By Stephen Nagy
Deep economic cooperation in the areas of manufacturing, technology and finance has coexisted awkwardly with decades-long political and territorial disputes between Japan and China. This has led Japan to develop economic relations with China through a policy that separates politics and economics or seikei bunri.
Amid intensifying US–China strategic competition, China’s track record of economic coercion and its long-term objectives to secure its own ‘core interests’, Japan has become more concerned about its economic reliance on China.
The seikei bunri principles for engaging with China economically are giving way to Japanese Prime Minister Fumio Kishida’s new ‘economic realist’ diplomacy. Policy approaches to address concerns about the impact of politics on Japan’s economic security include selective diversification of supply chains away from China, reshoring, friend-shoring and national technological development.
The drift away from seikei bunri has raised concerns in Tokyo about Japan’s vulnerability to economic coercion and the weaponisation of supply chains.
Political leaders in Japan have already committed significant strategic and financial resources to enhancing economic security through selectively diversifying supply chains and reducing reliance on China. Initiatives include the adoption of supplementary budgets for economic security, such as securing domestic production bases for advanced semiconductors. Supplementary budgets have focused on promoting domestic investment to support supply chains and encourage their diversification.
Despite the political and security complexities, the mutually dependent economic relationship remains largely intact, is deepening and highly complementary. There is no replacing China as Japan’s major market for goods and services. Japanese companies have invested heavily in China, particularly in the automobile, electronics and machinery sectors. China is also a major source of low-cost goods and components for Japanese companies. This role has kept prices low and enhanced the competitiveness of Japanese products in global markets.
To decouple the Japan–China economic relationship would require untangling the complex and multifaceted mutual dependency that defines it.
After taking office in October 2021, Kishida positioned economic security as a major focus of his administration based on assessment of the challenges associated with China’s rise. In the wake of Russia’s invasion of Ukraine — with its impact on downstream energy and food security — Kishida warned that ‘East Asia could be the next Ukraine’.
Tokyo is promoting reshoring, urging Japanese businesses to migrate their production back to Japan from China or to explore new production bases in Southeast Asia, India and other countries. The government has introduced policies to support companies that are considering reshoring, including subsidies, tax breaks and regulatory reforms.
Tokyo has also highlighted the importance of diversifying supply chains, particularly for key components and materials such as rare earth metals. The Japanese government has been investing in alternative sources of rare earth metals, such as recycling and developing new mines in other countries. Japan is also exploring the use of new materials that can replace rare earth metals.
Tokyo has encouraged collaboration to enhance economic ties and agendas under the umbrella of the ‘Free and Open Indo-Pacific’. The G7 Foreign Ministers’ statement on 18 April 2023 — which stressed that ‘resilient supply chains should be built in a transparent, diversified, secure, sustainable, trustworthy and reliable manner’ — exemplifies this.
Japan has also emphasised the importance of strengthening domestic industries. This includes the development of new industries and technologies expected to decrease Japanese vulnerability to China and deepen its economic security.
A critical component for Japanese businesses is semiconductor materials. Despite being a major producer of semiconductors, Japan continues to rely on imports of key materials from other countries, including China. To mitigate this vulnerability, Tokyo has directly courted the Taiwan Semiconductor Manufacturing Company, among others, to relocate to Japan. It has also been investing in the development of next-generation semiconductors and encouraging its companies to move up the value chain to reduce their dependence on imports.
China continues to enjoy a monopoly over rare earth metal extraction and exports that makes Japan and other states vulnerable to rare earth supply chain weaponisation. This exposes signature Japanese industries including electronics, automobiles and renewable energy to possible coercion.
As with energy and other mineral resources, Japan lacks domestic sources of rare earth metals and is reliant on imports. Developing new mines is difficult and expensive and there are few viable alternatives to China as a supplier. Recent initiatives with Canada remain financially unviable.
Developing alternative sources of rare earth metals requires not only the extraction and processing of ores, but also the development of downstream industries that can use the metals in products. While Japan has a strong high-tech industry, developing new industries that use rare earth metals takes time and requires significant investment which may not meet the demands of the current market.
Enhancing economic security and creating resilience against economic coercion and other forms of economic instability will be difficult. It will require Kishida and future administrations to develop new mines and processing facilities for rare earth metals while meeting a range of environmental standards to ensure activities are conducted safely and sustainably.
Developing new mines and processing facilities for rare earth metals will require careful planning, consultation and collaboration with stakeholders, including local communities, environmental groups and government agencies. The Kishida administration is starting this process, working with Australia and African states, such as Namibia, in joint ventures.
Japan’s efforts to reduce its dependence on China reflect a desire to enhance economic security and reduce vulnerability to geopolitical risks and uncertainties. With the shift to economic realism away from the principles of seikei bunri, the Kishida administration aims to balance economic opportunities with Japanese national interests in an increasingly complex and uncertain global environment.
About the author: Stephen Nagy is a Professor in the Department of Politics and International Studies at the International Christian University, Tokyo and Visiting Fellow at the Japan Institute for International Affairs.
Source: This article is published by East Asia Forum and appears in the most recent edition of East Asia Forum Quarterly, ‘Re-defining the ASEAN–Japan Relationship’, Vol 15, No 3.