Japan’s Shifting Tides

I recently came across some striking results of a CSIS-Nikkei Virtual Thinktank (CSVT) survey on the shifting Japanese attitudes of doing business in Mainland China.

The online survey [Japanese], published in January 2013 and based on roughly 3300 responses, polled mid-to-senior level Japanese business managers over the age of 20. Overall, the survey confirmed the rising Japanese threat perception and general wariness of doing business in China, which largely mirrors the thinking of the general public. What was rather striking, however, was not only are more level-headed businesses redirecting their future investments away from China, but rather the increasing alignment with right-wing policies of Prime Minister Abe’s political faction. Some of the noteworthy results in this business survey include:

  • Q2: 77% believe China will have diminished significance as an essential production base for the Japanese economy in the future.
  • Q6: 82.2% cite political risk as the greatest risk factor of doing business in China.
  • Q11: 47.9% cite Southeast Asia as the most likely destination of future FDI in emerging markets, vs. India (41.9%) and China (3.6%).
  • Q12: 55.2% believe that Japan should make its dominion over Senkaku Islands explicit by building permanent facilities or stationing civil servants; vs. 30.9% believe any construction should be postponed to maintain status quo. (wow!)
  • Q13: 36.1% believe Japan should deploy Self-Defense Forces to safeguard Japan’s sovereignty over the Senkaku Islands; vs. 34.9% believe the Coast Guard (not SDF) should accept the possibility of physical conflict with China and step up island patrols. (wow!)
  • Q14: 34.3% believe Japan should lessen its business involvement with China in light of ongoing disputes; vs. maintain status quo (28.2%), vs. separate business priorities from politics (19.8%). Note: 17.8% believe Japanese businesses should pull out of China altogether.
  • Q18: 38.8% support Cabinet leaders’ visit to Yasukuni Shrine on official capacity, vs. private visits are acceptable (27.2%), vs. no visits should be made (22.2%).

No data on year-on-year changes exist, as this is the first opinion survey conducted since CSVT’s establishment in late 2011. Fluffy public opinion polls aside, other business surveys (JETRO Survey of Japanese-Affiliated Companies in Asia-Oceania, Reuters-Nikkei corporate survey, Chiba Bank Research Institute China impact survey) also confirm Japan’s shift in economic posturing within Asia. With declining levels of business interests and physical assets to safeguard in China, this shift is likely to encourage nationalist assertions by the myopic right-wing leadership in Japan.

The surveyed firms with plans to expand in China/HK declined by 15%; Indonesia, Myanmar, the Philippines, and Taiwan remain as popular FDI destinations.  Source: JETRO Survey of Japanese-Affiliated Companies in Asia and Oceania (FY 2012 Survey), Page 17.

Surveyed Japanese firms with plans for short-term expansion in China/HK declined by 14.5%;
Indonesia, Myanmar, the Philippines, and Taiwan are growing in popularity as FDI targets.
Source: JETRO Survey of Japanese-Affiliated Companies in Asia and Oceania (FY2012), Pg.17

Japanese corporate realignment

Two major components contribute to the growing shift in Japanese businesses away from China.

First is the baseline, where Japanese and other foreign investors are already redirecting their businesses to Southeast Asia. Rising labor and manufacturing costs, strengthening Renminbi, and changing demographics are among the main reasons cited in the flagging levels of foreign direct investment (FDI) in China during the last year. Among the foreign investors, the Wall Street Journal reported:

Asian firms accounted for much of the investment drop in China ($95.7B in 2012). Investment from 10 Asian economies—Hong Kong, Taiwan, Macau, Japan, the Philippines, Thailand, Malaysia, Singapore, Indonesia and South Korea—fell 4.8% last year and accounted for about 82% of the total. Hong Kong was the single biggest investor, reflecting in part money from mainland investors being recycled back into the country.

The second, more Japan-specific component, is the rising political cost of doing business with China. Among a growing backdrop of diplomatic tussles starting in the mid-2000’s, the turning point became the 2010 Chinese fishing trawler collision near the disputed Senkaku/Diaoyu islands. Bilateral relations quickly deteriorated through a series of anti-Japan protests, starting with the suspension of rare earth metal export licenses to Japan in 2010. The government’s purchase of the disputed islands in September 2012 to counteract the Tokyo Governor’s initial purchase proposal backfired, causing angry Chinese demonstrators to launch consumer boycotts and attacks on Japanese storefronts and factories, including an attack on the ambassador’s car.

Wagging-the-dog

In spite of ongoing diplomatic spats of farcical nature, the fundamentals of China-Japan trade relations remain strong. Of the Japanese firms surveyed by JETRO for example, most cite procurement/labor cost increases and weak domestic sales as the main reason behind curbing future ambitions in China. And despite frustrations that their bottom line is undercut by their local competitors’ cheap pricing and government ties, most businesses appear to be prepared to wait out the political storm in hopes of capturing a larger slice of the 1.4 billion market. In the meantime, businesses are making forays into Southeast Asia to explore opportunities for further diversification of risk.

The greatest danger, then, lies in the growing antagonization of Japanese businesses, which will in turn energize the increasingly hawkish stance taken by the ruling LDP party led by PM Abe. While most of the Japanese public do not share the far-right nationalism that is espoused by these political leaders, increasing regional political risk and national-level economic priorities (ie. energy shortages, currency appreciation) is enabling national security and economic concerns to remain in the limelight. As seen in the CSIS-Nikkei survey, this need is unmistakeably driving the business community towards greater alignment with rightist policies.

The hope here is for both countries to dial down their ‘wag-the-dog’ rhetoric in favor of more level-headed approaches to political disputes. But the greater urgency is for healthy bilateral business ties to prevail in order to limit the reaches of PM Abe’s future policy changes.

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