The U.S.-China trade dispute has heightened global uncertainty about international trade and its impact on the geopolitical balance of power. Experts are evaluating the Trump administration’s use of tariffs and sanctions as tools of foreign policy, and multinational corporations, international financial institutions, and even governments are recalibrating to their effect on markets.

As international economics and geopolitics become more explicitly intertwined, Japan has been increasingly visible and active in global affairs. Prime Minister Shinzo Abe’s diplomacy in the Middle East and strengthened ties with Russia and India are the most obvious signs of this shift. But perhaps more significantly, Japan’s overseas investment has provided an alternative to Chinese development financing.

Antagonism between the United States and China puts Japan in a unique position. In the Japan-U.S. trade talks, to begin in full after Japan’s Upper House election in July, American negotiators will likely raise the need to change Japan’s global investment strategy in order to meet the growing challenge from China.

Abe and U.S. President Donald Trump are united in the view that strengthening and deepening the U.S.-Japan alliance will be essential to counter China’s maritime, economic and technological influence, but they also agree that a creative and comprehensive approach is required to offset China’s growing prowess in these areas.

Overseas investment

Japan’s large capital reserves and its financial capabilities are significant tools for geopolitical influence. Importantly, Japan is not only “cash rich,” it is also ahead of China in the competition for global investment. China’s “Belt and Road” initiative garners more media coverage, but Japan is a more important actor for infrastructure investment in the developing sector.

The Wall Street Journal reported in April that, according to International Monetary Fund data: “Since the end of 2016, when Japanese and Chinese ownership of overseas assets reached almost identical levels, Japanese investment has outstripped China’s by tens of billions of dollars. … Collectively, Japan owned $1.667 trillion in foreign assets in the third quarter of 2018, while China owned $1.542 trillion in the second quarter.”

Moreover, Tokyo’s prudent investment strategy and bilateral diplomatic approach toward Central and Southeast Asia, the Middle East and India has actually been more significant and effective than Beijing’s. Unlike China, Japan does not use a neocolonial approach and seeks genuine economic development, thereby alleviating regional speculation about its geopolitical ambitions. Japan’s edge comes from experience and skill in development finance, so there is no need to cause excessive debt.

Together, the U.S. and Japan can provide competitive avenues for funding outside the Belt and Road, ensuring that China will not be the only source for development loans. The recently-passed U.S. BUILD Act, which aims to use development funding to advance U.S. foreign policy goals, is one step in this direction, although at present it lacks a clear policy or sufficient staffing.

Japan should also maximize its private-sector global investment. From a broad perspective, inefficiencies in the Japanese bond market and the yen’s vulnerability to constant market changes and geopolitical turmoil are structural weaknesses holding back Japan’s full geoeconomic capabilities. For example, the increasingly likely “no deal” Brexit is expected to cause the yen to rise.

Abe’s global diplomacy

More visibly, Japan is playing a significant global role through diplomacy. Abe’s cooperative effort with Trump is only one example of his diplomatic effectiveness. His trip to Iran established Japan as a critical interlocutor promoting stability and peace in the Persian Gulf. But he has also increased trade with Saudi Arabia, putting Japan in a position to sustain and secure flows of Middle Eastern oil and gas. As a whole, joint U.S.-Japan security agreements and deepening structural ties have contributed to mitigating Russian and Chinese influence in the region.

Japan has also established closer trade relations with India, and Abe’s collaboration with Prime Minister Narendra Modi is focused on infrastructure development. More significantly, Japan and India are natural geopolitical allies to offset China’s attempt to secure a dominant position in the Indian Ocean and Southeast Asia.

And Russia needs Japanese economic investment in the Russian Far East. Current negotiations over the Northern Territories issue may lead to formal treaty ending World War II, although it is unlikely the sovereignty dispute will be settled quickly. But Abe sees improved ties with Russia as deterrent against the deepening Sino-Russian strategic alliance, and Russia’s economic problems could give Japan leverage for a more favorable deal on the dispute over a group of islands off Hokkaido held by Moscow since 1945.

It is important to underscore that despite the recent summit between Russian President Vladimir Putin and Chinese President Xi Jinping, the Sino-Russian strategic partnership is fraught with contradictions. Russia also maintains close ties to India.

Between the U.S. and China

Amid tensions with the U.S., Beijing needs Japanese trade and investment. Abe and Xi have developed a positive diplomatic relationship and ties have improved. China recognizes Japan’s expanding military capabilities and views U.S.-Japan ties as unbreakable for the foreseeable future. But Beijing desires mutually beneficial economic relations, and has recently utilized a more conciliatory approach compared to its past rhetoric.

The Japan-U.S. alliance and Japan’s developing cyber-resilience strategy is designed to hinder Chinese cyber intrusions into the corporate sector. But Japanese banks and corporations still see the opening up of China’s markets as a possibility, and therefore support Abe’s reciprocation of the conciliatory approach on trade and investment.

Along with the U.S., Japan is positioned to eventually be one of the major actors in establishing a rules-based international trading system that reforms the traditional multilateral institutions created after WWII. This is one potential outcome of the Trump administration’s unconventional bilateralism — it is by no means certain. But neither is an economic crisis.

Japan’s geostrategic role is global in scope and Japanese diplomacy is meeting current challenges in a unique fashion. Japan has long been a major economic actor, but as international economics and geopolitics become increasingly linked, its latent regional influence as a stabilizer and key investor is emerging, and becoming evermore vital.

Paul Goldstein is the founder, president and chief executive officer of Pacific Tech Bridge (PTB), a consultancy based in Arlington, Virginia, that specializes in global research, cybersecurity and U.S.-Japan corporate cooperation.

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