Can Japan Inc navigate the rift between China and America?

WHEN ABE SHINZO became Japan’s prime minister for a second time in 2012, relations with China were on the skids. Tensions over disputed islands brought the two countries to the brink of conflict. Japanese car dealerships in China were set ablaze. Protests at a Panasonic factory turned violent.

After that, tempers cooled and relations warmed. Mr Abe had planned to host Xi Jinping for a state visit in Tokyo this spring, the first by a Chinese leader since 2008. Japan Inc, too, has been dining out on the bonhomie. Annual trade between China and Japan, the world’s second- and third-biggest economies, amounts to more than $300bn. Japanese firms accumulated over $130bn in assets in China. The flow of Japanese foreign direct investment there hit an all-time high of $14.4bn last year.

According to Morgan Stanley, an investment bank, listed Japanese firms derived only 4% of revenues from China. But 26% of their profits were tied to China through suppliers or customers, more than depended on America, calculates Jesper Koll, a Tokyo-based economist. He reckons this profit share shot up to 63% in the second quarter, as the Chinese economy recovered faster than others from covid-19. 

Now the mood seems once again to be souring. Covid-19 put paid to Mr Xi’s visit. His crackdown on democracy in Hong Kong and the economic...



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