Japanese business, once a big fan of Chinese operations and a huge source of China’s investment inflows, has abandoned its former enthusiasm.
As Beijing struggles to get its economy back on track and grapples with American and increasingly also European hostility, the turn among Japanese businesspeople and investors is unwelcome to say the least. It saddles Communist Party leader Xi Jinping and his associates with a still more difficult economic and financial challenge.
This latest turn in Japanese business sentiment puts it much in line with the rest of the developed world. Business in the United States and to a lesser extent the European Union has all but 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 measures convinced many in the West that the best option was to diversify sourcing away from China, mostly to other Asian venues. Those efforts have not only cost China exports but also a source of economic dynamism and hiring, as well as the investment inflows on which the economy’s growth trajectory has depended.
If this loss of business confidence weren’t enough, governments in the West have also turned on China. Washington has become openly hostile. President Joe Biden, though he reflexively reversed everything the Trump administration did, has nonetheless kept in place the tariffs on Chinese imports that former President Donald Trump put in place in 2018 and 2019. The Biden administration has enlarged them, recently raising tariffs on Chinese-made electric vehicles (EVs), parts, and batteries, as well as solar panels, wind generators, medical equipment, steel, aluminum, and computer chips. The EU hasn’t gone this far, but in response to what it describes as “dumping” EVs on its markets, it has threatened tariffs as well.
By comparison, the government in Tokyo has taken a low profile on tariffs or other anti-trade measures. It has shown its distrust of China in other ways. The roots of this hostility stem from Beijing’s actions some years ago to cut off shipments of rare earth elements to Japan. Beijing was upset because Tokyo refused to relinquish rights to disputed islands in the East China Sea. Tokyo has responded with efforts to get the world’s developed economies—the so-called G7 nations of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—to find and develop rare earth deposits outside of China. However, it isn’t the Japanese government that has shown the greatest skepticism toward China—it’s 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 percent of its membership saw China as weakening economically. That isn’t a small number, but it pales next to more than half who voiced that negative 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 percent 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 become so pessimistic that it 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 isn’t makes the hill that Beijing must climb to recapture prosperity that much steeper, rockier, and higher.
