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TOKYO – Yoshihide Suga isn’t known for his acrobatic skills. Nor is kabuki theatre the Japanese prime minister’s thing. But Suga is proving his proficiency in both disciplines as he joins hands with US President Joe Biden against China.
Suga, a ruling Liberal Democratic Party veteran, surely agrees with the spirit of Biden’s push to safeguard Taiwan’s democracy and limit China’s economic dominance. But he’s also learning that China is the only economic game in town for his deflation-plagued nation.
Data released on April 16, the same day Suga was at the White House meeting Biden, showed China grew a world-beating 18.3% year-on-year in the first quarter. That comes at a time when Japan is suffering a fourth wave of Covid-19 infections that look sure to derail recovery hopes.
Three days later, though, Chinese President Xi Jinping’s government put Suga’s China-US tightrope act into even starker relief. A surge in China-bound shipments, particularly tech-sector goods, produced Japan’s biggest export jump in more than three years. Exports rose an above-consensus 16.1% in March from a year earlier.
Shipments to Japan’s top customer, China, skyrocketed 37.2% between January and March, powered by semiconductor machinery, nonferrous metals and plastic materials. Things are not going so swimmingly for Japan’s trade partner across the Pacific.
A slow US rebound is proving to be a drag on Japan Inc, says economist Takeshi Minami at the Norinchukin Research Institute. Customarily, US-bound shipments of the best tech Japan has to offer add more value to Japanese corporate profits than those to China or the rest of East Asia, Minami says.
That’s changing, and fast.
Japanese goods heading to the US rose only 4.9% in March, the first year-on-year gain in five months. The advanced pace of China’s post-Covid revival is increasing Japan Inc’s reliance on mainland demand, belying claims of Tokyo “decoupling” from Beijing.
What’s more, Chinese producers are making it clear they’re ready to buy all the chip fabricating equipment that Japan Inc makes. All of which makes Suga’s budding Biden bromance – and joint stance on Taiwan sovereignty – look a bit awkward.
As Tom Learmouth at Capital Economics points out, the US-bound export growth Japan is enjoying “is unlikely to provide much of a tailwind to growth this year.” In other words, Japan needs to strategize on ways to sell even more goods externally.
Where might they go, if not to China?
Four days after Suga and Biden made a consequential joint Japan-US statement on Taiwan, Xi reminded Tokyo of the heavy price it could pay. Speaking at the Boao Forum for Asia, Xi said that “bossing others around or meddling in others’ internal affairs would not get one any support” at Chinese ports.
Lest Suga’s inner circle miss the nuances of Xi’s retort, the Communist Party-backed Global Times barked in an editorial: “We advise Japan to stay away from the Taiwan question. The deeper it is embroiled in, the bigger the price it will pay.”
Recent Asia-region history offers all too many previews of the pain Beijing can apply.
Since 2016, South Korea has struggled to rebuild trade relations with Beijing. Xi’s government retaliated assertively to Seoul welcoming a US-developed Terminal High Altitude Area Defense missile shield.
China clamped down on South Korean-bound travel groups and visas for K-pop stars planning mainland tours, dealing a massive blow to the Korean domestic tourism industry and to its outbound cultural industry. South Korean cars, movies, cosmetics and other goods faced boycotts, while chaebol Lotte shuttered its retail operations in China.
Overcoming these actions and others has preoccupied Moon Jae-in’s presidency. Moon plans to be in the US in late May. The visit is sure to be monitored closely by Beijing for signs Moon’s government is tilting too far Washington’s way.
Ditto for Prime Minister Scott Morrison’s government in Canberra. Australia’s push for investigations into the origin of the coronavirus – and Beijing’s handling of the outbreak – put its resource-export-driven economy in harm’s way. So far, Xi’s government has responded with penalties on coal, wine, beef and other key exports.
Xi’s best chance of wooing North Asian leaders is topping the 6% growth rate his government is predicting for 2021. The question, notes Chi Hung Kwan at the Research Institute of Economy, Trade and Industry think tank, is can China produce double-digit annual growth for the first time in 11 years?
Though Kwan says it’s not out of the question, he argues that the rising yuan is a boon for exporters in Japan, South Korea, Singapore and elsewhere in Asia. Thanks to yuan appreciation, China Inc has greater purchasing power. He calculates that the size of China’s gross domestic product relative to the US rose from 66.6% in 2019 to 70.4% in 2020.
“As a result,” Kwan says, “the timing of China’s GDP overtaking US GDP is likely to come earlier than the widely expected 2030.”
