Japan’s Economic Pragmatism: Cooperating and Competing with China

Asei Ito1

Introduction: The Japanese Dilemma in a New Era

The Japan–China relationship is likely to be particularly complex and delicate in the

2020s. For decades, China has proven to be both an indispensable economic opportunity and a

tangible security threat to Japan. In this setting, during his second period as prime minister from

2013 to 2020, Shinzo Abe adopted a posture that showed a dual nature of hedging and

engagement toward China. Matthew Goodman summarizes this approach as “engaging where

possible, hedging where necessary, and trying to uphold the international rules-based order.”2

Indeed, during this period the Japanese government and Japanese enterprises struck a careful

balance, hedging against economic dependence on China with the “China Plus One” strategy

designed to diversify Japan’s manufacturing and investment base; establishing a National

Security Council (NSC) to coordinate security policy; and leading multilateral frameworks such

as the Trans-Pacific Partnership (TPP) to shape rules and norms for regional economic

integration. Japan furthered engagement with China by regularly holding high-level official

meetings focused on non-sensitive cooperation fields and conditional cooperation in third-

country markets, as well as the Regional Comprehensive Economic Partnership (RCEP), in

which China is a member. This combination of hedging and engagement was a natural and

logical outgrowth of the realities Japan faced with a rising China.

However, the conditions that allowed the Japanese government to adopt this dual strategy

are changing rapidly. First, the intensification of strategic competition between the United States

and China that began in 2018 is expected to continue during the Biden administration, and this

tension will force the Japanese government to make difficult decisions, such as the extent to

which Japan should decouple from the Chinese economy. It is now clear that for the United

States, the confrontation between the two major powers extends far beyond the trade deficit

question, which was the initial point of focus. In addition, the Covid-19 pandemic created

unprecedented shocks. As geopolitical tension between China and surrounding regions increased,

unfavorable opinions about China began to grow in the United States, Australia, and India.3

Japan postponed the official visit of Xi Jinping to Japan, originally scheduled for spring 2020,

1 Associate professor at Institute of Social Science, University of Tokyo. asei@iss.u-tokyo.ac.jp. The author is

grateful for valuable comments and suggestions by Michael Green (CSIS), Matthew Goodman (CSIS), Peter

Raymond (CSIS), Nicholas Szechenyi (CSIS), Hannah Fodale (CSIS), Jada Fraser (CSIS), Mie Oba (Kanagawa

University), Masafumi Kaneko (PHP Institute), and other experts who reviewed earlier drafts of this paper.
2 Goodman, Matthew. 2020. “Strategic Ambivalence: Japan’s Conflicted Response”, the Korea Economic Institute

(KEI), June 24, 2020. https://keia.org/publication/strategic-ambivalence-japans-conflicted-response-2/.
3 For American case, see Kim, Patricia. 2021. “U.S. Perceptions of China in the Pandemic Era and Implications for

U.S. Policy”, Alliance Policy Coordination Brief, Carnegie Endowment for International Peach and the Japan Forum

on International Relations, Inc. https://carnegieendowment.org/2021/01/21/u.s.-perceptions-of-china-in-pandemic-

era-and-implications-for-u.s.-policy-pub-83684

mailto:asei@iss.u-tokyo.ac.jp

https://keia.org/publication/strategic-ambivalence-japans-conflicted-response-2/

https://carnegieendowment.org/2021/01/21/u.s.-perceptions-of-china-in-pandemic-era-and-implications-for-u.s.-policy-pub-83684

https://carnegieendowment.org/2021/01/21/u.s.-perceptions-of-china-in-pandemic-era-and-implications-for-u.s.-policy-pub-83684

mainly because of the pandemic.4 Meanwhile, the Chinese economy outperformed other major

economies in nominal Gross Domestic Product (GDP) growth, at an annual 2.3 percent rate in

2020.5 On the one hand, China’s disputes with the United States and countries around it have

deepened, while on the other, the relative importance and gravitational effects of the Chinese

economy are becoming stronger than ever.

In this historic moment, Japan must deal with the novel conditions of the 2020s, which

are substantially different from those of the mid-2010s. This poses a particular challenge to

Japan due to its deep economic interdependence with China; at the same time, Japan’s national

security rests on the solid foundation of the U.S.–Japan Alliance. The Japanese government and

the ruling Liberal Democratic Party (LDP) are now attempting to develop a unified economic

security promotion act to address the risks posed by China’s advances in emerging technologies.6

While this is driving Japan in a more security-dominant direction, constant dialogue with China

is expected to continue. The Japanese approach will be effective if consensus can be built among

domestic and international actors on the right balance between hedging and conditional

engagement with China.

This paper begins by summarizing the history of Japan–China economic relations from

the 1950s to the present, with a focus on the opportunities provided and risks posed by China.

The next section investigates the following three questions related to Japan’s approach. First,

why did Japan adopt a dual approach? Second, how deeply is Japan hedging and engaging with

China? Third, which trajectory will Japanese strategy towards China take in the post-Abe period?

The paper concludes with an examination of the novel challenges Japan faces in furthering its

China strategy and how Japan and the United States can align their respective approaches.

4 The Japan Times, “China's Xi Jinping postpones state visit to Japan due to coronavirus”, March 5, 2020.

https://www.japantimes.co.jp/news/2020/03/05/national/chinas-xi-jinping-postpones-japan-visit-covid-19/.
5 Reuters, “China's Q4 GDP growth beats f'cast, ends 2020 in solid position after COVID-19 shock”, January 17,

2021. https://www.reuters.com/article/china-economy-gdp/wrapup-chinas-q4-gdp-growth-beats-fcast-ends-2020-in-

solid-position-after-covid-19-shock-idUSL1N2JT039.
6 Strategic Headquarters on the Creation of a New International Order of Policy Research Council, Liberal

Democratic Party of Japan. 2020. “Recommendation: Toward Developing Japan’s “Economic Security Strategy”,

December 16, 2020. Japanese version: https://jimin.jp-east-

2.storage.api.nifcloud.com/pdf/news/policy/201021_1.pdf. English version: https://jimin.jp-east-

2.storage.api.nifcloud.com/pdf/news/policy/201021_5.pdf.

https://www.japantimes.co.jp/news/2020/03/05/national/chinas-xi-jinping-postpones-japan-visit-covid-19/

https://www.reuters.com/article/china-economy-gdp/wrapup-chinas-q4-gdp-growth-beats-fcast-ends-2020-in-solid-position-after-covid-19-shock-idUSL1N2JT039

https://www.reuters.com/article/china-economy-gdp/wrapup-chinas-q4-gdp-growth-beats-fcast-ends-2020-in-solid-position-after-covid-19-shock-idUSL1N2JT039

https://jimin.jp-east-2.storage.api.nifcloud.com/pdf/news/policy/201021_1.pdf

https://jimin.jp-east-2.storage.api.nifcloud.com/pdf/news/policy/201021_1.pdf

https://jimin.jp-east-2.storage.api.nifcloud.com/pdf/news/policy/201021_5.pdf

https://jimin.jp-east-2.storage.api.nifcloud.com/pdf/news/policy/201021_5.pdf

Historical Background

Coupling or Uncoupling Economies and Politics

In considering the current U.S.–China confrontation, referred to as a new Cold War in

some media,7 a review of the history of the Japan–China economic relationship during the Cold

War may be helpful, although China’s current position in global economy is substantially

different.

After the signing of the Peace Treaty between the Republic of China (Taiwan) and Japan

in 1952, formal diplomatic relations between Japan and the People’s Republic of China (PRC)

were disconnected. As the Japanese government adopted an approach separating politics from

the economy (Seikei Bunri) to develop trade ties with the PRC, the PRC adopted the opposite

approach, coupling politics and the economy (Seikei Hukabun) to limit engagement with Japan.8

Due to this disagreement, the economic relationship between Japan and mainland China was

limited until the 1960s, resting on agreements such as the LT (Liao-Takazaki) trade scheme,

which represented a pragmatic approach to trade in non-sensitive sectors of both economies.9

Japanese trade pragmatism towards China appeared much earlier. In October 1949, when

the PRC was established, Mr. Karoku Hosokawa, a member of the Japanese Communist Party,

wrote an article criticizing the attitude of Prime Minister Shigeru Yoshida towards China.

Prime Minister Shigeru Yoshida told a newspaper reporter that “it doesn't matter

whether China is red or blue, Japan must maintain trade relations with China” in

response to the current situation in which the Chinese Communist Party and its army are

certain to become the leading forces in the Chinese revolution. What on earth does he

think of this new situation?10

While Mr. Hosokawa criticized Mr. Yoshida from a Marxist perspective, Mr. Hosokawa also

emphasized the importance of Japan-China trade as China is historically a major trading partner

for Japan as shown in Figure 1. China accounted for 17.6 percent of total Japanese trade from

1901 to 1939 on average, though this dropped to 1.4 percent from 1951 to 1960 due to the

political divide caused by the Cold War.

7 Rachman, Gideon. 2020. “A new cold war: Trump, Xi and the escalating US-China confrontation”, The Financial

Times, October 4, 2020. https://www.ft.com/content/7b809c6a-f733-46f5-a312-9152aed28172.
8 Tanaka, Akihiko. 1991. Japan-China Relations: 1945-1990, The University of Tokyo Press, Chapter 2 (Japanese).
9 Hoadley, J. Stephen and Sukehiro Hasegawa. 1971. “Sino-Japanese Relations 1950-1970: An Application of the

Linkage Model of International Politics”, International Studies Quarterly, Vol. 15, No. 2, pp.147-148.
10 Hosokawa, Karoku. 1949. “The Chinese Revolution and the “China White Paper””, Chuokoron, October 1949,

pp.24-31 (Japanese). I have learnt this episode based on discussions in following article. Inoue, Toshikazu. 2014.

“What was “Asia” for Postwar Japanese Society? Focusing on the 1950s”, in Taizo Miyagi ed. The Formation of

Postwar Asia and Japan, Chuokoronshinsha (Japanese).

https://www.ft.com/content/7b809c6a-f733-46f5-a312-9152aed28172

Figure 1. Share of North America and China in Japanese Trade (1874-2020)11

Note: Each line indicates the share of trade volume (sum of import and export) in total Japanese trade in

current Japanese Yen. The data for 2020 is preliminary. For statistical convenience for a long-term period, the

author adopted North America as a proxy of the United States. While North America contains Canada, Mexico

and other economies, the United States accounted for approximately 80 percent of trade volume in the region.

