The rise of China and sustained recovery of Japan

This paper examines the role of Japanese exports to China in the economic recovery period during the 2000s. It take a close look at the impacts on industry-level production, the impacts on aggregate manufacturing production, and the impacts on small firms’ production and tertiary industry activity.

It is explained that after prolonged recession, the Japanese economy had recovered from the crisis in the first half of the 2000s and has recorded sustained growth in the last several years. Tremendous structural changes during and after the financial crisis were one of the main driving forces for the recovery. However, dramatic increases in exports were another. In particular, increases of Japanese exports to China were substantial in the 2000s and supported the recovery of the Japanese economy from its demand side. The dependence of the Japanese export sectors on the Chinese economy has risen in the past ten years. China is now almost surpassing the United States as destination of Japanese exports.

Key points and conclusions include:

• the Japanese production was driven by exports to the United States until the mid-1990s but was then driven by exports to China after the late 1990s
• the effects on the production were highly different across firms - the increased exports to China were beneficial for the recovery of manufacturing industries with advanced technology 
• increased exports to China were beneficial for the recovery of large firms in manufacturing industries with advanced technology - they also had beneficial impacts on small firms with advanced technology
  
• it is the sectoral adjustment costs that magnify a threat of the rise of China - some policy that mitigates the adjustment costs may increase complementarities between the Chinese and Japanese economies.