationary state. The ratio of job openings to job seekers reached the highest level in two years, and for the first time in fifteen years, incomes also went up.

Q: The incomes of working people went up?

A: Wages for the workers. The economy is now getting into a virtuous cycle. In relation to raising the consumption tax rate to 10 percent in October of next year, we should never see a situation where the economy will lose steam so that tax revenues will not increase. We have to see good growth attained by the economy otherwise we cannot expect tax revenues to go up. As you can see, our big target is to lift the economy out of deflation. We have to carefully analyze what is the state of the economy at this time. That is why this week we asked 45 experts to look into the economic indicators which will be made available for the months of July through September. I hope an appropriate decision will be made. We are aiming at simultaneously attaining economic revitalization and fiscal consolidation. This is the only way to go.

Q: You have pledged a third arrow which is structural reforms and labor reforms. Some say that this has stalled , that there hasn’t really been deregulation and that labor reforms haven’t taken place.

A: We had already made a decision to liberalize the retail electricity market. Also, we will go ahead with regulatory reform in health care. We made a decision to go ahead with a drastic reform of the agricultural sector, which was impossible to do for the past 40 years. A decision was made to push for bold reform in the strategically designated economic special zones. We would also like to go ahead with reforming the employment area.

Q: Do you think a viable Trans-Pacific Partnership [a 12-country trade deal the United States is promoting, which includes Japan] agreement can be reached? Will your country agree to the agricultural liberalization the U.S. demands?

A: The TPP ends up creating an economic area in the Asian Pacific area, which is the world’s growth center.

Q: But will the trade deal work out?

A: The TPP is an attempt to build fair and free rules in a very wide area, not only with tariffs but also including the state-owned enterprises and intellectual property. We would like to have both Japan and the U.S. lead this effort. As for agriculture - I said previously that it is for the first time in 40 years but actually it is for the first time in 60 years - a drastic reform will be put together for the agricultural cooperatives in Japan. We would like to see the competitiveness of Japanese agriculture go up. By working together with economic partnerships such as TPP, inroads can be made into a wide economic area for the agriculture of Japan.

Q: My question is simple: Do you believe that you and the United States can reach an agreement on TPP? The U.S. has an issue protecting automobiles and Japan has a similar issue protecting its beef and agriculture. U.S. Trade Representative Michael Froman had contentious negotiations here recently.

A: I think it is arriving at a final stage. I issued instructions to [Minister of State for Economic and Fiscal Policy Akira] Amari saying that negotiations should go forward so a conclusion can be reached. I think the important thing is for both Japan and the United States to show flexibility.

Q: Do you feel there is more hope for TPP now that the Republicans are in control of both the House and the Senate? It was known that the Democratic leader of the Senate, Harry Reid, was against TPP.

A: I do not know the details about the U.S. domestic political situation. But the Obama administration does have a strong determination for the conclusion of the TPP. In that vein, I assume that cooperation will be gained from the Congress and that they will work together.

Q: There are reports that you will meet Chinese President Xi Jinping at next week’s Asia Pacific Economic Cooperation [APEC] meeting. If a meeting does take place, what would you like to discuss with the President of China?

A: The China-Japan relationship is one of the most important bilateral relationships. As far as the economy is concerned, we do have an inseparable relationship. Because we are neighbors, there are many problems. But because we do have problems, we should have a dialogue with each other without attaching any preconditions. [The Chinese want to have preconditions including that Abe promise not to visit the shrine again.] So it would be nice if a summit meeting can take place at the occasion of the Beijing APEC summit. If a summit meeting is realized, the message I would like to impart is to call for the initiation of the maritime communication mechanism, which would be a communication channel to prevent an accidental clash.

Q: Is that the maritime hotline?

A: Something like that - a hotline on the working level first. Since Japan and China together have a responsibility for the peace and prosperity of the region, we hope that we can go back to basics and develop a cooperative relationship . . . based on common strategic interests.

Q: Do you believe you can develop that kind of relationship? Or based on China’s behavior in the Senkaku Islands - China is now moving within 40 miles of the coast of the islands rather than 60 miles - do you think it is very difficult ?

A: The Senkaku Islands are an integral part of Japanese territory based on international law as well as in the context of our history. We presently have control over those islands and we will continue to do so in the future.

Japan benefits a great deal by making lots of exports to China as well as making investments in China. At the same time, China is importing goods from Japan which could only be made in Japan, and they are processing them and making them into final products to be distributed throughout the world. Also, Japanese businesses are creating 10 million jobs in China as well.

Q: But Japanese businesses invested 41 percent less into China last year, correct?

A: That is correct. That is all the more why the Japan-China relationship needs to be improved. We have to see the leaders of the two countries shake hands and have a meeting. That would benefit mutually the interests of both countries.

Q: President Obama reaffirmed last April that the U.S.-Japan Treaty of Mutual Cooperation and Security extended to the Senkaku Islands. Do you feel that is enough reassurance? Do you feel you can count on the United States?

A: Of course the Japan-U.S. alliance is the cornerstone of Japanese diplomacy and foreign relations. As the security situation in the Asia-Pacific is getting severe, the U.S. presence has a decisive importance. President Obama came to visit Japan in April. I think he was the first U.S. president to say clearly that Article 5 of the mutual security treaty covers the Senkakus. His statement is very significant in my thinking. I trust very much the president who is the leader [of] the most important ally of Japan. When President Obama visited Japan, we were able to confirm that our alliance is playing a leading role in ensuring a peaceful and prosperous Asia-Pacific.

Q; You have called for a reinterpretation of Article 9 of Japan’s constitution to build up Japan’s Self-Defense Forces? What is your vision? Do you feel Japan has to be more able to defend itself and also able to go to the defense of its allies?

A: We are willing to contribute more to the stability and prosperity of the world. We have an obligation to defend the lives of the people of Japan. On July 1, the cabinet decision was made to change the interpretation of Article 9 of the constitution. Changing the interpretation means that now it is possible to exercise the right to collective self-defense. As a result of this, I believe the Japan-U.S. alliance will be stronger. I firmly believe that as a result of that, the peace and stability of the region as well as that of Japan will be made even stronger. The U.S. government shows active support to our thinking.

Q: What do you want your legacy to be?

A: My mission will be to make sure the Japanese economy will really get out of the deflation which has continued for the past 15 years. Because we have not yet fully gotten out.

bc-japan-abe-qanda (TPN)