There is no doubt that the row over a group of tiny islands in the East China Sea has sealed the deterioration in relations between China and Japan. The diplomatic spat over the Diaoyu/Senkaku islands, which sparked violent protests, with Japanese flags and factories burned, stunned Tokyo, and caused Japanese companies to consider scrapping investment plans in China. Why open a new factory, they ask, just for it to be firebombed or defaced while an acquiescent administration turns a blind eye?
Until recently the “one-plus-one” investment policy (for every factory built in Japan, companies also had to build one overseas) benefited China. But now insiders say firms will look to support growth in Indonesia, the Philippines or newly open Burma.
For the International Monetary Fund, which has taken its annual meeting to the Japanese capital for the first time since 1964, the dispute is one of many linked to slowing growth and a rise in protectionism.
This week’s meeting was scheduled for Cairo, until the Arab spring made the region look too unstable for a gathering of finance ministers and global institutions. But with Chinese frigates circling the disputed islands and pleas for calm going unheeded, Tokyo’s political situation is closer to Cairo’s than the IMF expected.
China’s leaders are undoubtedly under pressure. Growth has slowed from more than 10% to less than 8% over the past two years, but its rising population means that growth of between 6% and 7% is needed just to keep pace. In March, Beijing cut its growth target for the whole of 2012 to 7.5%. As any student of politics knows, a foreign dispute distracts attention from failing economic policies.
But opting for a short-term boost in domestic popularity over a deterioration in long-term relations with foreign investors looks to be a huge mistake by the Beijing authorities. And the IMF understands that this local dispute has much wider ramifications: after all, Japan is the world’s third-largest economy and China, its second-biggest, accounts for about a fifth of the world’s total economic output. Any slowdown is going to hamper a global recovery.
The Americans have already put the brakes on expansion in China, in reaction to general corruption and to the growing threat from intellectual property theft. European companies have also backed off, preferring to send in high-value goods made at home.
Japan’s economy is not in great shape either. This year, colossal spending on imported gas and oil will send the balance of payments into reverse for only the second time in three decades. The yen is at a historic high against the dollar, making Japanese products expensive abroad, and the political situation remains unstable, with the Democratic party government able to push through a VAT rise only on a promise of early elections.
And let’s not forget the eurozone crisis. That continues to provide plenty of food for thought for IMF officials, given the failure to deal with Spain’s financial black hole and growing public unrest among southern Europe’s increasingly desperate citizens.
Yet it is the Japan/China dispute that is worrying them most. Japan believes the Chinese are wilfully making trouble: it has stressed that it bought the islands earlier this year to keep them out of the hands of the mayor of Tokyo, a Boris Johnson-style character with a populist enmity towards the Chinese community in Japan.
Maybe Beijing thinks it can go it alone without Japanese investment. It would be wrong, and the decision could have implications for us all.The Guardian
- Japan: Chinese Officials to Attend IMF Summit in Tokyo (blogs.voanews.com)
- IMF chief asks Japan, China not to be trapped by territorial row (english.kyodonews.jp)
- Tension enhanced by China’s regular patrol of disputed Senkaku sea area (chinadailymail.com)
Categories: Trade & Investment