The full scale of the contemporary Japanese economic and diplomatic orientation toward

mainland China was put into place after the normalization of diplomatic relations with the PRC

in 1972, at which point formal diplomatic relations with Taiwan were disconnected. The

negotiation was led by Prime Minister Kakuei Tanaka and Foreign Minister Masayoshi Ohira of

the Liberal Democratic Party (LDP), despite an intra-party split on the issue.12 In 1978, after

Deng Xiaoping, a Chinese pragmatic leader, returned to political power in Beijing, he visited

Japan and Singapore to explore modernization strategies. Following careful study of Europe, the

United States, and some of its Asian neighbors,13 China’s gradual reformation from a centrally

planned economy to a market economy began with the relaxation of state control over economic

activities and the establishment of Special Economic Zones. This strategy, based on the idea of

comparative advantage, was given the name of Reform and Opening, and it accelerated after

11 Source: Data for 1874-1970 is taken from Yamazawa, Ippei, and Yuzo Yamamoto. 1974. Estimates of Long-Term

Economic Statistics of Japan Since 1868: Volume 14 Foreign Trade and Balance of Payments, Toyo Keizai

Shinposha (Japanese); data for 1971-2020 is from The Ministry of Finance, Japan, Monthly Trade Statistics Report

(each year).
12 Inoue, Masaya. 2018. “The Japan-China Treaty of Peace and Friendship as History”, Asia-Pacific Review, 25(1),

pp.75-89.
13 Vogel, Ezra F. 2011. Deng Xiaoping and the transformation of China, Cambridge, MA: Belknap Press of Harvard

University Press, see Chapter 7 and 10.

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China North America

1992.14 Due to the gap in economic development between Japan and China, the Japanese

government began to provide official development assistance (ODA) to China in 1979.15

A speech by Prime Minister Masayoshi Ohira in 1979 in Beijing captures the spirit of

Japanese engagement with China:16

The reason why the countries of the world have accepted your modernization policy as a

blessing is that it is based on the principles of international cooperation and the hope

that the emergence of a more prosperous China will lead to a better world. The reason

why Japan has made a strong commitment to cooperate with the modernization of China

is not only because of our own way of thinking but also because it is backed by the

expectations of the world.

During the 1980s and 1990s, the Japan–China economic relationship was clearly

characterized by the fact that Japan was a more advanced economy. This difference was defined

by relative GDP size as well as the gap in corporate and technological capabilities. China was a

smaller economy and was far from an economic superpower, both quantitatively and

qualitatively. Japanese companies, including small and medium-sized enterprises, increased their

investment in China in the 1990s, particularly in labor-intensive manufacturing industries, which

later expanded to encompass machinery, electronics, and other industries following China’s

accession to the World Trade Organization (WTO) in 2001.17 China’s share in Japanese trade has

rapidly increased from 5 percent in 1992 to 11.8 percent in 2001 (see Figure 1).

“Cold Politics, Hot Economy”

For Japanese companies, Chinese risk is not a new issue. Economic engagement with

China has faced several challenges beginning in the 2000s if not earlier. During the Junichiro

Koizumi administration (2001-2006), bilateral political tensions were high due to historical

issues. This period was dubbed “cold politics, hot economy (Seirei Keinetsu).”18 During this

time, bilateral trade and Japanese investment in China continued despite rising tensions, as

China’s share in Japanese trade kept increasing, reaching 20.7 percent in 2010 (see Figure 1).

This separation of economy and politics was the outcome of a pragmatic attitude in both nations.

14 Fang, Cai, Ross Garnaut, Ligang Song. 2018. “40 years of China’s reform and development: How reform

captured China’s demographic dividend” in Ross Garnaut, Ligang Song, Fang Cai ed. China’s 40 Years of Reform

and Development: 1978-2018, Australian National University Press.
15 Ministry of Foreign Affairs of Japan, “Overview of Official Development Assistance (ODA) to China”, Ministry

of Foreign Affairs of Japan, February 1, 2016. https://www.mofa.go.jp/policy/oda/region/e_asia/china/index.html.
16 Masayoshi Ohira’s speech entitled “Sino-Japan Relations Heading to a New Century: Seeking Depth and

Breadth”, December 7, 1979, at Beijing Political Consultative Hall.
17 Alvstam, Claes G., Patrik Ström and Naoyuki Yoshino. 2009. “On the Economic Interdependence between China

and Japan: Challenges and Possibilities”, Asia Pacific Viewpoint, Vol.50, No. 2, pp.198-214.
18 Masaya Inoue. 2016. “The Impact of LDP Politics on Japan-China Relations”, The Tokyo Foundation for Policy

Research, January 12, 2016. https://www.tkfd.or.jp/en/research/detail.php?id=275.

https://www.mofa.go.jp/policy/oda/region/e_asia/china/index.html

https://www.tkfd.or.jp/en/research/detail.php?id=275

Throughout the 2000s, China’s coastal regions became transformed into what was called the

“workshop of the world” as they received large amounts of foreign direct investment,19 and

China gradually became a hub of the East Asian production network.20 According to the Ministry

of Economy, Trade, and Industry (METI) of Japan, by 2012, Japanese affiliates in China reached

7,700 in number and accounted for 33 percent of the total number of Japanese oversea affiliates,

increasing from just 16.9 percent in 2000 (Figure 2).21

Figure 2. Distribution of the Japanese overseas affiliates by region (%)22

Note: ASEAN 4 are Philippines, Malaysia, Thailand, and Indonesia; NIEs are Taiwan, South Korea, and

Singapore; China contains both mainland China and Hong Kong.

The Japan–China economic relationship entered a new phase from 2008–2012 due to the

global financial crisis of 2008, China surpassing Japan in terms of GDP in 2010, and the

19 Kwan, Chi Hung. 2009. “Transforming the World's Workshop:  Center of industry shifts from light to heavy

industry”, Research Institute of Economy, Trade and Industry, July 31, 2009.

https://www.rieti.go.jp/en/china/09073102.html.
20 Regarding the degree of China’s participation into a global supply network, please see figure 1.15 (page 27-28) in

Li, Xin, Bo Meng, and Zhi Wang. 2019. “Recent patterns of global production and GVC participation” in World

Bank ed., Global Value Chain Development Report: Technological Innovation, Supply Chain Trade and Workers in

a Globalized World, Washington: World Bank Group.
21 Ministry of Economy, Trade, and Industry (METI), “Summary of the 40th Basic Survey on Overseas Business

Activities (July 2010 Survey)”, April 21, 2011. https://www.e-stat.go.jp/stat-search/file-

download?statInfId=000022043392&fileKind=2.
22 Source: METI, Basic Survey on Overseas Business Activities, each year.

https://www.meti.go.jp/statistics/tyo/kaigaizi/index.html.

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Other

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https://www.meti.go.jp/statistics/tyo/kaigaizi/index.html

challenges resulting from Chinese coercion around the Senkaku Islands between 2009 to 2012.23

First, China’s V-shaped recovery following the 2008 crisis and the age of double-digit growth

resulted in a fundamental shift in the economic balance of power between the two countries.

During this time, China was transforming itself into an economic superpower. At the same time,

the increased importance of the Chinese state and retreat of the private sector was taking place,

exemplified by China’s massive post-crisis stimulus package. China’s Marshall Plan to rescue

the global economy was also an idea floated at the time.24

Both the economic and political relationship between Japan and China became strained,

and this period in the relationship has been called the worst point since diplomatic

normalization.25 Maritime tensions began to rise in 2010 after a Chinese fishing boat crashed into

a Japanese Coast Guard ship. After the Japanese government purchased land on the Senkaku

Islands from private owners on September 11, 2012, on the pretext of protesting the transfer,

there were massive demonstrations in over 100 cities in China that targeted Japanese-owned

factories, supermarkets, and automobiles.26 Several consequences directly followed the rise in

maritime tensions, among which were physical damage to Japanese property in China and a

sharp decline in revenues of Japanese companies with interests there; a downturn in public

perceptions of China in Japan;27 and a hiatus from dialogue between officials at the highest

levels. Prior to tensions in 2012, the Japanese government and private companies had also

become acutely aware of the risks of working with China, as the Chinese government had

unofficially regulated the export of strategic materials such as rare earth elements since 2010.28

Following these incidents, both political and economic actors in Japan came to understand that

economic interdependence between Japan and China could be diplomatically weaponized in the

context of a political confrontation. The Japanese business community was prompted to perform

a serious review of the risks to doing business in China, which had increased since the period of

“cold politics, hot economy.” Even so, Japanese companies continued their operations in China,

though other events during that timeframe, such as the Great East Japan Earthquake and floods in

Thailand in 2011, made Japanese companies realize the critical importance of diversifying key

elements and components in the supply chain.

23 China began to challenge Japan’s sovereignty over those islands, located in the East China Sea, during that period

and has become increasingly assertive in the waters round the islands since then.
24 The Global Times, ““Chinese Marshall Plan” a sound notion”, September 22, 2009.

https://www.globaltimes.cn/content/427625.shtml.
25 The Japan Times, “Five years after nationalization of the Senkaku Island”, September 11, 2017.

https://www.japantimes.co.jp/opinion/2017/09/11/editorials/five-years-nationalization-senkaku-islands/.
26 Asahi Shimbun, “Anti-Japanese Demonstrations in 100 Cities: Chinese Authorities' Suppressive Stance

Unsuccessful”, September 19, 2012. http://www.asahi.com/special/senkaku/TKY201209180624.html.
27 See “Public Opinion Poll on Diplomacy” by The Cabinet Office, https://survey.gov-online.go.jp/index-gai.html,

and “Japan-China Joint Public Poll” by the Genron NPO, https://www.genron-npo.net/world/archives/9354.html.
28 Regarding the Japanese diversification efforts on rare earth elements, the Japanese dependency to import from

China dropped from 90% in 2005-2010 to 60% in 2018. See Vekasi, Kristin. 2019. “Politics, markets, and rare

commodities: Responses to Chinese rare earth policy”, Japanese Journal of Political Science, 20(1), pp. 2-20.

https://www.globaltimes.cn/content/427625.shtml

https://www.japantimes.co.jp/opinion/2017/09/11/editorials/five-years-nationalization-senkaku-islands/

http://www.asahi.com/special/senkaku/TKY201209180624.html

https://survey.gov-online.go.jp/index-gai.html

https://www.genron-npo.net/world/archives/9354.html

According to a study by Professor Kristin Vekasi, the Japanese business community

adopted three main strategies to respond to China’s risks: voice, exit, and loyalty.29 The exit

strategy consists of seeking alternative destinations for Japanese investment instead of China. As

already shown in Figure 2 above, on the investment side, the China Plus One strategy, designed

to diversity Japan’s manufacturing base in the region, became widely accepted as Southeast

Asian nations gradually opened their economies.30 Although the absolute number of Japanese

affiliates in China did not decrease rapidly, the relative share in the total Japanese affiliates

declined from 33.0 percent in 2012 to 29.6 percent in 2018 (Figure 2). Beyond ASEAN4,

including Thailand and Malaysia, Japanese companies saw Vietnam and Myanmar as alternative

or supplemental bases for production especially in labor-intensive sectors. Although Japanese

companies working in China recovered after 2014, the negative impact on investment

decisionmaking and forecasts remains.31 The voice strategy attempts to mitigate risk by lobbying

and corporate social responsibility (CSR) activities, whereas the loyalty strategy adopts a much

quieter approach to maintaining businesses in China.32 It should be noted that conventional

conceptions of China’s risks for Japan have largely been limited to bilateral considerations, while

the current geopolitical risk experienced today is broader.

A Dual Approach

The Japanese approach to China over the last decade can be characterized as carefully

combining dimensions of engagement and hedging.

