If the Middle Kingdom is able to pressure Japan to join a free trade agreement, such an agreement would likely allow China to challenge Japan’s myriad forms of economic protectionism through the agreement.

Japan could very well wake up one day to find, in a scenario no less dramatic than Godzilla’s arrival in Tokyo, that many of its top companies are owned by Chinese investors.

China, its corporations, its entrepreneurial firms and its sovereign funds will surely welcome any opportunity to make serious inroads into the Japanese economy, just as the Chinese have shown an incipient interest in taking over U.S. and European firms.

(China’s outbound FDI has increased from $551 million in 2000 to almost $7 billion in 2005, and in early 2007 a Chinese government agency surprised the world with a $3 billion investment in the Blackstone Group — a U.S. private equity firm).

In fact, they would likely delight in doing so, symbolism aside, given the suboptimal way in which Japanese manage their economic assets.

Chinese companies, funded by their financial institutions, could launch very generous but hostile takeover bids against Japanese companies — including, conceivably, the jewels of the keiretsu system and Japan’s hereto untouchable Fortune 50 companies, the pride and joy of the country.

If such bids were launched in compliance with Japanese law, and if Japan nevertheless raised ad hoc obstacles to block them, China would likely again be able to retaliate beyond what Japan would be able to handle, thanks again to the asymmetry.

For example, it could impose trade restrictions on Japanese goods, or up the ante and reverse Japanese acquisitions of Chinese companies and even expropriate Japanese assets in China. Based on the plausible scenario of such retaliation, the Japanese government would eventually have to allow the takeovers, just as the cash-strapped corporations would be tempted to accept the Chinese money and business skills.

Thus Japan could very well wake up one day in the not too distant future to find, in a scenario no less dramatic than Godzilla’s arrival in Tokyo, that many of its top companies are owned by Chinese investors.

There is a feeling in the West that despite Japan’s impressive economic performance, the country did not remember to include its friends when times were good.

Japan might also be surprised, in this scenario, to discover that the Europeans and Americans would not rush to provide Japan with a diplomatic or financial cushion against Chinese economic and political pressure, regardless of how strongly Japan might continue to align itself with the United States on political and military matters.

On the contrary, the U.S. capital markets and the financial establishment — not in the least Blackstone — would be all too happy to support and service Chinese acquirers. Mercantilism excludes, it alienates potential friends and lonely Japan has failed to cultivate loyalty or allies in the world.

As we have seen, foreign presence in the Japanese market, whether through investments or trade, has been infinitesimal in proportion to its massive economic size.

There is a feeling in the West that despite Japan’s impressive economic performance, the country did not remember to include its friends when times were good, as the United States has done, and as China is doing now.

Certainly, as China emerges as a potential military threat, the United States will look to strengthen its military alliance with Japan, and Japan will happily oblige (along with its new military partner, Australia).

But neither the Americans nor the Europeans (nor the Australians) will have any interest in blocking Chinese-led economic reform in Japan, as “closed economy Japan” runs counter to everybody’s interest.

If anything, the Americans and Europeans would encourage Chinese entrepreneurs to persevere if Japan chose to block their open market takeover attempts. Having run up against the same walls over the last thirty years, they would in all likelihood welcome the prospect of someone else at last getting through.

Chinese companies, funded by their financial institutions, could launch very generous but hostile takeover bids against Japanese companies.

Through trade agreements, investments and M&A activity, therefore, and with Western support, Chinese companies could conceivably work their way through the entire Japanese production chain.

As they did, they would likely look to reform practices in line with new, more globally oriented business principles, since the Chinese are today demonstrably more receptive to foreign ideas and global participation than the Japanese. Once inside, the Chinese could gain sufficient leverage to challenge a raft of regulations and practices.

European and American companies would then look to take advantage of their partnerships with Chinese companies or leverage their own China subsidiaries (many Western SMEs in China have grown larger than their headquarters in Europe or the United States) and follow them into the country. Growing asymmetric dependence between Japan and China may finally blast open Japan’s economy for everyone.

An economic mega-shock would likely be very healthy for Japan. With new money, faces and ideas at last, Japan’s economy might finally begin to undertake long overdue productivity improvements among all sizes of companies and begin to function as a mature economy. The benefits would flow not from the Chinese or their firms per se, but merely from opening to global competition.

As China continues to push for a robust free trade regime in Asia, it will only be a matter of time before it pressures Japan to join, and Japan would find it hard to resist.

The opening would force the back leg of Japan’s economy to step up to global business standards, sheltered no more. This raises the question of how Japan would likely react to such a chain of events.

A minority of forward-looking Japanese would be comfortable with the larger significance of such a development. As the Hong Kong joke goes, China just had a couple of bad centuries and is back in business.

Or as management consultant OHMAE Kenichi comments, “Over the last 4,000 years of history, Japan has been a peripheral country to China, with the exception of this one last century. In the future, Japan will be to China what Canada is to the United States, what Austria is to Germany.”