Japan-China relations: Try “economic statecraft”!

Hirokazu Kobayashi

CEO, Green Insight Japan, Inc.

Professor Emeritus and Visiting Professor, University of Shizuoka

Following the friendly atmosphere fostered by the two leaders at the October 31 Japan-China summit, China took issue with the "Takaichi remarks" on November 7, and headlines about deteriorating Japan-China relations have dominated the Japanese media. However, the "Takaichi Remarks" merely cited a specific example of the 2015 "Legislation for Peace and Security”. They were not a gaffe by Prime Minister Takaichi. In fact, watch the recorded testimony before the Budget Committee carefully. Prime Minister Takaichi was reading from a prepared statement, suggesting that the response was planned and anticipated.

Some political parties and media outlets argue that Japan should not expand its military capabilities to avoid attack by external forces. However, there is no historical evidence to support this argument. Although Switzerland is a permanently neutral state, it fulfills its neutrality obligations through "active armed neutrality," which allows it to maintain military forces and a conscription system. Furthermore, its terrain makes it a natural mountain fortress. It is said that the Hitler regime judged that attacking Switzerland would result in too significant a loss relative to the gains. Costa Rica abolished its army in 1948, and Iceland has no standing army; however, Costa Rica is under US protection, and Iceland is under NATO protection. The Vatican enjoys special protection due to its religious and symbolic value. Bhutan relies on India. Conditions for establishing a disarmed state include: (1) having little to gain from invasion, (2) having no threatening nations nearby, and (3) not being a buffer zone between major powers. Japan fails to meet any of these criteria. Japan possesses: (1) advanced science and technology, (2) a hardworking national character, (3) a sophisticated culture, (4) a pivotal role in the First Island Chain in the Pacific, (5) a potential flashpoint for US-China conflict, (6) a vital maritime transport hub, and (7) the world's sixth-largest maritime territory with significant seabed resources. Some strategic analyses and commentaries position the "Japanese archipelago line" as the key to accessing the Western Pacific.

Is it possible to confront China militarily? The Stockholm International Peace Research Institute (SIPRI) reported that China's official 2024 military expenditure was at least US$314 billion, noting that official figures may exclude certain expenditures, and the actual amount could be significantly higher. Meanwhile, Japan's military spending is approximately 8.37 trillion yen (US$54 billion). That is, the gap is nearly six times. Simple monetary comparisons cannot determine military strength. However, short-term reversals are complex. They cannot be reversed in the short term. AI projections suggest that even over a decade, Japan is unlikely to achieve equivalent military capabilities. Does this mean that the solution lies in military capabilities? The 2022 National Security Strategy and Defense Capability Development Plan outlines a form of denial deterrence to prevent an adversary from intending to attack. This strategy includes stand-off defense (long-range missiles), integrated air and missile defense, unmanned assets (drones, etc.), cross-domain capabilities (space and cyber), C2 (command and control), ISR (intelligence, surveillance, and reconnaissance), mobility, civil protection, and sustainability/resilience (maintaining and restoring societal functions). These do not necessarily imply nuclear armament.

Deterrence against attack is not solely about military armaments. Following Russia's invasion of Ukraine in 2022, numerous international companies decided to withdraw from or scale back their operations in the Russian market. The number exceeds 1,000 companies. The economic loss is estimated at US$107 billion (16.6 trillion yen) as of 2024. The strategy of preemptively demonstrating the economic costs to make the expected benefits of invasion negative, has recently been systematized in international political science as “economic statecraft.” The international community already has systems in place to absorb corporate losses for national security reasons, and Japan could, in theory, adopt one. Couldn't we legislate an order for Japanese companies with bases in China to withdraw or halt trade with China, with the Japanese government guaranteeing the associated losses? I had an AI calculate the related gains and losses for Japan. (1) Excluding future losses such as the total fixed assets of Japanese companies in China, (2) sales scale, (3) asset impairment due to market withdrawal, and (4) supply chain reconstruction costs, the immediate impact is estimated to reach approximately 100 trillion yen (US$645 billion). This is comparable to the national budget deployed for COVID-19 countermeasures. While it is necessary to estimate the negative aspects of this deployment accurately, the budget is manageable. Furthermore, Japan should call for cooperation from its allies and quasi-allies. I believe that deploying this type of economic deterrence should be made available as an option. Japan, possessing diverse deterrence measures in both military and economic spheres, will ultimately contribute to regional stability. Institutionalizing economic deterrence as a policy tool is now realistic, and there is significant urgency in considering it.