JAPAN
16 September 2014
Japan and China -- a valuable economic partnership
Japan and China have a very deep economic partnership today. While political factors are challenging this, the strong economic partnership can also help stabilize the political relationship.
Since China's opening to the world in 1978, Japan and China have developed a very deep economic partnership.
This is because the Japanese and Chinese economies are very complementary in many respects. This provides them with many opportunities to grow prosperously together.
Japan is a high-tech country, especially in the electronics and automobile industries. While China is a middle-income country in need of technology to climb the development ladder.
Japan is a slow-growth market, in light of its aging and now declining population. Whereas China is a fast-growth market thanks to its rising incomes and growing middle class.
China's middle class is also becoming a new force in international tourism. And increasing numbers of Chinese tourists are now visiting Japan, one of its closest neighbors. Japan is also attracting growing numbers of Chinese students to its excellent universities. While there are flows of tourists and students from Japan to China, they are outnumbered by flows from China to Japan, as China's population is ten times bigger than Japan's.
In short, Japan and China have a very deep economic partnership today. While political factors are challenging this, the strong economic partnership can also help stabilize the political relationship. Both countries need each other.
The initial instigation for Japanese investment in China was Vice Premier Deng Xiaoping's 1978 visit to Japan, the first visit of a Chinese state leader to Japan. Deng visited a Panasonic TV factory in Osaka and asked company founder Konosuke Matsushita to help him modernize China’s electronics sector.
Moved by the personal appeal for help, Matsushita, then 83, vowed to do everything he could. He visited China and found factories using technology from the 1940s. Throughout the 1980s Matsushita transferred technology, trained Chinese workers and otherwise helped China modernize its industry through 150 separate projects.
China learned how Matsushita made everything from electric irons to transformers and semiconductors. In return, Matsushita earned the Chinese government’s goodwill and gained unparalleled expertise in manufacturing and selling in the Chinese market.
Panasonic's investment in China was part of the wave of Japanese investment in emerging Asia that was a crucial driver of the region's development.
Japan is now one of the world's most important overseas investors, with an accumulated stock of over $1 trillion. About 30% of this investment goes to Asia, of which one-third is in China. Japan now has some 23,000 companies operating in China, employing 10 million Chinese workers.
Japan's investment in China and elsewhere in Asia has enabled the region to participate in the explosion of "global value chains" this past decade. Asian countries perform different "tasks" in the value chain, consistent with their comparative advantage. For example, Japan and Korea usually specialize in product design and high-tech component manufacture, while China tends to specialize in lower value added assembly activities.
Without the fragmentation of production processes into these value chains, China's economic potential would be much lower. And participating in value chains has many benefits in terms of technology and knowledge transfer.
Japan has also benefited greatly from its investments in China which improve the competitiveness of its manufacturing sector. While many initial Japanese investments in China were aimed at producing for international markets, today they are increasingly targeting China's growing local market.
Despite the immense mutual benefits, political factors have been undermining this investment partnership in recent years. Japan's direct investment in China fell by 32% in 2013, and there are signs that it has continued to fall even further in 2014. Other factors like China's rising costs and slowing economy have played a role.
Japanese companies are now switching the focus of their investment to Southeast Asian countries like Indonesia, Vietnam and the Philippines, along with the enormous Indian market. But Japanese business is very concerned about recent political developments, and would clearly prefer a more stable situation in order to benefit from the immense complementarities between the two countries.
Chinese companies are now also beginning to invest in Japan, although the flows are still small. Japanese companies with good technologies and highly skilled staff are good targets for Chinese investors. The Japanese deals that attracted the most attention included Lenovo's joint venture with NEC in personal computers, Haier’s purchase of Panasonic’s appliance unit, and Suning Appliance’s acquisition of electronics retailer Laox. All of these investments share the same three investment motifs: technology, brands and expertise.
Under its Abenomics program, the Japanese government is now seeking to increase the very low level of foreign investment in the country (currently less than 4% of GDP). China, with its very active outward investment policy, offers Japan a very important source of investment.
Japan is China's second biggest source of imports, with 8% of total, just behind Korea's 9%. It is also China's second most important export destination, with 7% of total, after the US's 17%.
Some of Japan's trade with China supports the investment relationship. Japanese companies export equipment and components to their factories in China. Exports of Japanese electronic equipment, machinery, medical and technical equipment, vehicles and so on facilitate China's industrial development.
And some components are assembled into final products by other companies. For example, it has been estimated that more than half of the parts and components, like capacitors, transistors and the liquid crystal screen, used in the iPhone 5 are made by Japanese manufacturers. The iPhone is assembled by the Taiwanese company Foxconn in southern China.
High quality Japanese consumer products also target middle class Chinese consumers. And as is the case the world over, Japan imports a vast array of competitively prices consumer products from China.