When Shinzo Abe returned for his second term as prime minister in December 2012, a

key diplomatic agenda was the stabilization and improvement of Japan–China relations. Top-

level meetings between Japan and China began again in 2014, and before his official visit to

Beijing in 2018, Abe held 14 summit meetings with Chinese counterparts (including with both

President Xi Jinping and Premier Li Keqiang). In this way, a warmer political climate was

gradually created, although it was sometimes referred to as an improvement “from negative to

zero,” indicating that the relationship may not have been fundamentally positive in any absolute

sense of the term.33

29 Vekasi, Kristin. 2020. Risk Management Strategies of Japanese Companies in China: Political Crisis and

Multinational Firms, Routledge.
30 Iida, Keisuke. 2015. “Political Risks and Japanese Foreign Direct Investment in East Asia: A Case Study of

“China-Plus-One””, The Korean Journal of International Studies, 13(2), pp.383-410.
31 Chen, Cheng, Tatsuro Senga, Chang Sun, and Hongyong Zhang. 2016. “Policy uncertainty and foreign direct

investment: Evidence from the China-Japan island dispute”, Queen Marty University of London, School of

Economics and Finance, Working Paper No.803.
32 For details of CSR activities by the Japanese companies, see chapter 5 of Vakasi (2020). Some of Japanese

affiliates in China publishes CSR report. Nidec Corporation. 2019. “CSR Resport in 2019”, Nidec (Chinese).

https://www.nidec.com/cn/sustainability/news/2019/news1206-02/-/media/www-nidec-

com/sustainability/report/report2019_cn.pdf.
33 Hu, Lingyuan et al. 2019. “Sino-Japanese Relations: 2018”, Journal of Japanese Studies (Riben Yanjiu Jilin), Vol.

2019, No. 1, pp.1-43 (Chinese). Also see Kawashima, Shin. 2020. “The Post-Abe Administration's Policy Toward

https://www.nidec.com/cn/sustainability/news/2019/news1206-02/-/media/www-nidec-com/sustainability/report/report2019_cn.pdf

https://www.nidec.com/cn/sustainability/news/2019/news1206-02/-/media/www-nidec-com/sustainability/report/report2019_cn.pdf

Despite the absence of a solution to the maritime tensions, political tensions between

Tokyo and Beijing were gradually relaxed. As this process continued, the Japanese business

community kept the need for mutual exchange and top-level meetings at the forefront of the

political agenda.34 During this period, the idea of cooperation under China’s key economic

initiatives—the Asian Infrastructure Investment Bank (AIIB) and the Belt and Road Initiative

(BRI)—were common subjects of conversation, and discussions on the AIIB issue were held

from January to April 2015.35 In March 2015, the Japanese government decided not to join the

AIIB as a founding member mainly due to concerns about its governance structure, among other

issues. At this time, five years after China surpassed Japan in terms of nominal GDP, the ODA

Japan was offering to China became an issue, as Japanese citizens began to increasingly question

the necessity of economic assistance to China.

Another important moment came in 2017, when the Japanese government adjusted its

China policy. Toshihiro Nikai, the Secretary-General of the LDP, visited Beijing to participate in

the BRI International High-Level Forum (May 14–15, 2017), sending a new signal of potential

cooperation. After this, on June 5, 2017, Prime Minister Abe gave remarks at Nikkei’s Future of

Asia forum, mentioning the BRI in a positive light.36 This came as a surprise for the Chinese

participants at the conference. Fudan University’s annual report on Japan–China relations

described this as follows: “Unexpectedly, Sino-Japanese relations in 2017 reached a turning

point in the strategic confrontation.”37 Even though the Japanese government did not join the

AIIB and did not cooperate directly with the BRI, a period of conditional cooperation with China

had begun.38

Abe’s statement at a press conference after the Asia Pacific Economic Cooperation

(APEC) meeting in 2017 describes the conditional cooperation approach to China as follows:

As for the BRI, we look forward to this initiative making contributions in a forward-

looking way to the peace and prosperity of the region and the world by adequately

incorporating the thinking held in common by the international community regarding

China: What's Next after Normalizing Relations?”, Nippon.com, September 10, 2020 (Japanese).

https://www.nippon.com/ja/in-depth/d00626/.
34 Japan-China Economic Association. 2014. “Wishing for a Return to Mutual Trust between Japan and China: With

Expectations for Market Function-oriented Reforms”, Recommendation of the 11th Meeting of the 21st Century

Japan-China Relations Outlook Committee.
35 Nakao, Takehiko. 2020. How the Asian Economy Has Changed: Diary of an Asian Development Bank President,

Chuokoron Shinsya (Japanese), see Chapter 6.
36 The Prime Minister’s Office of Japan, June 6, 2017, “Speech by Prime Minister Abe at the 23rd International

Exchange Conference “Future of Asia” Dinner”.

https://www.kantei.go.jp/jp/97_abe/statement/2017/0605speech.html.
37 Hu, et al. 2019.
38 METI, “Memorandum of Understanding (MOU) signed on the occasion of the First Japan-China Third Country

Market Cooperation Forum”, October 26, 2018. https://www.meti.go.jp/press/2018/10/20181026010/20181026010-

1.pdf.

https://www.nippon.com/ja/in-depth/d00626/

https://www.kantei.go.jp/jp/97_abe/statement/2017/0605speech.html

https://www.meti.go.jp/press/2018/10/20181026010/20181026010-1.pdf

https://www.meti.go.jp/press/2018/10/20181026010/20181026010-1.pdf

openness, transparency, economic efficiency, financial soundness, and other such aspects

of the infrastructure. Japan wishes to cooperate from this viewpoint.39

The four conditions given here, namely, openness, transparency, economic efficiency,

and financial soundness, form the foundation of Japanese cooperation with China.40 However,

some in Japanese policy circles believe that there are no projects that can realistically fulfill all

four conditions. Nevertheless, Abe’s visit to Beijing in October 2018 was a highlight of his

China policy, as the Japanese government gave formal notification of the termination of new

ODA projects, while the two governments jointly announced 52 projects aimed at economic

cooperation in third-country markets.41 While third-country market cooperation has been jointly

pursued, its real outcome is yet unclear. China has begun to employ the term “Quality Belt and

Road (Gaozhiliang Yidai Yilu),” even though the definition of quality might differ from that of

Japan or other countries.42 Nevertheless, the policy attitude of Japan toward China’s

infrastructure initiative has shifted from a policy of disregard to one of conditional engagement.43

The Japanese government also appears to be simultaneously following a careful hedging

strategy. The establishment of the NSC in December 2013 represents a strategic adjustment in a

broad sense. This body was proposed during Abe’s first period in office in the 2000s, and the

39 Abe, Shinzo. 2017. “Press Conference by Prime Minister Shinzo Abe Following His Attendance at the APEC

Economic Leaders’ Meeting, ASEAN-related Summit Meetings, and Other Related Meetings”, Speech, Philippines,

November 14, 2017.
40 During this period, the author had publicly proposed that Japan should join to the AIIB by stating “In order for

Japan to sustainably expand its involvement in development in Asia, where demand is remarkable, it is desirable for

Japan to be involved in the concept of a more diverse regional economic initiative through participation in the AIIB,

which is building an institutionalized management system, while maintaining the Asian Development Bank (ADB),

which is led by Japan and the United States as its base axis”. Ito, Asei. 2017. “How to look at China's “One Belt,

One Road” Involvement through the Asian Investment Bank”, Nihon Keizai Shimbun, July 20th, 2017.

https://www.nikkei.com/article/DGKKZO18998440Z10C17A7KE8000/.
41 The official evaluation of the Japanese ODA to China by the Chinese government appeared during Abe-Xi

meeting, Beijing, October 26th, 2018. A meeting summary by the Japan side is as follow: “In light of the

termination of new ODA to China, Prime Minister Abe expressed his hope to build an era in which the two countries

will work side by side to contribute to regional and global stability and prosperity through dialogue and human

resource exchange in the field of development and cooperation on global issues. In response, President Xi expressed

his high appreciation for Japan's ODA contributions and made positive remarks about such cooperation,” Summary

by MOFA, Japan. https://www.mofa.go.jp/mofaj/a_o/c_m1/cn/page4_004452.html. Also, the views of Mr. Shinichi

Kitaoka, President of JICA, are as follows: “In conjunction with the Prime Minister's visit to China, it was officially

decided that Japan's ODA to China will be terminated. It is significant that China expressed its “gratitude” for

Japan's ODA to China, and we should continue to maintain a cooperative relationship with China. In my personal

opinion, ‘international cooperation’ is not limited to assistance to poor countries. Depending on the international and

domestic situation, there is room for JICA to cooperate with China.” In International Development Journal, January

2019, “Special Interview (January issue): Emphasizing ODA in an Era of “Home Country First” (Japanese).

https://partner.jica.go.jp/resource/1550110094000/journalView201901/journal/journal/201901-06.html.
42 Ito, Asei. 2019. “China's Quest for a “High-quality Belt and Road Initiative””, AJIAA-Commentary, July 18

2019. http://www2.jiia.or.jp/en_commentary/201907/18-1.html.
43 Ito, Asei. 2019. “China’s belt and road initiative and Japan’s response: from non-participation to conditional

engagement”, East Asia: An International Quarterly, 36(2), pp.115-128.

https://www.nikkei.com/article/DGKKZO18998440Z10C17A7KE8000/

https://www.mofa.go.jp/mofaj/a_o/c_m1/cn/page4_004452.html

https://partner.jica.go.jp/resource/1550110094000/journalView201901/journal/journal/201901-06.html

http://www2.jiia.or.jp/en_commentary/201907/18-1.html

Democratic Party of Japan (DPJ) also considered pursuing it when it governed between 2009 and

2012. But Abe realized the plan in 2013 with a small staff (in either a four-minister meeting or a

nine-minister meeting) supported by a bureaucratic body. NSC meetings were held particularly

frequently in 2017, due to North Korean nuclear and missile tests. The NSC has also held

meetings regarding China-related issues focused mostly on security challenges such as coercion

around the Senkaku Islands. But the NSC added an “Economic unit (Keizai han)” in April 2020,

widely considered a response to U.S.–China strategic competition that became increasingly

centered on economic security.44

A year after Donald Trump took office, U.S.–China confrontation began on trade issues

and it gradually became clear that the relationship was becoming one of strategic competition.

New issues in the relationship concerned questions of technology, as manifested by equipment

problems found in Huawei 5G, and the extent to which the United States, in coordination with

allies and partners, should decouple from the Chinese economy and limit China’s capacity to

dominate the market in sensitive and emerging technologies for reasons of national security.

Japan, meanwhile, became increasingly focused on diversifying manufacturing and investment to

support supply chain resiliency in response to the Covid-19 pandemic.

