Business trumps politics

The value of goods and services traded between China and Japan shrank 3.9 percent in 2012, coming to a total of 329 billion US dollars and recording the first decline in three years, China's General Administration of Customs reported on January 10. An even larger decline was noted in the level of imports of Japanese goods into China over the year, which were down 8.6 percent and caused Japan to fall from China's fourth-largest trading partner to its fifth most important.

The single cause behind steep drop-off in trade can be traced back to the pronouncement in Washington in mid-April by Shintaro Ishihara, then the governor of Tokyo, that he was in discussions with the family that owned three of the five uninhabited islands that make up the Senkaku archipelago.

After that, a dispute that has simmered for decades exploded into a full-scale confrontation, the impact of which is still being felt today.

Fury in China, Taiwan, Hong Kong

The outcry from China, Taiwan and residents of Hong Kong was immediate and vociferous. The islands are marked on Chinese maps as the Diaoyu chain and have been Chinese territory since before recorded history, Beijing and the protestors protested.

In the weeks after Ishihara's pronouncement, and as a "fighting fund" that he set up for companies and individuals to donate to steadily grew, incensed mobs roamed the streets in dozens of Chinese cities. They overturned and set fire to cars made by Japanese manufacturers, looted Japanese department stores, stormed Japanese restaurants and stoned consulates.

Factory buildings and equipment operated by Panasonic Corp. in Qingdao and Suzhou were damaged by protestors, while Aeon closed 30 of its 35 department stores across the country after its Qingdao outlet was ransacked. Car dealerships for Nissan, Toyota and Honda were attacked and damaged.

A poll by Reuters at the time of the unrest claimed that some 41 percent of Japanese companies believed the bilateral dispute had had an impact on their business plans and that some were considering scaling down their presence in China or shifting operations to other countries in the region, such as Indonesia, Malaysia or Thailand.

A spokesman for an unnamed transportation equipment maker said he feared that Chinese workers could put pressure on the company by refusing to work on production lines or making unreasonable wage demands.

In an interview with the Wall Street Journal, the then-Japanese Prime Minister Yoshihiko Noda said the violent protests by Chinese would have a negative impact on the nation's economy and scare off potential foreign investors.

In 2011, Japanese firms invested 6.3 billion US dollars in China, up 50 percent from the previous year. In the same period, US investment into the country shrank to a mere 3 billion US dollars.

Calm returns

Nine months after Ishihara's statement, relative calm has returned and Japanese firms are reiterating their commitment to China.

"Yes, we were affected by this and in September our sales in China were halved year-on-year, but in our latest figures for December, that had recovered to 84 percent," said Keisuke Kirimoto, general manager of the international communications division at Toyota Motor Corp.

The company is so confident that the worst is over that it has set a sales target of 900,000 units in 2013, which would surpass its best-ever annual result of 890,000 units.

"Our commitment to the Chinese market remains unwavering," Kirimoto told DW. "This is one of the most important markets for us - if not the most important market in the world.

"Everyone needs to be mindful of what happened and we have to learn from that situation, but it has not changed our attitude towards China," he added.

It is a similar situation at Honda Motor, which was forced to reduce output at its three Chinese manufacturing plants as demand for its cars shrank.

"It is coming back and people are going back onto dealers, so we expect to be completely back to normal by the end of the Chinese New Year in February," said company spokeswoman Akiko Itoga.

Another well-known Japanese firm, NEC, has a major presence in China but said the impact of the unrest was "minimal" and that it had not shaken the company's ambitions for the market.

In for the long haul

"As a production location and, in particular, as a sales market, Japanese firms are in China for the long haul," said Martin Schulz, senior economist at Fujitsu Research Institute. "China has been the most important market for some years and will remain that way."

Firms are aware, however, of the disruption that was caused to their operations and have learned that they were to some extent over-exposed by having too many of their operations based in China, Schulz said. As a result, many are choosing to expand their overseas operations by focusing on new facilities in countries in Southeast Asia, such as Thailand, Indonesia and the Philippines, which also offer new marketing opportunities.

But China remains too large and too tempting a target.

"It's black and white; pulling out of China is not an option for Japanese firms," said Schulz.