Will Japan Sustain Its Economic Restrictions on China?

(PHILIP FONG/AFP via Getty Images)

The Tokyo Skytree (right) and Mount Fuji (back left) are seen from the I-Link Town observatory in Ichikawa city, Chiba prefecture, east of Tokyo, Japan, on July 2, 2023.

Japan's participation in U.S.-led economic restrictions on China will likely continue, improving the efficacy of these restrictions and fueling Beijing's commitment to economic coercion as a tool of foreign policy. Despite its military alliance and close diplomatic partnership with the United States, Japan has tended to differentiate its economic tools of foreign engagement from Washington's, mainly due to Japan's trade dependencies and restrained approach toward strategic confrontation post-World War II. But this has changed since Tokyo's implementation of chip export restrictions on China, announced in March and implemented in July. This decision was partly due to trade realities, given Japan's semiconductor sector and advanced industry at large are highly dependent on U.S. chip designs. But it was also informed by China's growing economic coercion tactics and expanding military presence in Japan's near seas, as well as China's rapid military modernization, which is partially supported by high-tech imports from Japan. Beyond chips, Tokyo has also considered restricting outbound investment into China, according to the readout of the Group of Seven (G-7) summit in May, further suggesting Japan's economic strategy toward China goes beyond mere alignment with Western supply chain decoupling. In the coming months and years, the evolution of Japan's economic restrictions on China will depend on domestic economic and political factors.

In seeming retaliation for chip restrictions, Beijing announced on July 3 that domestic exporters of gallium and germanium, key minerals in semiconductor supply chains, would need to apply for licenses and disclose their overseas buyers. These restrictions could particularly impact Japan, the Netherlands and Germany (all of which have imposed or considered imposing chip restrictions on China), as they purchased 86% of China's gallium compound exports in 2022.

While Japan is currently undertaking unorthodox monetary policies and issuing great amounts of debt, this will not disrupt its economic stability or force Tokyo to take a more conciliatory tone vis-a-vis Beijing. Japanese Prime Minister Fumio Kishida and new Bank of Japan (BoJ) Governor Kazuo Ueda support an eventual transition away from Japan's unorthodox ultra-loose monetary policy, which uses low interest rates and heavy purchases of government bonds by the BoJ to fund Japan's growing budget deficit. In a sign that the central bank is following through on this desire to tighten monetary policy, it hiked the maximum yield on 10-year bonds from 0.5% to 1.0% on July 28. But even though Japan's annual fiscal deficit has steadily grown over the last 30 years, interest payments on those bonds in 2022 (8.2 trillion yen) were slightly lower than in 2015 (8.3 trillion yen) and much lower than in 2000 (10 trillion yen). This is partially by design, as the BoJ has kept caps on bond yields low. Moreover, government revenues grew from 50.7 trillion yen to 68.4 trillion yen from 2000-20, further suggesting that Japan's interest payments on government bonds are still far from threatening economic stability. This stability shows that monetary policy is unlikely to heavily influence Japan's foreign policies, including its willingness to wield trade restrictions against China, in the near term. And given that Japan's debt is almost entirely held by Japanese entities, China has little ability to wield major bond sell-offs as a retaliatory tool against Tokyo, as Beijing could against Washington.

However, stronger Chinese retaliation against key sectors of the Japanese economy could prompt Tokyo to reconsider its restrictions on China. China is Japan's top trade partner, with mainland China and Hong Kong combined purchasing roughly 24% of Japan's exports and supplying 21% of Japan's imports in 2022. In July, China imposed its most recent trade restrictions on Japan, which targeted exports of Chinese critical minerals exports and imports of Japanese fish. The restrictions are projected to have a limited overall impact on the Japanese economy, with the country's relatively minor fishing industry and individual industrial producers being the most affected. But they still reinforce to Tokyo the importance of combating China's economic coercion, an issue of growing concern to Japan and the West, as evidenced by G-7 summit attendees' pledge to ''foster resilience to economic coercion.'' If China expands its trade retaliation beyond particular companies or minor sectors, Tokyo could consider slowing or reducing economic restrictions on China, particularly if such Chinese retaliation coincided with a Japanese economic recession. But for now, an economic slowdown looks more likely than a recession for Japan, with the International Monetary Fund projecting in May that the country's real GDP would grow by 1.3% in 2023 and 1.1% in 2024.