In April 2020, Japan proposed a new pair of initiatives: The Supply Chain Diversification

Support Project (SCDSP)45 and the Supply Chain Resilience Initiative, a part of the initiative has

been implemented with the Association of Southeast Asian Nations (ASEAN).46 Both initiatives

are regarded as new attempts to reduce dependency on China in key medical and manufacturing

production capabilities. 47 These programs have been called “decoupling kabuki,” as they only

entail minor adjustments given the vast amount of Japanese foreign direct investment into

China.48 Yasuyuki Todo, a Japanese specialist on international economics, questioned the basis

for the initiative, saying that “what is needed is not support for a return to the domestic market or

the relocation of production bases to Southeast Asia. We need to support a wide range of

overseas businesses, especially those with high added value, that is not limited to a single

44 Nihon Keizai Shimbun, “National Security Council Establishes Economic Unit, Urgently Needs to Respond to

New Corona”, April 1st, 2020. https://www.nikkei.com/article/DGXMZO57510630R00C20A4PP8000/.
45 METI, “Overseas Supply Chain Diversification Support Project”. May 26, 2020 to March 27, 2021.

https://www.jetro.go.jp/services/supplychain. METI, “Subsidy for domestic investment promotion project for supply

chain measures”. https://www.meti.go.jp/press/2020/11/20201120005/20201120005.html
46 METI, “Supply Chains Resilience Initiative (SCRI) with ASEAN”, April 22, 2020.

https://www.meti.go.jp/press/2020/04/20200422005/20200422005.html.
47 METI. 2020. White Paper on International Economy and Trade (2020).

https://www.meti.go.jp/report/tsuhaku2020/2020honbun/i2110000.html.
48 Kennedy, Scott, and Matthew Goodman. 2020. “Decoupling Kabuki: Japan’s Effort to Reset, Not End Its

Relationship with China,” July 28th, 2020. https://www.csis.org/analysis/decoupling-kabuki-japans-effort-reset-not-

end-its-relationship-china.

https://www.nikkei.com/article/DGXMZO57510630R00C20A4PP8000/

https://www.jetro.go.jp/services/supplychain

https://www.meti.go.jp/press/2020/11/20201120005/20201120005.html

https://www.meti.go.jp/press/2020/04/20200422005/20200422005.html

https://www.meti.go.jp/report/tsuhaku2020/2020honbun/i2110000.html

https://www.csis.org/analysis/decoupling-kabuki-japans-effort-reset-not-end-its-relationship-china

https://www.csis.org/analysis/decoupling-kabuki-japans-effort-reset-not-end-its-relationship-china

region.”49 A JETRO survey conducted in December 2020 found that 7.2 percent of Japanese

manufacturing subsidiaries working in China were considering where to locate their production

for the medium to long term,50 but that hard decoupling would not be feasible in the short term,

given the pandemic and the economic irrationality of such moves.

More broadly, the Japanese strategy to hedge external risks has taken a multilateral

approach. The Japanese government took leadership of the TPP agreement after the Trump

administration withdrew from it.  As China has openly shown a positive attitude to joining the

TPP in 2020, the geo-economic meaning of TPP is not fixed yet.

Key Questions

Why Did Japan Advance a Dual Approach?

Why, during the second Abe administration, did Japan advance a dual approach to

China? First, the economic fundamentals are the most important factor behind Japanese

pragmatic approach. China’s economic rise resulted in a significant rebalancing of power

between Japan and China, as well as between the United States and China. China’s nominal GDP

surpassed that of Japan in 2010, and China is approximately three times larger than Japan in

terms of nominal GDP in 2020.51 Japan’s maritime tensions with China have caused Japan

significant political risk, which requires a hedging strategy. At the same time, as labor and

manufacturing costs rise in China, businesses have been attracted to China as a market rather

than a production base, and are further incentivized by China’s economic gravitational pull,

moving relations in a cooperative direction.

Another related factor is the existing trade network and economic interdependence

between Japan and China. As Figure 1 has shown, the share of Chinese trade (both export and

import) has risen at a rapid pace since the 2000s, reaching the highest level in post-war history at

21.7 percent in 2017. The Chinese economy today has a two-sided gravitational effect. On the

production side, the formation of manufacturing clusters as well as improved research and

development capabilities generate substantial agglomeration economies, while on the

consumption side, the rising middle class creates one of the largest home-market effects, both of

which are strong incentives to operating in China. One Japanese businessperson told me that

49 Nihon Keizai Shimbun, “The World after the Corona Shock: Companies must continue to diversify their

production and procurement”, April 16, 2020.

https://www.nikkei.com/article/DGKKZO58080800V10C20A4KE8000/.
50 JETRO. 2020. “FY2020 Survey on the Actual Condition of Japanese Companies Operating Overseas (Asia and

Oceania, December 2020)”. https://www.jetro.go.jp/ext_images/_Reports/01/b5dea9948c30e474/20200017.pdf.
51 In 2020, the nominal GDP for Japan was 529.19 trillion yen (approximately 5 trillion USD) whereas China’s

nominal GDP reached 15.4 trillion USD. See the Cabinet Office of Japan

(https://www.esri.cao.go.jp/jp/sna/menu.html) and National Bureau of Statistics of China. 2021. “National Economy

Recovered Steadily in 2020 with Main Goals Accomplished Better Than Expectation”, January 18, 2021.

http://www.stats.gov.cn/english/PressRelease/202101/t20210118_1812432.html.

https://www.nikkei.com/article/DGKKZO58080800V10C20A4KE8000/

https://www.jetro.go.jp/ext_images/_Reports/01/b5dea9948c30e474/20200017.pdf

https://www.esri.cao.go.jp/jp/sna/menu.html

http://www.stats.gov.cn/english/PressRelease/202101/t20210118_1812432.html

“without competing inside the Chinese market, we will lose a global position.”  The presence of

agglomeration economies in China limits the feasibility of the China Plus One strategy as the

supply chain network has already formed, centered in China. Figure 3 below shows the

decomposition of intra-regional trade in East Asia, the European Union, and NAFTA regions. A

feature of East Asia’s economic development is a large amount of intra-regional trade in parts

and components,52 which is a result of lower trade costs and active foreign direct investments.53

As a result, full scale of decoupling with China is economically unfeasible in East Asia.

Figure 3. Intra-Regional Trade Structure in East Asia, EU, and NAFTA (1980-2018)54

An interesting question is why the Abe administration adjusted policy toward China in

2017. Besides business interests and the general need to rescue the bilateral relationship from its

poor situation, another possible reason could be Japan’s desire for China to exert its influence

over North Korea to reduce the ballistic missile threat. In 2017, North Korea launched ballistic

missiles 16 times, including some that were sent over Hokkaido. According to official

information, 46 meetings of the NSC were held in 2017 (a combined total of the four-minister

52 In RIETI-TID database 2018 version, EU28 still contains United Kingdom, and East Asia consist of Japan, China,

Hong Kong, South Korea, Taiwan, Singapore, Indonesia, Malaysia, Philippines, Thailand, Brunei, Cambodia, and

Vietnam. https://www.rieti.go.jp/en/projects/rieti-tid/pdf/about_en.pdf.
53 Kimura, Fukunari. 2006. International production and distribution networks in East Asia: Eighteen facts,

mechanics, and policy implications. Asian Economic Policy Review, 1(2), pp.326-344.
54 Source: Research Institute of Economy, Trade and Industry (RIETI), Trade Industry Database (TID), 2018

edition.

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Parts and Components Processed goods Capital goods Primary goods Consumption goods

East Asia EU 28 NAFTA

https://www.rieti.go.jp/en/projects/rieti-tid/pdf/about_en.pdf

meetings and the nine-minister meetings).55 Of these 46 meetings, 25 dealt with the North

Korean issue, and 8 of these were concentrated in April alone. When Nikai visited Beijing to

participate in the BRI International High-Level Forum in May 2017, he brought with him a letter

from Abe to Xi which includes the North Korean issue.56 As Abe’s first positive remarks on the

BRI came in June 2017, these two issues appear to have proceeded in parallel. This period

exemplifies how Japan can use economic engagement to support its national security objectives.

Finally, a close personal connection with President Trump allowed Abe to explain and

implement a dual approach towards China, though that became more challenging as the U.S.

position on China hardened.57 The intensification of the U.S.–China confrontation in 2018 and

thereafter altered the diplomatic landscape in the region and will affect Japan’s approach going

forward. Japan’s economic policy towards China in the post-Abe period will face much greater

and more complex challenges, such as the question of extraterritorial enforcement that both the

United States and China can exert through sanctions, which could affect Japanese companies in

coming years.

How Deep are Japan’s Hedging and Engagement Strategies?

The second question relates to the possible depth of both hedging and engagement

towards China. The SCDSP, as noted, has been called decoupling kabuki. It is also reasonable to

say that such minor intervention is observable by those in favor of economic decoupling

(hedging) and those in favor of enhancing cooperation (engagement). On the decoupling side, as

noted, the existing diversification program is marginal compared to the total Japanese FDI stock

in China. On the cooperation side, third-country market cooperation is only just getting

underway and is still at an early stage. Although the absolute impacts remain marginal, Japan’s

dual approaches are not merely superficial and support a sophisticated strategy in the context of

confrontation and uncertainty between the United States and China.

A comprehensive understanding and assessment of Japanese strategy reveals several

layers (see Table 1 below). Recent projects including the SCDSP appear on a surface layer,

where the practical project and programs are included, while the middle layer contains legal acts

and multinational agreements. Policy practices on the surface layer can be completed over the

course of an administration or even during a single fiscal year, while the implementation of the

middle layer requires a longer policy cycle, perhaps over several administrations. The bottom

and foundational layers depend on a wider and deeper political consensus across parties and

55 See “National Security Council: Status of Meetings” at the homepage of the Prime Minister of Japan and His

Cabinet. https://www.kantei.go.jp/jp/singi/anzenhosyoukaigi/kaisai.html.
56 Sankei Shimbun, “LDP Secretary-General Toshihiro Nikai meets with Chinese President Xi Jinping, Prime

Minister Shinzo Abe calls for mutual visits in a letter”, May 16, 2017.

https://www.sankei.com/politics/news/170516/plt1705160028-n1.html.
57 Putz, Catherine. 2019. “The Art of the Balance: Japan, China and the U.S.”, The Diplomat, January 30, 2019.

https://thediplomat.com/2019/01/the-art-of-the-balance-japan-china-and-the-united-states/.

https://www.kantei.go.jp/jp/singi/anzenhosyoukaigi/kaisai.html

https://www.sankei.com/politics/news/170516/plt1705160028-n1.html

https://thediplomat.com/2019/01/the-art-of-the-balance-japan-china-and-the-united-states/

generations. Thus, the RCEP and the fifth political documents of the Japan–China relationship

fall on the engagement side in the middle layer. Simultaneously, the establishment of the NSC

and the signing of the CPTTP can be placed as hedging-competition on the middle layer.

Table 1. The Second Abe Administration’s Approach toward China58

 Hedging/Competition Engagement/Cooperation

Surface layer

(programs, projects)

Supply-chain diversification

Program

Third-country market

cooperation

Middle layer

(domestic bureaucratic and

legal setting, bilateral

official document,

multinational agreement,

business consensus)

CPTPP, Japan–EU Economic

Partnership, Japan-United States

Trade Agreement, NSC,

Comprehensive Economic

Security Promotion Act

(recommended)

RCEP, Fifth Political

Document (on the Japan–

China relationship, not

materialized)

Bottom layer (strategy and

basic approach)

Free and Open Indo-Pacific (FOIP) concept

Foundational layer The U.S.-Japan Alliance

According to a media report, if President Xi Jinping’s Spring 2020 state visit to Japan had

been realized, the two governments might have released the fifth political document on the

Japan-China relationship.59 According to Nikai’s remarks in September 2020, had that been the

case, the fifth document was expected to have been signed and “we would strengthen our

determination to achieve world peace and prosperity together, with Japan and China playing a

central role in the so-called ‘co-creation (kyosou)’ of the world.”60 The word kyousou does not

represent a brand-new concept in the Japan–China relationship, as Prime Minister Yasuo Fukuda

previously referred to a similar expression in his speech entitled “Let’s Create a Future Together

(Tomoni Mirai wo Tsukurou)” in 2007.61 Nevertheless, Akio Takahara, a specialist in Chinese

politics, has proposed a cautious approach to the possible fifth document, prioritizing a careful

58 Source: Drafted by the Author.
59 Nihon Keizai Shimbun, “Japan and China to Consider 'Fifth Document”, Sep 28, 2020.

https://www.nikkei.com/article/DGKKZO50331530X20C19A9FF8000/. Nihon Keizai Shimbun, “The Fifth

Document” to be Considered by Both Governments During Xi's Visit to Japan”, Nov 2, 2020.

https://www.nikkei.com/article/DGKKZO51690680R01C19A1MM8000/.
60 Regarding Mr. Nikai’s mention, see following news sources. Nihon Keizai Shimbun, “Japan-China 'co-creation'

the key word, LDP Secretary General Nikai said”, September 17, 2020.

https://www.nikkei.com/article/DGXMZO63982220X10C20A9PP8000/. Asahi Shimbun, “Mr. Nikai: Japan-China

Relations “Spring in Anyone's Mind”; Hopes for Xi's Visit to Japan”, September 18th, 2020.

https://www.asahi.com/articles/ASN9L567BN9KUTFK017.html. For an earlier mentioning, see Nihon Keizai

Shimbun, Japan-China 'Co-Creation' from Mutual Benefit, Nikai to Speak in Beijing”, December 28, 2017.

https://www.nikkei.com/article/DGXMZO25196870Y7A221C1EAF000/.
61 Fukuda, Yasuo. 2007. “Let’s Create a Future Together (Tomoni Mirai wo Tsukurou),” Speech, Peking University,

Beijing, China, December 28, 2007.

https://www.nikkei.com/article/DGKKZO50331530X20C19A9FF8000/

https://www.nikkei.com/article/DGKKZO51690680R01C19A1MM8000/

https://www.nikkei.com/article/DGXMZO63982220X10C20A9PP8000/

https://www.asahi.com/articles/ASN9L567BN9KUTFK017.html

https://www.nikkei.com/article/DGXMZO25196870Y7A221C1EAF000/

review of the previous four documents.62 One critical topic in previous documents relates to

hegemony, as the Joint Communique in 1972 clearly states:

The normalization of relations between Japan and China is not directed against any third

country. Neither of the two countries should seek hegemony in the Asia-Pacific region

and each is opposed to efforts by any other country or group of countries to establish

such hegemony63

In the negotiation process of the Japan-China Treaty of Peace and Friendship, the Chinese

government was eager to persuade Japan to include the “anti-hegemony” clause, which was

widely recognized as an anti-Soviet Union strategy in the 1970s.64 Given the growing global

influence of China, what does this clause mean in the 2020s? If the Japanese government truly

takes the importance of these documents into account, the next document, if necessary, should be

placed on the middle layer of the above chart, based on a serious consideration and discussion. It

should not be on the surface layer led by a small circle or without consensus among domestic

actors.

Another middle layer item, RCEP, refers to rule-based engagement with China as the

agreement contains a dispute settlement mechanism in certain chapters. Although the level of

liberalization is lower than that contained in the CPTPP, the agreement contains a chapter on

electronic commerce in chapter 12, for example, where multilateral agreements appear for the

first time in relation to China.65 RCEP does allow for government intervention for national

security and public policy needs. In response to this, Dr. Shintaro Hamanaka has criticized the

agreement for potentially benefiting China too much,66 but other evaluations by Japanese

academics have generally been positive.67

62 JIJI.COM, “Seeking Ways to Compete and Cooperate with China: Intellectuals View on the Japan-China

Diplomacy”, Jan 29th, 2021. https://www.jiji.com/jc/v4?id=20200129world0001.
63 MOFA, “Joint Communique of the Government of Japan and the Government of the People's Republic of China”,

September 29, 1972. https://www.mofa.go.jp/region/asia-paci/china/joint72.html. Also see the article 2 of the

“Treaty of Peace and Friendship between Japan and China”, August 12, 1978.

https://www.mofa.go.jp/mofaj/area/china/nc_heiwa.html.
64 For the initial meaning of “antihegemony” in the documents, see Tanaka (1991) and Inoue (2018).
65 Leblond, Patrick. 2020. “Digital Trade: Is RCEP the WTO’s Future?” Centre for International Governance

Innovation, November 23, 2020. https://www.cigionline.org/articles/digital-trade-rcep-wtos-future.
66 Hamanaka, Shintaro. 2021. “What the RCEP Signing Means?: A Geopolitical View”, IDE Square, November

2021. https://www.ide.go.jp/Japanese/IDEsquare/Eyes/2020/ISQ202020_039.html.
67 Kimura, Fukunari. 2021. “The Key to the Development of Mega FTA Strategies: A New Phase of Trade Policy”,

Nihon Keizai Shimbun, Jan 19th, 2021. https://www.nikkei.com/article/DGXKZO68252940Y1A110C2KE8000/.

Nakagawa, Junji. 2021. “TPP expansion to be promoted after U.S. return: A new phase of trade policy”, Nihon

Keizai Shimbun, Jan 20th, 2021. https://www.nikkei.com/article/DGXKZO68294020Z10C21A1KE8000/. Oba, Mie.

2021. “RCEP, not at odds with TPP: A new phase of trade policy”, Nihon Keizai Shimbun, January 21, 2021.

https://www.nikkei.com/article/DGXKZO68333030Q1A120C2KE8000/.

https://www.jiji.com/jc/v4?id=20200129world0001

https://www.mofa.go.jp/region/asia-paci/china/joint72.html

https://www.mofa.go.jp/mofaj/area/china/nc_heiwa.html

https://www.cigionline.org/articles/digital-trade-rcep-wtos-future

https://www.ide.go.jp/Japanese/IDEsquare/Eyes/2020/ISQ202020_039.html

https://www.nikkei.com/article/DGXKZO68252940Y1A110C2KE8000/

https://www.nikkei.com/article/DGXKZO68294020Z10C21A1KE8000/

https://www.nikkei.com/article/DGXKZO68333030Q1A120C2KE8000/

The establishment of the NSC and its economic unit constitutes a substantial expression

of domestic hedging strategy, while CPTPP and the Japan–EU EPA are multilateral hedging

frameworks to help promote a rule-based economic order. The Japanese strategy in the middle

layer is characterized as a multilateral and rule-based approach. On the engagement side, a

METI’s report in 2019 calls this rule-base trade policy, and attempt to bridge-make between U.S.

and China based on rules.68 On hedging side, Professor Mie Oba calls the multilateral approach

“institutional hedging,” a practice that began in the early 2010s.69 For this reason, President Xi’s

positive attitude toward the CPTPP in 2020 surprised Tokyo. China’s interest in the CPTPP will

be a new challenge for the Japanese approach, as socialist Vietnam has already joined the

agreement.

The Japanese approach also has deeper layers, namely, the bottom layer and the

foundational layer, which are rooted in deeper strategic needs. The Free and Open Indo-Pacific

(FOIP) concept remains premature and is not yet well defined.70 FOIP does not exclude and

directly compete with China, according to Shinzo Abe’s remarks in 2017, 71 while related

frameworks, such as the Quadrilateral Security Dialogue (Quad), are regarded as relating to

security cooperation toward containing China. However, as many countries, including ASEAN,

72 Germany,73 the United Kingdom,74 and France,75 begin to refer to FOIP, it will remain a key

68 “In response to the deepening confrontation between the U.S. and China, Japan, which is deeply involved in both

economies, aims to promote “bridge building” through rule-making.”  See METI. 2019. “Current Status and Future

Direction of External Economic Policy”, The 6th meeting of the Trade and Industry Subcommittee, Industrial

Structure Council, METI, June 19, 2019.

https://www.meti.go.jp/shingikai/sankoshin/tsusho_boeki/pdf/005_02_00.pdf.
69 Oba, Mie. 2020. “Regional Economic Institutions and Japan’s Leadership: The Promotion of Institutional

Hedging”, Center for Strategic & International Studies (CSIS) Strategic Japan Program Paper, 2020.

https://www.csis.org/programs/japan-chair/strategic-japan-working-papers#2020.
70 For a Japanese discussion, see Indo-Pacific Cooperation Research Group, GRIPS Policy Research Institute. 2020.

“Toward Stability of the International Order and Promotion of International Cooperation in the Indo-Pacific in the

Post-Pandemic Era: Policy Recommendations to the Japanese Government on Indo-Pacific Cooperation”, October

29, 2020. https://www.grips.ac.jp/cms/wp-content/uploads/2020/10/GRIPS.pdf.
71 “I want to make the region from the Pacific Ocean to the Indian Ocean free and open based on fair rules. I believe

that this vast ocean should be an international public good that will bring peace and prosperity to all people without

distinction in the future. Under this free and open Indo-Pacific strategy, I believe that Japan can cooperate with

China, which has the concept of One Belt, One Road”. See Shinzo Abe’s speech at the “Welcome Reception for the

3rd Japan-China Entrepreneurs and Former Senior Government Officials Dialogue (Japan-China CEO Summit)

2017”, December 4, 2017.  https://www.kantei.go.jp/jp/98_abe/actions/201712/04taiwa_kangei.html.
72 ASEAN. 2019. ASEAN Outlook on the Indo-Pacific, June 23, 2019. https://asean.org/asean-outlook-indo-pacific/.
73 The Federal Government, Germany. 2020. Policy guidelines for the Indo-Pacific region: Germany – Europe –

Asia: Shaping the 21st century together, September 2020.
74 Her Majesty's Government, the United Kingdom. 2021. Global Britain in a competitive age The Integrated

Review of Security, Defence, Development and Foreign Policy, March 2021.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/969402/The_Integ

rated_Review_of_Security__Defence__Development_and_Foreign_Policy.pdf.
75 Ministère des Armées, République Française. 2018. France and Security in the Indo-Pacific 2018 (updated in

May 2019).

https://www.meti.go.jp/shingikai/sankoshin/tsusho_boeki/pdf/005_02_00.pdf

https://www.csis.org/programs/japan-chair/strategic-japan-working-papers#2020

https://www.grips.ac.jp/cms/wp-content/uploads/2020/10/GRIPS.pdf

https://www.kantei.go.jp/jp/98_abe/actions/201712/04taiwa_kangei.html

https://asean.org/asean-outlook-indo-pacific/

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/969402/The_Integrated_Review_of_Security__Defence__Development_and_Foreign_Policy.pdf

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/969402/The_Integrated_Review_of_Security__Defence__Development_and_Foreign_Policy.pdf

element of Japanese policy in the future. Two realistic reasons for Japan to prioritize FOIP are

that Japan does not have sufficient geo-economic power to implement any grand design alone,

and Japan is regarded as a trustworthy partner by many nations, particularly by ASEAN

countries.76 Lastly, the U.S.-Japan alliance has a foundational importance for Japan particularly

in terms of national security as it guarantees U.S. commitment to the region.