Unfortunately, Japan's trade with China has also been adversely affected by political factors in the recent past. Japan's exports to China have seen a double-digit decline for two consecutive years, 2012/2013. And imports from China also declined in 2013, for first time in four years. Overall, Japan's total trade with China declined by 6.5% in 2013.
Japan has always had a low share of Asia and the world's tourist trade, receiving even less visitors than neighboring Korea. But 2013 saw over 10 million tourists visit Japan, an increase of 24% over the previous year. And 2014 seems set become another record year, with tourist arrivals already numbering 6 million for the first six months of 2014.
Some 80% (or 8.1 million in 2013) of Japan's tourists come from Asia, with the leading sources being Korea (2.5 million), Taiwan (2.2 million) and China (1.3 million). While China may be number three in terms of the number of visitors to Japan, Chinese tourists have quickly become the world's largest spenders on international tourism, as any shop owned in Ginza can tell you.
Chinese tourists now outspend second-ranked United States and third-ranked Germany. Chinese travelers have an incentive for making their luxury purchases abroad — circumventing China’s high taxes on such purchases at home.
Japan has emerged as the most desired destination for China’s wealthy travelers this year, according to a recent report by Travelzoo Asia-Pacific. As many as 29% of survey respondents from mainland China ranked Japan as their top travel destination, significantly up from 18% in 2013. The weak yen has made Japan a new shopping paradise for deep-pocketed Chinese travelers.
But according to all reports, Chinese tourist to Japan are not only interested in shopping, they also appreciate visiting Japan's many cultural sites and natural wonders like Mount Fuji and Hokkaido.
The Japanese are also an important source of tourists to China, which has become the world's fourth biggest destination for tourists, with some 56 million visitors in 2013. Japan is the second biggest source of tourists in China, after Korea and ahead of Russia and the US.
China is also a growing destination for international students, with over 292,000 students in 2011. The three leading sources of these students were South Korea (21%), US (8%) and Japan (6%).
There are indications that both governments understand the regrettable costs, and will seek to rebuild the political relationship which can be a great source of prosperity, stability and security to both sides.
The growing number of tourist and international student movements between both China and Japan provides important economic benefits to both sides. It also provides a means for improving cross-cultural understanding, which can foster greater respect and trust between the two peoples.
Executive Director
Asian Century Institute
This is because the Japanese and Chinese economies are very complementary in many respects. This provides them with many opportunities to grow prosperously together.
Japan is a high-tech country, especially in the electronics and automobile industries. While China is a middle-income country in need of technology to climb the development ladder.
Japan is a slow-growth market, in light of its aging and now declining population. Whereas China is a fast-growth market thanks to its rising incomes and growing middle class.
China's middle class is also becoming a new force in international tourism. And increasing numbers of Chinese tourists are now visiting Japan, one of its closest neighbors. Japan is also attracting growing numbers of Chinese students to its excellent universities. While there are flows of tourists and students from Japan to China, they are outnumbered by flows from China to Japan, as China's population is ten times bigger than Japan's.
In short, Japan and China have a very deep economic partnership today. While political factors are challenging this, the strong economic partnership can also help stabilize the political relationship. Both countries need each other.
Japan's investment in China
China's dramatic rise since 1978 has been driven by international investment, especially from Japan.The initial instigation for Japanese investment in China was Vice Premier Deng Xiaoping's 1978 visit to Japan, the first visit of a Chinese state leader to Japan. Deng visited a Panasonic TV factory in Osaka and asked company founder Konosuke Matsushita to help him modernize China’s electronics sector.
Moved by the personal appeal for help, Matsushita, then 83, vowed to do everything he could. He visited China and found factories using technology from the 1940s. Throughout the 1980s Matsushita transferred technology, trained Chinese workers and otherwise helped China modernize its industry through 150 separate projects.
China learned how Matsushita made everything from electric irons to transformers and semiconductors. In return, Matsushita earned the Chinese government’s goodwill and gained unparalleled expertise in manufacturing and selling in the Chinese market.
Panasonic's investment in China was part of the wave of Japanese investment in emerging Asia that was a crucial driver of the region's development.
Japan is now one of the world's most important overseas investors, with an accumulated stock of over $1 trillion. About 30% of this investment goes to Asia, of which one-third is in China. Japan now has some 23,000 companies operating in China, employing 10 million Chinese workers.
Japan's investment in China and elsewhere in Asia has enabled the region to participate in the explosion of "global value chains" this past decade. Asian countries perform different "tasks" in the value chain, consistent with their comparative advantage. For example, Japan and Korea usually specialize in product design and high-tech component manufacture, while China tends to specialize in lower value added assembly activities.
Without the fragmentation of production processes into these value chains, China's economic potential would be much lower. And participating in value chains has many benefits in terms of technology and knowledge transfer.
Japan has also benefited greatly from its investments in China which improve the competitiveness of its manufacturing sector. While many initial Japanese investments in China were aimed at producing for international markets, today they are increasingly targeting China's growing local market.
