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Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

Section 4
Economic Strategies of Japan and JapaneseCompanies toward East Asia
KIMURA, Fukunari

1. U.S.-China Conflict and Production Networks(1) Countermeasure to changing circumstances
The U.S.-China confrontation, which began in 2018 under the Trump administration as a tariff war, has gradually expanded its scope to include competition
over technological hegemony among the superpowers and issues of humanrights and political regimes, and the degree of confrontation has deepened further under the Biden administration. Japan, an ally of the United States, hasbeen forced to undertake a major review of its security policy. However, there
are signs that the tide is turning in the area of economic security, particularly
with regard to export controls in the high-tech sector.
Certainly, the deterioration of sentiment toward China in Washington, D.C.,
is extremely strong, and it is unlikely that the U.S. and China will move toward
reconciliation anytime soon, as the US enters presidential election mode overthe next year. Meanwhile, a speech given by Jake Sullivan, Assistant to the
President for National Security Affairs, at the Brookings Institution on April 27,
2023, suggested that the White House is trying to settle the current issue. He
said that export controls over China are “with a small yard and a high fence,”
and that the goal is de-risking and diversifying, not decoupling, as European
Union President Von der Leyen has suggested. In the context of export control,
the US is introducing strict controls to decouple some high-tech sectors, but
creating an environment in which other economic activities can develop freely,i.e., decoupling is only partial. This statement is considered to be an indicationof the intention to reflect the voices of the economic community that values
business with China, which is not readily apparent, although there are probably
many competing opinions in Washington, DC.
European countries are visiting China one after another, starting withGerman Chancellor Scholz in November 2022, accompanied by businessmen,
separating politics and economics, in an attempt to expand their business presence in China. In fact, the U.S. also continues its close economic relationshipwith China, and in 2022, despite the slowdown of the Chinese economy in thesecond half of the year, both imports and exports reached all-time highs forthe entire year. While the impact of export controls in the high-tech sector,

(2) Japan’s decoupling policy
The set of policies called economic security-related policies are a mixture of various objectives and measures, but here we will review Japan’s decoupling-related
policies, especially from the perspective of supply chain decoupling.
First, for a middle power like Japan, which is sandwiched between two
superpowers, a distinction should be made between defensive and offensive
decoupling policies in light of their immediate objectives. Defensive decouplingpolicy here refers to the policy of increasing domestic supplies or supplies froma third country in order to reduce dependence on a specific country when there
is a risk of sudden supply disruptions of critical commodities in the case of geopolitical tensions. On the other hand, offensive decoupling policy is a policy ofrestricting the supply of critical commodities to another country with the intention of damaging it.
In the case of Japan, most of the policies adopted so far are defensive decoupling policies. A certain degree of risk management has first been promoted by
the private-sector. In particular, the “China+1 strategy” (i.e., separating Chinese
operations from the rest of the world) was adopted early toward that country,
and was carefully reexamined especially after the Senkaku Islands issue andChina’s rare earth export restrictions in 2010.

Part Ⅱ
Part Ⅲ

especially as it determines the direction of cutting-edge innovation, cannot beignored, there is little concern of the world as a whole being split in half. A pragmatic approach is becoming clear: continuing the confrontation with China, but
taking immediate economic gains while taking risks into account.
Japan and Japanese companies have seemed to be so caught up in the
security debate to prepare for the worst-case scenario that they have stopped
thinking. In export control, too much reliance is placed on the anticipation of
the other party’s moves between the government and the private sector, andexcessive careful attention is limiting free economic activities. Certainly, in relations with China, it may be difficult for Japanese companies to start moving
aggressively because of the detention of Japanese VIP in March 2023. However,it should be well understood that that is exactly China’s strategy to divide theWest. And just because the strategy toward China is difficult, can it be said
that Japanese companies are embarking on expanding their activities to the
Association of Southeast Asian Nations (ASEAN) and other parts of the world?
We must not forget the economy. The government needs to create the economic
environment and companies need to develop their corporate strategies, whileassessing where their competitors are drawing the line and trying to increase
their economic activity.

