The spread of COVID-19 around the world has caused global economic activity to stagnate and development to reverse, which has undoubtedly brought a great negative impact on Japan, which takes manufacturing as one of its economic pillars. Before the outbreak of the epidemic, thanks to the opening of the global market and the mutual flow of capital, labor and other factors, Japan, with a high degree of external dependence, basically completed the layout of industrial chain in the global market, especially the Chinese market, and achieved stable production efficiency. However, after the outbreak of COVID-19, China’s production fell into a state of temporary stagnation, which had a knock-on effect. As a result, Japan’s domestic production slowed down or even stopped, causing social anxiety and panic about the shortage of materials such as epidemic prevention and life.
Taking this opportunity, the Japanese government issued the Emergency Economic Policy in April 2020, in which it pointed out that the government finance would take the lead to guide the return of Japanese production lines by means of policy guidance, fiscal subsidies, land and tax incentives. According to a survey conducted in June by The Nikkei Business Daily, nearly 70 percent of companies said they would reconsider changes to their production chains. On July 17, Japan’s Ministry of Economy, Trade and Industry (METI) released the amendment to the first budget of 2020, which clearly stated that 220 billion Yen would be invested to support domestic enterprises to adjust and relocate overseas industrial chains back to Japan. This means that while COVID-19 has brought crisis to Japan’s existing industrial chain, it has also promoted the emergence of new changes, which may change the future layout of Japan’s industrial chain and even gradual de-Sinification.
The status quo of excessive external dependence
According to statistics of Japan Trade Recovery Association JETRO (table below), in 2019, the trade volume between China and Japan was 303.89 billion US dollars, accounting for 21.3% of Japan’s total foreign trade volume. Among them, the export volume to China was 134.71 billion US dollars, accounting for 19.1% of Japan’s total export volume. The import volume to China was 169.18 billion US dollars, accounting for 23.5% of Japan’s total import volume. China is Japan’s largest trading partner. Economic relations between China and Japan are at an unprecedented close period. But on the other hand, it also reflects that Japan’s industrial chain relies heavily on foreign countries, especially the Chinese market.
| The Development of Japan’s Trade with China in Recent Three Years (Unit: US $100 million) | ||||
| Year | Total Japanese trade with China | Japan’s exports to China | Japan’s imports from China | Japan’s trade deficit with China |
| 2017 | 2969.1(21.7) | 1326.5(19.0) | 1642.6(24.5) | -316 |
| 2018 | 3174.4（21.4） | 1439.2（19.5） | 1735.2（23.2） | -296 |
| 2019 | 3038.9（21.3） | 1347.1（19.1） | 1691.8（23.5） | -344.7 |
Data Source: Japan Trade Promotion Agency, Monthly trade trends in Japan
Under the impact of COVID-19, the vulnerability of Japan’s industrial chain to excessive external dependence has been further revealed. First of all, according to the statistics of Japan Sanitary Materials Industry Federation and from the ministry of Economy, Trade and Industry “production dynamic statistics survey”, at present, Japan’s self-supply rate of epidemic prevention materials such as masks and disinfectant water is only about 20%. Laptops and other products in greater demand due to COVID-19 are almost entirely dependent on the Chinese market. When the first wave of the epidemic broke out in China, Japanese manufacturers of epidemic prevention materials and other industrial products cut production or suspend production because of the interruption of the supply of raw materials and parts.
As the epidemic spreads around the world, supply chain problems tend to be complicated. In the second quarter, China largely contained the outbreak, but Japan saw its second peak. Constrained by the external environment, some raw materials, core components and production equipment that Japan relied on to import in the first quarter were not smooth, which affected the resumption of production and the progress of economic recovery. The second wave of the epidemic forced Japan to increase the import of materials, and even some industries had to increase their overseas investment due to the rupture of the domestic production chain, forming a cycle of further external dependence of the production chain.
