Turning Point in Japan’s Trade with China

Osaka – Monday, July 19, 2010

Nikkei, Japanese newspaper specialized in business and economy, reported today that Japan’s trade with China is at the verge of turning point and may even abolish trade deficit with China to make it trade surplus. With low cost made in China products imported to Japan, trade deficit with China had been around 2 to 3 trillion per year since the middle of 1990s but for 2009 it has shrunk to approximately 480 billion yen.

This is because of the increase in purchasing power of China accompanied by economic growth. There are also qualitative changes in trade such as automobile trade started to drive export from Japan to China. These indicate that China is transforming from “factory of the world” to “market of the world”, and China’s presence as both production site and consumption market is drastically increasing.

If Japanese companies succeed to penetrate Chinese consumption market, it may not only contribute to abolishing trade deficit with China making it trade surplus but also to optimizing total trade imbalance.

1. What is the recent trend of Japan’s trade with China?

1) Analysis and estimation by Barclays Capital

Balance of trade with China for January – March 2010 was surplus, excluding seasonal factors, is the conclusion of their analysis. When they estimated by adding their original adjustment of seasonal factors to trade statistic data issued by Ministry of Finance, trade balance with China is 740 billion yen per year in surplus, although it had been in deficit for the past 21 years since October – December 1988.

2) Indication of data issued by Ministry of Finance, the primary source of Barclay Capital’s analysis

Data issued by Ministry of Finance also reveals changes in Japan’s trade with China. In 2009 with worldwide economy recession triggered by Lehman's fall, import from China to Japan decreased by 16% from 2008, when export to China from Japan decreased only by 4% from 2008.

There are 2 points that needs to be taken into note of. One is that China’s recovery which was earlier than developed countries minimized the trade decreased. The other is that trade of finished products such as automobile and high tech equipments increased prominently.

Percentage of export of transportation equipments (passenger cars, trucks etc.) increased by 3% from 2008 to 10.12% in 2009. This is about double from 5.15% in 2004 when it was at one of the lowest level because of local production by Japanese companies (in the midst when China was called “factory of the world”).

Similarly, for January – March 2010, export of video equipments such as video cameras were 1.6 times of January – March 2009, and export of digital cameras especially of high end products increased by approximately 80%.

2. Why Japan’s trade with China had been in deficit for a long time?

Primary reason why Japan’s trade with China had been in red for a long time is the fact that Japanese companies positioned China as production country/site instead of consumption market with its low labour cost. Japan’s key industry had been clothes until 1990s and shifted to electronics after 2000; however, their business flow had remained the same. Raw materials and components were exported to China from Japan and finished products produced were imported from China to Japan. This means that the value added in China by production equals trade deficit.

3. How has Japan’s trade with China changed (or started to change) today?

However, finished product drives export from Japan to China today. According to JANA (Japan Automobile Manufacturers Association, Inc.), approximately 96,400 cars were exported January – May 2010, which is 50% increase from January – May 2009. Passenger cars including Toyota’s LEXUS constitute approximately 89,600 of them. Japanese companies had been preserving domestic production for these kinds of high end, value-added products and Chinese consumers are aggressive in buying such products today.

This is because China’s purchasing power has been increasing with high economic growth when Japan’s purchasing power has been decreasing with low birthrate combined with aging population and low growth in average income. With disparity in economic growth of the two countries, it is quite possible that scenario of Japan’s trade with China turning from deficit to surplus becomes a reality.

4. How has China’s purchasing power been drastically increasing? How is it estimated to continue increasing and why?

Consumer spending amount of China has been drastically increasing and it is estimated be more than that of Japan in 2020. According to the white paper of international trade and industry for 2010, China’s consumer spending is only 1.53 trillion USD for 2008, which is less than that of 60% of Japan’s. However, in 2010 it is estimated to drastically increase to 5.570 billion USD, which is 3.6 times that of 2008. This is incredible because this surpasses Japan’s consumer spending which is 3.61 billion USD.

China’s consumption market is estimated to continue increasing drastically even with decrease in population similarly to Japan, supported by increase in middle income households. China’s middle income households whose annual income is between 5,000 and 35,000 USD is estimated to almost double from 500 million people in 2010 to 9700 million people in 2020.

An expert in international trade views on recent trends that seem negative factors for employers support such estimation and outlook that China’s import from Japan is likely to continue to increase. He views that the recent repeated labour disputes and increase in labour cost are in fact increase in income for employees, meaning increase in purchasing power of consumers (= employees). Therefore he concludes that exports of finished products from Japan to China would continue to increase despite decrease in total population.

5. What are upcoming challenges and risks for Japanese companies?

On-the-spot challenge and risk for Japanese companies is increase in labour cost of China, but their primary upcoming challenge would be to find new business opportunites in China. Also, in leveraging China’s internal demand, it is quite possible that local production in China becomes more active meaning stable export of raw materials and components from Japan to China is also inevitable.

Leveraging Chinese consumption market is a common challenge for all developed countries of matured economy. This means that global competitiveness and speed of Japanese companies would be vital to expand export to China. This is why a consultant of BCG (Boston Consulting Group) says that Japanese companies would not succeed entering and penetrating Chinese market unless they increase market share in China at an early stage.

On the other hand, if Japan’s trade with China becomes in surplus, it is possible that a new view in foreign currency exchange might emerge, which is a risk for Japanese companies. Developed countries that have been requesting revaluation of RMB market with the objective of taking corrective action imbalanced global economy but they may regard RMB appropriate against yen as it is.