Japan-China co-operation in 2018

Leaders urge greater economic integration in Asia

Enhanced financial and monetary co-operation between China and Japan, the world’s second and third largest economies, is likely to be one of the prime trends to follow in the next 12 months.

There remain considerable strains in the bilateral relationship, not least reflecting differences over territorial claims and China’s increased military presence across eastern Asia. Yet Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe have reinforced their domestic political power bases in the last few months. For both leaders, US President Donald Trump’s shift towards unilateralism is an incentive to identify shared interests and improve ties in regional trade and finance.

China is Japan’s largest trading partner, while Japan is China’s second largest. Japan, benefiting from China’s outbound tourism boom, welcomed around 5m Chinese visitors in 2017, more than from any other country.

Although the Japan-US security pact will continue to dominate Japan’s foreign policy, both countries’ engagement with the US to curb the nuclear ambitions of North Korean leader Kim Jong-un could be another factor in improving collaboration. This could spread to spheres such as bilateral currency co-operation and monetary back-up for Asian countries suffering capital outflows because of higher US interest rates.

Multilateral co-operation with the 10 countries in the Association of Southeast Asian Nations is an important focus. This has intensified in the last two decades, with a greater commitment to East Asian economic co-operation under the so-called Asean Plus Three grouping, which includes China, Japan and South Korea. While Sino-Japanese political disputes have occasionally raised alarm in the rest of Asia, the rivalry has also benefited the region, since countries play the two economic giants against each other to gain better deals.

Asean accounts for only around 10% of the region’s GDP, while the ‘Plus Three’ represents 90%. Competition between China and Japan has been one reason for sub-optimal co-operation among the ‘Plus Three’, but this could change.

Xi is urging further regional economic integration and greater efforts on trade and investment. Aside from the Beijing-backed Regional Comprehensive Economic Partnership, he is proposing further talks on a free trade agreement between China, Japan and South Korea that does not include the United States.

At the same time, almost 70 countries have signed up to China’s cross-border Belt and Road infrastructure initiative. Although it would be politically difficult, Japan’s greater involvement in the Belt and Road would be a major boost for the region. This could mirror the extended co-operation between the Asian Development Bank, in which Japan plays a major role, and the China-led Asian Infrastructure Investment Bank, from which both the US and Japan are absent.

For all the strength and wealth Beijing and Tokyo accumulated, since 1800 neither has been powerful enough to claim regional dominance. Japan’s failed bid for east Asian hegemony during the second world war, its destruction and subsequent economic reconstruction has been a development no less significant than China’s renewal under communism and its more recent capacity to influence global financial markets.

As Chinese and Japanese interests become progressively aligned in technology, finance and industrial development, they might be able to reconcile and work together towards greater regional co-operation. Setbacks along the way are probable – but the future path seems increasingly clear.

David Marsh is Chairman of OMFIF and Adam Cotter is OMFIF’s Head of Asia.

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