Deepening economic ties belie China-Japan tension

September 3, 2015

The author is a Reuters Breakingviews columnist. The opinions here are his own.

Hostility between Asia’s two biggest economies is bubbling up again. But commercial logic is pulling in the other direction: Japan’s economic success increasingly depends on China, and vice versa.

On Sept. 3, geopolitics seems to be trumping economics. China’s huge military parade to mark 70 years since the end of World War Two is a well-timed nationalistic jamboree at a difficult juncture for the Chinese economy.

Meanwhile, Japan’s military is seeking its biggest budget in 14 years, partly to reinforce its hold on uninhabited islands in the East China Sea – a claim hotly contested by Beijing. The Japanese economy, too, is struggling, as Prime Minister Shinzo Abe’s battle against deflation falters.

Still, one of Abe’s tools is a weaker yen. And that has been a resounding hit with Chinese tourists. Out of the 11 million foreign visitors to Japan between January and June, 2.8 million were from China, a 114 percent jump from a year earlier. They are spending heavily on all kinds of high-quality Japanese goods: reportedly thronging Japanese drugstores to buy Okamoto condoms, for example.

Investment is also perking up from the gloom of 2012, when disputes over the islands spawned anti-Japan riots in China. Earlier this year, trading house Itochu and Thailand’s CP Group together bought more than a fifth of China’s CITIC for $10.4 billion, the largest acquisition of a Chinese business by a Japanese investor.

However, a weak Chinese economy has seen Toyota delay a Lexus factory on the mainland. It’s also clouding the outlook for trade between the two.

This has more than trebled since 2000. But Japan’s annual exports to China have slumped more than 18 percent since Abe came to power in 2012; trade the other way has fallen 10 percent in dollar terms. Japan is also staying out of the Asian Infrastructure Investment Bank, which will finance Chinese President Xi Jinping’s new China-centred trade network.

Of course, strong commercial ties don’t prevent conflict – just ask Britain and Germany. But business people and tourists alike would probably rather see better relations between Asia’s two big neighbours.

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