Japan economy shaky as island spat hits business

By Yuri Kageyama

Associated Press

Published: Tuesday, Oct. 9 2012 6:45 a.m. MDT

China, with its growing middle class, had been one of the emerging markets that Japanese companies were counting on to boost sales amid a long stagnation in their domestic market.

Japan's trade with China reached record levels over the last 12 months, totaling more than $340 billion. China is Japan's biggest export market.

Although the immediate damage is being felt in Japan, the souring relations and the realization of the so-called "China risks" are likely to crimp investments from Japan, hurting the Chinese economy as well, in the long run. Japan not only exports to China but also has significant manufacturing investments there in areas such as autos.

The unfolding dispute between the two Asian neighbors underlines how easily historical animosities can be revived — and so emotionally — no matter how closely intertwined the economies have grown. Enmity between the two nations started with military Japan's victory against China's dying Qing empire in 1895 and then exploded as Japan invaded swathes of China in the 1930s and 1940s and enforced a brutal occupation. China's communist government has nurtured anti-Japanese sentiment in successive generations through its control of education and the media.

Carl Weinberg, chief economist at High Frequency Economics, based in Valhalla, New York, said the territorial dispute is not going to set off a shootout.

"However, economic conflict has already begun. This can and will cost the woebegone Japanese economy dearly in the form of exports," Weinberg wrote in his weekly report, estimating that the loss of 40,000 vehicles for Toyota is worth about half a billion dollars.

Increasingly, Japanese have been looking to other nations such as Vietnam, Thailand and Indonesia as destinations for investment, and a hostile China could speed up that trend.

Japanese supermarket chain Aeon Co. said damage at one of its stores had totaled 700 million yen ($8.8 million) as looters smashed windows, broke in and ran amok, toppling shelves and kicking merchandise. That doesn't account for the loss of sales from the store's closure or boycotting consumers.

But spokesman Toshiyuki Mukohara was calm, noting the company remained committed to China, and its 34 other outlets were doing business as usual.

"We are dealing with regular Chinese people," he said.

Although the flare-ups have calmed in recent weeks, it would still require courage to be seen in a Japanese car in some Chinese cities.

Japanese automakers temporarily closed some of their China factories. Production is back up this week but reduced to lower levels as demand has collapsed.

Toyota, which makes the Prius hybrid, Camry sedan and Lexus luxury models, had planned to sell 1 million vehicles in China this calendar year.

"But that may be very difficult to achieve," company spokesman Dion Corbett said.

Follow Yuri Kageyama on Twitter: www.twitter.com/yurikageyama

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