Standoff over Senkakus could stall growth in both nations

Kyodo

With the tense diplomatic standoff over the Senkaku Islands straining economic ties with China, business analysts warn the sovereignty row will soon start taking a toll on the economies of both Asian giants.

For Japan, which is already showing further signs of a slowdown, dampened exports to its largest trading partner and reduced earnings for the Chinese subsidiaries of Japanese firms would likely rub salt in the wound.

Given the intertwined nature of the world’s second- and third-largest economies and their level of mutual dependence, some business analysts noted that China ultimately will also likely suffer a negative impact to its economy, such as declining stock prices, just as its breakneck growth is beginning to slow.

Many officials of Japanese companies that have done business with China for years share the opinion that bilateral ties are at one of their lowest points since diplomatic relations were normalized in 1972.

During a visit to Beijing last week, Keidanren Chairman Hiromasa Yonekura expressed eagerness to help improve the chilled ties, telling reporters he would do everything in his power to improve the situation.

But many others are considerably less optimistic.

“Nothing can really be done on the private-sector level,” an official at a construction equipment maker said, asking that his name be withheld.

A total of 22,307 Japanese companies were doing business in China as of the end of 2010, according to the Japan External Trade Organization.

Among them, a wide variety of manufacturers of products such as automobiles and electrical machinery have built plants in China, which serve as their bases for exporting goods to the rest of the world. But in recent years, more firms from the nonmanufacturing sector, including supermarket and restaurant businesses, have also made inroads into the Chinese market.

Bilateral trade totaled some $344.9 billion (about ¥27 trillion) in 2011, accounting for 20.6 percent of Japan’s total trade volume.

The Daiwa Institute of Research estimates that a one-month suspension of exports to China would cut Japan’s gross domestic product by ¥2.2 trillion, a drop in real GDP of almost 0.2 percent, while Chinese affiliates or subsidiaries of Japanese companies would see sales revenue drop by ¥1.7 trillion.

Mitsumaru Kumagai, chief economist at the Tokyo-based think tank, also raised concerns about the likelihood of domestic automakers reducing output at their factories in China.

Aside from manufacturing, the tourism industry is expected to be severely impacted. After a clash between a Chinese trawler and Japan Coast Guard cutters near the Senkaku islets in 2010, Japan’s consumption is estimated to have fallen by ¥31.8 billion due to a decline in the number of Chinese tourists, according to Toshihiro Nagahama, Dai-ichi Life Research Institute’s chief economist.

“The impact this time will be significant as it comes at a time when the business environment is poor,” Nagahama said.

As a Chinese campaign to boycott Japanese products spreads and Chinese customs tightens its checks on air freight from Japan, some analysts said the resulting stagnation in bilateral economic exchanges will eventually start hurting China as well.