The impacts of the China/Japan island dispute

Senkaku Islands

Senkaku Islands

In the latest development of the dispute over the Senkaku/Diaoyu Islands, Japan scrambled fighter jets after a Chinese Military Surveillance plane entered the airspace around the disputed islands. Japan considers this the first violation of Japanese airspace since Japan started keeping records decades ago. Chinese naval and Japanese Coastguard ships are embroiled in a game of cat and mouse in the waters surrounding the islands.

Relations between the two countries have been at its worst in decades. Most of this escalation is driven by national interests by both sides. However, international law, which is supposed to help mediate disputes like this are making things more complicated and fuelling the fire. Observers are asking, are countries of Asia really going to go to war over the uninhabited islands? Some have argued that this dispute is merely a piece of political theatre fuelled by the leadership transition in China and elections in Japan. In addition, Asia is too busy getting rich and does not have the time or the stamina to make war.

Some have argued that the dispute is a perfect distraction for China and Japan. China has enough problems at home and is not interested in escalating disputes abroad. China is only pressing its case so aggressively because if it does not than it appear to look weak in the eyes of its people and the world. Also, China is encouraging nationalism to distract its population from the social problems created by the country’s slowing economic growth, the growing gap between the rich and the poor and rampant corruption. Chinese nationalism over the islands has turned into an endorsement of the CCP who have hitched its legitimacy on preserving its territorial sovereignty and thus has become the Party’s raison d’etre.

Japan also has pretty big domestic problems as well. Japan has the weakest projected economic growth rates. It is facing an energy crisis from the fallout of Fukushima Disaster. Its defence industry is dying which poses a threat to national security. Therefore, the island dispute has captured the public imagination in both countries.

One important side affect of the dispute is the economic implications for both China and Japan. Japanese manufacturers have poured almost $1 trillion into Chinese factories since 1990 and have created over 1.6 million jobs in China. Due to anti Japan sentiments and China Japan tensions, a survey by Reuters suggest that over 37% of Japanese corporations are reconsidering their investment strategies in China and may shift their factories elsewhere. Recent anti Japanese sentiments have hit Japanese sales in China. For example, Japanese automobile sales went down by 41% in September 2012 compared to the previous year while their market share in China decreased by 6%.

On the plus side the decrease of market share of Japanese products will provide an advantage for Chinese domestic products. However, it will also have a negative impact on the Chinese economy. Japanese firms as well as Chinese businesses that cater to Japanese visitors are being hit hard by the anti Japanese sentiments. In addition, people who work at these businesses are being called traitors by their countrymen. It means that the Chinese workers who work there will lose their jobs.

Beijing contends that the economic repercussions of the dispute is a double edged sword; Japan has a lot more to loose. According to a report released by JP Morgan Chase in October, it estimated that the China Japan dispute will cause Japan’s GDP to shrink by 0.8% in 2012’s 4th quarter, down from zero growth in a previous forecast. In addition, car exports to China would drop by 70% in the final quarter of 2012. Analysts compare this to the economic impact suffered after the Tsunami in 2011. IMF Chief Christine Lagarde summed up the fears of the international economic community by emphasising that Japan and China are the world’s second and third largest economies respectively, account for 20% of the world’s GDP and have a bilateral trade relationship worth $340 billion a year.

Categories: Finance & Economy

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