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Adapt Now: Japan Firms Heed Message in China Dispute

Dhara Ranasinghe | Senior Writer, CNBC Asia-Pacific
Thursday, 25 Oct 2012 | 1:35 AM ET

Japanese companies, bearing the brunt of the economic fallout from a territorial dispute between China and Japan, appear to be heeding one message from the spat: adapt now or pay the price of a dispute that looks likely to rumble on for some time.

TPG | Getty Images

Nissan, Japan's second biggest automaker, plans to spend about $376 million on a new plant in Thailand in 2014 to diversify its production following a wave of anti-Japanese protests in China last month, the Nikkei business daily reported on Wednesday.

A poll released by Reuters this week showed that almost a quarter of Japanese manufacturers are rethinking their investment plans in China, while some could move their future production off the mainland.

The long-term risks from the dispute have grown and Japanese firms clearly see a need to adjust their strategies to protect themselves from a further deterioration in relations between Asia's two biggest economies, analysts say.

"We're seeing almost every day car companies saying, look we're just too worried about investing in China, pulling their investments and saying there are safer places to invest in Asia, or moving their investments to Brazil," Nick Smith, director and strategist at CLSA in Tokyo told CNBC's "Cash Flow" on Wednesday.

China- Japan tensions flared up last month after a row over disputed islands, known as Senkaku in Japan and Diaoyu in China, led to violent anti-Japan protests in China and prompted Chinese consumers to shun branded products such as Japanese cars, with sales falling sharply as a result. And although the protests have died down, tensions continue to simmer - the Japanese coast guard said it spotted five Chinese vessels in the area just outside the waters around the disputed islands.

Data on Monday showing Japanese shipments to China tumbled 14.1 percent in September from a year earlier, the biggest decline since January, have fueled worries about the impact of the dispute on Japan's economy, which some economists say is now at risk of slipping into a recession after a strong start to the year.

China is the number one market for Japanese exports and Japan is the number two market for Chinese exports.

Lessons From the Past

Analysts say that although it will take time, Japan has shown before that it can lower its reliance on China when faced with a threat.

(Read More: Japan Firms Say China Protests Affect Business Plans)

During a territorial spat in 2010, China, believed to be the producer of 95 percent of the world's supply of rare earth minerals, implemented a de facto embargo on exports of the materials to Japan, which uses the minerals to manufacture hybrid cars, mobile phones and other high-tech products.

The incident forced Japanese firms to diversify its sources of rare earth materials. Japan's imports of such minerals from China fell 50 percent to 3,007 tons in the first half of 2012, according to global mining website mining.com. Before 2009, China accounted for at least 90 percent of Japan's rare earth imports.

Analysts say the fact that rare earths have not been a significant feature in the latest row between China and Japan reflects Japan's reduced reliance on China for these imports.

"I don't think they (Japanese firms) will abandon the China market but they have to assess what it means for their future growth and investment," said Patrick Chovanec, associate professor at Tsinghua University in Beijing.

"Look at what happened two years ago when this dispute flared up and China blocked off rare earth materials to Japan. Well Japan has spent the last two years working out what to and reduce the impact of Chinese influence," he said, adding: "China doesn't have a stranglehold on Japan."

Still, China remains a key market for Japan and the concerns about the economic implications of the dispute are unlikely to go away anytime soon, analysts say.

"These tensions are going to continue and the consumer boycott of Japanese products is likely to last for some weeks to come, possibly for some months," Alastair Newton, senior political analyst at Nomura told CNBC Asia's "Squawk Box" on Wednesday.

"There is a risk that we are taking a long-term step down in relations between Japan and China. I've heard people talking hear about 'cold politics, cold economics,'" he said.

By CNBC's Dhara Ranasinghe.