Japan-China Trade Tensions Cool, But Risks Remain as Ishiba Courts Beijing

As Prime Minister Shigeru Ishiba’s diplomatic overtures to Beijing gain momentum, Japan is racing to avoid becoming collateral damage in the escalating U.S.-China trade war. A letter from Ishiba to Chinese President Xi Jinping in early 2025, signaling renewed bilateral talks, has sparked hope for stability. Yet beneath the surface, Japan’s economy faces a precarious balancing act between two superpowers, with trade data revealing both progress and persistent vulnerabilities.

Diplomatic Gains and Economic Data

The most visible diplomatic breakthrough has been Beijing’s partial lifting of seafood import restrictions imposed after the 2011 Fukushima nuclear disaster. By January 2025, China reported no radioactive anomalies in Fukushima seawater samples, paving the way for resumed imports. This symbolic gesture—long a sticking point—has eased tensions, though Japan remains frustrated by delays in finalizing the process.

Economic data shows Japan’s trade with China remains vital but declining. Bilateral trade fell to $334.8 billion in 2023, a 10.4% drop from 2021, while Japan’s position as China’s top trading partner slipped to third, behind South Korea. Meanwhile, Vietnam has overtaken Japan as China’s third-largest export destination, highlighting structural shifts in regional supply chains.

The Visa Liberalization Gambit

To revive people-to-people ties, both nations have eased travel restrictions. China reinstated a 30-day visa-free regime for Japanese tourists, while Japan introduced 10-year multiple-entry visas for Chinese travelers. These measures aim to boost tourism—a potential economic lifeline for Japan’s aging population—but have sparked backlash. Critics warn of overcrowding and rising property prices in cities like Tokyo, where Chinese tourists already account for a third of foreign visitors.

Trilateral Tensions and the U.S. Factor

Japan’s efforts to deepen ties with China are shadowed by U.S. President Donald Trump’s return to power in 2025. Trump’s 145% tariffs on Chinese goods, reciprocated by Beijing with 125% duties on U.S. imports, have reshaped regional trade dynamics. In response, Japan, China, and South Korea held their first trilateral economic dialogue in five years in March 2025, agreeing to accelerate negotiations for a trilateral free trade agreement (FTA). This pact, if finalized, could create a counterweight to U.S. protectionism but risks drawing Japan deeper into China’s orbit.

Security and Public Sentiment: The Elephant in the Room

Despite diplomatic progress, Japan’s public remains deeply skeptical of China. A 2024 survey found 90% of Japanese citizens held an unfavorable view of China, driven by incidents like the fatal stabbing of a Japanese schoolboy in Shenzhen and Chinese military incursions into Japan’s airspace. These tensions are compounded by unresolved territorial disputes over the Senkaku/Diaoyu Islands, where China removed a controversial maritime buoy in February .

On the security front, Japan’s military modernization—driven by its "deterrence alongside diplomacy" strategy—has raised eyebrows in Beijing. China views Japan’s acquisition of long-range missiles and its push to revise its pacifist constitution as provocative, even as Ishiba insists these moves are purely defensive.

Investment Implications

For investors, Japan’s trade balancing act presents mixed opportunities:
1. Winners:
- Exporters to China: Firms like Toyota and Canon could benefit from stabilized trade, though their exposure to U.S. tariffs remains a risk.
- Tourism and Hospitality: Japanese firms catering to Chinese tourists, such as Hoshino Resorts and Lotte Hotel, may see gains from visa liberalization.
- Green Tech: Collaborative projects in renewable energy and carbon capture, highlighted in bilateral talks, offer long-term growth potential.

1. Losers:
2. U.S.-exposed Sectors: Companies reliant on U.S. markets, like SoftBank (with its U.S. semiconductor investments), face headwinds from Trump’s tariffs.
3. Traditional Manufacturing: Firms competing with cheaper Southeast Asian rivals, such as Mitsubishi Heavy Industries, may struggle as Vietnam’s trade with China surges.

Conclusion: Navigating the Crossfire

Japan’s efforts to avoid the U.S.-China trade crossfire are yielding incremental progress—symbolized by seafood imports and visa reforms—but deeper reconciliation faces formidable obstacles. With bilateral trade down 10.4% since 2021 and public distrust at historic highs, Japan’s economic future hinges on balancing deterrence and diplomacy without alienating either superpower.

The trilateral FTA talks and green tech collaboration offer pathways to stability, but investors should remain cautious. Structural shifts—such as China’s growing trade ties with Vietnam and the U.S.’s transactional approach under Trump—suggest Japan’s economy will remain vulnerable to geopolitical whims. For now, the best bets are firms insulated from trade wars or positioned to capitalize on niche opportunities in tourism and sustainability.

In the end, Ishiba’s letter to Xi marks a diplomatic step forward—but without breakthroughs on security and historical grievances, Japan’s trade trajectory remains as fragile as the Senkaku/Diaoyu buoys themselves.