Reuters, 21 September 2012

(Reuters) – About 41 percent of Japanese firms see an escalating territorial row with China affecting their business plans, with some considering pulling out of the country and shifting operations elsewhere, a Reuters poll showed on Friday.

The Reuters poll comes as relations between Asia’s two biggest economies have hit their lowest point in decades over a dispute centered on an uninhabited group of islands in the East China Sea — known as the Senkaku in Japan and Diaoyu in China.

Customs officials in the port city of Tianjin near Beijing have told Japanese companies their imports will be inspected more frequently, the Asahi newspaper reported, in a worrying sign that Japan’s shipments to China could slow. Automaker Honda Motor Co said it was already making contingency plans.

“We are trying to forecast things in advance and preparing as much as possible to avoid any impact on our business,” Takanobu Ito, Honda’s chief executive, told a news conference.

Street protests in China have forced some Japanese firms to suspend operations in that country, and the share prices of Japanese firms with exposure to China have tumbled.

But the Reuters poll of 400 large and medium-sized firms, of which roughly 260 responded between August 31 and September 14, was taken before the worst of the protests, which damaged factories, restaurants and retail stores.

“We’re worried that Chinese workers could start boycotting production lines at Japanese firms in China or start making unreasonable demands for wage increases,” said one transportation equipment maker.

Firms in sectors such as wholesale, transport equipment and electric machinery were among those expecting the most fallout from worsening relations with China and other parts of Asia.

Some of the firms which see friction with China affecting business plans have suffered not only from rowdy protests involving damage and consumer strikes, but other problems as well.

“We were stranded at customs there even as we followed proper procedures for exporting parts,” said one machinery firm.

A transport machinery company complained that it was excluded from bidding in China.

“We need to consider closing our base in China and withdrawing our personnel,” said one metal products company.

Others voiced caution about investing in China, while considering putting off plans to make inroads into Chinese markets or seeking alternate sites.

“We have had many diplomatic clashes in the past, and in the end this always comes back to hurt Japanese companies who are in China,” said Naoto Saito, a senior economist at Daiwa Institute of Research.

“This is likely to happen again, so companies will seriously start to question whether they want to go to China or tap other markets.”

Japanese companies could bypass China for Southeast Asian countries such as Indonesia, Malaysia or Thailand, Naito said.

China, the world’s second-largest economy, and Japan, the third-largest, have total two-way trade of around $345 billion, but some experts believe anti-Japan sentiment could prompt firms to rethink investments in China in the longer term.

“The impact on our business so far has been small, but Japanese and non-Japanese employees at our offices in Shanghai and Hong Kong have been subjected to harassment,” said one services sector firm.

In the Reuters poll, 56 percent of firms urged the next Japanese government to put the utmost priority on steps to prop up the economy and stabilize currency rates.

Only 2 percent cited smoother diplomatic relations with Asia as a priority for the next government, which is to be formed after general elections that must be held by around August 2013.

With the dollar hovering around 78 yen, not far from a record low of 75.31 yen hit last October when Japanese authorities intervened heavily to stem their currency’s gains, about one-third or respondents sought yen-selling intervention to help safeguard the export-reliant economy.

On the government’s contentious plan to double the sales tax to 10 percent by 2015, 45 percent said it should be implemented as planned while 40 percent said the state of the economy at the time should be considered before making a final decision.

Only 10 percent called for putting off the sales tax rise, in stark contrast with the many lawmakers who are wary of a voter backlash over the tax increase.

(Additional reporting by Stanley White; Editing by Kim Coghill)

(This story was refiled to correct the spelling of port city in paragraph 3)

http://www.reuters.com/article/2012/09/21/us-japan-china-poll-idUSBRE88J1CH20120921