Part Ⅰ

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Part Ⅳ

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Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

After 2020, against the backdrop of geopolitical tensions that rose with
the new Corona pandemic, two types of METI subsidies were established forJapanese companies: the “Subsidy for Domestic Investment Promotion Projects
for Supply Chain Measures” and the “Support Program to Strengthen Overseas
Supply Chains for Demonstration Projects and Project Feasibility Studies”.
Although not officially specified, the former was intended to encourage production bases located in China to return to Japan, while the latter was intended
to diversify production bases from China to ASEAN and other regions. Whilethese policies have produced some results, they have not caused a major leaveof Japanese companies located in China.
Furthermore, the Law for the Promotion of Economic Security, enacted andpromulgated in May 2022, states that the first of its four pillars is to ensure astable supply of critical commodities. In December of the same year, the law
designated 11 critical commodities (antimicrobial agents, fertilizers, permanent
magnets, machine tools and industrial robots, aircraft parts, semiconductors,
storage batteries, cloud computing programs, natural gas, critical minerals, andship parts) and announced a policy of providing financial assistance. Some of thecritical commodities are intended as a kind of industrial policy, but most of them
are defensive decoupling policies.
Most of the offensive decoupling policies related to Japan have taken as
countermeasures to the extraterritorial application of U.S. export controls.
Japan itself expanded export control items in 2018 and 2021, but this has not
had a significant impact.1) The introduction of export controls on 23 items ofsemiconductor manufacturing equipment (scheduled to take effect in July)announced at the end of March 2023, in line with the US, is a new step forward.
A defensive decoupling policy considers how much risk to take in relation
to costs, and therefore is considered to be a restraint that limits the scope of
decoupling rather than an orientation of total decoupling. On the other hand,
an offensive decoupling policy is one in which a middle power such as Japan is
likely to keep pace with its ally, the U.S., rather than deciding how far to go basedon its own strategy. As long as any decoupling policy is implemented against themarket mechanism, it will incur certain costs and leads to the problem of who
will bear those costs. In the case of offensive decoupling policies, in particular, it
is highly likely that the costs will be borne by industries and companies in which
Japan is internationally competitive.
1) Hayakawa, Ito, Fukao, and Deseatnicov (2023) used econometrics to analyze whether exports declined for items that Japan placed under new export controls in 2018 and 2021, but
found no statistically significant decline.

Part Ⅱ
Part Ⅲ(3) Impact of U.S. Export Controls on JapanThe U.S. export control policy in the high-tech sector, which is an offensive
decoupling policy for the U.S., could affect not only China, but also Japan andother countries that cooperate with the U.S. How large are the effects?
First, at the industry and sector level (general machinery, electrical machinery, transportation equipment, and precision machinery), no clear offensive
decoupling effects are detected based on international trade data, at least until
the end of 2022 (Ando, Hayakawa, and Kimura 2023, forthcoming). East Asianmachinery exports recovered quickly from COVID-19 and are back on a growthpath. This differs significantly from North America and Europe. There wasa slight slowdown from the second half of 2022. The reasons for this include
the lull in special demand due to the nest egg demand associated with the newcorona, the slowdown in the smartphone market, the end of the semiconductorboom, China’s zero corona policy, and rising transportation costs due to the war
between Russia and Ukraine. In addition to these factors, geopolitical tensions
may also be a factor, but it is not clear at the industry or sector level. In particular, China remains an important trading partner for Japan. There are signs of acertain degree of reorganization of production networks to deal with the tariff
war between the U.S. and China. For example, in Vietnam and Mexico, which
are used as detour points, we observe an increase in exports to the U.S. and foreign direct investment, including Chinese firms. However, the impact of export
controls is not clearly seen.
The effects of export control are detected in more detailed product levelor for specific companies. Ando, Hayakawa, and Kimura (2023) focus in particular on the tightening of U.S. export controls on Huawei in August 2020 and
attempt to quantify the effects using detailed product data on Japanese exports
to China. They found that the reduction in Huawei’s production of telecommunications equipment reduced Japan’s exports by reducing demand for various
components used in telecommunications equipment, rather than by the extraterritorial application of U.S. technology exports. The magnitude of the reductionin Japan’s exports was about 3% of Japan’s annual exports to China. Ando,
Hayakawa, and Kimura (forthcoming) analyzed the effect of export controls on
U.S. semiconductor manufacturing equipment from November 2022 using dataon U.S. exports to China and found that U.S. exports of it to China decreased byabout 16-36%. If the export controls on Japanese semiconductor manufacturing
equipment scheduled to be introduced in July 2023 were to result in a similar
reduction in Japanese exports to China, it would result in a 5-11% reduction inexports of it.
Thus, statistically significant effects were observed at detailed product level

