Shinzo Abe speaks to reporters in Tokyo

View from Washington: Japan looks beyond Covid-19

Image credit: Kyodo/via Reuters

Shinzo Abe's stimulus package looks to repatriate manufacturing to help kick start his country's economy after the outbreak.

Earlier this month, Japanese Prime Minister Shinzo Abe published his country’s coronavirus stimulus package. It included ¥220bn (£1.6bn) for companies that move manufacturing back home from China and a further ¥23.5bn (£168m) should they relocate it elsewhere.

At time of writing, Beijing’s response has been surprisingly muted. But there can be little doubt that Abe’s move has inflamed one of the world’s most difficult geopolitical relationships. Only seven years ago, the two countries came close to armed conflict over the disputed Senkaku/Diaoyu Islands in the East China Sea. History is peppered with their often vicious disputes.

But beyond local tensions, the stimulus shift has been taken as an acceleration and extension of the ‘decoupling’ foreseen between China and the major Western economies. This was kickstarted by the Sino-US trade war and is today being fuelled further as Beijing is seen as trying to reap propaganda dividends from Covid-19 rather than accepting appropriate responsibility.

There had been recent signs of a thaw between China and Japan. Before the virus outbreak, Chinese President Xi Jinping had been set to make an official state visit to Tokyo. Then during the outbreak itself, Japan was one of the first countries to send aid to Wuhan in the shape of personal protective equipment (notably Japan’s self-​sufficiency in PPE is one of the reasons analysts believe it has been able to take a strong line).

China and Japan are also mutually significant trading partners. In 2017, bilateral trade rose by almost 10 per cent to £230bn, after years of decline attributable to the Senkaku-Diaoyu dispute. Chemicals and high technology products are major imports and exports on both sides.

Given all these factors, Abe’s objectives need to be judged with care. For example, one comparison Japanese economists are drawing between Japan’s Covid-19 public spending and that of other leading countries is that it includes ‘multipliers’.

For example, most of the UK’s Treasury package comprises loans and wage subsidies intended to protect jobs during the crisis, but Japan has also put its mind to measures that will stimulate economic activity once it passes: building and then staffing new manufacturing capacity will help here.

This has echoes of the ‘shovel-ready’ strategy the Obama administration applied to its stimulus spending after the 2008 financial collapse. It gave priority to funding those infrastructure projects that could provide immediate and longer-term returns.

Going beyond that, this coronavirus has, the Japanese say, exposed serious breaches in the traditional supply chain.

At the peak of China’s struggle with the outbreak in February, exports to Japan collapsed by 47 per cent. They are beginning to return – although any manufacturing-based supply-chain resumption is reckoned to take at least three months – but the impact on Japanese companies that used components, partially- or wholly-finished products from China was severe.

There may indeed be some raw politics behind all these explanations (though when the pioneers in Kanban just-in-time manufacturing speak up, it’s usually worth listening). Certainly, Japan has so far eyed China’s emergence as a global superpower with far more unease than any country in the West. But its economists’ point about ‘multipliers’ stands – and as more pointed rhetoric emerges towards China in the West – may be getting lost in a very febrile political atmosphere.

In the UK, for example, you can entirely understand the concerns of MPs and the security services over the prospect of an advanced UK semiconductor IP company like Imagination Technologies moving its domicile to China. There is a risk that Chinese investors will attempt to launch M&A raids against western companies with sensitive technologies as their economy recovers earlier than others.

But one could equally say that inadequacies in the UK’s own supply chain have been exposed, particularly its lack of domestic manufacturing capacity. Rivalries and anger (a great deal of it justified) should not allow broader issues to be overlooked. To that end, Japan’s strategy might well be one to consider much more closely.

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