Diaoyu row lands Japan’s economy in hot water

Japan's much disputed efforts to purchase the Diaoyu Islands have not only badly scarred its diplomatic relations with China, but also pose a severe threat to its already-vulnerable economy. With the economy of the island nation heavily dependent on foreign trade, especially with China, Japan has few ways to hedge against Chinese protests of its products and services.

During periods of economic torpor, Japan relied on foreign trade to get back on its feet again, given the country's sluggish growth in domestic consumption. And, over the past several decades, a large portion of Japan's foreign trade activity has been with China.

In 2011, 23.6 percent of Japan's overall exports went to China. In comparison, only 8.8 percent of China's exports arrived in Japan during the same year. Meanwhile, many of Japan's other major trade partners, including the US and EU, have cut their demand for Japanese goods, leaving the country more reliant than ever on the Chinese market.

But, as tensions build between the two nations surrounding the Diaoyu Islands, Chinese consumers are losing their enthusiasm for Japanese products. This has already translated into slowing activity and falling revenues for many of the sectors that account for the bulk of Japan's GDP, including automobiles, electronics and tourism.

Many domestic travel agencies, including China Comfort Travel, have canceled excursions to Japan since territorial disputes began heating up in April. This has dramatically curbed consumption in the country by Chinese tourists, who have long formed a huge segment of the foreign travelers in Japan.

Meanwhile, sales volume of Japanese vehicles fell 2 percent year-on-year in August; while sales of German and US-branded automobiles have surged 25.3 percent and 21.2 percent respectively during the same period, according to data from the China Association of Automobile Manufacturers.

Mounting anti-Japanese sentiments have also hit operations in Japanese factories in China, and companies like Panasonic and Canon have all scaled back their operations since the start of the week.

If the plant closures persist - or if factory activity is further slowed by widespread boycotts of Japanese-branded products - the enormous amount of foreign direct investment Japan's high-technology corporations have been funneling into China for the past several years could be endangered.

In order to preserve its economy, Japan must relinquish its claims to the Diaoyu Islands or risk severing its vital trade relationship with China.

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