Part Ⅰ

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Part Ⅳ

Section 4 / Economic Strategies of Japan and Japanese Companies toward East Asia

42

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

and for companies. However, the magnitude is not so large at the macro level.
Offensive decoupling and other restrictions on economic activities in the nameof security may increase in the future. However, it is highly likely that complete
decoupling of supply chains will not be achieved. If we believe that the final
result will be only partial decoupling, governments and companies will have totake appropriate measures to deal with the situation.

2. Asian Economies Remain Vibrant(1) Growing Southeast and South Asia
In 2023, developed countries are experiencing a marked economic slowdown, if
not a recession, and according to the IMF (2023), economic growth in developed
countries is projected to slow down from 2.7% in 2022 to 1.3% in 2023 and 1.4%
in 2024. Japan’s growth rate remains as low as ever, and many media reports
take the tone that the entire world is in a recession. However, Asian economies
continue to grow robustly.
China has been in a slump since the second half of 2022 and is having adifficult time recovering from the new corona pandemic while also dealing with
its own structural economic problems. Although many believe that China will
not be able to return to its previous growth trajectory, the ADB (2023) still its
forecasts economic growth of 5.0% in 2023 and 4.5% in 2024 (Table 1-4-1). Sincea large economy can grow at such a high rate, it still has the potential to create
many business opportunities.
Southeast and South Asia have already returned to their previous growthtrajectory and are growing further. In 2022, Southeast Asia as a whole recorded
growth of 5.6%, with Malaysia, Vietnam, and the Philippines performing particularly well at 8.7%, 8.0%, and 7.6%, respectively, and Indonesia and Cambodia
at 5.3% and 5.2%. In 2023, it is expected to see a slight slowdown due to theeconomic downturn in developed countries, but the region is becoming increasingly attractive as a production base and a market. South Asia as a whole is
growing at 6.4% in 2022, enjoying a large potential for growth, and is expected tocontinue to grow after 2023.
It is inevitable that Japan and Japanese companies will seek a deeper relationship with the Asian economy.

Section 4 / Economic Strategies of Japan and Japanese Companies toward East Asia

2023(f)2024(f)