China's licensing regime for gallium and germanium exports will enable Beijing to flexibly scale its retaliation proportionately to Japan's economic restrictions, most likely by targeting specific Japanese companies without harming China's access to key technologies. In this case, the mineral restrictions should have only a modest impact on Japan's economy as a whole.
China announced on July 7 that it would begin screening all imports of Japanese seafood in response to Japan's plan to dispose of nuclear wastewater from the 2011 Fukushima reactor meltdown into the ocean. Seafood is not a major export (comprising less than 0.3% of Japan's exports by value in 2022), nor is it critical to Japan's high-end supply chains, so the economic impact of the new Chinese screenings will be minimal. Even so, agricultural constituencies in Japan will continue to voice their discontent.

A change of government in Japan could also prompt a rethink of the country's economic policies toward China, but such a change looks unlikely as long as political opposition to Kishida remains disorganized. A series of recent policy failures has threatened Kishida's popularity both among Japanese voters and within his ruling Liberal Democratic Party (LDP). However, Japan's opposition parties are consumed with internal power struggles and are at a structural disadvantage compared with the LDP, which has held the prime ministership for 61 of the past 68 years. And the largest LDP faction that opposes Kishida's economic policies — led by former Prime Minister Shinzo Abe prior to his assassination in July 2022 — remains in a state of flux, with no officials yet capable of replacing Abe's outsized role in LDP politics. Furthermore, Kishida may be able to modestly strengthen his Cabinet with an expected reshuffle in September. As long as his political opponents remain disorganized, Kishida's leadership is likely secure, forcing the more pro-China members of the LDP — like the leader of the Shisuikai faction, Toshihiro Nikai — to bide their time.

One of Kishida's most prominent policy failures has been the error-riddled national rollout of the My Number digital identification system, which incorrectly linked hundreds of thousands of citizens' accounts to others' private documents in May and June, prompting an apology by Kishida and an inquiry into Japan's Digital Ministry.
Kishida also failed to call a snap election in June, when public support for him was high (58% in late May) following the G-7 summit. Kishida's reluctance to do so was potentially due to the fact that an end to the legislative term would have de facto rejected a controversial LGBTQ+ bill for which U.S. ambassador to Japan (and close contact of U.S. President Joe Biden) Rahm Emanuel had rallied during last-minute political conversations with LDP coalition partner Komeito. Rather than irk Japan's most important ally in Washington, Kishida may have opted to delay the snap election and thus enable a watered-down version of the LGBTQ+ bill to pass, despite LDP opposition to it. Amid these varied troubles, public support for Kishida has dropped to 34%, a low point for his leadership.

Japan's slowly growing economic competition with China will thus likely persist through general elections in late 2025, worsening Beijing's sense of containment and fueling China's supply chain resilience measures and expansion of economic retaliatory tools. Japan's economic competition with China will continue to grow, preserving a key regional partner in Washington's strategic economic competition with China. This will reduce China's ability to circumvent trade restrictions, especially on high-tech goods, which will push Beijing to consider greater trade retaliation, including against Western and Japanese tech goods that are easily replaceable. Western and Japanese restrictions will also push China to deepen its military and trade partnership with Russia — a relationship that has already greatly expanded since Russia's invasion of Ukraine — to bolster supply chain resilience, particularly in the energy trade. In the unlikely event that an economic downturn or change of administration prompts Japan to back down from its economic restrictions against China, China could more easily dodge Western tech restrictions and fulfill its state-led innovation policies (e.g., in artificial intelligence and semiconductor development). It could also drive Beijing to reduce its joint military drills with Russia in the Sea of Japan and the East China Sea, which are partially intended as a military deterrent to Japan.