Policy Alert #35 | September 29, 2012

As tensions continue to escalate between Japan and China over disputed island territories, it remains to be seen whether and how their economies will be affected in the short and long-term. China is Japan’s largest trade partner, while Japan is China’s fourth largest trade partner; bilateral trade volume was over $340 billion US dollars in 2011.

Following our Aug. 31 post on island tensions in Northeast Asia, In this Policy Alert we focus on Japanese and Chinese commentary on the economic dimensions of this crisis.

JAPAN

Officials in Japan urged both countries to act with restraint, while Japanese companies in China began looking for ways to reduce their dependence on China amidst declining sales across various sectors.

• Prime Minister Yoshihiko Noda warned China on Tuesday that demonstrations in China over the territorial dispute could weaken China’s economy by scaring away foreign investors. PM Noda encouraged both countries to “behave with restraint’, and urged the Chinese government to protect the safety of Japanese nationals and Japan-affiliated companies.

• Japanese automakers Toyota and Nissan announced on Wednesday that they are cutting back production in China and have dampened their sales outlook for 2012. Koji Endo, auto analyst at Advanced Research Japan, stated that “For the time being I think you’re going to see Japanese automakers’ sales in China down by 20 to 30 percent. The last time we had protests like this in 2010, the effects only lasted about a month, but I think this time is going to be different.”

• Meanwhile, the Asahi Shumbun reported that Japanese businesses are looking for ways to reduce their dependence on China for rare earth elements, a vital component in several areas of manufacturing. China accounts for more than 90 percent of the global output of rare earth elements and is the main supplier for Japan. Following a disruption of imports in 2010 during another East China Sea dispute, the Japanese government began subsidizing corporate development to reduce or eliminate the use of rare earths.

CHINA

A Xinhua editorial expressed concern that the island dispute “is starting to take a toll on bilateral economic and trade ties,” and reported on several recent developments in the economic sector, including flight cancellations, spontaneous consumer boycotts of Japanese goods, and the absence of Japanese firms at a commerce fair in Chengdu.

At the same time, it appears that government officials are trying to avoid fanning the flames. Although on Sept. 13 Vice Minister of Commerce Jiang Weizeng expressed support for the consumer boycotts, at a later Sept. 21 press conference, Foreign Ministry Spokesperson Hong Lei avoided a question about the possibility of economic sanctions against Japan.

Some commentary in the officially-sanctioned press, while asserting China’s usual stance on the islands, thinks that economic ties will help the two countries avert outright conflict.

• “One certain thing is that war is unlikely in the Asia-Pacific….With global economic integration, the expanding of armed conflicts will be no good to any country involved,” wrote Han Xudong, professor at the PLA University of National Defense.
• In an interesting twist, a Global Times editorial expressed concern about China’ internal stability: “We may be easily united in opposing Japan’s public opinion, but if some Chinese people suffer economic losses due to less cooperation with Japan, we may have to face internal conflicts….What determines who will win the long-term struggle is the unity of society.”