Media  Global Economy  2012.12.20

Challenges in Japan-China economic relationship

English translated version of "Business Prospect" on NHK Radio Channel 1 on November 27, 2012

1. The Chinese Communist Party recently held its 18th National Congress, and new Chinese government leaders, including Mr. Xi Jinping, were elected. You visited Beijing just after this Congress.

I was invited by a member of Chinese economic media to speak at a symposium the day after the Party's National Congress. The overall theme of the symposium was "China and the World," in which participants discussed what reforms are necessary for China to further develop its economy, which is entering a stage of slower growth and faces a variety of challenges, and how China's economy is to be integrated into the global economy under such conditions. Chinese government officials, including the governor of the People's Bank of China, the counterpart to the Bank of Japan, along with researchers and business leaders participated in the symposium, as well as many foreign attendants, including officials from the U.S. State and Treasury departments, sinologists and economists. There were two representatives from Japan, one of whom was me and the other was from the finance industry. During the symposium I got the general impression that China is strongly focused on its relationship with the United States.

2. What kind of atmosphere did you feel in China at the time?

I got a sense of emotional excitement at the time after power had been transferred to new leadership. I also found that the Chinese people share a sense of crisis over the possibility that future economic development may not be maintainable at the same pace as before without reforms. Many Chinese speakers emphasized the necessity of reforms aimed at preventing corruption, restructuring state-owned enterprises that are dominant but not efficient, correcting income disparities, and shifting from investment-driven economic growth to economic growth relying on domestic consumption. One Chinese speaker referred to the fact that the word "reform" was used repeatedly in the Party's Congress.

An American researcher, on the other hand, put it bluntly that reform has been mentioned so many times in political rhetoric since it was first declared in the context of reforming state-owned enterprises in 1995, but has never been put into practice and nothing has changed in 17 years.

I was interested in the fact that all Chinese presenters emphasized the functioning of the market economy, while in Japan structural reform through a market-oriented economy carried out by the Koizumi cabinet has frequently been criticized to have caused disparities. Some of the Chinese presenters also made critical statements against foreign protectionist measures in trade and investment, essentially blaming foreign countries' tariff hikes on Chinese products and blocking China's takeover of foreign companies. Some of them also mentioned that China must not be isolated from globalization. It seems to me that China is proactively taking risks under the market economy and valiantly taking on the challenge to enter overseas markets, which stands in clear contrast to Japan's recent inward-oriented mindset.

3. Which session of the symposium did you join?

During the two-day symposium I participated in one session titled "China and its Neighbors." Everyone on stage at this session was foreign, except for the Chinese moderator, including two Americans, a Russian, a South African and me, a Japanese.

4. What kinds of statements did the panelists make?

Although I must refrain from speaking on what the other panelists said, I spoke about the following:

First, I pointed out the close economic relationship between Japan and China.
Japan made a large contribution to Chinese economic development through official development assistance (ODA). Japan was the first country in the world to have resumed ODA after the Tiananmen Square Protests in 1989.

A large volume of trade is one of the characteristics of Japan-China relations. China is Japan's largest trading partner, while Japan is China's second largest trading partner. The Japan-China trade relationship is also characterized by its flow of products. Japan exports high-tech parts, materials, and industrial machinery to China, which China then uses to manufacture products to export to the United States and Europe. This means that both countries have an interdependent and inseparable supply chain, including everything from supplying part and materials to manufacturing finished products.

With regard to investment, Japan is the world's largest investor in China. Between January and August this year, foreign investment in China has declined by 3.4% year-on-year while Japanese investment has increased by 17%. Furthermore, Japanese investment has shifted from China's low-wage manufacturing industry to manufacturers which domestically produce goods targeting higher-income Chinese consumers. Investment in sales and service businesses has also increased. These investments significantly contribute to China's economic transition from an export-driven economy to an economy oriented towards domestic demand.

Second, I also raised the following points regarding the further development of both countries' economies. Firstly, an economic partnership agreement between Japan and China that implements various liberalization measures - including the abolition of tariffs, unification of product standards, and freedom of investment - will further strengthen economic ties between both countries. Secondly, Japan experienced a number of problems between the 1960s and 1980s, such as environmental pollution, yen appreciation, trade friction with the U.S., industrialization of farming areas, and privatization of the national railways and public telephone and telegram corporations, which are very similar to the challenges China is facing, such as environmental issues, economic structural adjustments, correction of income disparities between urban and rural residents, and issues involving state-owned companies. Apart from the fact that some of the policies adopted by Japan successfully dealt with problems while others failed, I am pretty sure that China can learn a lesson from Japan's experience.

5. Were you asked any questions concerning the territorial dispute between Japan and China?

One person from the floor asked me about it. I replied with the official position of the Japanese government that there is no territorial issue between Japan and China. I added that although Japan has territorial disputes with Russia and South Korea, political issues do not affect economic relations with these countries and therefore Japan and China should not damage their interdependent economic relationship with political disputes. Japan and China have inseparable bonds between their economies. If either of them attacks the other, it will have consequences for the attacker itself. Japan and China should keep economic relations and political issues segregated.

(This article was translated from the Japanese transcript of Mr. Yamashita's speech in the "Business Prospect" session of the radio program "First in the Morning News" broadcast by NHK Radio Channel1 on November 27, 2012.)