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Japan, China need to worry about a common foe

Squabbles over remote islands have sparked a Chinese backlash against Japanese brands. But China's slowing economy is having an even bigger impact on Japan's exports. And while China has toppled the U.S. as Japan's biggest market, both nations face a common economic enemy in the form of plunging demand from Europe.

The slump in Japan's exports in September may seem a direct hit from violent anti-Japanese demonstrations last month over a disputed group of islands in the East China Sea. After Japanese auto dealerships were torched and a mob in Xi'an assaulted an unlucky Toyota Corolla owner, sales of Japanese cars have plummeted. Earlier this month, Toyota said China sales in September halved from the same month a year ago. That's consistent with the 10-per-cent decline in overall Japanese exports and a 14-per-cent drop in shipments to China.

But the protests are really a symptom of China's deeper economic trouble – a sharp slowdown in domestic growth combined with sluggish demand for its own exports. Economic pressure shortens the public fuse, and nationalism is an all-too-tempting way for politicians to deflect blame. Japanese exports to China have been falling since late last year – they're down 10 per cent so far this year, and 12 per cent in the third quarter.

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China is Japan's largest export market, overtaking the European Union in 2006 and the United States in 2009. And while the country is a growing consumer of Japanese goods, most of what it imports is the heavy industrial machinery needed to make the products that Japan used to manufacture. The only bright spot for either country is a sluggish recovery in U.S. demand. Japan's exports to the United States rose 5 per cent in the third quarter; China's were up 3 per cent.

If there is a word for what really ails Japanese exports, it is neither Diaoyu nor Senkaku – the Chinese and Japanese names, respectively, for the disputed islands – but Europe. Japan's exports to the European Union dropped 23 per cent in the third quarter, their sharpest decline since 2009. China's exports to the same destination were down 40 per cent over the same period, the largest drop since at least 1990. When it comes to exports, China and Japan share a common foe.

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