Beijing: China and Japan’s worst diplomatic crisis since 2005 is putting at risk a trade relationship that’s tripled in the past decade to more than $340 billion.

Toyota Motor Corp., Honda Motor Co. and Panasonic Corp. reported damage to their operations in China as thousands marched in more than a dozen cities on Sunday after Japan last week said it would purchase islands claimed by both countries. Protesters called for boycotts of Japanese goods and in some instances smashed store fronts and cars.

Tensions between China and Japan further complicate policy makers’ efforts to fortify growth in Asia’s biggest economies as the European debt crisis saps demand for exports. Panasonic and Canon Inc. on Monday said they’re shutting some plants in China through yesterday and the China Automobile Dealers Association said the protests will hurt sellers of Toyota, Honda and Nissan Motor Co. cars in China more than Japan’s March 2011 earthquake.

“The escalating dispute is adding one more layer of uncertainty,” said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd., who previously worked at the World Bank. “Japan is now more reliant on China for economic growth than vice versa. Its already weak economic recovery may falter. China will suffer less.”

In 2011, China was the largest market for Japanese exports, while Japan was the fourth-largest market for Chinese exports. China’s shipments to Japan totalled $148.3 billion (Dh544.57 billion) last year as it imported $194.6 billion of Japanese goods, according to Chinese customs data.

Disputed islands

Tokyo Governor Shintaro Ishihara triggered the dispute in April when he said he may use public funds to buy the islands, known as Diaoyu in Chinese and Senkaku in Japanese, from a private Japanese owner. Tensions escalated after Japan’s cabinet approved the purchase of the islands for 2.05 billion yen ($26 million) on September 11. China has said it doesn’t accept the move.

Sales of Japanese-branded passenger cars fell last month in China, compared with gains of more than 10 per cent for German, American and South Korean vehicles according to the China Association of Automobile Manufacturers. China is the world’s largest car market.

Toyota and Honda both reported that fires damaged their dealerships in the eastern Chinese city of Qingdao. Separately, Phoenix Satellite Television Holdings Ltd. showed footage of Japanese cars that had been overturned, with their windshields smashed by protesters.

Many dealerships in China that sell Japanese cars have shut after some outlets were attacked and vandalized, said Luo Lei, deputy secretary general of the China Automobile Dealers Association.

Ransacked stores
Protesters in Qingdao ransacked a Jusco supermarket and a Heiwado Co. department store in the city of Changsha was attacked, the Kyodo News Agency reported.

Shares of Ajisen China Holdings Ltd., an operator of Japanese ramen restaurants in China, fell the most in more than fourth months in Hong Kong trading. Aeon Stores (Hong Kong) Co., the Hong Kong-listed unit of Japan’s Aeon Co. that operates Jusco supermarkets in China, fell the most in more than three months.

The declines were the result of concerns that the two companies’ sales would be hurt by the dispute over the islands and that some of their stores may be vandalised, Linus Yip, chief strategist at First Shanghai Securities, said by phone.

Equity markets were shut for a public holiday in Japan on Monday.
‘Illegal protests’

In the southern city of Guangzhou, police said they detained seven people for vandalising a Japanese-brand car yesterday and held another three for smashing an unidentified store front. The northern city of Xi’an banned “illegal” protests in some areas and said any vandalism justified by “national interest” won’t be allowed, according to a statement posted on the local public security bureau’s website.

Panasonic on Monday said it’s temporarily closing plants in the cities of Qingdao, Suzhou and Zhuhai. The electronics maker is checking on damage at its Qingdao and Suzhou facilities, spokesman Atsushi Hinoki said.

Canon spokesman Hirotomo Fujimori said the company was closing two of its plants in Guangdong province and one in Jiangsu province through yesterday to ensure the safety of employees. No damage has been reported at the plants, he said.

Manchurian incident

Yesterday was the anniversary of the Mukden Incident, also known as the Manchurian Incident, which took place in 1931 near what is now the Chinese city of Shenyang and led to the Japanese invasion of the northeastern portions of China.

The protests this month have come as economic growth in China moderated in the second quarter to the slowest pace in three years.

That’s already led Komatsu Ltd., the world’s second-biggest maker of construction equipment, to cut its annual profit forecast as a Chinese government campaign to rein in home prices has depressed demand. Of Komatsu’s 1.98 trillion yen revenue in the year through March, about 14 per cent came from China, according to data compiled by Bloomberg.

Hitachi Construction Machinery Co., the third-biggest maker of building equipment, said in July that it expected sales of excavators built by foreign suppliers in China to drop 20 per cent to 56,000 units in the year to March 2013, following a 37 per cent slide the previous year.


Japanese investment


That hasn’t stopped Japanese investments in China. Foreign direct investment by companies from Japan surged 19.1 per cent from a year earlier to $4.73 billion in the first seven months of this year, according to the Chinese Ministry of Commerce. By comparison, investment from the European Union fell 2.7 per cent and funds from the US rose 1 per cent during the same period.

Protesters also called for a boycott of Japanese goods after demonstrations swept Chinese cities in 2005 in a row over school textbooks that critics said downplayed Japan’s wartime atrocities, prompting some companies from the nation to reconsider investment plans for China.

That didn’t prevent Chinese imports from Japan surging 15.2 per cent in 2006, almost triple the previous year’s pace.

The trade and economic interests of the world’s second- and third-biggest economies have become increasingly intertwined, said ANZ’s Liu. An escalation of the dispute could deal “a blow to the Asian economy and the global one as a whole,” he said.