Behind the United States, China and Japan operate the second- and third-largest economies in the world, respectively. China and Japan also trade an estimated $350 billion worth of goods and services with each other annually. This qualifies them as one of the largest trading partnerships in the world. In recent years, economic growth in China has driven the world economy, and outside countries have sought to get in on the action.
History of the Partnership
Japan has been trying to get itself out of an economic funk that has lasted for more than two decades. Turning to China for growth has helped, however, and China has been interested in importing Japan's manufacturing expertise and success in exporting its cars, electronics and machinery to the rest of the world. A recent survey on China's growing integration with Japan detailed that the relationship began early on, when China started importing industrial goods to build out its manufacturing infrastructure. This includes machinery and equipment to build factories and steel mills, but also a transportation infrastructure that includes bridges, roads, airports and rail systems.
The survey lists Japan and Germany as the two primary countries able to successfully supply China with advanced goods, in a large enough scale to help it build out its industrial economy. It also stated that the U.S. has been less interested in supplying industrial equipment, which stems in part from fears of its companies losing their competitive advantages if expertise is also exported.
Taking Aim at the Chinese Consumer Market
Like other countries, Japan is also very interested in bringing its goods and services to China's burgeoning class of consumers. The most obvious reason for the interest is China's population of more than 1.3 billion - the largest in the world. In contrast, Japan is a small island with a population of just over 127 million. This qualifies it as a high-density population, but one that is only the 10th largest in the world.
Japan is particularly interested in building factories in China, in order to produce Honda and Toyota vehicles. The Yen remains a strong currency compared with other currencies, and this makes Japanese goods more expensive in markets that it would like to export to. To overcome this obstacle, Japan has sought to produce cars and electronics products directly in overseas markets. This can localize costs and help keep prices more reasonable for underlying customers.
Japan's vicinity to China has also been beneficial for the relationship between the countries. Similarly, Australia's vicinity to China and other growing Asian markets has proven ideal for it to export its commodities, such as iron ore. Japan has also been more easily able to customize its products to Asian, and in particular, Chinese tastes.
The link between the two countries is strong and only getting stronger. Japan is already China's largest trading partner in terms of imports; for all of 2011, Japan accounted for 11.2% of China's total imports. Surprisingly, only 7.8% of China's exports go to Japan, which qualifies it as Japan's third-largest trading partner; only the U.S. (17.1%) and Hong Kong (14.1%) are larger. Given Japan's smaller size, China is its largest export and import partner; China accounted for 21.5% of Japan's total imports in 2011 and 19.7% of its total exports.
The Bottom Line
The relationship between China and Japan cannot be understated. The countries have two of the largest economies in the world and need each other for support going forward. China counts on Japan for its manufacturing savvy to grow its own economy, while Japan needs China's market to help it grow out of a multi-decade economic funk.