(Bloomberg) -- China and Japan are two of Asia’s most powerful nations and the region’s biggest trading partners. Yet centuries of intense rivalry mean their economic embrace can never be taken for granted. Disputes can flare up for all kinds of reasons, from competing territorial claims to the treatment of Japanese nationals living in China.
Relations have reached a delicate new phase as China becomes as much a competitor as a partner to Japanese industry and shifts to a more assertive stance in regional affairs. That presents a challenge for Japan, with its close historic ties to China’s strategic rival, the US.
Why have relations been tense over the years?
China and Japan have for centuries been the dominant political and cultural powers of Northeast Asia. They’ve influenced each other’s language, economic development, and culinary traditions. Trade picked up from the late 19th century, but so did political friction, leading to a series of armed conflicts. Japan invaded and annexed parts of China during this period, and from the 1930s through World War II, Japan’s Imperial Army launched brutal campaigns in China, including the infamous mass killings in Nanjing. These events continue to overshadow relations between the two countries.
Why are China-Japan relations so rocky today?
China’s growing military clout is a source of concern in Tokyo. President Xi Jinping has overseen a doubling of defense spending since he took office in 2013, according to the SIPRI Military Expenditure Database. In response, Japan has moved to expand its own military. A five-year defense buildup launched in 2022 is projected to cost ¥43 trillion ($273 billion), pushing defense spending to 2% of gross domestic product from just over 1% previously.
After the war, the US and Japan signed a security treaty that gave the US responsibility for deterring threats to Japan from other regional powers. Lately, the US has dropped its misgivings about a more potent Japanese military, acknowledging it could help to counter China’s territorial ambitions, including its designs on Taiwan.
Japan’s government has been vocal about the importance of Taiwan to its own security. Japan accused China of firing ballistic missiles into its exclusive economic zone close to Taiwan in 2022, when Beijing conducted one of its biggest exercises around the Taiwan strait in decades.
Chinese military and coast guard vessels have been venturing in growing numbers into waters near Japanese-controlled islands in the East China Sea that Beijing claims as its own. Japan has moved to expand military installations such as anti-ship missile bases in the area, motivated by concerns about the islands and the spillover from any conflict over Taiwan.
Japanese officials are also wary of growing military cooperation between China and Russia, including joint naval and air force exercises around Japan. A Chinese military aircraft breached Japanese territorial airspace for the first time in August 2024, prompting condemnation from Tokyo. China, meanwhile, said a Japanese destroyer had sailed into its territorial waters in July.
Japan’s 2024 annual military white paper made more than 1,000 mentions of China, saying its neighbor is “rapidly building up military capabilities” ranging from nuclear weapons to cyber warfare tools.
China has accused Japan of not learning the lessons of history and returning to militarism.
What’s the situation with China-Japan trade?
As China gradually opened its markets from the late 1970s, Japanese companies including Panasonic Holdings Corp. and Toyota Motor Corp. opened production sites in the country to sell to a growing class of prosperous consumers.
Japanese firms also latched on to China’s potential as a source of cheap labor for manufacturing. Companies such as clothing retailer Uniqlo set up factories there or sourced goods from Chinese companies before selling them in Japan and elsewhere.
China is now Japan’s top trading partner, while China counts only the US as more important in bilateral trade. But the relationship is evolving fast, with Japanese firms now on the defensive and their investments in China on the decline.
Why is that?
Chinese businesses have been moving up the value chain to compete directly against Japanese companies in producing more expensive items such as cars and electronics. Increasingly, Japan is becoming a supplier of components to China rather than finished products.
Chinese consumer brands including low-cost clothing retailer Shein are expanding in Japan. And Chinese electric car manufacturers such as BYD Co. have emerged as a competitive threat to Japan’s automakers, not only in China but around the world.
A survey published in November by the Japan External Trade Organization showed only 58.4% of Japanese firms expected to post an operating profit in China for 2024. Some Japanese companies, including Mitsubishi Motors Corp. and Nippon Steel Corp., have pulled out of the country or pared back operations there.
Doing business in China has always been unpredictable for Japanese companies and they’ve occasionally been caught up in political quarrels.
More recently, tightening restrictions including a new counter-espionage law in China have made Japanese firms more wary of investing in the country and individuals more cautious about visiting. Detentions of Japanese citizens in recent years have added to the concern.
In a further blow, Japanese technology companies including Tokyo Electron Ltd. and Nikon Corp. have been hit by new rules — imposed under pressure from the US — that restrict exports to China of machines and chemicals used in making the most cutting-edge semiconductors.
What’s the outlook for China-Japan economic ties?
The number of Japanese-affiliated companies looking to expand in China and Hong Kong was at a record low at the end of 2024, according to the JETRO survey.
Yet China remains a vital destination for exports of Japanese machinery, cars, and chemicals. And Japan is still an important source of high-tech products that Chinese firms are unable to produce. Although many foreign car brands are struggling in China, Toyota isn’t throwing in the towel, with the Nikkei newspaper reporting in late 2024 that the automaker plans to open a new factory in Shanghai around 2027 to build luxury Lexus electric cars.
Chinese officials bracing for an increase in US import tariffs during Donald Trump’s second term as president have been trying to smooth tensions with US allies, including Japan. Japanese Foreign Minister Takeshi Iwaya went to China in late December to bolster economic and trade ties, with the two sides rolling out new measures to promote tourist visits. Iwaya and Chinese Foreign Minister Wang Yi also affirmed the importance of improving communication between the countries on security matters.
Chinese tourists have flooded back into Japan since the pandemic, and Chinese students have been looking to attend Japanese colleges after the US and other countries curtailed access to their universities.
What are the territorial disputes about?
The main point of contention is the East China Sea islands, called Senkaku in Japan and Diaoyu in China, that have a combined surface area of 3 square miles (7 square kilometers).
The US has said the islands are covered by its security treaty with Japan. China has been sending coast guard and government vessels into the area almost every day after a decision in 2012 by then-Japanese Prime Minister Yoshihiko Noda to take some of the islands from private into state ownership. The number of Chinese vessels entering the zone hit a record in 2024. China and Japan also have competing claims to a gas field in the area.
--With assistance from Josh Xiao.
©2025 Bloomberg L.P.