In the shorter run, China’s “V-shaped” recovery is the only real game in the global economy. “We expect export momentum to remain robust in the rest of 2021,” Tommy Wu of Oxford Economics said in a report. “While global shipping delays pose a near-term challenge, the strong global economic recovery that we expect this year should support China’s export outlook.”
All this puts Japan Inc at a crossroads.
Before Biden moved into the White House on January 20, many Japanese tech giants were tempted to take the Trumpian path. A December 30 Kyodo News poll, for example, found that more than 40% of companies Tokyo considers strategically vital – possessing sensitive technology — had already begun, or were considering, shifting manufacturing bases out of China.
The 44% of companies in question sought to diversify supply chains by moving to Southeast Asia and India, according to the survey. Those include Canon Inc, KDDI Corp, Kobe Steel, Mitsubishi Heavy Industries, NEC Corp and Toyota Motor Corp.
But as 2021 unfolds and the divergence between the US and China widens, the logic behind shifting away from China is being less and less compelling.
In fact, notes Xiang Haoyu, a research fellow at the China Institute of International Studies, many Japan Inc sectors “saw China’s advantages through Covid-19 and want to expand and upgrade their production capacity” there.
It’s still the case, says Yoshinori Ogawa, chairman of the Japanese Chamber of Commerce and Industry in China, that “Japanese companies are striving to develop with China as the economy becomes globalized and supply chains become further intertwined.”
Sealing the deal, in certain ways, was Japan joining the China-centric 15-nation Regional Comprehensive Economic Partnership, history’s biggest trade deal. Around the same time Suga was signing on to RCEP last year, Honda Motor was expanding its plant network in China.
Toyota, meantime, unveiled a joint venture with five mainland companies to make fuel cell systems for commercial vehicles with partners China First Automobile Works and Guangzhou Automotive Group. It also signed on to supply gasoline-electric hybrid systems to Guangzhou Auto. That marked the first time it shared the technology with a foreign country.
Panasonic Corp still relies on China for a quarter of its overall business, a roughly $16 billion share of it. Panasonic and other Japan Inc icons are engaged in what Scott Kennedy at the Center for Strategic and International Studies in Washington calls “decoupling kabuki.” Kennedy argues that we’re seeing “Japan’s effort to reset, not end its relationship with China.”
Japan’s China links are a matter of economic realpolitik. It’s been a decade since China surpassed Japan in GDP terms. Its economy is three times larger than Japan’s. Decoupling seems a risky strategy considering who’s buying the bulk of Japan’s goods.
As such, the objective is really “avoiding over-dependence” on China, says economist Naoto Saito of Daiwa Institute of Research. As 2021 proceeds, it’s becoming “unthinkable” for tech CEOs “not to consider” the Chinese market as a key manufacturing center.
In the meantime, chip-market turmoil is one of the best things Japan has going for it, says economist Michael Wolf at Deloitte Touche Tohmatsu Ltd, who sees a “silver lining.”
“Semiconductors and their machinery,” he says, “make up a substantial portion of Japan’s exports, amounting to a little more than half the value of motor vehicle and parts exports. Surging exports of semiconductors and their machinery, which were up 24.7% from a year ago in January, more than offset the decline in motor vehicle and parts exports. The decline in auto exports may ultimately outweigh the rise in semiconductor exports, but the chip shortage will not be all bad for Japan’s trade balance.”
Snafus will happen, though.
Xi is gearing up to secure a rare third term as party leader at next year’s Congress. Lashing out at archrival Japan could be just the thing both to placate hawks in Beijing and ramp up pressure on Washington and its allies.
Suga faces his own acrobatic act with his party’s right wing, which favors Biden’s effort to make 2021 even more uncomfortable for China. Balancing Japan Inc’s need for a vibrant overseas market, domestic politics and having Biden’s back on Taiwan will not be easy.
For one thing, Japan’s pacifist post-war constitution makes Suga deploying ships or troops to aid any US brinksmanship toward China a non-starter. For another, any move by Beijing to boycott Japan’s tech exports would make deflation great again.
One of the first tasks for any foreigner setting up shop in Japan is grasping the concepts of honne and tatemae. The former is what a politician really thinks, the latter a sugar-coated, politically-correct version of an idea or policy.
This construction explains how Suga will try to have it both ways on China in the Biden era.
Yet from a follow-the-money standpoint, Suga’s tech giants, by way of their sales trends, are reminding Tokyo that China is a rival best held close.