HOT ECONOMICS, COLD POLITICS: THE INFLUENCE OF ANTI-JAPANESE PROTESTS ON JAPANESE FOREIGN DIRECT INVESTMENT IN CHINA

Abstract

The Japan-China relationship is one of the most significant bilateral economic relationships in the world. However, it is also convoluted by political and historical tensions, which can be characterized as “hot economics, cold politics”. Although Japan is the second largest investor in China after Hong Kong, anti-Japanese protests periodically occur in China and anti-Japanese sentiments in China are commonplace in Japanese daily news. The central conflicts between these nations are the result of the legacy of World War II and territorial disputes. While the atrocities of the past remain part of the Sino-Japanese history, this historical brutality continues to influence China and Japan relations through Chinese nationalism and anti-Japanese protests. Despite the underlying political tension, China and Japan have continued to trade and have a strong economic relationship. Japan has a powerful economy and China is the largest growing market in the world, and so Japan invests heavily in Chinese businesses. Because of this, Japanese foreign direct investment (FDI) plays an important role in both countries’ economies. FDI data over the past decade suggests that macroeconomic trends and natural disasters had the greatest effect on Japanese FDI. International FDI broadly declined in 2006, was mixed following the 2008 financial crisis, and broadly increased following the recovery from the crisis. Japanese FDI in China was an exception to the broad international increase in FDI in 2013. It is likely that the larger magnitude, longer duration anti-Japanese protests that occurred in 2012 over contentious contemporary and historical issues contributed to greater decreases in the amount of Japanese outward FDI in China. Although investment decisions are complex and take into account many factors, the decision to dramatically contract Japanese FDI to China in late 2012 and early 2013 appears to be a direct economic response to the 2012 political protests.