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China comes to Japan’s rescue

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If Japan were a company, it would be ripe for a takeover by a corporate raider.  High and rising debt.  Ageing and declining workforce.  No effective strategic direction.  It is not surprising therefore that China is now moving in.

Everyone is worried about the day when Japanese investors will no longer be willing or able to invest in Japanese Government Bonds, as the country’s level of public debt pushes through the 200 per cent of GDP level.  At the same time, China’s feels overinvested in US Treasuries and risky European debt, and is looking to diversify its foreign exchange holdings.

Perfect solution, invest in Japanese Government Bonds.  And this is exactly what China has been doing of recent times.  According to the Japanese Finance Ministry, China bought over $14 billion worth of Japanese securities in the first five months of this year (and that does not include JGBs bought through foreign brokerages).  This trend will likely continue, and may be accelerate.

Japanese companies have always underperformed in terms of profitability.  They have typically been managed partly as social enterprises which provide security and comfort for their workers, as much as they provide profits and dividends for their shareholders.  But these companies have lots of potential particularly because of their advanced technology.  And these companies are very tuned into the Chinese market, which has become the main driving force for the Japanese economy.

Westerners find penetrating the Japanese market well nigh impossible, with all of its invisible barriers.  That’s why according to UNCTAD data Japan’s stock of inward foreign direct investment as a share of GDP is only 4.1 per cent.  It ranks an embarrassing 195th out of 199 countries, with only Iraq, Nepal and Kuwait and Cuba having lowever FDI/GDP ratios than Japan!

But once again, Chinese investors can find their way through the bamboo jungle of investment barriers and are now slowly snapping up Japanese companies according to reports from Dealogic.

Japan has always been a closed society, and today migrants make up less than 2 per cent of the local population.  But over the past decade or more, the door has creaked open to migrants, in part through dodgy means like programs for “trainees” and students.  Once again, China is slipping through this door and the number of Chinese migrants in Japan has risen dramatically.  They are now rivaling Koreans as the largest migrant group.

As the US State Department reports, Japan is one of the world’s flashpoints when it comes to human trafficking, which services its massive sex industry.  This is managed by the Japanese mafia (yakuza) which is now increasingly sourcing its girls from China.

Lastly, a walk down through Ginza is enough for you to see the buying power of China's nouveau riche tourists which are now coming to Japan in hordes, especially since the recent relaxation of visa requirements.

Japan’s political system is democratic in contrast to China’s authoritarian regime.  But Japan is unable to match China for political direction and stability, and for projecting power.  And Japan has only itself to blame for leaving itself strategically vulnerable to a neighbour whose population is ten times bigger, and whose political ambitions know no bounds.

To see how China operates, you only need to look at Hong Kong.  On the surface, Hong Kong looks to still have its independence.  In reality, China has totally infiltrated its whole society and political system.  Now yellow blood is flowing in the old blue veins of the former British colony.  And just last week, China managed to seduce Taiwan with a free trade agreement.

But every yin has a yang.  Japan could become a Chinese satellite like Hong Kong, Macao and Taiwan, and may be end up much better off for it!



World Investment Report 2009, UNCTAD


Trafficking in Persons Report, 10th Edition.  June 2010.  US Department of State