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Edith Terry

Japan's response to China's rising power has the potential to change the balance of power in East Asia, if not the world.

The over-confident Japan of the 1980s has turned timorous and irascible, with right-wing politicians seeking to fan national anxieties by blowing up fears of China's supposed military and economic threat.

Two visions of its future relationship with China are emerging in Japan. One is tied to the past, in which Japan was partner to the US in the Cold War containment of China. The other is a co-operative model and is coming to life spontaneously as Japanese business barrels into China with astonishing speed.

Unlike the politicians, Japanese business has worked out that China's rapid move up the ladder of technological and manufacturing sophistication can help revive its fortunes.

Says Andy Xie Guozhong, managing director with Morgan Stanley in Hong Kong: 'For Japanese brands like Sony and Matsushita, China is paradise. It has given them a second life.

'For manufacturing companies, you're dead if your people are expensive and lazy. They go to China and see workers who are like the Japanese were 30 to 40 years ago. The combination is explosive.

'Japanese imports from China are rising by leaps and bounds, even though the Japanese economy is falling apart,' he adds.

Japan is China's leading trade partner, dominating China's automotive imports, as well as video equipment, semiconductors, electronic components, chemical products and steel.

Japan's exports to China, as of June, reached half the level of its exports to the US, prompting one Japanese researcher to predict that by 2010 China would become Japan's most important market.

While Japanese investment in China trails that of Hong Kong or Taiwan, and is still far below its 1995 peak, in 2001 it was up 64 per cent to 18 billion yen (HK$1.2 billion).

The pattern of Japanese trade with China is U-shaped, with Japan exporting intermediate parts and components for its China-based factories and subcontractors, and those same factories exporting products back to Japan.

China is one of a handful of countries to run a substantial trade surplus with Japan. While the others are predominantly energy and resource exporters, such as Brunei and Indonesia, 80 per cent of China's exports to Japan are manufactured goods.

At least 60 per cent of the Chinese exports flooding into Japan come in under Japanese brands, according to Chi Hung Kwan, a Tokyo-based economist with the government's Research Institute of Economy, Trade and Industry. Last year's dispute over shiitake mushrooms, tatami mats and spring onions was a 'dispute between Japanese trading companies and Japanese farmers', Mr Kwan said.

'People are confused. They think that China has caught up to Japan, but that's certainly not true if you look more closely. The two countries are complementary. The high value-added process is done in Japan, the low value-added process is done in China. 'Made in China' is almost meaningless.'

The problem faced by Japanese industry is what to leave behind in Japan.

In the 1980s and 1990s, Japanese multinationals employed strategies based on developing products in Japan, carrying out the initial manufacturing in the more technologically sophisticated factories in Japan, then moving production to Japanese factories in other countries, largely in Asia.

China has stunned the Japanese by closing the product-cycle gap more rapidly than any of Japan's other Asian competitors.

Between 1997 and 2000, China's share of Japan's imports of consumer appliances jumped from 28.5 per cent to 37.7 per cent. In 2000, Japan's imports of computers and peripherals from China doubled, according to the Japan External Trade Organisation.

The authoritative Japanese financial newspaper Nihon Keizai Shimbun  warned Japanese firms recently: 'Failure to develop an effective strategy that realistically addresses China's strength will probably prove fatal.'

If Japanese business sees its future as intertwined with China, Japanese politicians are heading in the opposite direction. Shintaro Ishihara, the governor of Tokyo who is seen to be a strong candidate to be Japan's next prime minister, has been warning the Japanese against a China threat since the late 1980s. As recently as Thursday, Mr Ishihara explained his visit to the Yasukuni Shrine to Japan's war dead in terms that referred to Japan's potential enemies.

'My thoughts were that I will do my best so that Japan will not eventually become a subject state to a foreign country,' he was reported to have said.

Over the past month, a curious sideshow has been playing out in Tokyo and Taipei, with conservative Japanese politicians providing encouragement to a proposal for a free-trade area linking Japan and its former colony, Taiwan.

The idea surfaced most recently in mid-July, when a group of 24 legislators from Taiwan led by Legislative Yuan vice-president P. K. Yuan met their counterparts in the Japan-Taiwan Parliamentarians' Council. At a Tokyo reception, Minister of Economy, Trade and Industry Takeo Hiranuma expressed his support, instantly drawing a harsh reaction from Beijing.

According to the Nihon Keizai Shimbun,  the free-trade area discussions reflected the fact 'both Japan and Taiwan are worried that they may be isolated within the Asian economy'.

Japanese anxieties about China date back to at least the mid-1990s, when the World Bank published a study that showed the Chinese economy was already bigger than Japan's on a purchasing-power parity basis. But in the past few years, Japan's sense of self-worth has plummeted as the economy has continued to stagnate.

'The two countries are at opposite extremes of globalisation,' said Ryosei Kokubun, an expert on Sino-Japanese relations at Tokyo's Keio University.

In a recent book, China Impact,  management consultant Kenichi Omae argues Japan will become a '10 per cent' country compared with China - not only 10 per cent in terms of population but also 10 per cent in terms of economic output and influence.

'Japan has to get ready,' says Zhao Quansheng, a professor of international relations at American University in Washington, DC. 'For the first time in 100 years, Japan is facing a united, strong and prosperous China. Japan has to accept that the relationship is different now.'

In terms of current US dollars, the Chinese economy is still less than a quarter of the size of Japan's, which is still second only to the US despite a decade of recession. In 2000, the latest year for which national income account statistics are available for both countries, China's gross domestic product was US$1.08 trillion (HK$8.46 trillion) to Japan's US$4.76 trillion.

Mr Zhao says he has to remind people there is still a large gap between the per capita incomes, as well as GDP, of the two countries. 'Still, the political implication is that China is relying less on Japan now, and that Japan has less leverage.'

Morgan Stanley's Mr Xie says that deep down, the Japanese know that their future is linked with China. 'The politicians lag way behind the economics, but eventually they will catch up.'



Learning to thrive with the 'enemy'