September’s Japanese trade figures underlined the economic impact of the maritime territorial dispute in the East China Sea that Tokyo is embroiled in with Beijing. Exports of Japanese cars to China and imports of Chinese tourists in particular were sharply reduced, compounding the difficulties Japan’s exporters, like their Chinese counterparts, are suffering in the sluggish global markets for their goods.
The trade effects of the dispute may be transitory, but a new Reuters survey points to a more permanent breaking of some of the many ties between the two economies. One in four Japanese companies, the survey finds, are rethinking their investment plans in China, either delaying or scaling back new investment; one in six said they were considering switching investment to other countries. The more than 250 Japanese companies surveyed were from both manufacturing and non-manufacturing industries, from electronics to apparel and retailing.
Japan is the leading source of foreign direct investment in China (excluding that from Hong Kong and Taiwan). The Japanese government reckons that some 20,000 of its country’s firms have invested a combined $1 trillion in China over the past two decades.
Some of what these Japanese companies are now thinking may be a political convenience for economic necessity. China’s cost advantages in low-end manufacturing are eroding. Supply chain and worker efficiency advantages decreasingly offset that. That would suggest that low-margin businesses like apparel and low-end consumer electronics, already being produced mainly for export, will move off- off-shore first, to places like Vietnam, Myanmar and Malaysia. Japanese companies that are counting on domestic Chinese sales, like the carmakers and retailers, have little choice but to ride it out, hoping that the diplomatic tensions will ease, and along with them this latest bout of anti-Japanese consumer sentiment in China.
This Bystander recalls that in 2005, when Sino-Japanese relations were going through one of their periodic low-points, Japanese executives started to consider the need to put some of their regional manufacturing capacity elsewhere than in China. By last year, they were putting three yen of new investment in Southeast Asia for every two they put in China. Now they have double cause to step up that trend.