Japan Benefits from China

WSJ writes:

Just as U.S. workers are now worrying that their jobs will be outsourced to China and India, many Japanese have long feared their industries would “hollow out” and move to China. For much of the 1990s, their fears were realized as China sucked manufacturing jobs out of Japan. But recently, China’s boom is contributing to Japan’s economic recovery and actually creating manufacturing work here.

Chinese demand is also combining with years of cost-cutting to allow Japanese companies to keep more manufacturing at home. Big manufacturers such as Hitachi Construction and consumer-electronics giant Matsushita Electric Industrial Co. have boosted efficiency and can now make highly complex goods as cheaply in Japan as they can overseas.

While the U.S. trade deficit with China surged 20% to $124 billion in 2003, Japan’s deficit with China shrank 24% to the equivalent of $19 billion. This February, Japan ran a monthly trade surplus with China for the first time in 10 years. Exports of Japanese machinery and electronic gadgets — exactly what China was supposedly grabbing from Japan — are among the biggest drivers of Japan’s recent expansion. Gross domestic product in Japan, the world’s second-largest national economy after the U.S., grew by a surprise 2.7% in 2003, and economists expect similar growth this year.

With growth averaging 7% a year for the past 10 years, China is becoming a powerful consumer on the global stage. It is also becoming a giant builder, especially as the 2008 Beijing Olympics approach. That generates Japanese exports to China of chemicals, cement and steel girders.

Even more important is the increasing production by Japanese companies in China, as they set up factories there to make everything from cellphones to clothes irons. Of the goods Japanese companies make in China, some 40% stay within China itself, says Koji Hiiragi, an economist at UFJ Institute, a Tokyo think tank. The equipment and components used in these China-based factories mostly come from Japan, creating — for the time being — a net gain in production inside Japan. Indeed, the main worry for Japanese economists these days is that a slowdown in China — which accounted for 79% of Japanese export growth last year — will threaten Japan’s recovery.

Like most advanced economies, Japan over the long term is gaining service jobs and losing those in manufacturing.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.