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Japan’s Challenge in the Age of China-US Rivalry

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Tokyo Report | East Asia

Japan’s Challenge in the Age of China-US Rivalry

Tokyo must find a way to synthesize national security and economic strategy amid increased competition between Beijing and Washington.

Japan’s Challenge in the Age of China-US Rivalry
Credit: Pixabay

One of Japan’s base strategic calculations has been to leverage China’s economic growth while maintaining its reliance on the United States for its national security. However, this ambition is under threat from the continuing rivalry between the U.S. and China, a situation that looks to become the new status quo. Against this backdrop, Tokyo seems ill-equipped to address emerging external challenges and adapt to this shift in the geopolitical environment, particularly regarding its ability to synthesize its national security and economic objectives. 

The difficulties Japan must confront moving forward are clearly illustrated by the issues that have emerged around the recent amendments to Japan’s Foreign Exchange and Foreign Trade Act (FEFTA). In November 2019 the act was revised, with the amended version enacted in June the following year. The new FEFTA stipulates that foreign investors must obtain approval from the Japanese government to acquire a 1 percent share or more of a specified entity. This is a dramatic reduction from the previous threshold of 10 percent and aims to make Japan’s screening procedure for foreign investment more exacting and to bring it closer in line with that of other nations such as the United States. This legislative change can be interpreted as an important move by Japan to prevent itself from becoming a “soft touch” among its allies vis-à-vis China.

However, recent events have highlighted certain shortcomings in the act. In early 2021, Rakuten, a Japanese company which operates in numerous industries such as e-commerce, financial services, and mobile telecommunications, revealed that a subsidiary of the Chinese tech giant Tencent would be acquiring a 3.65 percent share of the company. This acquisition was taking place without the Chinese subsidiary seeking approval from the government to acquire the greater than 1 percent share, despite Rakuten being a specified entity under the FEFTA. How were they allowed to bypass the amended legislation? Reportedly, they claimed an exemption available to foreign investors who do not intend to participate in managing the company in which they are acquiring a share. However, how they used the exemption was clearly not in the spirit of the amended act. Chinese investment in Rakuten, a specified entity and part of Japan’s fundamental infrastructure network, is precisely the type of investment that the amendments are designed to target. In fact, reports suggest that U.S. authorities have already expressed concern about the acquisition and, alongside Japanese authorities, have announced their intention to monitor the situation.

The shortcomings of the amended FEFTA, specifically its focus on national security, is further highlighted by the recent actions of Toshiba, a leading Japanese electronics company. Toshiba has been accused of using the act to manipulate corporate governance mechanisms. One report claimed that during its July 2020 shareholder meeting, Toshiba once tried to reject shareholder proposals put forward by foreign activist investors on the grounds that no national security considerations were at play. More worryingly, Japan’s Ministry of Economy, Trade and Industry (METI) became involved and placed pressure on foreign investors according to the report. An investigation conducted by lawyers concluded in June 2021 found that the proposals did not involve any relevant national security considerations, but the involvement of the METI was not in line with the intention of the FEFTA. This episode raises questions about the validity of the FEFTA amendments given their focus on regulating foreign investment exclusively in relation to national security concerns. Japan’s attempts to enhance corporate governance and transparency has undoubtedly been harmed by this episode and the finding that management at Toshiba and the METI attempted to exploit the FEFTA to reject unwanted shareholder proposals.

As can be seen from the examples above, Tokyo is still struggling to align its national security and economic policy directions. Certain national security issues have not been successfully integrated into the country’s economic policy, leaving Japan several steps behind its allies and partners. One can argue that these two domains are not only misaligned but have been brought into conflict, with national security being used to undermine corporate governance, damaging Japan’s reputation on the international stage. Not only does this have the potential to endanger Japan’s national security, but it can also taint the country’s market and discourage foreign investment.

While it may be tempting to lay the blame for these issues at the feet of the FEFTA amendments, the problems faced by Japan are more fundamental. Japan currently has no strategy to integrate its national security and economic concerns and the government lacks the operational structure to execute such a strategy even if it existed. Security and economic policymakers work in isolation in their distinct spheres, with only superficial efforts made to bring these two areas together. Thus, to move forward, it is necessary to demolish the factionalism of the outdated bureaucracy. This should be achieved not simply by changing the structure of bureaucratic staffing appointments but also by attracting talent away from the private to the public sector. In this way, government will be home to a variety of viewpoints and opinions that can inform a unified approach to national security and economy.

Japan is at a crossroads and inaction is not an option. In the era of the China-U.S. rivalry, Japan must learn how to adapt to a constantly shifting geopolitical landscape — or it risks being left behind.

Guest Author

Michio Ueda

Michio Ueda is a former vice president of Geostrategic Business Group at EY-Parthenon. He led a wide range of projects across industries, and provided unique perspectives on Asian politics and its implications for the business sector. Michio received an M.A. distinction in Southeast Asian Studies from the University of Wisconsin-Madison, where he studied as a Fulbright fellow. He previously worked in the Japan Ministry of Defense and the Boston Consulting Group.