Why Is China Playing Nice With Japan?

Despite tensions over disputed land and the memories of World War II, economic necessity is bringing the two neighbors closer than they’ve been in years.


TOKYO — It was no coincidence that when Chinese President Xi Jinping wanted to signal a willingness to warm up his nation’s chilly relations with Japan, he chose a group of business leaders as his audience.

China’s leader made a surprise visit to a lavish dinner on May 23 for no fewer than 3,000 Japanese business leaders at the Great Hall of the People in Beijing. “China has always been committed to the development of China-Japan relations as its policy principle, and it will continue to do so in the future,” he told the group, led by ruling Liberal Democratic Party senior figure Toshihiro Nikai.

Xi appeared downright chummy with Nikai — a sharp contrast to his April meeting with Japanese Prime Minister Shinzo Abe, and especially his November meeting, where he looked like he had just come from a funeral.

The more upbeat Xi coincides with what analysts say is a surprisingly low-key response from Beijing to legislation Abe is pushing that would expand the role of the nation’s self-defense force to help out allies, principally the United States. Abe is using his supermajority in parliament to push through legislative changes that would allow the armed forces to engage in collective self-defense. The notion of helping out if U.S. forces defending Japan coming under attack is not radical. Many Japanese legal scholars believe, however, that the idea requires a change to Japan’s pacifist constitution. While Chinese media has condemned the move, often quoting Japanese opponents to the idea, top Chinese officials have been largely quiet.

There has also been good news for Abe from his other big problem area, South Korea. After taking a hard-line position on Abe and cancelling a series of planned bilateral meetings, President Park Geun-hye has recently sounded much more conciliatory. In an interview with the Washington Post in early June, Park let drop that the two countries were in “the final stage of our negotiations” on the issue of forced prostitution for Japan’s military during wartime. (Tokyo refers to them as “comfort women,” while those on the other side prefer the term sex slaves.)

According to Japanese media, a possible deal would include a personal apology from Abe and money to the survivors direct from the Japanese government, rather than through a “private” fund as previously offered. Seoul would in turn agree that the gesture finally settles the issue, and would stop protesting it internationally. While no deal has yet to be announced, Park’s willingness to go out on a limb in such a public fashion suggests that she too is eager to mend relations. And in a minor victory for better ties, the two countries in early July papered over a squabble regarding U.N. historical designation for some of Japan’s first factories, some of which had used forced laborers, including Koreans, during World War II.

These improvements have come about even though Abe has shown little inclination to soften his stance on what are politely called “historical issues”: He and his supporters have stuck to their view that international investigations into comfort women, including a 1996 U.N. report, have exaggerated the severity of the crimes. They also believed China exaggerated the death toll of the 1937-1938 Japanese massacre of Chinese civilians in the city of Nanjing. And Abe himself continues to parse his words instead of presenting a grand gesture: While he remains reluctant to utter the magic word “apology” that China and South Korea seem to be seeking, he offered “deep remorse” in his April speech to a joint session of the U.S. Congress, clearly hoping that will be enough.

The change in mood may instead reflect a sudden reversal in economic fortunes. Japan, long a laggard due to an aging society and shrinking prospects, appears to be on the mend — while the red-hot Chinese economy has cooled off dramatically. South Korea, meanwhile, is also facing its own slowdown, due in part to a decline in demand from China, its largest foreign market.

Abenomics, Abe’s signature economic program, featured massive injections of cash by the central bank, depressing the value of the yen. This in turn has produced a windfall for corporate Japan since the lower currency means that overseas profits are automatically worth more when translated back into yen. Japan’s gross domestic product is now looking surprisingly perky at a 3.9 percent annual growth rate, good enough to give it top honors among the G-7 nations (admittedly a fairly low hurdle).

China’s economy has been buffeted by a crisis in confidence coming in the form of a sharp sell-off in the stock market. The Shanghai Composite Index fell more than 30 percent in just three weeks from its peak of 5,166.35 on June 12. After a recovery helped by government-backed buying, the market has again been hit hard with the Shanghai exchange dropping 8.5 percent on July 27, the biggest one-day fall since 2007.

Other warning signs abound. China’s GDP in the first half of 2015 rose 7 percent from the same time last year. While that’s pretty good shooting for almost any other country, it is China’s worst performance since the financial crisis in 2009. Industrial profits slipped 0.3 percent in June from a year earlier, suggesting tougher times ahead for big manufacturers. Closely watched PMI data, which surveys the views of purchasing managers at select companies, showed that a majority believe conditions are worsening.

In South Korea, exports have been hit by the strength in the won versus the Japanese yen, which is making it more difficult for its big conglomerates to go head-to-head with their newly invigorated Japanese rivals. And South Korean GDP grew at a sluggish 1.2 percent annual rate in the second quarter. “The Korean economy may be teetering on the brink amid sluggish exports and domestic consumption in the wake of the Middle East respiratory syndrome (MERS) outbreak, Greece’s debt crisis, and China’s stock market rout,” said the Korea Times, an English-language newspaper, in a mid-July editorial.

South Korea also fears being left out as the No. 3 player in the trilateral relationship, given its much smaller economy — 14 percent of the size of China’s and 31 percent the size of Japan’s.

Some economists say that a quiet economic rapprochement between China and Japan has been underway for some time, following a sharp downturn in economic ties in 2012 when a debate over the disputed Diaoyu/Senkaku, a small group of islands in the East China Sea, flared anew. “Economic relations have improved significantly over the past nine months, with a lot of negotiations behind the scenes,” said Martin Schulz, a senior economist at the Fujitsu Research Institute.

There have been some tangible signs of progress. Chinese real estate investment in Japan is meanwhile on the rise, especially in big cities like Tokyo. There has also been a highly visible surge in the number of Chinese tourists — May figures showed a 134 percent year-on-year increase.

A key question is what China wants from Japan on the economic front. It is cash rich with plenty of investment capital, and with Japan’s economy showing limited potential for the long term, what is the advantage? One answer is the “soft infrastructure” where Japan now excels, according to Schulz of Fujitsu Research. “China does not need Japanese investment, but they need Japanese technology,” he said. China is also keen to gain the involvement of Japan, as well as the United States, in the Beijing-led Asian Infrastructure Investment Bank. The new public-sector bank is China’s answer to the Western-dominated World Bank. Japan and the United States were highly notable no-shows for the opening party of the lending body, initially capitalized at $50 billion, and their involvement would help lend valuable credibility. With Japan’s long history in lending to developing nations (including China, not too long ago), it could also help out in avoiding some of the inevitable mistakes.

It is of course too soon to suggest that the less frosty relations will approach the level of global warming. Abe is preparing his much anticipated mid-August speech marking the 70th anniversary of the end of World War II. There are no signs that he will risk alienating his conservative political base to extend any new apologies for Japan’s wartime actions. An approach seen as churlish by Seoul and Beijing could put relations back into the freezer.

But for now, it looks like the mantra of recent years for these East Asian neighbors — “hot economics, cold politics,” a phrase popular enough to have its own Japanese Wikipedia page — has returned.


William Sposato is a Tokyo-based writer who has been following Japan’s politics and economics for more than 20 years. He previously worked at Reuters and The Wall Street Journal.

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