Exodus of Japan Inc. Slams China

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The Japanese-Chinese imbroglio over the Senkaku Islands – or Diaoyudao Islands, as they’re called on the other side of the pond – has been artfully kept on the front burner with a mix of symbolic gestures, carefully orchestrated military provocations and reactions, “scholarly” papers, articles in the media, government pronouncements, and all manner of other artifices. And Japanese businesses, particularly automakers, have paid a steep price in China, where sales collapsed following the outbreak in the fall of 2012.

But now, decisions made one at a time by Japanese businesses are hitting the Chinese economy, at a moment when it can least digest such hits.

It didn’t help that the Shanghai Maritime Court seized a Japanese-owned iron-ore cargo ship. The owner, Mitsui O.S.K Lines Ltd., “still refuses to perform its obligations,” the court ruled, according to the Asahi Shimbun. These “obligations” date back to 1936, just before the Second Sino-Japanese War, when Zhongwei Shipping Co. in China leased two ships to Daido Kaiun, a predecessor of Mitsui O.S.K. The two ships were promptly confiscated without compensation by the Japanese military and sank in 1944.

Family members of Zhongwei’s founder first filed suit in Japan, but lost. In 1988, they filed suit at the Shanghai Maritime Court. In 2007, the court ordered Mitsui O.S.K. to pay $28.3 million in damages.

Other lawsuits have been filed in China against Japanese companies, demanding compensation for various wartime damages, including forced labor. Chinese authorities, adhering to the 1972 Japan-China joint communique by which China had relinquished its right to demand compensation for wartime damages, have long dismissed these lawsuits. But in March, as an indication that the honeymoon was over, a Beijing court allowed such a lawsuit to move forward for the first time.

And so the seizure of the ship was another “demonstration that the judicial authority is willing to take a hard line,” a source in Beijing told the Asahi Shimbun.

“Extremely regrettable,” is how Chief Cabinet Secretary Yoshihide Suga called the seizure during a news conference on Monday. “The move can undermine the spirit of the 1972 Japan-China joint communique from its very foundation and discourage Japanese corporations from doing business in China.”

And that’s exactly what has been happening for months – in a most dramatic way, and where it hurts China the most.

As if to underline that Japan wasn’t about to be cowed by China, Prime Minister Shinzo Abe sent a ritual offering of “masakaki” tree stands  to Yasukuni Shrine, which honors nearly 2.5 million Japanese war dead, including 1,000 war criminals from World War II. Visits by officials to the shrine are a sore point with China and other countries that have not forgotten the atrocities that the Japanese military committed on their soil generations ago. And so the masakaki offering was eagerly reported on Monday, showing Abe’s name and title on wooden plaques in front of the small trees.

At first, when the hostilities over the Senkaku Islands erupted in China, Japanese executives, though taken aback by the violent aspects of it all, figured that this too shall pass. When it came to trade and investment, they’ve been able to work their way around political minefields. Even as sales by Japanese automakers, retailers, and others plummeted in China, and even as they struggled with disruptions of all kinds, corporations continued with their investment plans, and the amount of direct investment in China actually increased for a few quarters after the events of 2012.

But since then, the tide of Japanese money has been receding. Direct investment by Japanese companies plunged 47.2% in the January-March quarter from a year ago, according to the Chinese Ministry of Commerce, the third decline in a row, and the largest decline since the January-March quarter in 2011, when the Great East Japan Earthquake and tsunami brought Japanese businesses to a near standstill.

China wants Japanese companies – or at least their money and technologies – to return to China. And said so. Last week, a delegation of 50 Japanese business leaders traipsed to China, led by Yohei Kono, former speaker of the Lower House and now head of Japan’s Association for the Promotion of International Trade. Kono met with Commerce Minister Gao Hucheng and Vice Premier Wang Yang. After which Chinese officials emphasized, as the Asahi reported, “the importance of separating business interactions from political confrontation.”

But it’s too late. Japanese corporations are now seeing risks in China that go far beyond the appropriation by hook or crook of technologies. They see that those risks are not abating, but that they’re getting more complex, and potentially more costly. And so they’ve started to plow their money into the fertile and often cheaper grounds in Vietnam and other parts of Asia. To the detriment of China.

Japanese companies have been big drivers behind the development of the Chinese economy. This pullback of their moolah and superb industrial expertise comes at a very inconvenient time for the Chinese economy. For years, it has lived off what appeared to be an endlessly inflatable credit bubble that created the largest construction and infrastructure boom in history, resulting in entire ghost cities and breathtaking industrial overcapacity.

But now the mountain of debt has started to curdle, overcapacity is taking down entire sectors, economic growth is slowing, and the credit bubble is cracking. The last thing China needs is the exit of such a large foreign investor and source of advanced technologies. But that’s what it’s getting. And countries in Southeast Asia are already licking their chops and counting yen.

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