Japan Focuses on Benefits From China's Growth

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Includes: ESALY, FRCOF, MARUY, MITSY, MSBHY, SHCAY, SSUMY
by: Investment U
By Tony D'Altorio

In an effort to get its economy out of a two-decade tailspin, Japan is looking to the west. But not to the economies of Western countries like the United States. Instead, it is looking west over the Sea of Japan - to China.

The financial crisis taught many Japanese businesses the dangers of over-reliance on the U.S. and Europe. Besides, it has a new cash cow.

Twenty years ago, China’s GDP was only an eighth the size of Japan. And even in 2005, Japan was sending it large amounts of overseas development aid. But now China has ousted it from its 40-year standing as the world’s second-largest economy after the U.S. Akira Kojima of the independent Japan Center for Economic Research notes the “historic power shift taking place… in which developing economies are leading.”

Japan is catching onto that altered reality and refocusing accordingly.

China and Japan: Friends with Benefits

Japan has already slipped behind its neighbor in a number of economic areas.

  • In 1994, it had three ports in the world’s top 20, in terms of containers handled. By 2008, all three had dropped off the list, while Shanghai and Shenzhen emerged in second and fourth place respectively.
  • Japan also lost its place as the favored regional base for foreign companies in Asia. Three years ago, those businesses wanted Japan for their research and development facilities. Now, they want China.
  • Japan can’t even claim a dominant power in the broader technology sector anymore. It used to own the solar energy battery market with companies like Sharp ADR (OTCPK:SHCAY); US-based First Solar (Nasdaq: FSLR) and China’s Suntech Power ADR (NYSE: STP) have taken over.

Yet somehow, Japan’s leadership appears untroubled by the competitive threat. Instead, it’s focusing on the benefits to be had from its neighbor’s enviable growth.

Akira Kojima of the Japan Center for Economic Research adds, “There is a consensus that, with a graying society suggesting poor prospects for economic growth, China, with its vast population and rising income, offers the best hope for Japan’s well-being.”

Why Japan Can’t Get Enough of China

China now absorbs nearly 19% of Japan’s total exports, more than what the U.S. takes in.

Once the Asian economic giant itself, Japan is now courting China for all its worth. The Japanese Ministry of Economy, Trade and Industry sees Chinese consumption increasing to $5.57 trillion by 2020, eclipsing its own forecasted $3.61 trillion.

That makes for an enviable client base. And Japanese businesses know it. They have taken to making goods in China for China, instead of for export elsewhere. Their enthusiasm helped lift foreign-direct investment there by Japanese manufacturers by 68% over five years to 3.74 trillion yen last year.

Some merchants don’t even have to leave home. Many retailers in Tokyo’s glitzy Ginza shopping district have come to depend on Chinese tourists and their Ginren credit cards. They can continue enjoying those benefits too. In July, Japan eased visa restrictions in the hopes of attracting 1.8 million Chinese visitors this year, up from 2009′s 1 million.

Those travelers should spend around ¥500 billion this year and with their income rising, they could spend 10 times more over the next decade, equating to 1% of Japan’s GDP!

Their newfound wealth is also helping to support and revitalize stressed Japanese companies. Chinese firms have invested in more than 600 of them, more than double what they did five years ago. That works very well considering how Western companies have pulled out. In addition, a growing number of wealthy Chinese are buying Japanese property. This has stirred hopes for the long-dormant sector.

Really, there is only one big downside to all of the attention. China’s recent record purchase of Japanese government bonds has put upward pressure on the yen, hurting Japanese exporting companies.

Yet that could be a small price to pay in the long run.

Japanese Investments Set to Rise from the China Connection

Some of the Japanese companies leading the push into China include electronics company Sharp, pharmaceutical business Eisai ADR (OTCPK:ESALY) and clothing retailer Fast Retailing ADR (OTCPK:FRCOF).

And Japanese trading houses have opened up into a wide range of sectors as well. Among the better-known names are Sumitomo ADR (OTCPK:SSUMY), Mitsubishi ADR (OTCPK:MSBHY), Marubeni ADR (OTCPK:MARUY) and Mitsui ADR (OTCPK:MITSY).

Despite their mixed past, China and Japan seem set on benefiting each other now. Make sure your portfolio takes note of this new era of collaboration.

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