Saturday, May 21, 2011

19/05 POINT OF VIEW/ Yoichi Funabashi: The spark for Japan's recovery must come from China

photoYoichi Funabashi (Asahi Shimbun file photo)

As the Fukushima nuclear reactors continue to buck efforts to bring them under control, Japan's triple disaster holds a magnifying glass to my country's vulnerabilities. Tokyo Electric Power Co. (TEPCO), the operator of the Fukushima plant and one of Japan's most powerful business interests, has informed my devastated nation that a further six to nine months will be needed to stabilize the facilities, increasing concerns of the risks of disruption to our energy supply.

In these trying times there are many challenges ahead for the government and many reasons for Japanese despair. Already the bond market has begun to rattle over the savagely downgraded TEPCO corporate bonds. The fear now is that this will spell the collapse of the Japanese government bond. But as world history amply demonstrates, crisis can breed opportunity. At a recent dinner in Tokyo, senior business leaders posed an intriguing scenario for Japan's recovery--if not revival: This is the moment for Japan to break with the past and move closer to China.

While talk of a new industrial revolution may sound optimistic, recall that some of Japan's best-known companies, including Panasonic, Sharp, and Toyota, laid the foundation of their manufacturing business atop the wreckage of the Great Kanto Earthquake of 1923. For a repeat, China may be the key.

As one executive at the dinner said, with his supply chain disrupted he had little choice but to expand his business and export base in China. He added he would also urge his parts suppliers to move to China, as some of their factories had been devastated.

Another chimed in: "That's right. The uncertainty of the energy supply is really the drawback here. You have to keep your production steady to stay in business, and expanding your business in China is a way to do so--whether you like it or not."

The disruption of the supply chain caused by the sudden cutoff of output from production centers and parts suppliers concentrated in the affected regions is indeed the pressing challenge. Both Honda and Mitsubishi Motors have found their factories in China choked by the suddenly reduced supply of semiconductor parts from the Tohoku area, and have been forced to cut down their China operations.

This is quite a moment. With Chinese markets and factories representing an increasingly crucial element to their global business, numerous Japanese companies are seeking to diversify their parts supply-chains and, in some cases, to transfer such operations to China.

Meanwhile, China makes no secret of its ambitions to catch up with, or even replace, Japan in the market by acquiring coveted technology from now-devastated Japanese parts manufacturers.

Guo Dingping, deputy director of the Institute of International Studies at Fudan University, pointed out that Japan's recovery demands will be a "booster to China" and could be a "turning point in Sino-Japanese economic and trade growth."

This is not to underestimate the immense impediments that need to be overcome. There is the risk that Japan's unstable and ineffective political leadership may once again fail to translate crisis into opportunity. Unless decisive action is taken in the opposite direction, the disaster could pave the way for a preponderance of parochial outlooks on Japan's future. Should such a vision prevail, Japan would almost certainly marginalize itself from the global scene. This must be avoided.

The robust Japan-U.S. alliance will continue to be central to peace and security for the Asia-Pacific region. At the same time, a more stable and trustworthy relationship between Japan and China is also essential to Japan's rebuilding. This is the moment of truth as to whether or not Japan will remain a global power. Future decisions on budgeting for official development assistance (ODA) will represent a significant test of this resolve.

Critical for Japan will be its ability and willingness to forge strategic economic ties with emerging markets--China especially. China was quick to respond after the disaster, even offering to dispatch a naval hospital ship (an offer Japan ultimately declined).

China's attitude can be ascribed to various motivations, including commercial "booster" effects, a sense of vulnerability to a "Jasmine revolution" and inflation, and the impressive demonstration of Japan-U.S. joint operations. Whatever the motive, China's clear signal that it is shifting toward a better bilateral relationship should not be overlooked.

The road to deepening mutual trust between Japan and China will not be smooth; new thrusts for investment and mergers and acquisitions between the two countries could engender an anti-China backlash among Japanese people.

The ban on rare earth exports to Japan last September is still fresh in Japanese minds. Mutual distrust runs deep. Top business executives are careful not to mention the "C" word (China) in describing plans to transfer production and research and development to China. One executive at the dinner cautioned they should not broadcast their thinking. "People will be upset to hear you are abandoning them when they are in deep trouble."

Political leadership on both sides will need to muster courage to reorient the relationship. Closer ties will stabilize the region, and Japan's new venture to tackle the challenges of nuclear safety, and green energy will contribute, too, to urgent needs within China as well as globally.

Surveying the course of history, Japan's new tilt to China will seem not dissimilar to the trajectory of its recovery and revitalization following the Pacific war. Then, Japan's new economic ties with the United States constituted the spark to jump-start Japan's recovery and revitalization.

But the success of the maneuver hinged critically on the ability to develop political stability and mutual trust between the United States and Japan. This time around, the spark must come from the China engine.

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Yoichi Funabashi is former editor in chief of The Asahi Shimbun. This article originally appeared in The Financial Times.

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