Why China Needs to Change its Japan Policy


The Chinese Communist Party’s 18th National Congress is one of the most important political events of the year, beginning a turnover in Party (and ultimately state) leadership. In addition to the leadership transition, the National Congress will define the party line in all major policy sectors, including foreign and defense policy. It is an excellent opportunity for Chinese leaders to turn the current disastrous Japan policy around before it’s too late.

The recent tensions between China and Japan over disputed islands in the East China Sea continue to simmer after the Japanese government purchased the islands from a private owner in mid-September. Following the purchase, nationalists from both Japan and Taiwan made publicity landings on the islands, revealing the extent that nationalism on both sides has hijacked the issue from political leadership. While order has been restored, extreme views of the dispute are beginning to prevail in the media of both China and Japan. It is no longer a question whether a new crisis will take place over the islands, but when.

While Beijing and Tokyo are said to be renewing talks over the disputed territory, the islands will continue to bedevil relations unless both China and Japan reset their policies with regard to each other. While Japan has an unfortunate sense of timing (purchase of the islands coincided with the anniversary of the Marco Polo Bridge Incident), China has also encouraged anti-Japanese sentiment in its school texts and (war) history museums. The gravest sin of Chinese policy toward Japan however seems to be a growing perception in Beijing that ‘Japan doesn’t matter’ and that China can get on without Japan. This erroneous perception weakens the Chinese leadership in the region and at home.

The most important bilateral relationship in the Asia Pacific is thought to be that between the U.S. and China. While that is true, a second bilateral of great importance to the Asia-Pacific – the Japan-China relationship — gets far less attention than it deserves. This bilateral has long been a bellwether for any Asian order, and is important for both medium- and long-term reasons. Medium-term trends show Chinese growth slowing, with double-digit growth slowing to around 7-7.5 percent. There are signs that the next Congress will push for reforms of the state-owned enterprises sector, encouraging instead a larger private sector, and overhaul local government finances. This will require regulatory framework, which returns ebbing confidence of foreign investors on a host of areas such intellectual property and impartial legal process in law. To carry out these reforms, China will need massive flows of foreign direct investment, particularly to its’ banking and manufacturing sectors.

For this, China needs Japan and Japanese investment badly.  More than 20,000 Japanese companies ranging from apparel, electronics, and the auto industry have operations in China, with an annual turnover of $345 billion. Now, that could be at risk. According to a Reuters poll taken in Tokyo in September, more than 37 percent of Japanese companies have expressed caution about future operations on the mainland, and suggested redirecting investment to Southeast or South Asia. This would not be good. The global economy needs Chinese reforms, just as the Chinese economy needs Japanese investment. 

And this financial debate is overlaid by the long-term great power cultural and military rivalry between the two powers. While both countries remain wedded to the modern liberal rules-based order, memories are short, and the possibilities for miscalculation ever-present. For all the talk of China’s defense modernization,  Japan’s defense budget is the world’s sixth largest and it has one of the region’s largest navies.

But Beijing needs Japan much more than it realizes. Declining or not, Japan is still big. It has the world’s third largest economy, and is the second largest holder of US treasury bonds. It has a large impact on global commodities and energy: it is the largest importer of liquid natural gas (LNG) and third largest importer of crude oil. Despite its financial troubles, it still carries considerable weight in financial global institutions like the IMF, the World Bank, and the World Trade Organization.Then there are Japanese activities in the Chinese market itself: in 2011, Tokyo invested $6.3 billion of operations on the mainland (while the U.S. only invested $3 billion that same year). Japan is said to have provided more than $45 billion in development loans to China since the 1970s.  China simply cannot afford to use Japan as a foil for its nationalism and domestic security.

Allowing national sentiment to rule foreign policy has hurt Beijing’s own ambitions. By encouraging or allowing nationalism at home, China’s regional policies alienate and isolate it from the very regional powers that it needs to renew its economy and develop its place as a power in the region. One result, as has been seen, is the shift of China’s neighbors from open engagement to cautious hedging. Worryingly still, Chinese policy-makers continue to see negative regional reactions to its growing Chinese assertiveness as part of a grand U.S. containment strategy. At one conference (governed by Chatham House rules), a senior Chinese scholar noted that in the China-Philippines dispute, it was clear that the U.S. was ‘leading from behind’, a grotesque inversion of political realities and a belittling of Philippine autonomy and decision-making.  What is worrying is that China is not only blind to its negative impact on Japan and other regional powers, but it believes the responsibility for that lies elsewhere. As long as this situation continues, then no matter what the delegates at the Party Congress decide in November, the future will look less rosier than it is now. 

John Hemmings is a non-resident fellow at the Center for Strategic and International Studies: PACNET.

December 5, 2013 at 09:44

Gradual managed deterioration of Sino-Japanese relation is very good for China. Japan needs China more than China needs Japan.

Moreover, as long as such deterioration does not lead to a hot war, it is precisely what China needs. The USA will never start a war, so the USA will be out of the picture.

It is pointless to have a warm relation between the two until Japan comes to its senses.

SK states so (no talk at allwith Abe), sensing the backing of a powerful China.

In fact, erosion of trade is the key winner for China. For some time, erosion of trade means recession in China but depression in Japan, eventually recovery for China but lasting recession in Japan.

The world is replete with FDI into China without Japan.

Japan’s long term prospects are bleak until it comes to its senses. US role is very limited because a hot war is not happening.

China is simply winning; it will play the same game for another 20-40 years. It will create economic problems for Japan with just a touch of military flavor. The USA will do zilch as long as a war has not started.