2.8

4.6

4.2

China

8.4

3.0

5.0

4.5

South Korea

4.1

2.6

1.5

2.2

Taiwan

6.5

2.5

2.0

2.6

3.5

5.6

4.7

5.0

Brunei

-1.6

-0.5

2.5

2.8

Cambodia

3.0

5.2

5.5

6.0

Indonesia

3.7

5.3

4.8

5.0

Laos

2.3

2.5

4.0

4.0

Malaysia

3.1

8.7

4.7

4.9

Myanmar

-5.9

2.0

2.8

3.2

Philippines

5.7

7.6

6.0

6.2

Singapore

8.9

3.6

2.0

3.0

Thailand

1.5

2.6

3.3

3.7

Vietnam

2.6

8.0

6.5

6.8

South Asia total

8.4

6.4

5.5

6.1

Bangladesh

6.9

7.1

5.3

6.5

India

9.1

6.8

6.4

6.7

Southeast Asia total

Note: This table includes data of countries other than those listed ones.
Source: ADB (2023)(2) Japan’s relative position
At the same time, it is necessary to be well aware of the position of Japan andJapanese companies in the eyes of Asian countries.
Figure 1-4-1 shows the value of imports and exports by country and region
for the 10 ASEAN countries. Even in 2020, when the impact of the corona pandemic was most severe, the decline in ASEAN’s trade, especially exports, wasvery small. This is largely because ASEAN countries succeeded in mitigating
the spread of the virus to a considerable extent, and ASEAN countries were able
to enjoy the positive demand shocks created by the work-at-home and stay-athome effects of the corona pandemic. In 2021, both imports and exports grewstrongly.
What is even more remarkable is China’s share of imports and exports
in this region. While ASEAN countries’ internal trade is just over 20%, China
accounts for 16% of ASEAN’s exports and 24% of its imports (in 2020 and 2021).
In particular, imports from China have come to exceed the sum of imports
from Japan, the U.S., and Europe. Although the depth of economic engagement
cannot be measured by trade volume alone, and direct investment in ASEAN
and technology flows must also be taken into account, there is no doubt that

Part Ⅱ

2022

7.9

Part Ⅲ

2021
East Asia total

Part Ⅰ

Economic growth rates of Asian developing economies(fact and forecast) (%)

Part Ⅳ

Table 1-4-1

43

44

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024（BILLION DOLLARS）
1,800[Import value]（BILLION DOLLARS）
1,800[Export value]

1,600

1,600
Other
（31%）

1,400
1,200
1,000
800
600
400
200
0

Figure 1-4-1

Other
（32%）

Other
（31%）

EU-27
（9%）
USA
（13%）
Japan
（8%）
China
（14%）

EU-27
（9%）
USA
（15%）
Japan
（7%）
China
（16%）

ASEAN
(23%)

ASEAN
(21%)

2019

2020

EU-27
（9%）
USA
（15%）
Japan
（7%）
China
（16%）
ASEAN
(22%)
2021

1,400
1,200
1,000
800
600
400
200
0

Other
（32%）
EU-27
（8%）
USA
（8%）
Japan
（8%）
China
（22%）

Other
（34%）
Other
（32%）
EU-27
（8%）
USA
（8%）
Japan
（8%）
China
（24%）

ASEAN
（22%）

ASEAN
（21%）

2019

2020

EU-27
（7%）
USA
（7%）
Japan
（8%）
China
（24%）
ASEAN
（21%）
2021

Exports and Imports of ASEAN Countries by Country or Region

Source: ASEAN Secretariat Website

ASEAN countries are becoming increasingly involved with China. On the other
hand, Japan accounts for only about 8% of both imports and exports, while theU.S. accounts for only 15% of exports and 7-8% of imports. It is clear that Japanis not in a situation where it can force ASEAN to select the U.S. or China as asole partner.
Kumagai et al. (2023) use the IDE-GSM model of the Institute of Developing
Economies to simulate the impact on countries around the world if the Westernand Eastern camps start decoupling their supply chains by imposing a 25%
tariff mutually. The results show that both camps would naturally be negatively
affected, but third countries that do not belong to either camp, such as ASEAN
countries, would be positively affected because they could continue to trade withboth camps. There is certainly an economic incentive for third countries, especially those deeply involved in the East Asian production network, to remain
neutral.
(3) Strategies of Japan and Japanese Companies toward ASEAN
If offensive decoupling ultimately remains part of the supply chain, Japan’s economic diplomacy with ASEAN will be extremely important. ASEAN, along with
China, is the region where the core international production network for themachinery industry in East Asia is deployed, and it has less policy risk in thesense that China bears. Japan is not the only friendly country to ASEAN, but
Japanese companies have built up a solid track record, and Japan has earned agreat deal of trust. Taking into consideration that geopolitical tensions are difficult to resolve in the short term, ASEAN is a valuable counterpart in maintaining

