The Japanese and Chinese economies are locked in a passionate embrace of codependency.  But who is on top?

Following China’s opening to the world economy in 1978, Japan was on top for a long while.  Japan provided official development assistance as indirect compensation for its violent occupation of major parts of China in the first half of the 20th century.  Japanese foreign direct investment in many factories greatly helped China’s export-led development.  And China also benefited from access to Japanese technology.

Watching the latest dispute between Japan and China, it now seems clear that China is moving on top.

What happened in this silly dispute?  A Chinese fishing vessel was in Japanese waters near the disputed Senkaku islands, and collided with Japanese coastguard boats, but without causing any injury or major damage.  Japan arrested the captain and crew of the fishing vessel.  It released the crew soon after but stubbornly held onto the captain for 17 days raising great ire on the Chinese side.  China may have swallowed a short detention, but hanging on to the captain for so long became a point of national pride.  There were large public protests not only in China, but also Hong Kong and Taiwan. 

The Chinese government stopped ministerial level contacts, and also cancelled an invitation to 1000 Japanese who were to visit the Shanghai Exposition.  Many Chinese tourists cancelled trips to Japan.  China imposed a de facto embargo on exports of rare earths.  China is the home to some 97 per cent of the world’s rare earth minerals, which are key components in many of Japan’s high-tech products like semiconductors, computers, and hybrid electric cars.  Japan imports 50 per cent of China’s rare earth shipments.  Four Japanese employees of the construction company Fujita were detained on suspicion of filming in a military area.  In short, Japan/China relations are now at their worst in five years. 

It’s important to remember that these Senkaku islands are only part of Japan by historical accident.  Historically, they were part of Taiwan, and today both China and Taiwan claim them as their own.  But when Japan took Taiwan from the Chinese Qing Dynasty in the late 19th century, Senkaku went with it to Japan.  After the end of World War 2, when Chiang Kai-shek occupied Taiwan after losing the Chinese civil war, Senkaku was in the hands of the American war victors.  Then in the 1970s, when the Americans handed Okinawa back to Japan, it also handed them Senkaku.  The Senkaku Islands have rich fishing grounds and are believed to have sizeable oil and gas deposits. 

In reality, Senkaku is a very long way from any Japanese territory, and much closer to Taiwan than to Okinawa.  When signing the 1978 Sino-Japanese Treaty of Peace and Friendship, then Vice-Premier Deng Xiaoping said: "Our generation is not wise enough to find common language on this Diaoyu/Senkaku question. The next generation will certainly be wiser. They will surely find a solution acceptable to all."  His brilliant response means “let sleeping dogs lie”, and his advice is more pertinent today than ever before.

Yesterday, following immense Chinese pressure and threats including from Chinese Premier Wen, the Japanese released the fishing boat captain.  As it happens, Japanese Prime Minister Kan, Chinese Premier Wen, US President Obama and Secretary of State Clinton were all in New York for the United Nations General Assembly.  Hilary Clinton urged the two sides to resolve the issue through dialogue.  State Department spokesman Philip J. Crowley said that the release of the captain “was a proper decision for Japan to make”.

The US confirmed that because the Senkaku Islands are under Japanese jurisdiction, they are covered by the US/Japan security treaty.  Diplomatically, the US indicated that they “don’t take a position on the sovereignty of the Senkaku Islands, but recognize current Japanese jurisdiction stemming back to the reversion of Okinawa to Japan”.  For the US, getting China to revalue its exchange rate is much more important than fighting over a few rocks in the sea. 

Amidst all the threats and noise over this incident, a new shape of the Japan/China codependency clearing emerged.  China clearly has much less need for Japan and can be much more assertive.  It no longer receives official development assistance.  It no longer really needs Japanese foreign direct investment.  China has too much money of its own.  And when it comes to technology, Japan’s is no longer quite so essential.  China is developing its own technological capacity.  In Asia, Korea and Taiwan are now emerging as technological giants.  And the Western technological leaders US, Germany and France are desperate to do business with China.

By contrast, Japan has now become very much a one engine economy.  It is increasingly driven by China which is its largest trading and investment partner, and an important destination for its technology exports.  The shops in Ginza now depend on China’s nouveau rich tourists emptying their pockets on Japanese luxury products.  China’s National Day is 1 October, and next week the Chinese will have one week’s holiday.  If the Chinese tourists were to boycott Japan, the Ginza shop-owners would be crying on their sushi.

China also has a Machiavellian tactic at its disposal.  It could make a hostile purchase of Japanese Government Bonds (JGBs).  China has been buying increasing amounts of JGBs to diversify its portfolio of foreign reserves.  This may be contributing to the strong yen which has Japanese exporters panicked.  The Japanese government has been intervening in foreign exchange markets to try to soften the yen.  If China really wanted to rattle Japan it could launch a very major purchase of JGBs and really push up the yen.

And last but not least, China could even boycotted the upcoming APEC Summit that Japan is hosting in Yokohama.  Very few other APEC members would appreciate Chinese absence from this annual get-together for the region.

It is difficult to see why Japanese Foreign Minister Seiji Maehara insisted on playing hard ball in this affair.  Japan now looks weak as it caved into Chinese pressure.  China appears to have been a bully boy when in fact I believe that it would prefer not to get in a tangle over these islands.  And North East Asia seems as if it is still as politically immature as ever and needs the Americans to keep peace. 

Japanese Prime Minister Naoto Kan has just reiterated his country's regular pitch for a seat on the United Nations Security Council.  You can bet for sure that China will oppose this bid even more strongly than in the past.

Fundamentally, the Japanese forgot two key points of wisdom. 

Mao Tse Tung once said "Fight no battle unprepared, fight no battle you are not sure of winning".  Japan had no hope of winning this from the beginning. 

And as my mother says, "when you are in a hole, stop digging!".  Japan could have and should have put an end to this affair much earlier than it did.

Reference

Quotations from Mao Tse Tung

http://www.marxists.org/reference/archive/mao/works/red-book/ch08.htm

 

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