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Economy

Cool heads needed to warm Japan's ties with China, South Korea

TOKYO -- Anger and frustration often hinder the ability to see things rationally. When people fight with each other, they tend to look down on their opponent or wish ill for the other party.

     If this animosity is between two countries, it can cause serious problems. And this is where Japan finds itself with China and South Korea.

     Online communities in Japan have been prognosticating about China and South Korea as Japan's diplomatic relations with the two countries stumble.

     The Chinese economy will collapse, goes one common refrain. The South Korean economy will break down under the weight of a stronger won, is another.

     Books with views echoing these sentiments are selling well in Japan.

     These feelings appear to be mutual. Newspapers and online forums in China and South Korea are full of opinions that belittle Japan. Japanese companies can no longer win against South Korean rivals, one opinion goes. The Japanese economy needs China to survive, says another.

     Emotionally charged opinions are gaining momentum both in public and political forums, and this should be a cause for concern. It could ruin any chance of improving relations.

People bluster, businesses suffer

Japan's economic ties with China and South Korea have weakened in recent years due to conflicts over historical and territorial issues, as well as changes in trade structures and business strategies.

     Violent anti-Japan demonstrations swept though China two years ago, and the economic effects of these can still be seen today. For instance, the market share for Japanese automobiles in China has declined. Soured ties are also probably why Japanese tourist numbers to China and South Korea are down.

     What is particularly noticeable lately is falling direct investment in China by Japanese businesses. Japan's net direct investment in China plunged 32% year-on-year in 2013.

     A recent survey by the Japan External Trade Organization found that China is now the third choice for Japanese companies in where to set up overseas headquarters. China used to be the top choice. Now Thailand is No. 1 and Vietnam is No. 2.

     Much of this is likely due to rising labor costs in China. But political risk is probably also a major factor.

     From the Chinese perspective, Japan has become less important as a trade partner. Exports to Japan accounted for as much as 20% at one point during the 1990s. Today, it is about 7%.

     Imports from Japan have halved over the past dozen years or so to stand at below 10%. It is believed that China's imports from Japan were less than those from South Korea last year.

     Trade between Japan and South Korea has also decreased significantly. South Korea's exports to Japan took up just 6% of its total exports last year, roughly half the level seen in 2000 and less than a quarter of its current exports to China.

     After shrinking year after year, South Korea's imports from Japan also stand below those from China today.

     But the fact remains that the three countries continue to be important trade partners to each other.

Mutually beneficial

"For Japan, China and South Korea, their mutual existence will become increasingly important since they all have their own economic problems," said Masahiro Kawai, a University of Tokyo professor who served as the dean of the Asian Development Bank Institute until March.

     China must modernize its industries and solve worsening environmental problems to realize sustainable economic growth and stabilize its society, Kawai said. He added that Japan's energy-saving and environmental technologies could help achieve these goals.

     For South Korea, whose small-business sector is weak, cooperation with Japan, a country with a broad and strong small-business sector, is beneficial, Kawai noted.

     For Japan and its declining population, Kawai said, tapping the vitality of the massive Chinese market is essential for its economic growth strategy.

     "Japanese and South Korean companies are linked through supply chains," said Hidehiko Mukoyama, senior economist at the Japan Research Institute. "South Korea still depends on Japan a lot when it comes to key components and high-quality materials." 

     "For Japanese companies, South Korean businesses, many of which have strong global sales power, are invaluable customers," Mukoyama added.

     The three countries can complement each other economically, but worsening political relations could cool their economic ties. Fortunately, there is willingness among the trio to work together on projects that would be mutually beneficial -- namely free trade agreements and environmental and energy cooperation. They should seize these projects as opportunities for repairing relations.

     It has been said that mutual economic dependence is powerless in the face of national conflicts. Nationalism certainly has the power to blow away economic interests.

     But cool heads that understand the importance of mutual dependence can also prevent conflicts. We should deepen ties with neighbors by seeing our own economic realities and priorities rationally.

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