Many economic bumps ahead for Japan

Since assuming office in December 2012, Abe has taken a slew of measures that have soured Japan's political ties with China and the Republic of Korea. As a result, Japan's economic and trade ties with the two neighbors have also suffered. Japan's trade with China has dropped for two consecutive years, from $344.9 billion in 2011 to $312.5 billion in 2013. Its trade with the ROK, too, has declined, from $105.5 billion in 2011 to $93 billion in 2013. Given that China and the ROK are Japan's largest and third-largest trading partners, the declining trade has weakened the Japanese economy. In particular, falling direct Japanese investment in China is an important factor behind Japan's falling exports to China, because more China-bound investment means more exports of machinery and related products to China.

Some experts say Japan's declining investment in China indicates Japanese enterprises are shifting their focus to lower labor-cost countries in Asia because of rising labor costs in China. But such experts' contention cannot explain the continuous increase of investment from Singapore, the ROK and the US in China in recent years.

The drop in Japan's investment in China started after the Abe government announced the "nationalization" of some of the Diaoyu Islands, a move that angered China and soured bilateral ties. At the same time, the relentless attempts of the Japanese government and media to exploit the "China threat" theory and the risks that "shadow banking" and the real estate bubble pose in China have also deterred Japanese enterprises from increasing their investments in China. Similarly, fears of the ROK suffering an economic collapse and entering "lost two decades" like Japan have curtailed Tokyo's economic cooperation with Seoul.

If the Sino-Japanese stalemate continues and China-ROK cooperation further deepens, Seoul is likely to replace Tokyo as Beijing's second-largest trading partner country.

Declining trade with China and the ROK and its reduced investments to the two countries will, to a large extent, thwart Japan's efforts to extricate itself from long years of deflation, which is not conducive to Abenomics. Because of this, and the growing trade deficit, Japan will soon be staring at fiscal and balance of payment deficits.

The author is a researcher at the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce.