BREAKING NEWS: Longtime Frenemies

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Why China and Japan must depend on each other even when they are frequently at odds

Recall mid-September. In the streets of a dozen Chinese cities—Beijing, Suzhou, Chongqing, Nanjing, Yunnan, Qingdao, Chaoshan—angry crowds went on a rampage.

The source of their collective angst was the drawn out standoff in the Diaoyu/Senkaku Islands, a string of five islets belonging to Japan located a hundred kilometers off Taiwan. The dispute had been simmering since mid-year but finally came to a boil after the Japanese government made it official that it would “buy” four of the islands from a Japanese businessman affiliated with the influential Koga family.

In response to the decision, thousands of Chinese protesters indiscriminately targeted what they believed were unjustified Japanese encroachments on Chinese public life. The Japanese Embassy was spared an all-out siege (although Ambassador Uichiro Niwa was harassed in his chauffeured car), but great corporate brands that had done so well in the mainland like Toyota, Honda, and Nissan were assaulted amid extensive media coverage.

The vicious display of rabid nationalism meant shops, retailers, dealerships, and motorists became the subject of public rage in China. Countless Japanese cars were overturned, mauled, and torched, even if Chinese nationals were driving them.

A number of Chinese commercial establishments openly proclaimed anti-Japanese sentiments with banners and signs. The worst incidents were compiled in a popular photo-sharing site and disseminated via social media.

An earlier attempt at conciliation at the latest Apec summit produced a short, 15-minute session between Hu Jintao and his counterpart Yoshihiko Noda. A similar meeting with the Philippine president, also embroiled in a thorny territorial row, never materialized and amounted to a snub by China. (This minor drama produced a sequel a week later during the 9th China-Asean Expo, when Xi Jinping and appointee Mar Roxas had a more fruitful dialog.)

The fallout from the widespread riots amounted to a new low in Sino-Japanese ties. In the same week, the Japan-China Economic Association canceled its impending visit to China, while commemorative activities marking 40 years of renewed ties between the two countries fizzled.

Toyota's Akio Toyoda, no doubt troubled by the implications of the crisis, lamented how “the large-scale anti-Japanese movement in China really affected the car sales. What we hope now is to recover as soon as possible.”

Quid Pro Quo
The fact that Toyoda mentioned recovery is proof that underneath the noise of conflict is a mutually beneficial relationship between two powerful nations. Ever since Japan was relegated to the world's third largest economy after China's ascension to second in 2010, both have moved closer together in different ways.

Since relations officially normalized in the 1972 China-Japan Joint Statement, the two rivals have weathered numerous bumps and have been able to profit from each other.

Before the hysteria over the Diaoyu Islands, which is perceived as either a saber-rattling exercise by China before its historic leadership change or naked geopolitical one-upmanship, business relations were very exciting. Until April this year, Japanese companies had invested more than US$2 billion in China, itself a mere sliver of the actual trade volume both share—worth US$27.5 billion as of May 2012.

An amusing aspect of the strong bilateral ties between Japan and China is that accurate investment figures between them are hard to come by, yet experts agree that it always runs in the billions.

For example, from 2001, Japanese FDI into China was less than US$4 billion as Japanese companies spread outward from their initial beachhead in Dalian and began engaging in joint ventures. The amount has risen exponentially and is only now on a downturn, with 2012 FDI so far at a meager US$8.33 billion.

During the previous decade, which saw its fair share of sour diplomatic episodes—usually involving erring fishermen—spending on joint ventures totaled a whopping US$83 billion.

Meanwhile, Japanese manufacturers wasted no time establishing factories in the mainland and currently plan to move facilities deeper into the interior.

The scale of interconnectedness today has established China as Japan's largest trade partner, while Japan is China's fourth largest trade partner. The countries of both governments are actually very eager to enhance the ease of doing business with each other thanks to the EUs economic decline.

This is why Frederic Neumann, senior economist for Asia at HSBC, said in an interview that despite the heated dialog among Chinese officials, the higher rungs of leadership preferred a more restrained rhetoric. The reality is China cannot do without Japan and vice versa—now more than ever.

With the Chinese economy at large moving away from manufacturing, the new focus on consumer spending and services means that Japan has an enormous market waiting for its leading brands. For Japan, its industrial base needs access to raw materials and the R&D potential from Chinese technology firms is badly needed. This symbiosis is the underlying bond that remains unshaken no matter how vitriolic diplomatic ties may be.

The lesson here is Japanese cars torched by furious mobs are mere gestures, equal parts ugly, misguided jingoism and thuggery. Beijing is smart enough to keep everything cool in secret.


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