How bad could it get? America’s ugly election

Regaining altitude

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Source: Datastream from Refinitiv

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hen 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 fac-

tory 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. Ja-

pan 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 Japa-

nese foreign direct investment there hit an

all-time high of $14.4bn last year. 

According to Morgan Stanley, an invest-

ment 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 de-

pended 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 cold war between

Beijing and Washington have led senior

Japanese officials to speak of risks rather

than opportunities in China. Earlier this

year Mr Abe’s government imposed new re-

strictions on foreign investment to protect

certain industries, battered by covid-19,

from Chinese bargain-hunters. The pan-

demic and the spectre of further American

sanctions against Chinese companies such

as Huawei, a telecoms-equipment giant,

are making Japanese companies think

about the stability of their supply chains,

not just efficiency, says Ke Long of the To-

kyo Foundation for Policy Research, a

think-tank. Mr Abe’s sudden resignation

on August 28th over ill health has added to

the uncertainty (see Asia section).

Closer inspection reveals a more nu-

anced picture, however. One source close

to the government says its aim is to focus

on “several strategic choke-points” in Chi-

na (such as medical supplies), while “keep-

ing many areas open for commercial activi-

ty”. Not so much a great decoupling, then,

as a quiet rebalancing.   

Mr Abe’s ¥244bn ($2.2bn) programme

to induce Japanese firms to diversify their

supply chains away from China is a case in

point. In July 57 companies, including Iris

Ohyama, a big plastics producer, and Sharp,

a maker of electronics, received a com-

bined ¥57bn to invest in production at

home; others got help to build factories in

South-East Asia. But of the 87 winning pro-

jects, 60 will be producing masks, disinfec-

tants, drugs or other medical supplies.

TO KYO