Japanese Business Opinion Turns Against China

Once a big fan of Chinese operations and a huge source of China’s investment inflows, Japanese business has turned away. As Beijing struggles to get its economy back on track and grapples with American and increasingly also European hostility, this Japanese turn is unwelcome to say the least. It saddles President Xi Jinping and his associates in Beijing with an even more difficult economic and financial challenge.

Japanese business in making this turn has joined most of the rest of the developed world. Business in the United States and to a lesser extent in the European Union (EU) has already lost confidence in China’s former reputation for reliability. Supply chain interruptions during the pandemic and then the years following under the quarantines and lockdowns of Beijing’s zero-Covid policies convinced many that the best option was to diversify sourcing away from China, mostly to elsewhere in Asia and, where the United States is concerned, in Latin America, too. Those efforts have not only cost China a source of economic dynamism and hiring, but also the investment inflows on which the economy’s growth trajectory has depended.

If this loss of business confidence were not enough, governments in the west have also turned on China. Washington has become openly hostile. Biden, though he reflexively reversed everything Donald Trump did, has nonetheless kept in place the tariffs on Chinese imports Trump had put in place in 2018 and 2019. Biden has even enlarged them, recently raising tariffs on Chinese-made electric vehicles (EVs) parts, and batteries, as well solar panels, wind generators, medical equipment, steel, aluminum, and computer chips. The EU has not gone this far, but in response to what it describes of “dumping” EVs on its markets, it has threatened tariffs as well.

The government in Tokyo has taken a low profile on tariffs or other anti-trade measures. It has, however, shown its distrust of China in other ways. Because some years ago Beijing tried to punish Tokyo for its refusal to yield to China over disputed islands in the East China Sea, Beijing cut off shipments of rare earth elements, Tokyo has led an effort to get the developed economies of the world – the so-called G-7 nations of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States – to find and develop rare earth deposits outside of China. But it is not the Japanese government that has shown the greatest skepticism toward China. It is Japanese business.

A huge poll conducted by Japan’s Chamber of Commerce and Industry shows that an increasing portion of its membership sees China’s economic situation worsening for the remainder of this year and beyond. And the turn in opinion has been sudden. As recently as last January, only some 39% of its membership saw China as weakening economically. That is not a small number, but it pales next to more than half who voiced that opinion in the most recent March-April poll. Almost one quarter of the respondents said that they would decrease their investment flows into China, and another quarter of respondents said that they would make no investments in China. A mere 16% of respondents planned to increase their investments.

China of course has bigger economic and financial problems than the pessimism of the Japanese business community or even the hostility of western governments. It still faces a property crisis of mammoth proportions, so large in fact that the recent trillion-yuan scheme for government purchases of vacant housing falls short of the need. Chinese consumers have lost confidence in the future and are reluctant to spend, while private business in China has cut back on both investment and hiring. It would help if Japan were favorably disposed to Chinese trade and investment. The fact that it is not makes the hill Beijing must climb to recapture prosperity that much steeper, rockier, and higher.