Islands dispute hurts investment, trade with Japan

16 january 2013

The territorial dispute over the Diaoyu Islands has hurt Japanese investment in China and bilateral trade between the countries, according to central government commerce authorities.

In September, Japanese investment in China and bilateral trade saw a slowdown, which Ministry of Commerce spokesman Shen Danyang described at a briefing on Friday as”to some degree” related to the Japanese government’s “purchase” of the disputed islands.

But”as long as Japan corrects its wrongdoings, there is actually great room for the long-term development of Sino-Japanese economic and trade relations,” and China believes that bilateral trade should enjoy a healthy future, the spokesman said.

The first nine months saw Japanese investment in China total $5.62 billion, an increase of 17 percent year-on-year, but at a much slower speed than its expansion in 2011, which the ministry reported as 50 percent.

In the meantime, bilateral trade saw a net decrease of 1.8 percent to $248.7 billion. In September alone, trade went down as much as 4.5 percent year-on-year, when China saw an increase of 2.2 percent in its exports to Japan and a decrease of 9.6 percent in imports, according to the General Administration of Customs.

Zhang Jianping, a researcher from the Institute for International Economic Research under the National Development Reform Commission, envisaged that”the negative effect of the island dispute will be reflected in Japan’s investment in China from the following months into the next year.”

China is Japan’s largest trade partner and Japan is China’s second largest source of foreign direct investment.

“The decrease in Japan’s investment in China will probably also harm Japan’s own economy through a decline in exports and corporate profits, while it would add pressure to China’s slowdown, affecting its industrial job market and domestic consumption,” he said.

Yao Haitian, a researcher from the Chinese Academy of Social Sciences Institute of Japanese Studies, forecast that”in the long run”, Japanese investment will continue to decline until it reaches”a point of balance” because it is unlikely that Japanese companies would give up the entire China market”.

Yao noted that”Japan has long been following a ‘China+1′ strategy” in overseas investment, meaning when it comes to overseas investment, it will divert some capital to one other emerging market economy while building a presence in China.

Some neighboring countries, including India and Vietnam, will see expansion in infrastructure and consumption as they benefit from an influx of Japanese investment, Yao said.

Japan’s investment in ASEAN member nations surpassed that in China in the past two years, according to statistics from Nikkei newspaper. In the second quarter, it increased by 40 percent year-on-year to 380 billion yen ($4.8 billion), higher than the 300-billion yen investment that went to China during the same period.

The shifting of Japanese overseas investment focus to Southeast Asian economies is seen by Zhang as part of its strategy to weaken China’s rise in economic power.

Mergers and acquisitions by Japanese companies have also seen a significant slowdown in China while its overseas mergers and acquisitions in general progressed on a faster pace.

Statistics from RECOF Corporation, a Japanese M&A consulting company, showed that Japanese mergers and acquisitions in China from July to September reached 5.6 billion yen, down almost 70 percent from that in April to June, while overseas mergers and acquisitions of Japanese companies maintained strong growth.

In addition to the slowdown in China’s economic growth and rising costs at home, Yoshimitsu Onji, president and chief executive officer of RECOF Corp, also blamed deteriorating relations and Chinese consumers’ boycott of Japanese brands in recent months.

In China’s domestic market, Japanese automakers are planning to cut their supply after a suspension of production amid mass protests in early October, according to Chinese auto market sources. Toyota reportedly saw its sales in China tumble by as much as 49 percent in September.