One of the most important questions for Japan is its relationship with China, especially on the economic front. After the appointment of new Prime Minister Shigeru Ishiba, ties have relaxed somewhat with China's easing of visa restrictions for Japanese nationals. However, much work remains to be done in 2025.
Trade Dynamics
So, let us analyze the dynamics of the Japan-China economic relationship.
Japan's economic ties with China improved progressively after the normalization of bilateral relations back in 1972. It is worth noting the four major documents that serve as the cornerstone of their bilateral relationship:
- 1972: The Japan-China Joint Statement
- 1978: The Japan-China Treaty of Peace and Friendship
- 1998: The Japan-China Joint Declaration
- 2008: The Japan-China Joint Statement on the Comprehensive Promotion of a Mutually Beneficial Relationship Based on Common Strategic Interests
Total trade between China and Japan stood at $335.4 billion USD in 2022, with China as Japan's largest trade partner. While this is good news for the Japanese economy, it also raises some pertinent questions. Is this trade feasible in the long run, especially given the political tensions between the two countries?
There are some notable areas of divergence between the two countries. These include the detention of Japanese nationals in China, Japan's limits on semiconductor exports to China, and China's import ban on Japanese seafood.
Japanese companies have supply lines in China. Efforts to relocate these began during the administration of former Japanese Prime Minister Shinzo Abe. It seems, however, that little progress has been made in this direction.
Recent attacks on Japanese nationals in China have made the situation worse. Under the circumstances, the present state of economic ties is too good to continue, and Japan needs to prepare for the aftermath.
Moving Ahead on Tech
For Japan, the future outlook will involve a lot of factors. One of them is the widening of its own trade basket.
Tourism is another issue. On this front, Japan must broaden its range of source countries for tourism to diversify its visitor base.
Then there is the technology battle. Japanese car manufacturers like Honda and Nissan are in talks to merge. Such developments are critical since Chinese car manufacturers are now way ahead of the game, especially when it comes to EV technology.
Japan is getting back on the semiconductor track with renewed investment in some of the Japanese prefectures. However, this will also involve coordination with other countries, especially its allies like the US.
In addition, Japan has been working on a joint design program with the United Kingdom and Italy to manufacture a joint strike fighter. Any increase in arms exports will greatly help the Japanese economy.
Southeast Asia Expansion
Furthermore, Japan also needs to increase its push into Southeast Asia. It already has a foothold in the region, especially in countries like Vietnam and Thailand.
Nonetheless, there are still many areas where Japan and China have convergent economic interests. Both countries are a part of the Regional Comprehensive Economic Partnership (RCEP). Furthermore, Chinese customers buy many Japanese products via e-commerce platforms.
At a summit in May 2024, Japan, China, and South Korea agreed to resume negotiations on a trilateral free trade agreement. From this, it appears Japan is adopting a China +1 strategy instead of totally leaving China behind.
Investing in the US and India
Given the political tensions between the US and China, Japanese companies should consider increasing their investments in the US market. This is especially relevant as a new administration led by Donald Trump will soon be sworn in. Akie Abe, the late prime minister's wife, recently met with President-elect Donald Trump, showing that Trump believes in the personal touch. This is something that Japanese policymakers need to factor into their diplomacy.
In addition, big Japanese apparel companies like Uniqlo need to look at moving ahead aggressively into the Indian market. This will become more important as political tensions rise with China. The fact that India is the fastest-growing major economy also needs to be taken into consideration by Japanese companies.
Furthermore, the collapse of the Chinese property market signals that its economy is not going too well.
De-risking and Decoupling
Tokyo would also do well to remember that the recent overtures from the Chinese side towards Tokyo could only be temporary and a means of buying time. China has also sent overtures to India in recent months. However, this is likely Beijing's preparations for the new incoming US administration.
As the G7 Hiroshima Communique (in 2023) notes: "We are not decoupling or turning inwards. At the same time, we recognize that economic resilience requires de-risking and diversifying. We will take steps, individually and collectively, to invest in our own economic vibrancy. We will reduce excessive dependencies in our critical supply chains."
Hence, for Tokyo, the key to its New Year's economy will be de-risking and decoupling from China in 2025. As they say, putting all your eggs in one basket is dangerous.
Follow our special New Year's series, Predictions 2025.
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Author: Rupakjyoti Borah
Dr Rupakjyoti Borah is a Senior Research Fellow with the Japan Forum for Strategic Studies. The views expressed here are personal.