China-Japan Economic Ties Glow Amid Political Chill

A year after about 20,000 anti-Japan protesters jammed the streets here, Japanese and Chinese officials are still wrangling over how to repair a damaged Japanese Consulate building -- a reflection of the icy political relations that persist between the two nations.

But it is a different story on the economic front. Not only are Japanese restaurants that were attacked during the April 16 demonstrations back in business, but more than 525 additional companies from Japan set up shop in Shanghai in 2005. That’s about the same number as in the previous year, indicating that fears of a Japanese corporate pullback from China were unfounded.

The rallies in Shanghai and other Chinese cities last spring were triggered by anger over Japanese history textbooks that glossed over wartime atrocities and Tokyo’s bid for a permanent seat on the United Nations Security Council.

After the protests, many Japanese companies said they would reconsider their strategy in China. But Japanese investment there hit a record $6.6 billion last year, climbing 12% from 2004, according to the Japanese Ministry of Foreign Affairs.

By Chinese government figures, Japan’s direct investment in China rose 20% last year.

Trade between China and Japan is balanced, in contrast to the U.S.-China flow of goods. Indeed, while economic relations between the United States and China are troubled, commercial links between Japan and China are as good as they have ever been.

That could limit U.S. officials’ ability to get their Japanese allies to lend a hand on economic issues related to China.

When Chinese President Hu Jintao arrives in the United States this week, President Bush is expected to press him to take a number of steps, including further opening China’s market and strengthening the Chinese currency.

American politicians have complained that an undervalued yuan has contributed to the $200-billion trade deficit with China, the fastest-growing major economy in the world.

On Sunday, Hu announced that China’s economy expanded 10.2% in the first quarter, well ahead of expectations.

That may offer little comfort to U.S. politicians complaining that China should buy more American goods. But in Japan, it will probably be viewed as another confirmation that businesses made the right move by bulking up investments in China, despite an initial slowdown after last year’s protests.

That Sino-Japanese economic ties have weathered the political strains is significant. These are among the largest economies in the world -- Japan ranks second and China is two notches below -- and analysts say the friction over historical issues presents a serious risk to economic security in Northeast Asia.

Japan’s economic recovery in the last year, after more than a decade of languishing performance, also has reduced domestic fears of China’s emerging economic power -- the so-called China threat syndrome that seems to be spreading in the United States and other Western countries.

“The mind-set in Japan has changed,” said Morio Matsumoto, who heads Japan-China economic affairs at the Japanese Ministry of Foreign Affairs. “China is not a threat but a chance for Japanese businesses.”

That helps explain why Tokyo isn’t pressuring Beijing to strengthen its currency. Nor did Japan join the U.S. and the European Union’s recent complaint to the World Trade Organization that China was unfairly setting high tariffs on imports of auto parts.

Scores of Japanese car component makers have set up operations in China, so they don’t face the higher duties. They poured into China because Japanese automakers are increasing production for sales in the country.

Honda Motor China, for example, says its Accord is now built with 80% locally produced parts and 90% of the suppliers for its Fit model are based in China -- more than Western automakers use. The auto-parts import tariff isn’t a big issue for Honda in China, said spokesman Masa Nagai.

Zhou Yongsheng, a professor at Chinese Foreign Affairs University in Beijing, describes current Japan-China relations as “politically cold and economically warm.”

Some analysts agree that the current two-track relations, political and economic, aren’t sustainable. “Unless the status quo changes, China and Japan may head toward confrontation not only about how the past is interpreted but also on economic and security issues over the next five years,” said Andy Xie, chief Asia economist for Morgan Stanley in Hong Kong.

Japanese companies are acutely aware of the risks and are trying to do what they can to improve ties. Toyota Motor Corp., for example, has established scholarships for Chinese students in rural areas. Hitachi Ltd. is awarding grants for Chinese to do research in Japan.

Like other companies, Hitachi thought twice about its strategy after the protests. In the end, nothing changed, said Terry Kubo, a Hitachi spokesman in Beijing. The company has invested $7 billion in China and currently employs 30,000 workers in the country.

“For the long term,” he said, “the China market is very important.”