Obama Meets Hatoyama in Japan

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Tokyo was hoping to shore up its influence in the region. So far, Tokyo, Bejing, and Seoul have agreed only to begin exploring a three-country Free Trade Agreement in the first half of 2010 and to aim for an investment pact sometime next year.

Japan's strategy reflects the changing balance of power in Asia. In recent years, Tokyo has cast a wary eye on Beijing's rising economic and military ambitions. Analysts say Japan is eager to keep China close as it gains economic and political clout. Tokyo wants to avoid being left behind in a global market dominated by China and the U.S. "There's a consensus among Japanese policymakers that Japan can't only rely on its relations with the U.S. because Washington's global influence has diminished," says Masaru Kaneko, an economics professor at Tokyo's Keio University.

As early as next year, China is expected to overtake Japan as the world's second-largest economy. While Tokyo and Beijing are rivals, they also rely on each other for trade. China is now Japan's biggest trading partner, outstripping even the U.S. Without China, Japan's economy would have been in far worse shape in the wake of the global financial meltdown. Many of the goods Japan ships to China are used to make TVs, shoes, cameras, and electronic parts, which are then sold to the U.S. The same goes for Asia, which accounts for 49% of Japan's exports and 40% of imports, according to Finance Ministry trade statistics. Meanwhile, Japan's trade with the U.S. continues to shrink.

But Japan's influence in Asia isn't entirely built on commerce. The security alliance with the U.S. has played a sizable role. Over the past several decades, having U.S. bases in Japan has helped to assuage worries in the region about a resurgence of Japanese militarism. That allowed Tokyo to focus on trade with its neighbors. Tokyo also has won over its neighbors by helping the region's poorest countries. "Japan can't just choose China over the U.S.," says Koji Murata, a professor of international politics at Doshisha University in Kyoto. "It has to stay on good terms with the U.S. If it doesn't, Japan could eventually weaken its own position in Asia."

With Hiroko Tashiro in Tokyo

Hall is BusinessWeek's technology correspondent in Tokyo.

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