Since the start of the Coronavirus Pandemic, many Asian nations have felt an increased impetus to relocate industrial capacity away from mainland China. One such nation that is aiming to do that is Japan.
The reasons for moving are complex and still widely debated amongst scholars, but there is a growing consensus in Japan that there is a need to reduce dependency on the country’s closest economic neighbour. In April 2020, the first shoots of this policy appeared with the announcement that “US$2 billion of the country’s record economic stimulus package will be used to help companies move production away from China”.
Earlier this week, it was further announced that “Japan will significantly ramp up a program encouraging businesses to build production sites in Southeast Asia to diversify supply chains that are too dependent on China”. Under this latest policy, the Japanese Government will pay up to half the total cost of moving investments out of China into the ASEAN region.
The central aim of the policy is that individual Japanese companies expand the number of countries they have operations in. This comes as a generalised pivot to Asia is taking place in the global economy.
Japanese Prime Minister Yoshihide Suga plans to announce a significant increase in Japanese investment in Vietnam during a visit to the country later in October 2020. It is anticipated that as part of this investment, a new defence deal between both nations will be signed, which is expected to act as a counterbalance to China’s growing influence over the South China Sea. Underlying the importance of this relationship is the fact that this will be the Prime Minister’s first overseas trip since he assumed office on 16 September 2020.
Particularly given the direction of national economic policy, ASEAN nations are an attractive destination for Japanese manufacturers. According to the Japanese External Trade Organisation, the “average annual compensation for a manufacturing worker is $5,956 in Indonesia and $4,041 in Vietnam, compared with nearly $10,000 in China”.
Even prior to winning the LDP leadership campaign, Suga made no secret of his desire to end Japanese dependency on its closet neighbour. With Japan allocating “¥220 billion for companies shifting production back to Japan and ¥23.5 billion for those seeking to move production to other countries”, it is unsurprising that President Xi Jinping and other senior Chinese figures have expressed their concerns about a Japanese manufacturing exodus.
The core focus of Japanese policies is on broadening national producers’ supply chains. The current policy draws inspiration from larger state initiatives to bring back industry to Japan from China. Since the start of these initiatives, there have been “over 1,700 applications worth more than 10 times the $2 billion budget, of which 57 projects totaling $544 million have been approved”. Both the US-China trade war and medical equipment shortages during the Coronavirus Pandemic have highlighted the dangers to the Japanese of non-diversified supply chains.
In the broader context, an ongoing ‘China Exit’ is likely to be a massive disruptor of the regional and international security. If Japan is able to successfully decouple from China, then it is possible that Australia, United States and United Kingdom may look to borrow from the Japanese playbook. If this does become the case, then longer term, Southeast Asia will likely be the biggest economic winners from the Coronavirus Pandemic.