A fiery diplomatic clash last month over Japans arrest
of a Chinese fishing boat captain near islands both Japan and
China claim as their own, threatened to sour relations between
the Asian rivals. But the spat is just the latest episode of
rising tensions, both economic and political, between the two
countries, as Japans economic dominance over Asia
continues to ebb.
In August, news broke that China had overtaken Japan as the
worlds second-largest economy behind the US in terms of
nominal GDP, seeming to mark one more stage in what some see as
Chinas inevitable ascent toward the number one position,
and to reinforce Japans decline into relative economic
Even though China won the accolade on the basis of just one
quarters GDP, and even though Chinas GDP has
outstripped Japans on occasion in the past, Japans
chances of regaining second place are slim, given dramatic
differences in growth rates between the two countries.
Japans nominal GDP (before adjustment for price and
seasonal variations) amounted to $1.29 trillion in the second
quarter, compared with $1.34 trillion for China, according to
Japanese government data. Since China is expected to grow at a
rate of around 10% in 2010 compared with 23% for Japan,
China appears set to stay ahead of Japan on an annual basis too
for the first time.
This is a shock for Japan, which has held the number two
spot in the global economic league table since 1968, when it
became a global manufacturing power and overtook Germany as the
second-largest economy behind the US. China then moved into
third place in 2007 and has now leapfrogged Japan too (although
in purchasing power parity, or PPP, terms it has been ahead of
Japan for some time).
Japanese policy-makers sought to appear stoic at the news,
with some, such as finance minister Yoshihiko Noda, noting that
Japan is still way ahead of China in terms of per-head national
income. Japans per head GDP was $37,800 in 2009 compared
with just $3,687 for China 103rd position in the world,
according to the World Bank.
This may signal Chinas rise, Japans
decline, and Chinas continuing rise to overtake
the US by 2030, according to Goldman Sachs, Masahiro
Kawai, a former senior official in Japans finance
ministry and now dean of the Tokyo-based Asian Development Bank
Institute, tells Emerging Markets. Japan can benefit from
Chinas growth if Japan can integrate itself more with
China (and other Asian emerging economies) through trade with
and investment in China, and transfers of technology related to
energy efficiency and environmental improvement.
Kawai adds: Healthy competition between the two
countries will be useful, for example in the area of promoting
international financial centres (Tokyo and Shanghai), currency
credibility (related to the role of the yen and yuan), etc. If
Japan wakes up and focuses on domestic reforms, like
agriculture and the labour market (foreign workers, old-age
caretakers), then the country can be more competitive, and
integrate itself with Asia and other emerging market
Reaction in China to news of its own success was restrained,
with Gu Yuanyang, economist with the Chinese Academy of Social
Sciences, acknowledging that the quality of Chinas growth
has still to match its quantity. China lags far behind in
the ability to transform technical progress into economic
benefits, and our weight of research and development to GDP is
very low, Gu told China Daily.
China had been expecting this, and it is not a key
milestone that is being set, but it has happened a little bit
faster than expected, Harvey Chen, an economic adviser to
Chinas State Council and president of the First Light
Academy of Economics and Management in Shanghai, tells Emerging
Markets. The key thing is to make sure that this
fast-running train does not derail, he adds.
After the financial crisis, a lot of countries are
still troubled, while China is much stronger than before. So
there is more self-confidence in China, but everyone is aware
of the reality that on a per capita basis, China still has a
lot of work to do. The Chinese government is principally
concerned about stability of growth. If current growth
continues for another 10 years, China will be in a much
stronger position [to close income gaps].
But while China refrained from crowing, and Japan showed
little outward sign of resentment over the economic achievement
of its rapidly emerging neighbour, Tokyos actions in
subsequent weeks with regard to relations with China appeared
strangely defensive and, in the eyes of some, aggressive.
Diplomatic tensions flared when Japanese coastguard vessels
arrested a Chinese trawler, which they claimed was fishing
illegally in waters near the Senkaku islands (whose ownership
is disputed among Japan, China and Taiwan), and which they
claimed had rammed one of the coastguard vessels as it
attempted to escape.
The vessel and its crew were brought back to Japan where its
captain remained in detention a highly unusual situation
in what are regular incursions by Chinese fishing vessels. The
dispute went right up to the prime ministers office in
Japan and to the highest levels in China, which protested
vehemently at the events and demanded that Japan back off.
Even as Beijing was cancelling planned treaty talks with
Japan on sharing gas and other mineral rights in other disputed
areas of the East China Sea, Japans annual Defence White
Paper called attention to what it claims were Chinas
growing military activities in the region.
Adding fuel to the sudden outbreak of tension between the
two east Asian powers, Tokyo is demanding to know what
motives lie behind Chinas sharply increased
purchases of Japanese government bonds (JGBs), and complaining
that it does not have similar access to the Chinese government
It remains unclear what suddenly prompted Japan to take
actions that would set back the improving relations which both
governments have striven for, with some success, after the
departure of former Japanese prime minister Junichiro Koizumi,
who brought them to a low ebb. Some, such as chief economist
Richard Jerram at Macquarie Securities in Tokyo, sense growing
frustration in Japan at its seeming inability to restore
growth, while China continues to move forward
Japanese political veteran Ichiro Ozawa, who challenged
prime minister Naoto Kan for the leadership of the Democratic
Party of Japan (and thus also for the premiership), has long
pushed for a much closer relationship between Japan and China,
even at the expense of loosening Japan-US ties.
Ozawa argues that an ageing Japan can fulfil its potential
only in the context of a common economic community in east
Asia, where people, as well as trade and investment, can move
freely across borders, and that big shifts in Japans
diplomatic stance are needed to bring this about.
Ozawa was defeated in the election, however, leaving
Japans affairs of state in the hands of Kan, who is
widely regarded as far more cautious, and less inclined to push
Japan in bold new directions that could restore not only its
economic growth but also its sense of national purpose.
Adding to Japans sense of diminishing economic clout,
in September India usurped Japan as Asias second-largest
importer of oil. Japan fell to third, with South Korea
occupying fourth position.
Japans apparent decline in terms of national
industrial output reflects in part a continuing shift of
Japanese manufacturing production to offshore locations in Asia
not least to China and India. This process is
accelerating, with the yen recently reaching a 15-year high
against the dollar and a nine-year high versus the euro. The
Federation of Japanese Economic Organizations (Nippon
Keidanren) warned recently that Japan is in danger of further
hollowing out from companies moving production (and
jobs) offshore, unless Japanese authorities counter yen
strength or endaka.
Goaded by such statements, and by his rival Ozawas
promise of muscular action on the yen, Prime Minister Kan
finally went into action on the foreign exchange front on
September 15, ordering the Bank of Japan (which acts as agent
for the finance ministry in such matters) to intervene, and
sending the yen at least temporarily lower.
But endaka is only one of many problems confronting Japan,
including chronic deflation, slowing domestic and external
demand, a government debt to GDP ratio approaching 200% and a
Japans population is on track to drop from 127 million
to just 90 million in the next 45 years, by which time almost
40% would be aged over 65, according to official estimates.
The symbolism of dropping to third place in the global
economic league table might be the wake-up call that Japanese
leaders need to focus on reviving growth, says Martin Schulz,
senior economist at Fujitsu Research Institute in Tokyo. But
not everyone is betting on it.