Japan is only harming itself with wrongheaded China Exit strategy

Japan is only harming itself with wrongheaded China Exit strategy

The COVID-19 pandemic gave Chinese President Xi Jinping a proper reason to cancel a planned visit to Tokyo in April, which would have reciprocated Prime Minister Shinzo Abe’s 2019 trip to Beijing.

But the fact that no effort has been made to reschedule the trip, Japanese diplomats say, is a sign of how relations between Asia’s two dominant powers have deteriorated.

With tension already rising over the South China Sea, another reason for cooling relations is Japan’s announcement of a 220 billion yen ($2 billion) fund to entice Japanese companies to leave China in an effort to strengthen corporate supply chains. Japan’s cumulative investment on the mainland amounts to around $100 billion, according to data from UBS.

Japan is one of many countries with a desire to bring production home, but Beijing is especially irritated because the initiative appears to have been carried out at least partly at the behest of the U.S., Japan’s main ally, as tensions increase in the South China Sea.

There is little evidence though to suggest that corporate Japan agrees with it. As the clash between government priorities and corporate realities plays out across the world, nowhere is that conflict more intense — or less likely to succeed — than in Japan.

“The world is becoming more government-heavy with heterodox policies reversing 40 years of free, global markets,” noted a recent Bank of America research report. With government scrutiny of supply chain locations primarily driven by national security considerations, the report added that this “geopolitical assessment is resulting in a combination of legislation, incentives as well as moral suasion to relocate supply chains from China to alternative jurisdictions.”

Yet, so far, at best there has been no more than an incremental shift. Indeed, “China has most likely gained market share in the first half,” said Tao Wang, an economist at UBS in Hong Kong. Today, she adds, China accounts for 13% of world exports, while Japan contributes 4%.

Another key detail in the Bank of America report is that while political, social and corporate pressures to re-shore production are growing, there is also a great deal of trepidation about the costs. “This is grounded in concern about losing the unrivaled cost, scale and ecosystem advantages built up by China over the last few decades,” the report says, suggesting now is not the best time to return home, which would inevitably involve higher operating costs.