Competition to coordination

Abe received a warm welcome from Chinese leaders, who appreciated his efforts to improve bilateral relations. "The healthy, steady and long-term development of China-Japan ties is in the fundamental interests of the two countries' people, and represents the common expectations of the international community," Chinese President Xi Jinping said during his meeting with Abe.

Echoing Xi, the Japanese prime minister, who had pledged to shift his country "from competition to coordination" with China prior to his visit, said Japan and China are neighbors and partners and have to avoid becoming threats to each other. He also said he hoped his visit would result in a new era of bilateral relations.

There is one promising development, according to Zhou Yongsheng, a professor with the Beijing-based China Foreign Affairs University (CFAU). "The two countries have agreed to join hands to tap third-country markets. This could deepen their pragmatic cooperation and also benefit the development of the third country," Zhou said.

He said there is huge potential for cooperation between Chinese and Japanese businesses as they enjoy different advantages. "Japanese companies are renowned for their management, meticulous investment planning and high stop-loss ability; Chinese companies are strong in strategic planning and following trends. Therefore, cooperation can bring both parties' strengths into play for win-win results."

By joining forces they can also avoid cutthroat competition, which had happened before and hurt the interests of both, Zhou added.

The two neighbors' willingness to cooperate has been welcomed by some third countries, Thailand being one of them. Thai companies were the only foreign firms to participate in the agreements signed at the forum.

According to Vikrom Kromadit, President of the Thailand-China Business Council, the cooperation could contribute more to regional progress. While Chinese enterprises and institutions generally have high efficiency, Japanese companies are characterized by their precision. Their combined advantages are likely to see projects executed faster and with high quality, Vikrom said.

A highlight of Abe's trip was the bilateral currency swap agreement, which will allow the two countries' central banks to swap 200 billion yuan, or 3.2 trillion yen ($28.78 billion), in the coming three years.

"The reinitiated currency deal would facilitate bilateral trade and economic exchanges by reducing unnecessary exchange rate costs and risks. It is also a response to the shortcomings of global and regional financial systems," said Wang Jiapei, a research assistant with the China Institute of International Studies (CIIS).

"For a long time, the dollar standard system has made all economies vulnerable to the negative effects of the U.S. monetary policy. Since East Asia lacks a systematic regional financial system, the countries in the region are vulnerable to fluctuation of the dollar and the impact of U.S. monetary policy," Wang said. The currency swap deal would contribute to the stability of the two countries' financial system. Wang said it could also promote the use of the yuan beyond China's borders and contribute to the currency's internationalization.

China and Japan had agreed on a currency swap deal in 2002 after the Asian financial crisis, when countries in the region were seeking stability mechanisms. The deal was renewed in 2007, with a credit line of $3 billion. By 2013, however, when it was up for renewal once again, the relations between the two countries had soured due to territorial disputes.

Defending free trade and maintaining multilateralism was also high on the agenda of both sides.

When meeting with Abe, Li called for boosting trade and investment in the region and jointly building an East Asia Economic Community to promote Asia-Pacific regional integration. Abe committed himself to building a free and just international economic order and said he hoped to work with China to promote the Regional Comprehensive Economic Partnership agreement.

As an export-oriented country and a beneficiary of the current international system, Japan highly values free trade, especially since it suffered huge losses due to trade frictions with the United States from the 1970s.

In the years after World War II, Japan, with its surging manufacturing industry, exported a large amount of goods to the United States. Its surplus peaked in 1986 at 1.3 percent of U.S. GDP, according to International Monetary Fund data. Subsequently, the United States, just like it is doing today, launched some 20 investigations into Japanese exports to the U.S.

As a U.S. ally, Japan voluntarily curbed its exports to the U.S. market and relaxed its monetary policy to encourage domestic consumption instead. Despite the measures, the U.S. trade deficit didn't decline but the Japanese economy suffered economic stagnation for two decades as the ultra-loose monetary policy created massive asset bubbles.

Both China and Japan are under pressure from the trade tariffs imposed by U.S. President Donald Trump under his "America first" policy. "They are both targets of the trade war. The U.S. tariffs on iron and steel have hit Japan harder than China since Japanese exports far exceed China's," Zhou from the CFAU pointed out.

Japan has also started to feel the pain of trade protectionism. Its exports to the U.S. fell by 5.2 percent in July compared to last year.

"But despite this, Japanese leaders refuse to directly attack the U.S. because their alliance with the United States is at the center of Tokyo's foreign policy," Zhou said.

Since trade and exports are vital to Japan's economy, it values the rules of the World Trade Organization and free trade, Jiang Yuechun, an expert on world economy with the CIIS, said. Jiang said that China and Japan, the second and third largest economy respectively, should shoulder more responsibility and play a bigger role in promoting trade and investment liberalization and facilitation, and maintaining the multilateral trading system.

Overcoming old disputes

The improvement in China-Japan ties is due to various factors, Wu Jinan, a senior expert with the Shanghai Institutes for International Studies, said. Besides the impact of the international situation, mainly characterized by U.S. unilateralism and trade protectionism, both China and Japan need to deepen their structural reform to overcome the bottlenecks in economic development. China is accelerating its economic restructuring and industrial transformation.

"Cooperation with Japan, which has taken the lead in areas such as energy conservation, environmental protection, medical care and high-end manufacturing, could contribute to China's industry upgrading," Wu said. "On the other hand, the huge Chinese market is very attractive to Japan. Japan's economy has been under downward pressure as the stimulus effect of Abenomics started declining. Japan will raise the consumption tax next October, which will further suppress the already weak domestic demand."

But though Abe has pledged to shift bilateral ties from competition to coordination, observers of China-Japan relations believe that future Sino-Japanese ties will still be affected by various factors, including U.S. policy and the lingering bilateral issues that have always presented challenges.

Jiang from the CIIS outlined a pragmatic approach. While China and Japan still have disagreements, these should not hinder the new phase in their relations, he said. They should control their divergences efficiently and tap their cooperative potential to consolidate bilateral ties.

Copyedited by Sudeshna Sarkar

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