Part Ⅱ
Part Ⅲthe economic vitality of “other economies” outside of export controls.
Japan and Japanese companies should adopt the following three strategies
to deal with ASEAN. First, it is important to explain well to ASEAN countries
the supply chain decoupling policies adopted by developed countries, and tohave them understand that there is room for ASEAN to be involved in decentralization of supply sources, especially in industries and products that are subject
to defensive decoupling policies. Also, Japan and Japanese companies should
firmly explain that there are few cases in which ASEAN needs to immediately
deal with the extraterritorial application of U.S. export controls in the high-tech
sector, but rather that they open up the possibility for ASEAN to accept hightech-related investment in the future.
Second, although the era of Japan as a prominent player in ASEAN was over,Japan must continue its efforts to further deepen economic ties with ASEAN
countries. Japan has contributed greatly to the development of economic infrastructure and the creation of international production networks, particularlyin the manufacturing sector, in ASEAN. While the importance of these contributions will not diminish in the future, the emphasis of ASEAN’s economic
development strategy is shifting toward services and urban amenities. The
ASEAN is particularly interested in digital and sustainability.
Third, Japan, together with ASEAN, must preserve the rules-based trading regime as much as possible and emphasize its importance to the world.
Since the 1990s, East Asia has led the world in the development of an international division of labor based on tasks, especially in the machinery industry, andthe preconditions for this were a rules-based trading regime and a long-lasting
peace. In the future, technological progress will make possible a more sophisticated international division of labor, but these two preconditions must continue
to be met in order to make effective use of the division of labor.
One of the major problems with the current policy measures to geopoliticaltensions is that developed countries are openly violating existing trade rules forreasons of security. A prominent example of this is the domestic priority for subsidies in high-tech sectors such as advanced semiconductors. It may be difficult
to push back the logic of security or the structure of confrontation between the
superpowers head-on, but this does not mean that the trading regime based on
rules should be seriously damaged. It is essential to keep other economic activities under trade rules as broadly as possible, while ensuring the consistency
with trade rules of security policies as much as possible. China may not agreewith the content of trade rules, but it feels a strong desire to be respected as aPart Ⅰ

45

Part Ⅳ

Section 4 / Economic Strategies of Japan and Japanese Companies toward East Asia

46

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

respectable country that abides by the rules in the international arena2). There
are still many meanings of international rules.
ASEAN can be a valuable partner in advocating the importance of arules-based trading regime. ASEAN has utilized globalization in economic development most effectively in the past 40 years under international rules. ASEAN
should not free-ride on global policy governance, as it has done in the past, butshould take responsibility for its own development.
There are many ways in which Japan and ASEAN can cooperate to preserve
the rules-based trading regime. First, in relation to the World Trade Organization(WTO), the second tier of dispute settlement, the Appellate Body, has ceased
to function with zero members due to the U.S. blockade. As a result, cases of
so-called “appeals into void” have been piled up, in which appeals are filed to theAppellate Body, which does not function after the panel of first instance reacheda conclusion.3) In March 2023, Japan announced its participation in the MultiParty Interim Appeal Arbitration Arrangement (MPIA), which is intended totemporarily replace the functions of the Appellate Body. However, Singapore is
the only ASEAN country that has already joined the MPIA, and it is important
to encourage other ASEAN countries to do so. In addition, Japan is co-chairing a joint statement initiative for e-commerce, and Japan could cooperate with
ASEAN, which is also taking steps to establish its own rules.
We would also like to promote the use of the mega-FTAs (Free Trade
Agreements) that Japan has concluded with ASEAN countries. In particular, theRegional Comprehensive Economic Partnership (RCEP) agreement covers thewhole East Asia, including China, and is expected to reduce policy risks within
the region by actively using such opportunities as regular meetings4). In the
Indo-Pacific Economic Framework (IPEF) currently under negotiation, a substantial agreement was reached in May 2023 on supply chains, the second of fourareas: trade, supply chains, clean economy, and fair economy5). The agreement
is to cooperate in preparation for sudden supply disruptions of critical commodities such as semiconductors and critical minerals. It is not clear to what extent
this will be effective, but it is not a matter of course to force the stakeholders to2) See Watanabe, Kamo, Kawashima, and Kawase (2021).
3) For example, the EU sued Indonesia for a nickel ore export ban and domestic processing
requirements (DS592), and Japan sued India for higher tariffs on ICT products (DS584),
both of which have been appealed out of court after the panel decision. See Trade Policy
Bureau, Ministry of Economy, Trade and Industry (2023) and WTO website.
4) See Kimura (2022) for a discussion of the role that RCEP could play.
5) Japan External Trade Organization (JETRO), “Business Brief: U.S. Department of Commerce Announces Substantial Conclusion of IPEF Supply Chain Agreement, Offers Measures to Realize Business Benefits,” Accessed on May 29, 2023.

