TOKYO - The risk of doing business in China has just gone up even higher for Japanese companies, after insurers decided not to cover them against riots in China following violent flare-ups in many cities there last month.
The move could deter Japanese businesses from making new investments in China, which remains locked in a major territorial spat with Japan.
Major Japanese insurers will stop selling policies that cover damage from public disturbances in China, according to a report yesterday by the influential Nikkei business daily.
Also, premiums for existing policies are likely to be increased in view of the greater-than-expected damage arising from last month's anti-Japanese protests, which turned violent. Future payouts could be capped as well to reduce the risk to insurers.
Many large Japanese firms operating in China are believed to have taken out special policies that also protect them against strikes, riots and civil commotion, especially after anti-Japanese protests in recent years.
The special policies cover both direct damage as well as loss of profits due to the closure of stores or plants.
However, last month's protests - triggered by Japan's nationalisation of three of the disputed Senkaku islands, which the Chinese call Diaoyu - saw some of the worst damage inflicted on Japanese businesses to date.
Electronics giant Panasonic had some of its plants vandalised by protesters. In Qingdao, Japanese car dealerships were torched, along with brand-new vehicles, while Japanese shops and restaurants were attacked.
Mr Yasuyoshi Karasawa, who chairs the General Insurance Association of Japan, told reporters late last month that insurance claims related to the month's protests were expected to go as high as 10 billion yen (S$155 million).
For Japanese companies, the latest developments have significantly raised the risk of doing business in China.
"We hope the Chinese government will help to deal with this so-called 'China risk'," said Mr Karasawa.
In recent years, many Japanese companies in China are believed to have secured promises of compensation from the local Chinese authorities should their property be damaged by rioters.
Last month, Heiwado, a Japanese supermarket, reportedly suffered 3.5 billion yen in damage after protesters vandalised all three of its outlets in Hunan province.
Reports said the Hunan provincial government agreed to compensate Heiwado for part of the damage, although the actual sum was not disclosed.
Mr Karasawa said he did not expect Japanese businesses to shrink their operations in China immediately.
However, the increasing risk of doing business in China comes at a time when many Japanese firms are already thinking of investing in South-east Asian countries, especially Myanmar.
Japanese apparel makers are reportedly eyeing Myanmar not only as an alternative to existing manufacturing bases in China, but also as an emerging market of 62 million customers.
Rapidly rising wages in China and the increasing frequency of strikes for higher wages have reduced the country's attractiveness to foreign investors.
According to the Japan External Trade Organisation, factory workers in Myanmar are paid an average of US$95 (S$115) a month - one-fifth the norm in China.
Furthermore, the continuing boycott of Japanese goods in China has seriously hurt sales of Japanese cars, forcing major automakers to slash production at their Chinese plants.
Sales of Toyota cars are said to have tumbled over 50 per cent last month. The company sold 86,000 vehicles in China in the corresponding month last year. It reportedly plans to cut production in China, lowering planned targets for this month by about 50 per cent.
Mazda sold 13,258 cars last month, a 35 per cent drop from levels seen a year ago.
In the case of Nissan, about 27 per cent of its projected global sales will come from China - the largest proportion among Japan's top automakers.
Its executive vice-president Takao Katagiri said at a press conference yesterday that China remains an important market for the company in the long term.
It plans to release its latest sales figures for China as early as next week, he said.
Meanwhile, the Senkaku row shows no signs of winding down. Four Chinese maritime surveillance ships were seen yesterday in waters near the disputed islands.
Earlier, seven Chinese military vessels were spotted sailing from the East China Sea to the Pacific Ocean along a route between Japan's Okinawa and Miyakojima islands, about 200km from the Senkakus.