10. Economic Interdependence of Japan and China: An Understanding

Recent developments between China and Japan are seemingly shaping a collision course and creating tensions in their bilateral economic relations. Economically, both countries are important to each other and any adverse event is likely to have a bigger long-term impact on their economies. This is because of the depth and width of the economic and financial engagement developed between them. On the one hand, China is now Japan’s biggest trading partner. Japan, on the other hand, has a substantial amount of investment in China. All the major Japanese companies are now deeply engaged in production in China and it is a strategic spot in their international supply chain. Similarly, short-term Japanese portfolio investment is playing an important role in the Chinese stock markets. Beyond these economic and financial linkages, Japan, in recent years, has been seeing an increasing number of open-wallet Chinese tourists to the delight of its sluggish economy. This chapter examines the possible economic impact of any disruption of this interconnection between China and Japan.