In early October, China’s top banks and central bank governor Zhou Xiaochuan pulled out of a high-profile IMF and World Bank summit in Tokyo in protest of Japan’s recent purchase of disputed islands in the East China Sea. Zhou, the scheduled keynote speaker, dispatched a deputy to deliver his speech instead.
The snub of top-level negotiations illustrated the cost of China’s escalating tensions with Japan. Japan reignited a long-standing territorial dispute in September when it bought an island chain, known as the Senkaku in Japanese and the Diaoyu in Chinese, from its private Japanese owner. Thousands of mainlanders have since taken to the streets in protest, vandalizing Japanese businesses and even brutally beating a Chinese man for driving a Toyota.
Old habits die hard
Japan and China have only fueled the fire with a public blame game. At a meeting of the UN General Assembly in September, China blasted Japan for the “illegal and invalid” island purchase and its “obsolete colonial mind-set.” That prompted Japanese Prime Minister Yoshihiko Noda to aver Japan’s “unwavering resolve to defend its territorial lands and waters.”
The economic toll of a major dispute between the world’s second- and third-largest economies could be as dire as its political consequences. Mass boycotts continue to hurt Nissan and Toyota, which reported their worst Chinese sales since 2008. In September, China Eastern Airlines saw international sales drop 18% from the previous month, while Japan’s two largest airlines reported cancellations on some 60,000 tickets for flights between September and November.
Analysts warn a prolonged dispute could have broader effects on a still-struggling global economy. Trade between the two Asian giants, estimated at more than US$340 billion, props up other regional economies and supply chains.
Disruption in the supply of finished goods manufactured in China – many utilizing Japanese parts and machines – could spur shortages and raise prices. Japanese exports to China fell 14% year-on-year in September amid the dispute, with car exports decreasing 44.5% annually.
A diplomatic exit
The dispute has reemerged during sensitive political times. China is heading into a once-a-decade political transition, while simultaneously combatting slowing growth numbers and rising unemployment.
In Japan, poor approval ratings and a standoff in parliament with the opposition party threaten to throw Noda out of office. In these troubled times, leaders on both sides may be eager to allow nationalistic sentiment to distract their people.
Chinese leaders have bolstered anti-Japanese sentiment in the past. In 2005, authorities tacitly supported an online petition calling on Beijing to oppose Japan’s membership on the UN Security Council until the country acknowledged historic crimes. Officials looked the other way as demonstrations turned into beatings and lootings, cracking down only as protestors turned to march toward Tiananmen Square.
However, there are signs that both countries are looking for an exit. New talks between senior officials suggest heads are cooling as both countries feel the economic effects.
In an interview with Bloomberg in mid-October, Noda struck a more conciliatory note. “If our ties cool, particularly economic ones, then it isn’t a question of one or the other country suffering. Both countries lose out.”