For Japan, taking the coVID-19 outbreak as an opportunity to expand domestic production of necessary materials and to transfer overseas production chain back to Japan seems not very easy. First, most of Japan’s multinationals have completed their overseas production chains, which are more economically viable than if they were based at home. If multinational companies are required to gradually move back and expand domestic production, the first to bear the brunt is not only the relocation costs but also the huge funds needed to maintain domestic production. Secondly, in recent years, earthquakes, typhoons, floods and other natural disasters occur frequently in Japan, which all bring unpredictable potential risks to the industrial chain. Thirdly, many multinational enterprises give priority to long-term stable benefits. The epidemic is not permanent. Long-term adjustment of the industrial chain only due to the epidemic, and the high cost may endanger the profits of enterprises and it is not conducive to their long-term development.
The trend of change led by the Japanese government
The Japanese government announced in mid-April Emergency Economic Plan, put forward the idea of overseas industrial chain’s return to Japan, and then started to collaborate with local governments in funding conditions, such as tax breaks, fiscal incentives from May, tried to dominate the situation by administrative intervention and promote the realization of the idea. However, according to the survey results of enterprises conducted by Nikkei in July this year, although more than 70% of Japanese multinational enterprises intend to or have already adjusted their industrial chains, only less than 10% choose to move their industrial chains back to Japan. Therefore, it is extremely difficult for most Japanese multinational enterprises that focus on maximization of production efficiency to move their production chain back from the Chinese market for a considerable period of time in the future.
In terms of this reality, the Japanese government gradually optimized the strategy and adopted two schemes, vigorously optimizing the domestic production environment to attract direct return and encouraging enterprises to gradually return after decentralizing the industrial chain. First, from the beginning of the single fiscal policy support to the construction of the overall industrial chain related environment. Taking the scheme of Kanto Bureau of Economy and Industry as an example, this scheme proposes to improve the infrastructure construction of logistics, transportation and warehousing to a greater extent, guarantee the upstream and downstream supply of raw materials at home and abroad, and provide hardware support for the return of industrial chains of various industries. The government will invest and take the lead to assist the industry integration, give play to the agglomeration effect, find suitable production land and purchase production equipment, etc., and attract the production chain to move back directly. On the other hand, with the informatization of production, the maintenance and expansion of industrial chain cannot be separated from the development of scientific and technological information. Japanese Prime Minister Yoshihide Suga first raised the idea of setting up an Information Industry Agency in an interview with the Yomiuri Shimbun newspaper on September 7 to promote Japan’s development in this field. The establishment of Information Industry Agency will play a great demonstration role and chain effect, promote the progress and transformation of Japan’s information production environment, and stimulate the growth and development of Japan’s domestic science and technology information industry. In this context, the return of the industrial chain of Japanese multinational enterprises means new growth points and cooperation space. China should see the development trend of this industry in Japan in advance and make corresponding strategic layout.
Second, select a few enterprises as demonstration objects, encourage and fund them to disperse the risks of industrial chain, transfer the production chain to Southeast Asia in the future, gradually complete the desinicization of production, and then further promote these enterprises to expand domestic production in Japan. These policies will have a direct impact on existing Japanese investments in China and potential future investments. Considering the comprehensive operating costs, few enterprises are willing to follow the Japanese government’s policies to move back from China. With the continuous increase of the Japanese government’s stimulus policies, however, more enterprises are inclined to change their attitude. With the support and encouragement of the Japanese government, 124 Japanese multinational enterprises applied for the first phase of the Promoting Diversification of Overseas production chains program launched by the Japan Trade Promotion Agency. A total of 30 companies on the list announced on July 17 have passed the qualification examination, and 15 of them have decided to follow the government’s call to move the industry chain to Vietnam. Many of the companies that make medical supplies and devices previously had supply chains mainly in China.
As neighbors, China and Japan have formed a basic trend of mutual dependence and common development in economy. However, Japan’s existing investment in China is at risk of losing and relocating due to the impact of its policies to deal with the epidemic. China should not only prepare for Japan’s competition in talents, investment and production factors’ returning to Japan, but also actively seek opportunities to promote the cooperation between the two countries in the field of information industry and optimize the production environment, so as to realize the pattern of “competition and win-win cooperation” between China and Japan as far as possible.
Major Teng is a research fellow at Asia Pacific Regional Development Institute of Hong Kong and he focuses on East Asian studies and China-Japan comparative politics research.