What is the Trajectory of Japan’s China Strategy?

The Covid-19 pandemic has had a significant impact on the regional and global economic

landscape. Substantial damage to GDP, unemployment, and disruption in supply chains are

major issues caused by the pandemic. China, the epicenter of the pandemic, was able to contain

the spread of the virus by the second quarter of 2020, and its economy grew 2.3 percent in 2020.

Nevertheless, the pandemic has had an outsized impact on Japan–China relations. Among the

most important effects, already mentioned, was that the postponement of Xi Jinping’s official

trip to Japan.77 As early as February 2020, the pandemic also made it impossible to ignore

Japan’s dependency on China’s manufacturing capacity.78 People’s feelings about China became

even more unfavorable, falling below the earlier negative image of China that public surveys had

measured before Covid-19.79 However, because the Chinese economy was one of the least

damaged by Covid-19,80 China’s domestic market and businesses are becoming increasingly

more important, not only to Japanese companies but also for all major foreign companies in

China.

Xi’s visit to Japan was expected to showcase the effectiveness of Abe’s approach towards

China. Now, a year after the official announcement of the postponement of the trip, the domestic

and global diplomatic landscape has measurably altered. Several notable changes were seen in

2020: Abe left office; China’s diplomatic practices, including its enforcement of the Hong Kong

National Security Law, attracted negative attention; and there has been a conflict on the border

between China and India. All of this has strengthened anti-China sentiment. However, at the

same time, the Chinese economy continues to be important. The absence of Chinese tourists has

had negative effects on local economies in Japan, and as the Chinese economy has continued to

https://www.defense.gouv.fr/layout/set/print/content/download/532754/9176250/version/3/file/France+and+Security

+in+the+Indo-Pacific+-+2019.pdf.
76 Seah, Sharon, Hoang Thi Ha, Melinda Martinus, Pham Thi Phuong Thao ed. 2021. “The State of Southeast Asia:

2021 Survey Report”, the ASEAN Studies Centre at ISEAS-Yusof Ishak Institute (ISEAS).

https://www.iseas.edu.sg/wp-content/uploads/2021/01/The-State-of-SEA-2021-v2.pdf.
77 Prime Minister’s Office of Japan, “Postponement of Chinese President Xi Jinping's Visit to Japan”, March 5 th,

2020. https://www.kantei.go.jp/jp/tyoukanpress/202003/5_p.html.
78 Nihon Keizai Shimbun, “Komatsu continues to walk a tightrope in production due to new pneumonia, parts from

outside China”, Feb 15th, 2020. https://www.nikkei.com/article/DGXMZO55678660V10C20A2MM8000/.
79 The Japan Times, “Japan records most negative view of China as unfavorable opinions surge, survey finds”,

October 6, 2020. https://www.japantimes.co.jp/news/2020/10/06/national/japan-most-negative-view-china-survey/.
80 International Monetary Fund. 2021. World Economic Outlook Update, January 2021.

https://www.imf.org/en/Publications/WEO/Issues/2021/01/26/2021-world-economic-outlook-update.

https://www.defense.gouv.fr/layout/set/print/content/download/532754/9176250/version/3/file/France+and+Security+in+the+Indo-Pacific+-+2019.pdf

https://www.defense.gouv.fr/layout/set/print/content/download/532754/9176250/version/3/file/France+and+Security+in+the+Indo-Pacific+-+2019.pdf

https://www.iseas.edu.sg/wp-content/uploads/2021/01/The-State-of-SEA-2021-v2.pdf

https://www.kantei.go.jp/jp/tyoukanpress/202003/5_p.html

https://www.nikkei.com/article/DGXMZO55678660V10C20A2MM8000/

https://www.japantimes.co.jp/news/2020/10/06/national/japan-most-negative-view-china-survey/

https://www.imf.org/en/Publications/WEO/Issues/2021/01/26/2021-world-economic-outlook-update

show positive growth Japanese companies based in China feel an even greater incentive to

cultivate Chinese markets.

Due to its confrontation with the United States, the Chinese government is actively

publishing policies and proposals on economic security topics. One new strategy, called the dual

circulation (shuang xunhuan), was presented in May 2020.81 The new 5-year plan and long-term

plan have adopted this concept, which emphasizes the self-sufficiency of demand and technology

and security issues (anquan).82 The Chinese government has tightened regulations on FDI and

export controls and has released the Chinese version of the entity list (Bu Kakao Shiti

Mingdan).83 The Extraterritorial Application of Foreign Legislation was released in December

2020.84

In this complex situation, the trajectory of Japanese policy toward China appears to be

heading in a hedging and competitive direction. One piece of evidence of this adjustment is the

LDP document entitled “Toward Developing Japan's Economic Security Strategy,” published in

December 2020.85
 The core concepts of the document are strategic autonomy, strategic

indispensability, and strategic core industries. It recommends that the government should enact a

comprehensive economic security promotion act in the ordinary Diet session in 2022.86 A wide

range of topics, such as energy security, technology security and export controls, and land

ownership are discussed. Because these documents refer to China most frequently, it is widely

regarded that the recommendations are intended to strengthen risk management related to China

though they do not aim to fully decouple from China.87

Although Japan’s current policy trajectory shows a tendency toward hedging approaches,

Japanese and other foreign companies in China, including U.S. companies, are facing an

81 Xinhua News Agency, “Xi Jinping attends economic sector members of CPPCC meeting”, May 23rd, 2020.

http://www.xinhuanet.com/politics/2020-05/23/c_1126023987.htm.
82 The Central Committee of the Chinese Communist Party. 2020. “Proposal of the Central Committee of the

Communist Party of China on Formulating the Fourteenth Five-Year Plan for National Economic and Social

Development and the Visionary Goals for 2035”, November 11, 2020. http://www.gov.cn/zhengce/2020-

11/03/content_5556991.htm.
83 The Ministry of Commerce, China. 2020. “The Ministry of Commerce Order No.4 of 2020 unreliable entities list

provisions”, September 19, 2020. http://tfs.mofcom.gov.cn/article/bc/202009/20200903002593.shtml.
84 The Ministry of Commerce, China. 2020. “The Ministry of Commerce Order No. 1 of 2021 on Rules on

Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures”.

http://english.mofcom.gov.cn/article/policyrelease/announcement/202101/20210103029708.shtml.
85 Strategic Headquarters on the Creation of a New International Order of Policy Research Council, Liberal

Democratic Party of Japan. 2020.
86 Regarding the strategic indispensability, following paper also mentions the concept. The PHP Institute. 2020.

“Recommendation Report: Japan's Course in the Era of High-Tech Hegemony: Aiming to be a free, open, and

leading country by securing “strategic indispensability””, April 2, 2020. https://thinktank.php.co.jp/policy/6092/.
87 According to author’s counting, the document includes the “China” for 41 times, “United States” for 25 times,

“E.U.” for 18 times, “India” for 12 times, “Indo-Pacific” for 10 times, “Australia” for 8 times, “Russia” for 7 times,

and “North Korea” for 0 times.

http://www.xinhuanet.com/politics/2020-05/23/c_1126023987.htm

http://www.gov.cn/zhengce/2020-11/03/content_5556991.htm

http://www.gov.cn/zhengce/2020-11/03/content_5556991.htm

http://tfs.mofcom.gov.cn/article/bc/202009/20200903002593.shtml

http://english.mofcom.gov.cn/article/policyrelease/announcement/202101/20210103029708.shtml

https://thinktank.php.co.jp/policy/6092/

enormous economic incentive to remain in the Chinese market. According to a recent survey by

Japan Bank for International Cooperation (JBIC) conducted between August and November

2020, China is reported to be the most prominent market in the 3-year forecast, partly because of

its rapid recovery from the pandemic.88 In the consumer products market in particular, China’s

extensive and growing middle-class consumer market is indispensable for many companies. This

incentive is evident to all leaders of major foreign companies in the durables and consumer

segment. President Xi himself wrote to Howard Schultz, Starbucks’ former CEO, in January

2021, saying, “I hope that Starbucks Corporation will make positive efforts to promote economic

and trade cooperation between China and the United State and the development of relations

between the two countries.”89 Japan’s case, traditionally the Japanese automobile industry and

electronics industry, such as Toyota, Honda, Nissan, Hitachi, and Panasonic, have cultivated the

Chinese market, and they have expanded businesses in terms of revenue in spite of past political

turbulence. A notable change in Japanese investment to China is the relative increase of non-

manufacturing sectors. In the consumer products market, Uniqlo, Muji, Shiseido are popular

brands in the Chinese market as the Chinese middle class demands higher quality products.90 It is

only natural for a business owner in a consumer or non-sensitive product segment to want to

maximize market opportunity in emerging economies, including China. Without a doubt, the

purchasing power of the rising Chinese middle-class will be outstanding. Corporate activities in

non-sensitive markets thus far appear to be isolated from policy debates about economic security

and China risks.

Unfortunately, reality is not so simple. Business engagement with China often comes

with Chinese expectations of pro-China support and other political risks. For example,

Taiwanese companies cultivated mainland China markets (often called Taishang), including

consumer segments, and as a result these Taiwanese companies have been expected to act as pro-

China activists in domestic political affairs, even being called a Chinese shadow or Chinese

agent.91 Japanese companies have faced political risks from China since the 2000s, while

Taiwanese economies and companies have generated even greater interdependence with China.

After the virtual Quad leaders’ meeting in March 2021, the Chinese media did not hesitate to

imply the powerful leverage exerted by the Chinese domestic market, stating, “China is the

88 The survey has been conducted in August to November 2020 by the JBIC. See JBIC. 2021. “Survey Report on

Overseas Business Development of Japanese Manufacturing Companies: Results of the Fiscal 2020 Overseas Direct

Investment Survey (32nd Edition)”, January 15, 2021. https://www.jbic.go.jp/ja/information/press/press-

2020/pdf/0115-014188_4.pdf.
89 Xinhua News Agency, “President Xi Jinping Replies Letter to Howard Schultz, Emeritus Chairman of the Board of

Directors of Starbucks Corporation”, January 14th, 2021. http://www.xinhuanet.com/politics/leaders/2021-

01/14/c_1126982101.htm.
90 For a move by Japanese entrepreneur, Mr. Tadashi Yanai, the founder and CEO of Fast Retailing (UNIQLO), met

with Kong Xuanyou, the Chinese ambassador to Japan, in August 2020. “Ambassador Kong Xuanyou meets with

Fast Retailing Chairman and CEO Tadashi Yanai”, The Embassy of the People’s Republic of China in Japan,

August 26, 2020. http://www.china-embassy.or.jp/jpn/sgxw/t1810086.htm.
91 Wu, Jieh-min. 2016. “The China Factor in Taiwan: Impact and Response”, in Gunter Schubert ed. Handbook of

Modern Taiwan Politics and Society, Routledge, pp.425-445.

https://www.jbic.go.jp/ja/information/press/press-2020/pdf/0115-014188_4.pdf

https://www.jbic.go.jp/ja/information/press/press-2020/pdf/0115-014188_4.pdf

http://www.xinhuanet.com/politics/leaders/2021-01/14/c_1126982101.htm

http://www.xinhuanet.com/politics/leaders/2021-01/14/c_1126982101.htm

http://www.china-embassy.or.jp/jpn/sgxw/t1810086.htm

largest trading partner for Japan, India, and Australia, and no one would want to lose this huge

market.”92 As shown by a recent case of the boycott of H&M products by Chinese consumers in

March 2021,93 the business community in non-sensitive segments must also be aware of possible

risks from geopolitical affairs.94

Rising tensions between Japan and China remind us of the “cold politics, hot economy”

of the 2000s, as well as the coupling of politics and the economy in the 1950s and 1960s. In the

2020s, theoretically it is possible that the Japan-China economic relationship will return to an

age of a coupling of politics and the economy, while the interdependence between the two

nations still moderately safeguards such risks. Nevertheless, even if the relationship returns to a

coupling of economics and politics, the economic power balance between Japan and China in the

2020s is totally different from that of the post-war period.