I will give Japan 40 years. What will happen to the relative power equation after 40 years? Between Japan and China, and between China and the USA?

Yes, the Japanese delusion is that China will implode.

December 1, 2012 at 11:33

good then dont invest in china, the usa gm company will take over japans place in china as a major car producer, read the news gm invests 1 billion in china. go invest else whereother countries will gladly take japans investment spots bye bye  

December 1, 2012 at 11:25

japan is the trouble maker in this case, it was them who nationalized the island, so making any amends will fail on japan not china. china should just do without japan and go about its own.japan is profitting more from china's labor anyway  

Just do it.
December 1, 2012 at 09:59

Let the nukes fly.

Common sense Japanese
November 21, 2012 at 05:15

Mr. Xi may be the last emperor of PRC, before s*** hits the fan.

Common sense japanese
November 21, 2012 at 05:13

No so optimistic about China's economic future, either. 
#1. China's demographics has already peaked.
#2. China's production capacity is way over the global demand, while developed nations (aka demand) is suffering from debt issues.
#3. Chines government, officials, bureaucrats are too corrupt to an un-imaginable degree. 
#4. Lack of legal system, protection of property rights make China a dangerous place to put your money in.
#5. Communist Party led system is obsolete, and will not be able to withstand the global competition (except with low cost labor) based on internet society with free flowing information.  Only way CCP can continue to hold on to power is through brute force.

Japanese with a common sense
November 21, 2012 at 04:38

This is a blessing in a disguise for us. 
The Wall Street wants Japanese to keep investing in China. But we need to rethink about China. 
It doesn't have any decent legal system.  No property rights.  Politics constantly changes and risk of investments are very high.  Japan should re-focus in the rest of the world.  SE Asia, South Asia, Middle East, and Africa. Why does it have to be China???

November 20, 2012 at 11:59

Do not listen on what china say. Watch what they do. Actions speak much louder than words.

Oh no
November 18, 2012 at 20:49

Oh no. The article didn't say nice things about China. Wah wah it therefore cannot be true. Japan did Pearl Harbour so they must be always in the wrong. A country in recession must have ZERO economic activity and immediately stop all foreign investment. Time to stick head in sand.

November 18, 2012 at 16:44

The cleanup at Fuku has spluttered to a halt. He has absolutely no idea what to do next. In fact the technology or equipment needed to really clean up Fuku still does not exist right now. Please bear this in mind before speaking about war.

November 15, 2012 at 06:28

Yes, listening to some of the Chinese commentators and comments does make one believe that the question is no longer;
If China will go to war with Japan, but rather when will the war begin?

November 15, 2012 at 03:22

Why is japan the instigator and why promote China as a Mighty not to be reckoned with? Seems like a bully trying to start fights due to themselves not taken seriously by the rest of world. China needs the rest of the world ecomonies such as Japan and the U.S.  Do not make any mistakes.. China could not sustain a long term or strategic war without nuclear weapons and that is a fact.. They would use various ways such as Cyber attack, new knock off weapons and infiltrations of spys. But in long run would not work to win the war…. Overall these petty disputes can be resolved very easily by resorting to consensus of mainland borders within a 12-20 miles or go by international martime law. Overall if that is the case, China would be in the wrong in the diayou islands disputes.

November 14, 2012 at 00:48

This author said “China needs Japan and Japanese investment…” This is not true. Recently, even West economists believe Japan is in recession now, if not, they will be in 2013. Just today, Washington Post said Japan's gross domestic product has shrunk 3.5 percent this year. Also, the revenue and the profit from all those Japanese auto-makers this year are all down and probably expect in the next year will be in decline because some Chinese consumers still boycott Japanese cars & other goods.
In addition, Japan chooses to be homogeneous for their country. So, they accept very small numbers of immigrants over the years. Ethnic Japanese have 99% of population. So, I believe their economy in general will slowly go down to the drain in the future. If you don’t believe me, you can go to look at Goldman Sach’s prediction in the next 20 to 30 years. It is no doubt that Japan needs the Chinese market more.
If anybody still has in doubt, including this author, then you probably believe the Pearl Harbor attack was done by the Chinese.

November 13, 2012 at 12:01

I doubt that the new leadership of the CCP change the current direction toward increasing risk of war. The CCP gambled that other countries rather bow and eat their pride than lose money and go to war, but it seems clear now that they miscalculated. I cant' speak for other countries, but I think that if the US suddenly retreat from the Asia-Pacific region as many chinese and some americans wish, Japan very likely enter a period of political turmoil followed a by changing the art.9 of the constitution, raise the defense budget from 1% to 3 or 4% of the GDP and build nukes. Because the behavior of the people of the PRC on the TV screens as convinced many japanese that expect a "benevolent Pax-Sinica" is delusional.

November 13, 2012 at 03:59

"For this, China needs Japan and Japanese investment badly" ???
Wrong. China has 3 trillions of money overseas. Those money will be useless soon. Why not just bring those money home?

November 13, 2012 at 00:17

Why do Americans always knows best about other people's problems but can't do a damn thing about its own problems ?

Talk ings point
November 12, 2012 at 15:59

the fault is with Japan though. Some times the principle matters, diaoyu island is the case. China may need Japanese investment, but Japan need Chinese market too. The island dispute hurts both, but it is a sacrifice both willing to make at this time. I don’t see China backing down. Japan is the instigator, why should China backing down?

If it leads to war, so be it. If US want to get involved, it’s fine too. China just need to prepare its strategic forces and face the dooms day with a stare.

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