Section 4 / Economic Strategies of Japan and Japanese Companies toward East Asia

47

Part Ⅱ
Part ⅢPart Ⅳ

References
Ando, M., Hayakawa, K., and Kimura, F. (2023) “Supply Chain Decoupling:
Geopolitical Debates and Economic Dynamism in East Asia”, submitted to
Asian Economic Policy Review. Forthcoming in the JCER Discussion Paper
Series.
Ando, M., Hayakawa, K., and Kimura, F. (forthcoming) “The Threat of Economic Deglobalization from Cold War 2.0: A Japanese Perspective”, Asian Economic Papers.
Asian Development Bank (ADB) (2023) Asian Development Outlook, April
2023, Manila: ADB.
Hayakawa, K., Ito, K., Fukao, K., and Deseatnicov, I. (2023), “ The Impact of theStrengthening of Export Controls on Japanese Exports of Dual-use Goods”,
International Economics, 174, pp. 160-179.
International Monetary Fund (IMF) (2023) World Economic Outlook April
2023: A Rocky Recovery, Washington, DC: IMF.
Kimura, F. (2022), “Significance and Role of RCEP” (Japanese title: RCEP noigi to yakuwari ). In Kimura, F., and Nishiwaki, O. (eds.), “Structural Transformation of International Trading Regime: The US-China Confrontation
WTO, Regional Economic Integration, and Japan” (Japanese title: Kokusai
Tsusho Chitsujo no Chikaku Hendo: Beichutairitsu･WTO･Chiikitogo to nihon), Keiso Shobo: 207-228.
Kumagai, S., Hayakawa, K., Gokan, T., Isono, I., Sukhniran, K., Tsubota, T., andKubo, Y. (2023), “The Impact of Global ‘Decoupling’ on the World Economy: IDE-GSM Analysis (Summary Version)” (Japanese title: Gurobaru na‘Dekappuringu’ ga Sekai Keizai ni Ataeru Eikyo -IDE-GSM- Niyoru Bunseki[Gaiyoban]), IDE Policy Brief, No. 1 (February 6).
Trade Policy Bureau, Ministry of Economy, Trade and Industry (2023), “The2023 Report on Compliance by Major Trading Partners with Trade Agreements (WTO, FTA/EPA and IIA)” (Japanese title: 2023nemban Fukosei Boeki Hokokusho: WTO Kyotei oyobi Keizai Renkei Kyotei･Toshi Kyotei kara Mita
Shuyokoku no Boeki Seisaku), METI.
Watanabe, M., Kamo, T., Kawashima, F., and Kawase, T. (2021), “A Study on the
Background of China’s Declaration of Intention to Join the CPTPP (Revised

Part Ⅰ

declare which side they will be on.
Geopolitical tensions are a major headwind for free economic activity, butthey have not run the entire world. We must pursue a balanced economic diplomacy and corporate strategy to ensure sound rules and vigorous economic
activities as broadly as possible.

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Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

Version)” (Japanese title: Chugoku no CPTPP Sanka Ishi Hyomei no Haikeini Kansuru Kosatsu [Kaiteiban]), RIETI Policy Discussion Paper Series
21-P-016 (September 11).