Remaining Issues

The Japanese and U.S. approaches to China are both moving in a more competitive

direction, backed by a growing consensus that the policy circles in both nations are all

increasingly recognizing China as a security threat. Zack Cooper calls this trend the “alliance

advocates school.”95 Even though this recognition is becoming mainstream, questions remain.

A fundamental issue related to policy toward China resides in the objectives of China

policy. What policy goals do Japan and the United States share? There are several problems: the

U.S. trade deficit; China’s unfair trade and industrial practices, which include subsidies to State

Owned Enterprises (SOEs), industrial policies such as Made in China 2025, and others; its

technology theft and dominance; and its political regime and values. Former Vice President Mike

Pence spoke of the Chinese Communist Party (CCP) as a major threat to the United States and

92 The CRI Online, “Japan-U.S.-Australia-India “Quad,” a small circle to control China, will surely end in futility”,

March 17, 2021. http://japanese.cri.cn/20210317/ddf586be-f09f-5484-f341-7ca9def36abd.html.
93 Nikkei Asia, “H&M under heat in China for past statement on Xinjiang labor: Retailer's online store inaccessible

on Alibaba's Tmall”, March 25, 2021. https://asia.nikkei.com/Business/Retail/H-M-under-heat-in-China-for-past-

statement-on-Xinjiang-labor. Regarding this topic, see following report. Zenz, Adrian. 2020. “Coercive Labor in

Xinjiang: Labor Transfer and the Mobilization of Ethnic Minorities to Pick Cotton”, Newlines Institute for Strategy

and Policy, Intelligence Briefing, December 2020.  https://newlinesinstitute.org/china/coercive-labor-in-xinjiang-

labor-transfer-and-the-mobilization-of-ethnic-minorities-to-pick-cotton/
94 Another remaining question related to business matter is how much cooperation with China can be done in

emerging segment such as big data, green, and financial sector. For finance, Japan-China ETF connectivity began in

2019. Global Strategy Department, Japan Exchange Group, Inc. 2019. “The Current Status of ETF Connectivity

between Japan and China”, December 3, 2019. https://www.fsa.go.jp/singi/chuukinken/siryou/1203jpx.pdf.
95 Cooper, Zack. 2021. “Parsing Differing U.S. Views on Japan’s Approach to China”, Alliance Policy Coordination

Brief, Carnegie Endowment for International Peach and the Japan Forum on International Relations, Inc.

https://carnegieendowment.org/2021/01/26/parsing-differing-u.s.-views-on-japan-s-approach-to-china-pub-83708

http://japanese.cri.cn/20210317/ddf586be-f09f-5484-f341-7ca9def36abd.html

https://asia.nikkei.com/Business/Retail/H-M-under-heat-in-China-for-past-statement-on-Xinjiang-labor

https://asia.nikkei.com/Business/Retail/H-M-under-heat-in-China-for-past-statement-on-Xinjiang-labor

https://newlinesinstitute.org/china/coercive-labor-in-xinjiang-labor-transfer-and-the-mobilization-of-ethnic-minorities-to-pick-cotton/

https://newlinesinstitute.org/china/coercive-labor-in-xinjiang-labor-transfer-and-the-mobilization-of-ethnic-minorities-to-pick-cotton/

https://www.fsa.go.jp/singi/chuukinken/siryou/1203jpx.pdf

https://carnegieendowment.org/2021/01/26/parsing-differing-u.s.-views-on-japan-s-approach-to-china-pub-83708

other liberal democratic societies,96 and a recent paper entitled “The Longer Telegram: Toward a

New American China Strategy,” called for U.S. policy responses to focus on a narrower group,

President Xi Jinping and his circle, rather than confronting the CCP as a whole.97 A more

pragmatic approach, however, would focus on practices related to specific trade policies,

industrial policies, and SOE issues in accordance with multilateral organizations, such as the

WTO. However, it is evident that these multilateral frameworks and agreements, including the

WTO and CPTPP, and this rule-based international approach will only work if the United States

fully backs them.98

Until now, as a regional power or an upper middle-power nation Japan has maintained its

geo-economic power through its size and technological capability to engage with China.

However, the next decades will be different as Japan’s relative decline in terms of economic

presence is inevitable. As such, even though Tokyo shares a deep concern with Washington

regarding China, it seems Tokyo’s policy goals are less ambitious in the short term than those of

Washington. Tokyo’s priority has concerned the stabilization of the relationship with Beijing, as

discussed.

It is important to note that Japanese citizens recognize the importance of China, although

many have a generally negative image of the country. In 2019, a survey conducted by the

Cabinet of Japan found approximately 80 percent of Japanese have an unfavorable perception of

China.99 However, the same survey asked, “Do you think that the future development of relations

between Japan and China is important for both countries and for the Asia-Pacific region?” and

found 75.1 percent of respondents considered it to be important (a combination of the 34.8

percent who responded that it was important and 40.3 percent that considered it to be fairly

important).100 Importantly, this survey was conducted the year after the start of major U.S.–

China confrontation and preceded the Covid-19 pandemic. A paper published jointly by U.S. and

Japanese experts refers to this as a dichotomy between the negative perception of China and

96 See “Vice President Mike Pence's Remarks on the Administration's Policy Towards China” at the Hudson

Institute HP, October 4, 2018. https://www.hudson.org/events/1610-vice-president-mike-pence-s-remarks-on-the-

administration-s-policy-towards-china102018.
97 Anonymous. 2021. “The Longer Telegram: Toward A New American China Strategy”, Atlantic Council Strategy

Papers, January 2021. https://www.atlanticcouncil.org/content-series/atlantic-council-strategy-paper-series/the-

longer-telegram/.
98 There was a belief or expectation in Japan that the U.S. may return to the negotiation table for the TPP and take up

the status of the agreement as it was in 2017. Nakagawa, Junji. 2017. “The Future of NAFTA Renegotiations:

Aiming for the Real Revival of the TPP Japan-US FTA negotiations: Don't panic”, Nihon Keizai Shimbun, August 9,

2017. https://www.nikkei.com/article/DGKKZO19778070Y7A800C1KE8000/.
99 “Public Opinion Poll on Diplomacy”, 2019, by the Cabinet Office. https://survey.gov-online.go.jp/r01/r01-

gaiko/2-1.html.
100 Ibid.

https://www.hudson.org/events/1610-vice-president-mike-pence-s-remarks-on-the-administration-s-policy-towards-china102018

https://www.hudson.org/events/1610-vice-president-mike-pence-s-remarks-on-the-administration-s-policy-towards-china102018

https://www.atlanticcouncil.org/content-series/atlantic-council-strategy-paper-series/the-longer-telegram/

https://www.atlanticcouncil.org/content-series/atlantic-council-strategy-paper-series/the-longer-telegram/

https://www.nikkei.com/article/DGKKZO19778070Y7A800C1KE8000/

https://survey.gov-online.go.jp/r01/r01-gaiko/2-1.html

https://survey.gov-online.go.jp/r01/r01-gaiko/2-1.html

perception of its importance.101 This is another aspect of the contemporary Japanese sense of

China that should not be overlooked.

Objective-setting is also related to another important question: can we influence China’s

trajectory? As China’s decision making is increasingly top-down, it is difficult to do so from the

outside. At the same time, it is also reasonable to say that the China’s current strategic trajectory

and institutional settings may not maximize benefits in the mid- or long term for China’s own

national interest and its people’s welfare.102 For instance, developing economies usually take

advantage of technology and personnel inflows from foreign nations to increase their economic

growth, which is often referred to as the “economy of backwardness” or “backwardness model.”

However, if decoupling in supply chains, research, and finance deepens, China will be unable to

access these avenues for growth as it tries to rise beyond its middle-income status.

In the short term, it is also important to examine the outcomes of Abe’s engagement with

China in the 2010s. Clearly, this approach did not change China’s interests or its trajectory.

However, as China also started considering the quality of its infrastructure and repeatedly

emphasizing the importance of multilateral frameworks such as the WTO, Japanese engagement

did help to influence the ways that China’s economic outreach is taking place by forcing its

commitment to several conditions, standards, and dispute settlement mechanisms. Unfortunately,

this tentative outcome is limited to economic aspects, and there has been no sign of adjustment in

security fields.

However, less ambitious does not automatically imply less effective in terms of

delivering benefits. Moreover, at least some of the hardline approaches taken by the Trump

administration may have been counterproductive or may even have resulted in the opposite of the

desired effect. For example, the Chinese government was able to easily justify massive policy

interventions into the semiconductor industry as a response to U.S. policies.103 On the contrary,

Yuji Miyamoto, a former Japanese ambassador to China, has suggested a possible moderate

approach to China: “China must change its direction in military, economic, and diplomatic

affairs in order to be successful in the international community. Japan’s role is important in

creating an environment in which China can change direction without compromising its mianzi

101 Kawashima, Shin, Matake Kamiya, and James Schoff. 2019. “Managing Risks and Opportunities for the U.S.-

Japan Alliance Through Coordinated China Policy”, Alliance Policy Coordination Brief, Carnegie Endowment for

International Peach and the Japan Forum on International Relations, Inc.

https://carnegieendowment.org/2019/10/10/managing-risks-and-opportunities-for-u.s.-japan-alliance-through-

coordinated-china-policy-pub-80026.
102 For example, following paper argues that the current institutional setting in China had contributed a rapid

economic growth in the past, however, it is the second-best solution. Bai, Chong-En. Chang-Tai Hsieh, and Zheng

Song. 2020. “Special deals with Chinese characteristics”, NBER Macroeconomics Annual, 34(1), pp.341-379.
103  Reuters, “China plans new policies to develop domestic semiconductor industry: Bloomberg”, September 3,

2020. https://www.reuters.com/article/us-china-semiconductors-usa-lawmaking/china-plans-new-policies-to-
develop-domestic-semiconductor-industry-bloomberg-idUSKBN25U0VM.

https://carnegieendowment.org/2019/10/10/managing-risks-and-opportunities-for-u.s.-japan-alliance-through-coordinated-china-policy-pub-80026

https://carnegieendowment.org/2019/10/10/managing-risks-and-opportunities-for-u.s.-japan-alliance-through-coordinated-china-policy-pub-80026

https://www.reuters.com/article/us-china-semiconductors-usa-lawmaking/china-plans-new-policies-to-develop-domestic-semiconductor-industry-bloomberg-idUSKBN25U0VM

https://www.reuters.com/article/us-china-semiconductors-usa-lawmaking/china-plans-new-policies-to-develop-domestic-semiconductor-industry-bloomberg-idUSKBN25U0VM

https://www.reuters.com/article/us-china-semiconductors-usa-lawmaking/china-plans-new-policies-to-develop-domestic-semiconductor-industry-bloomberg-idUSKBN25U0VM

(reputation).”104 Although the author is sympathetic to the later approach, under the current

political environment, there are no guaranteed outcomes to both a hardline approach and a soft-

line approach as China today is a far larger and more powerful nation than it was in 1972 or even

2001. China is now capable of implementing a domestic-based economic policy, dual

circulation.

