Japan sets fund to help firms shift operations from China

FPI / April 12, 2020

The disruption of supply chains due to the Wuhan coronavirus crisis has led Japan to set aside ¥243.5 billion (nearly $2.5 billion U.S.) of its economic support package to help manufacturers shift production out of China.

The funds include ¥220 billion for companies shifting production back to Japan and ¥23.5 billion for those seeking to move production to other countries, according to details posted online by the Japanese government.

China is Japan’s largest trading partner, but Chinese imports dropped by nearly half in February as the coronavirus shut down factories that Japanese manufacturers needed for parts.

Last month, Prime Minister Shinzo Abe's government panel on future investment discussed the idea of shifting manufacturing of high-added-value products back to Japan, and for production of other goods to be spread across Southeast Asia, Bloomberg reported.

“There will be something of a shift,” said Shinichi Seki, an economist at the Japan Research Institute. Seki said some Japanese manufacturers in China that were focused on exports were already considering moving out.

“Having this in the budget will definitely provide an impetus,” Seki said.

Companies, such as car makers that are manufacturing for the Chinese domestic market, will likely stay put, Seki said.

Japan's move to shift manufacturing out of China comes amid efforts between the two nations to improve ties. Chinese supreme leader Xi Jinping was supposed to make a state visit to Japan this month, but the summit, which would have been the first of its kind in a decade, was postponed a month ago as the virus began to spread through Japan. No new date has been set.

Japan exports a far larger share of parts and partially finished goods to China than other major industrial nations, according to data compiled for the panel on future investment. A February survey by Tokyo Shoko Research Ltd. found 37 percent of the more than 2,600 firms that responded were diversifying procurement to places other than China amid the coronavirus crisis.

“We are doing our best to resume economic development,” Chinese Foreign Ministry spokesman Zhao Lijian said at a briefing Wednesday in Beijing when he was asked about the move. “In this process, we hope other countries will act like China and take proper measures to ensure the world economy will be impacted as little as possible and to ensure that supply chains are impacted as little as possible.”

Bloomberg noted that "The initial stages of the COVID-19 outbreak in China appeared to warm the often chilly ties between the two countries. Japan provided aid in the form of masks and protective gear — and in one case a shipment was accompanied by a fragment of ancient Chinese poetry. In return, it received praise from Beijing. In another step welcomed in Japan, China declared Avigan, an anti-viral drug produced by Fujifilm Holdings Corp., to be an effective treatment for the coronavirus, even though it has yet to be approved for that use by the Japanese."

But many Japan blame China for mishandling the early stages of the outbreak and Abe for not blocking visitors from all of China sooner. Until last month, only visitors from Hubei, the epicenter of the outbreak, and one other province had been banned.

In the meantime, other issues that have deeply divided the neighbors — including the Senkaku Islands dispute in the East China Sea that brought them close to a military clash between 2012 and 2013 — have not been resolved.

Chinese government ships have continued to patrol around the Japanese-administered islands regularly throughout the crisis, with Japan saying four Chinese ships on Wednesday entered what it claims to be its territorial waters.

Free Press International