Hot economics doused by cold politics

Japan strives to do business with China while shopping around for other deals

It was a rare and symbolic meeting. On Sept 25, Japan's Chief Cabinet Secretary Yoshihide Suga met an 11-strong delegation of China's business heavyweights in a reception at the Japanese prime minister's office in Tokyo.

Headed by CITIC Group Corp chairman Chang Zhenming on their five-day visit, the Chinese business leaders talked with their counterparts from Japan Business Federation. Most of these Chinese executives' companies, such as the China Investment Corp, are investing in Japan. When Sino-Japanese relations are at an impasse, the business people of the two countries are racking their brains to move things forward.

The Japan-China Economic Association, headed by Toyota Motor Corp Chairman Fujio Cho, is expected to send about 100 Japanese business magnates to visit China in November.

For a time, the Sino-Japanese relationship was somewhat paradoxical in that both countries enjoyed flourishing trade and investment ties while political rifts remained.

This "hot economics, cold politics" situation, however, has fallen apart recently. Bilateral economic relations have declined along with the diplomatic deadlock caused by Japan's illegal nationalization of China's Diaoyu Islands in September last year.

The territorial dispute has trampled on the cooperative relations that the two countries have nurtured over many years and, in particular, has adversely affected their strong economic ties.

Data from the Japan External Trade Organization published in August showed that exports to China for the first half of the year fell to the lowest level in four years. The rate of decline in Japanese exports to China accelerated to 16.7 percent for January to June of this year from 14.8 percent in July-December of the previous year. And Japan's imports of Chinese goods also fell, but a much smaller 6.1 percent to $86 billion. JETRO predicts that Japanese exports to China will keep declining.

Figures from China's Commerce Ministry corroborated the decline in trade between the two countries. In the first seven months, China-Japan trade fell 8.8 percent year-on-year to $174 billion, with China's imports of Japanese goods sinking 13.2 percent to $90.81 billion and exports to Japan dropping 3.5 percent to $83.19 billion.

Though Japanese corporate leaders are trying to help untie the knot in bilateral relations, they have a dual agenda, adopting a "China Plus One" strategy. They have been looking to tie up investment in the Association of Southeast Asian Nations countries.

The JETRO statistics show that Japan's investment in the ASEAN members jumped 55.4 percent from the previous year to $10.29 billion in the January-June period, the highest ever on a six-month basis.

Direct investment in China, however, plunged 31.1 percent to $4.93 billion, indicating that Japanese firms have shifted focus to Southeast Asia since the territorial dispute erupted.

For Japan, ASEAN, with a population of 600 million, is a land of growth. The region's GDP is growing at more than 5 percent. There is also a growing middle-class.

Mazda Motor Corp and Honda Motor Co Ltd have announced $900 million worth of investments to boost production in Thailand, building new assembly plants and expanding factories.

The yen's steep fall sparked by "Abenomics" - the inflationary policies advocated by Japanese Prime Minister Shinzao Abe - has boosted Japanese manufacturers' price competitiveness in key industries such as auto, steel, electronics and machinery. The Japanese currency has fallen roughly 20 percent against the dollar since December. Japanese companies' sapping purchasing power is only encouraging them to speed up investments overseas.

Japanese banks have lent a record amount to Southeast Asian businesses, with loans rising almost 8 percent to $152.8 billion by the end of the first quarter.

Japanese corporate acquisitions in the region have also reached a record $8.2 billion so far this year, led by Mitsubishi UFJ Financial Group's $5.7 billion purchase in July of a 75 percent stake in Thailand's fifth-largest bank, Bank of Ayudhya.

A poll of 100 Japanese entrepreneurs by the Nihon Keizai Shimbun financial daily found that 44.4 percent said they would expand production abroad, and 38.4 percent would spend more in 2013 on equipment in the ASEAN countries. This compares with only 19.9 percent and 19.8 percent, respectively, planning expansion in the United States and China.

Japan is the ASEAN's second-largest trade partner after China.

Abe has visited seven ASEAN countries since taking office last December, and is expected to complete the full round in October. His administration is circumventing mounting frictions with its two immediate neighbors, China and South Korea, by reaching out to other countries outside Northeast Asia. It has been going that extra mile particularly to strengthen ties with the ASEAN countries. Japan's moves are aimed at consolidating its status in Southeast Asia and putting up a united front with some regional countries in territorial disputes with China.

The upcoming visit to China by a large contingent of Japanese business people should send a clear message: China remains a magnet. The Chinese government decided in May 2012 to allow direct trading of its currency against the Japanese yen, making yen the first currency other than the US dollar to do so.

But the magnet can't work magic against the backdrop of a "political divorce" of the two countries. It is up to the Japanese government to decide whether it is willing to "retie the knot".

The author is China Daily's Tokyo bureau chief. Contact the writer at caihong@chinadaily.com.cn.