Sino-Japan economic ties chill amid political spats

Eighty-two years after Japan's invasion of China and one year since Japanese government's "purchase" of China's Diaoyu Islands, bilateral relations mired in history have witnessed the cooling down of economic exchanges, despite remaining hopes among business people.

The phrase "warm economic ties, cold political relations" has been used since the 1990s to describe China-Japan relations. The recent disputes, however, have renewed concerns that economic ties are no longer "warm" amid "cold political relations."

The tension follows the Japanese government's unilateral move in September 2012 to "nationalize" part of the Diaoyu Islands, which have been Chinese territory since ancient times.

Moreover, Japanese cabinet members worshipping at the war-linked Yasukuni Shrine and attempts to amend the constitution to allow Japan to possess "normal" armed forces have further strained tensions between the world's second- and third-largest economies.

China's official customs statistics suggest that the volume of China-Japan trade has dropped 8.8 percent year-on-year to $174 billion in the first seven months of this year. The trade volume shrank six percent in August alone.

Statistics from Japan External Trade Organization (JETRO) show that exports of machinery, cars and auto parts declined dramatically by 63 percent between September and December of 2012 compared to the same period in the previous year.

Auto sales of Japanese brands in China have also been overshadowed. According to Zeng Fengyi, an employee with Toyota Moto (China) Investment Co Ltd, the China market has been "fatigued" since September of last year.

The market has not rebounded in the first eight months this year, with overall Japanese car sales in China down by 6.6 percent year-on-year, statistics show.

For Zeng, who spent eight years working in Japan's advertising industry before working for Beijing-based Toyota, said the stagnant sales should be blamed on the soured Sino-Japan relations.

"On the other hand, car companies from the Republic of Korea and Germany swooped in last year when some Japanese firms were retreating from the market, providing Chinese consumers with more choices," said Zeng.

He said that many China-Japan cooperative projects have been delayed and postponed with no exact date of resumption. "It takes time, I doubt it will recover until next year," he said.

However, some Japanese insiders have attributed the bleak status quo to more than just political rift over the Diaoyu Islands, but also factors such as China's economic restructuring and its growing labor costs.

Minoru Arahata, director of the Dalian branch of JETRO, said China has placed higher standards on investments and trading along with its economic growth deceleration, which have hampered Sino-Japan economic trade.

Japan resorted to monetary quantitative easing to stimulate its economy, and the devalued yen also required Japanese companies to pay more.

Japan has encouraged its enterprises to invest in the Association of Southeast Asian Nations (ASEAN) through what is called the "China+1" strategy, which refers to diversified investment into the ASEAN as an alternative to China.

Japan Economic News (Nikkei) commented that the strategy is a method of "assuring the connection with China's market while escaping the political risks."

For Japanese firms, however, the importance of China's market has not changed, the Japanese daily paper added.

The latest survey from JETRO suggests that 59 percent of Japanese firms polled will maintain investments in China, and 25 percent of them are considering an expansion.

Haruyuki Kinoshita has promoted Japanese health products in China for three years and peppers his fluent Mandarin with Beijing slang.

"It's important to speak Chinese and understand Chinese culture," said the 50-year-old business man, who has looked to the emerging market and expected China business to expand to account for more than half of his company's overall business.

"The China market is of great potential as Chinese people are increasingly concerned about health, providing us opportunities," said Haruyuki.

For Japanese firms, the Chinese market has become increasingly important, especially in Japan's own sober economic environment with its dwindling domestic market due to low birth rates and an aging population.

Haruyuki and other Japanese working in China remain optimistic about China's market, with more veering toward the service sector instead of traditional manufacturing.

Ichiro Moritani, CEO of IBC JAPAN CO., Ltd., a foreign investment consulting firm, said the sway from manufacturing to the service sector beefs up the brittle economic ties stretched by souring China-Japan relations.

"If bilateral trade was solely in the automobile industry, for example, it would be high risk if cars cannot be sold, while cooperation in the service industry helps reduce such risk," said Ichiro Mori.

Liu Junhong, a researcher from the Japan Institute of the China Institute of Contemporary International Relations, said increasingly tense global competition has created higher risk for Japanese firms who retreat from China. Western capital would soon fill their shoes, leaving Japan few opportunities to return to China's market, which is directly related to its economic revival.

"The most urgent and utmost thing is whether this sense of crisis could result in political pressure on the Abe administration and help improve Sino-Japan relations."

Zhou Yongsheng, deputy director of the Japan research center at China Foreign Affairs University, noticed that Japanese Prime minister Shinzo Abe said he was eager to improve Japan-China relations in a meeting with Chinese President Xi Jinping at the recent G20 Summit.

Without Japan's good faith in resolving the territorial dispute through negotiation, the already cooled economic situation will continue, Zhou said.

China is willing to promote the healthy development of Sino-Japanese trade rather than the "economic chilling," but only if Japan shows its sincerity in bolstering bilateral relations, he added.