Ultimately, domestic factors will fundamentally shape China in the mid- and long term.

A critical issue is the impending demographic transition in China. The working-age population

began to fall in 2010, and this trend is expected to accelerate in the 2020s.105 This aging society

will mean a smaller labor force, a lower savings rate, less innovative dynamics, and a larger

social security burden. A series of demographic challenges may require China to take on a more

inward-looking approach, compared to its current focus on active outward engagement with

developing economies. Given the rapid pace of aging, Chinese policymakers are choosing to

heavily invest in robotics and digital technology, which Professor Barry Naughton, a specialist

on the Chinese economy, calls the grand steerage.106 Professor Nobukatsu Kanehara, former

Assistant Chief of the Cabinet Secretary in the second Abe administration, assumes that China’s

aggressiveness will peak around 2030 and asks, “How can Japan maintain stability during this

period? That will be Japan’s grand strategy.”107 A different view has appeared in “The Longer

Telegram,” as it notes a new China policy “must be long term, implemented over the next thirty

years.”108

There is also an urgent need to manage business uncertainty in U.S.–China confrontation

over the short term. As both the United States and China have tightened export controls, the

Japanese business association has written to the Minister of Economy, Trade, and Industry,

104 Nihon Keizai Shimbun, “Yuji Miyamoto: “Japan's Role is Important” in Avoiding Clashes between the U.S. and

China”, March 17, 2021. https://www.nikkei.com/article/DGXZQOJB062OZ0W1A300C2000000/.
105 Fang, Cai. 2016. China’s economic growth prospects: From demographic dividend to reform dividend. Edward

Elgar Publishing. For more recent data and argument, including an issue of 14.9% decline in new birth in 2020, see

Zhang, Jun. 2021. “China’s Accelerating Fertility Crisis”, Project Syndicate, March 23, 2021. https://www.project-

syndicate.org/commentary/china-fertility-rate-population-aging-two-child-policy-by-zhang-jun-2021-03.
106 Naughton, Barry. 2020. “Grand Steerage”, in Thomas Fingar and Jean Oi ed. Fateful Decisions: Choices That

Will Shape China’s Future, Stanford University Press, pp. 51-81.
107 “Just like the constellations, the relationship between countries seems to be unchanging, but it is changing day by

day, and in ten years, the power relationship will change completely. Unfortunately, Japan will peak out just like the

UK and France did in the past. I believe that China, with its current momentum, will also peak out at some point in

the form of being overtaken by India. Until then, China will continue to act like a hegemonic power in Asia, and it

will continue to be a nuisance for neighboring countries. How can Japan maintain stability during this period? That

will be Japan's grand strategy. The FOIP I mentioned earlier is a concept with this in mind.” See “Reflections on

Japanese Diplomacy in the 75 Years Since World War II”, Koken, August 2020. https://koken-

publication.com/archives/691.
108 Anonymous. 2021, page 78.

https://www.nikkei.com/article/DGXZQOJB062OZ0W1A300C2000000/

https://www.project-syndicate.org/commentary/china-fertility-rate-population-aging-two-child-policy-by-zhang-jun-2021-03

https://www.project-syndicate.org/commentary/china-fertility-rate-population-aging-two-child-policy-by-zhang-jun-2021-03

https://koken-publication.com/archives/691

https://koken-publication.com/archives/691

Hiroshi Kajiyama,109 and to the Chinese government.110 A concern exists that Japanese business

interests will be damaged due to sanctions by one of the two economic superpowers. Minister

Kajiyama noted that “It is also important to ensure that you have the same competitive

conditions as companies from other countries. There is no need to go beyond what is required

under the export controls of each country, and there is no need to be overly defensive.”111 With

regard to tightening regulations such as export controls and financial regulations, a weak

domestic consensus will be an issue for both Japan and the United States. According to a survey

conducted by the Japan Center for Economic Research, Japanese businesspeople have a range of

views on decoupling and cooperation with China (Figure 4 below).112

109 “Request to METI: Extraterritorial Application of Regulations in China and the U.S. (Request)”, Nov 10 th, 2020.

https://www.cistec.or.jp/service/china_law/20201110.pdf.
110 Center for Information on Security Trade Controls (CISTEC) and Other Associations. 2020. “U.S.-Japan Joint

Position Paper on the Second Draft of the Chinese Export Control Act”, Aug 11, 2020.

https://www.cistec.or.jp/service/china_law/20201110-tenpu1.pdf. Center for Information on Security Trade Controls

(CISTEC) and Other Associations. 2020. “Joint EU-Japan Position Paper on the Second Draft of the Chinese Export

Control Act”, Aug 11, 2020. https://www.cistec.or.jp/service/china_law/20201110-tenpu2.pdf.
111 METI. 2020. “Summary of the post-cabinet press conference by Minister Kajiyama”, Nov 17th, 2020.

https://www.meti.go.jp/speeches/kaiken/2020/20201117001.html.
112 The Survey is conducted by Japan Center for Economic Research (JCER) via online from July 14th to July 16,

2020 (which means after the Hong Kong National Security Law’s enforcement, and before the U.S. Secretary of

State Mike Pompeo’s speech in July 23rd 2020). The number of observations were 3,000 who affiliated in listed

Japanese companies, and age over 20. The survey is jointly designed with JCER, Prof. Shin Kawashima, Prof. Akio

Takahara, Prof. Tomoo Marukawa, Prof. Yasuhiro Matsuda, Prof. Ryo Sahashi, and author. A part of results is

appeared in Nikkei Asian Review, “Japanese business rethinks high-tech deals with China,”, September 3, 2020.

https://asia.nikkei.com/Politics/International-relations/U.S.-China-tensions/Japanese-business-rethinks-high-tech-

deals-with-China.

https://www.cistec.or.jp/service/china_law/20201110.pdf

https://www.cistec.or.jp/service/china_law/20201110-tenpu1.pdf

https://www.cistec.or.jp/service/china_law/20201110-tenpu2.pdf

https://www.meti.go.jp/speeches/kaiken/2020/20201117001.html

https://asia.nikkei.com/Politics/International-relations/US-China-tensions/Japanese-business-rethinks-high-tech-deals-with-China

https://asia.nikkei.com/Politics/International-relations/US-China-tensions/Japanese-business-rethinks-high-tech-deals-with-China

Figure 4. Diversified views on decoupling with China113

Note: Question is “If the U.S. government asks the Japanese government to implement a decoupling with

China, do you think Japan should also cut off the flow of products, money, personnel and technology with

China?” This survey was conducted between July 14 and July 16, 2020. Total sample size was 3,000.

Lastly, Japan and the United States need to respect the diverse views of other countries in

the region. East Asian countries, such as South Korea and the member states of ASEAN also

share similar opportunities and challenges with Japan. Obviously, Asia’s prosperity depended on

the post-Cold War peaceful geopolitical environment and is now being seriously challenged by

current strategic confrontation, as noted by Singapore Prime Minister Lee Hsien Loong in his

article “The Endangered Asian Century”.114 In the aftermath of the Covid-19 pandemic, as well

as in the age of Sustainable Development Goals, closer regional and global cooperation is of the

utmost importance in steering recovery.

113 Source: Survey by Japan Center for Economic Research.
114 Lee, Hsien Loong. 2020. “The Endangered Asian Century: America, China, and the Perils of Confrontation”,

Foreign Affairs, Vol.99 No.4, pp.52-64. It was just five years before this article that Prime Minister Lee stated

“Speaking as an Asian country and a participant in both the AIIB and the TPP, Singapore hopes that eventually

China will join the TPP, and the US and Japan will join the AIIB” in his keynote speech at the Shangri-La Dialogue

in 2015. Both suggestions are not realized and even the United States has withdrawn from the TPP negotiation. Lee,

Hsien Loong. 2015. “Transcript of Keynote Speech by Prime Minister Lee Hsien Loong at the Shangri-La Dialogue

on 29 May 2015”, Prime Minister’s Office of Singapore, May 29, 2015,

https://www.pmo.gov.sg/Newsroom/transcript-keynote-speech-prime-minister-lee-hsien-loong-shangri-la-dialogue-

29-may-2015.

10.7%

20.9%

25.0%

20.4%

14.6%

8.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Strongly agree If anything,

agree

Neither agree

nor disagree

If anything,

disagree

Strongly

disagree

Do not know

https://www.pmo.gov.sg/Newsroom/transcript-keynote-speech-prime-minister-lee-hsien-loong-shangri-la-dialogue-29-may-2015

https://www.pmo.gov.sg/Newsroom/transcript-keynote-speech-prime-minister-lee-hsien-loong-shangri-la-dialogue-29-may-2015

Concluding Remarks

From an economic perspective, the dual nature of Japan’s strategy towards China is a

pragmatic consequence of regional realities in Asia. Since Japanese economic prosperity depends

on a stable geopolitical environment and trade facilitation in Asia, Japan has advanced an

engagement policy with China since the 1970s. Through the past four decades, China’s rapid

development has created a vast economic opportunity for Japan, but also has caused a rise in

geopolitical tensions. Since the 2000s, Japanese enterprises have accumulated business capital as

well as risk management capability, but the China Plus One strategy has limits as the

gravitational pull of the Chinese economy is greater than ever. During the second Abe

administration, the Japanese government advanced a dual strategy, namely hedging and

cooperation with China during a moderate geopolitical environment. However, the risk of doing

business with China is now transforming from a bilateral political risk to great-power

competition risk.

After a half-century of post-war Japanese cooperation and engagement with China, the

intensification of U.S.-China competition will test the robustness of the Japanese dual approach

in the 2020s. Unlike the attitude of Prime Minister Yoshida in 1949, when he said, “it doesn't

matter whether China is red or blue,” today Japan cannot adopt such a view as China’s geo-

economic and geo-political influence are fundamentally different from the past. As such, U.S.-

Japan coordination and multilateral frameworks to manage China’s rise are particularly

important as Japan’s relative decline in economic presence is inevitable. Under a more

centralized political regime in China, the CCP’s market intervention and weaponization of

economic interdependence are tangible risks for Japanese enterprises as well as western

companies. Japan’s active role in multilateralism and its dual approach towards China could

take the edge off of strategic competition by providing rule-based engagement dimensions with

China, though this approach alone does not guarantee the possible shift of China’s trajectory

especially in security fields. In this context, Japanese economic pragmatism, which has been

prevalent since the 1950s, moderately contributes to regional stability and prosperity despite its

own limitations.