Despite the immense mutual benefits, political factors have been undermining this investment partnership in recent years. Japan's direct investment in China fell by 32% in 2013, and there are signs that it has continued to fall even further in 2014. Other factors like China's rising costs and slowing economy have played a role.
Japanese companies are now switching the focus of their investment to Southeast Asian countries like Indonesia, Vietnam and the Philippines, along with the enormous Indian market. But Japanese business is very concerned about recent political developments, and would clearly prefer a more stable situation in order to benefit from the immense complementarities between the two countries.
Chinese companies are now also beginning to invest in Japan, although the flows are still small. Japanese companies with good technologies and highly skilled staff are good targets for Chinese investors. The Japanese deals that attracted the most attention included Lenovo's joint venture with NEC in personal computers, Haier’s purchase of Panasonic’s appliance unit, and Suning Appliance’s acquisition of electronics retailer Laox. All of these investments share the same three investment motifs: technology, brands and expertise.
Under its Abenomics program, the Japanese government is now seeking to increase the very low level of foreign investment in the country (currently less than 4% of GDP). China, with its very active outward investment policy, offers Japan a very important source of investment.
Japan's trade with China
Over the past three decades, China has become Japan's biggest trading partner, and today accounts for 18% of exports and 22% of imports.Japan is China's second biggest source of imports, with 8% of total, just behind Korea's 9%. It is also China's second most important export destination, with 7% of total, after the US's 17%.
Some of Japan's trade with China supports the investment relationship. Japanese companies export equipment and components to their factories in China. Exports of Japanese electronic equipment, machinery, medical and technical equipment, vehicles and so on facilitate China's industrial development.
And some components are assembled into final products by other companies. For example, it has been estimated that more than half of the parts and components, like capacitors, transistors and the liquid crystal screen, used in the iPhone 5 are made by Japanese manufacturers. The iPhone is assembled by the Taiwanese company Foxconn in southern China.
High quality Japanese consumer products also target middle class Chinese consumers. And as is the case the world over, Japan imports a vast array of competitively prices consumer products from China.
Unfortunately, Japan's trade with China has also been adversely affected by political factors in the recent past. Japan's exports to China have seen a double-digit decline for two consecutive years, 2012/2013. And imports from China also declined in 2013, for first time in four years. Overall, Japan's total trade with China declined by 6.5% in 2013.
Japan/Chinese tourism
Japan's immense tourism potential is now better exploited thanks to a new wave of Asian tourists.Japan has always had a low share of Asia and the world's tourist trade, receiving even less visitors than neighboring Korea. But 2013 saw over 10 million tourists visit Japan, an increase of 24% over the previous year. And 2014 seems set become another record year, with tourist arrivals already numbering 6 million for the first six months of 2014.
Some 80% (or 8.1 million in 2013) of Japan's tourists come from Asia, with the leading sources being Korea (2.5 million), Taiwan (2.2 million) and China (1.3 million). While China may be number three in terms of the number of visitors to Japan, Chinese tourists have quickly become the world's largest spenders on international tourism, as any shop owned in Ginza can tell you.
Chinese tourists now outspend second-ranked United States and third-ranked Germany. Chinese travelers have an incentive for making their luxury purchases abroad — circumventing China’s high taxes on such purchases at home.
Japan has emerged as the most desired destination for China’s wealthy travelers this year, according to a recent report by Travelzoo Asia-Pacific. As many as 29% of survey respondents from mainland China ranked Japan as their top travel destination, significantly up from 18% in 2013. The weak yen has made Japan a new shopping paradise for deep-pocketed Chinese travelers.
But according to all reports, Chinese tourist to Japan are not only interested in shopping, they also appreciate visiting Japan's many cultural sites and natural wonders like Mount Fuji and Hokkaido.
The Japanese are also an important source of tourists to China, which has become the world's fourth biggest destination for tourists, with some 56 million visitors in 2013. Japan is the second biggest source of tourists in China, after Korea and ahead of Russia and the US.
International students
Japan is a growing destination for international students. In 2013, there were some 136,000 international students in Japan, 60% (or 82,000) of whom came from China.China is also a growing destination for international students, with over 292,000 students in 2011. The three leading sources of these students were South Korea (21%), US (8%) and Japan (6%).
Looking ahead
The opening of China to the world economy from 1978 has enabled a very strong and mutually beneficial economic relationship to develop between Japan and China. Unfortunately, recent political developments have disturbed the trade and investment side of this relationship.There are indications that both governments understand the regrettable costs, and will seek to rebuild the political relationship which can be a great source of prosperity, stability and security to both sides.
The growing number of tourist and international student movements between both China and Japan provides important economic benefits to both sides. It also provides a means for improving cross-cultural understanding, which can foster greater respect and trust between the two peoples.
Author
John WestExecutive Director
Asian Century Institute