By: Rumi Aoyama

In early 2015, Panasonic and Toshiba announced that they would stop producing television sets in China. As Japan continues to decrease its investment in China, the two multinational corporations’ partial exit seemed to underscore an overall trend of Japanese firms withdrawing from China. On Feb. 23, Nikkei News reported that Citizen Watch Company had suddenly closed down its parts factory in Guangzhou, laying off all 1,000 employees there.

Relations at a Nadir

The Sino–Japanese relationship has hit its worst downturn since normalization of diplomatic ties. High-level dialogues, including summit talks, have been suspended since the Japanese government nationalized the Senkaku/Diaoyu islands in September 2012 and Prime Minister Shinzo Abe visited Yasukuni Shrine in December 2013. With its One Belt One Road strategy in 2013, Beijing launched its own diplomatic offensive to improve ties with neighboring states, resuming intergovernmental contacts with Japan as well. But China has not shown any sign of compromise on the history or the Senkaku/Diaoyu issues.

Meanwhile, Japan is moving toward its alliance relationship with the United States and has been developing a new collective security regime. There remains a deep-rooted mistrust between the two sides in both political and security areas.

It was against this backdrop that Japanese firms began to leave China. Despite the political predicament, its conditions in the labor market that have been the most important factor affecting these developments in the economic relationship between the two countries. Since large- and medium-sized corporations alike still yield profit in the market, the withdrawal of Japanese firms from China does not indicate dwindling business opportunities for all Japanese companies in the mainland.

Japanese firms entered China ahead of other countries after Beijing’s reform and opening-up policy in the late 1970s. According to the Chinese Ministry of Commerce, by the end of 2012, 23,094 Japanese firms had set up in China. The current Chinese Ambassador to Japan, Cheng Yonghua, evaluates these firms’ investment activities in China highly, stating that “by May 2015 Japanese accumulated investment in China had reached US$100.4 billion, making it the first country to surpass US$100 billion.”

Times change

But recently circumstances have changed for many Japanese firms, which have been in the Chinese mainland market for nearly four decades. Annual Japanese investment in China has decreased since 2012, when it peaked at US$7 billion. The amount in 2014 was US$4.3 billion, 38.8 percent lower than the previous year.

The business model in China has also started to change. Previously, foreign firms produced goods in China using abundant and cheap local labour, and sold their products to foreign markets. But increases in labor costs (particularly as a result of the 2008 labor contract law) have affected the profitability of firms seeking good returns. A survey conducted by the Japan External Trade Organization (JETRO) shows that 83.9 percent of Japanese firms believe that wage increases are a significant problem for their business activities.