Japan's fragile economic recovery at risk as China-Japan ties deteriorate

Japan's fragile economic recovery is facing fresh headwinds as tensions with China escalate following remarks by Prime Minister Sanae Takaichi, rattling business confidence and tourism just as bilateral ties had begun to stabilize.

People attend a protest in front of the Japanese prime minister's official residence in Tokyo, Japan, Nov. 28, 2025. [Photo/Xinhua]

Before the latest downturn, China-Japan relations had been gradually improving. Osamu Onodera, director general of the Beijing office and chief representative for Northeast Asia at the Japan External Trade Organization (JETRO), said in an interview with China.org.cn that exchanges between the two governments and business communities had regained some momentum.

Japanese corporate sentiment toward investing in China, which had declined in recent years, was beginning to level out with signs of a possible rebound, according to a JETRO global survey conducted in September.

That fragile improvement unraveled after Takaichi's remarks on Taiwan in early November. Onodera said a number of bilateral events and meetings were canceled or postponed, with China announcing countermeasures that altered the overall climate of economic and trade cooperation.

He described the immediate impact on Japan as sizable in sectors such as travel and entertainment, while warning that prolonged tensions could increasingly shape corporate behavior, including long-term investment decisions.

"China and Japan are close neighbors separated by only a narrow stretch of water, and economic and business relations remain important for both countries," he said. "Dialogue and interaction remain important, especially when the situation becomes difficult, and it is hoped that both governments continue dialogue."

China and Japan have complementary industrial chains, and Onodera said lower trade barriers had made international supply chains increasingly intertwined until recently. However, experiences during the pandemic and natural disasters have prompted companies to reassess and diversify their supply chains. He cautioned that current tensions could further complicate the outlook for Japanese businesses.

"Prolonged tensions will not benefit anybody," he warned.

On the ground, the consequences are already being felt. Shang Meixi, a Tokyo-based businesswoman who runs health care and hospitality companies, told China.org.cn that the tightening political atmosphere has had a clear impact on her operations.

Compared with previous years, she said, overall customer numbers have dropped by about two-thirds, with the decline especially evident in medical aesthetics, where many clients have shifted to destinations such as South Korea. Her hotel business has been more resilient due to its international clientele, but she said pressure across the sector is undeniable. "For myself, the only realistic response has been to adjust priorities, focus on service quality, and protect our reputation among existing clients," she said. 

Official data show Japan's economy has slipped back into contraction. Japan's inflation-adjusted GDP contracted 0.6% quarter on quarter and 2.3% annualized in July-September, according to the Cabinet Office in early December. Exports fell 1.2%, while private residential investment dropped 8.2%. Corporate capital spending reversed an initial 1% growth forecast to a 0.2% fall, a key driver of the economic slump.

China remains central to Japan's economy. China is Japan's largest trading partner, second-largest export destination and biggest import source, with bilateral trade hitting $308.3 billion in 2024. More than 50,000 Japanese firms operate in China, bringing cumulative investment of more than $130 billion and logging a 55.5% year-on-year jump in actual investment in the first three quarters of 2025.

Two-way exchanges remain robust across sectors: some 8.2 million Chinese mainland tourists visited Japan in the first 10 months of 2025, accounting for a quarter of total foreign tourist spending and boosting Japan's employment and economic gains.

Shang observed that Japanese society is, to some extent, "admiring of strength." She advised: "We must maintain a clear and firm stance, allowing the other side to fully appreciate China's strength and principled bottom line. At the same time, we should preserve channels for communication at the people-to-people level to promote more rational and pragmatic exchanges. Over time, the Japanese side will gradually adjust and move toward a more pragmatic approach."

Tensions between China and Japan have escalated since Nov. 7, when Takaichi suggested Japan could intervene militarily in the Taiwan Strait. Her remarks sparked a fierce backlash from China, which issued a series of countermeasures.

Chinese foreign ministry spokesperson Mao Ning said Takaichi's comments sent a gravely wrong signal to "Taiwan independence" separatist forces, urging Japan to adhere to the one-China principle, honor political commitments underpinning bilateral relations and exercise caution on the Taiwan question. China also condemned remarks by a senior official in the Japanese prime minister's office calling for Japan to acquire nuclear weapons.