Through the recent spillover reports, an important thing to take note of is the interdependence of China and Japan. They have a trading relationship of $340 billion/year. Japan is China’s largest investor and China is both Japan’s largest trading partner and financier.
Especially with the latest political dispute between Japan and China (senkaku/diaoyu islands), their relationship is becoming increasingly strained. Major Japanese companies like Toyota and Japanese Airlines have been hit hard in recent months and there is little sign that the dispute will be ending soon. S&P was recently quoted as saying that if it continues to worsen, “it may hurt Japan’s macro economy and affect the credit quality of rated Japanese companies on a large scale”.
This great interdependence would also leave Japan among the most vulnerable if another type of shock were to hit China. Although a low probability, China does show indicators of a real estate bubble. Would these types of shocks affect Japan in a similar way? If China’s shock was more economical than political, it would still be difficult for Japanese companies like Toyota and Japanese Airlines to grow in the China market. I suppose in the political situation, Japan could look to other areas of Asia to grow, but from the economic shock standpoint, a larger portion of the developing asian economy would be hit and would cause other parts of the world economy to be affected like commodity prices (metals) that are important in Japanese manufacturing.