Financial Times – September 26th 2012
It’s déjà vu all over again .
The casus belli is a little-known group of islands. The country in possession is perceived, not least by itself, to be in long-term economic decline. The claimant considers the islands a symbol of national humiliation stretching back into the nineteenth century.
Like Argentina in 1982, China is ruled by an unelected cabal at the apex of an organization designed for a bygone era. Like Britain, Japan is an ally of the United States and unsure how much support to expect from its superpower friend.
There are obvious differences too. Even at its 1970s low point, Britain’s economy was much larger than Argentina’s, whereas China has recently displaced Japan as the world’s second economy.
Furthermore, Japan’s armed forces have not fired a shot in anger in sixty years, and military expenditure has rarely topped 1% of GDP. By contrast, China is a nuclear power with military expenditure at least double Japan’s.
Unlike Britain and Argentina, China and Japan are not at opposite ends of the earth. They are neighbours, with a thriving trading relationship. That means there is more at stake – which makes it less likely that the face-off could escalate into a military clash , but far more devastating if it did.
As the historian Barbara Tuchman pointed out, history is replete with examples of misjudgements and accidents leading to disastrous outcomes. Before August 1914 optimists believed the burgeoning trade between Germany and Britain made war too ruinous to be contemplated for both sides. The analysis was right, but not the forecast.
So the first priority must be to defuse immediate tensions and restore a semblance of normality. But it will only be a semblance. This latest eruption of the Senkaku/Diaoyu imbroglio has raised too many questions aboutthe future of Sino-Japanese relations.
Photos of Chinese protestors holding signs proclaiming “Exterminate the Japanese” went viral in Japan and will not be forgotten quickly. Neither will the claims – not by over-excited bloggers, but by officials in respectable Chinese media – that Japan’s sovereignty over Okinawa is questionable. That is equivalent to questioning the United States’ sovereignty over Hawaii.
Arson at a Panasonic (formerly Matsushita) factory was especially symbolic. In 1978, Deng Xiaoping himself visited Konosuke Matsushita, the company’s legendary founder, and requested assistance in modernizing the Chinese economy. Panasonic accepted the invitation, and became the first Japanese company to set up a manufacturing operation in China. From the Japanese perspective, what the rioters torched in Qingdao was not just production capacity but a whole era of Deng-inspired pragmatism and shelving of grievances.
The economic risk can be hedged over time. Much of the output of Japanese manufacturers in China is for export to the consumer markets in developed countries. This kind of production was always likely to shift to cheaper locations once Chinese labour costs lost competitiveness. It would be no surprise if recent events – including this week’s outbreak of labour strife at Foxconn – were to expedite the process . Indeed Toyota supplier Toyo Tire and Rubber is already reviewing its options. On-shoring is a possibility – especially if more aggressive monetary policy were to knock back the yen – but rarely can the smiles of Thailand have looked more welcoming.
The strategic issues run deeper. The concept of “soft power” has been found seriously wanting. The success of sushi and J-pop bands in China proved no more helpful than the popularity of Boy George and Chariots of Fire were in deterring General Galtieri in 1982. The argument for more hard power – increased defence spending – is likely to gain traction, as will nationalist voices on the right who have been sceptical about engagement with China. The idea of downplaying the Japan-US military alliance and shifting to a more “pan-Asian” strategy now seems dangerously naïve.
Less clear is the impact on Japan’s standing in the world. The Falklands War is inextricably associated with Thatcherism. The economic disasters of the 1970s caused Argentina to assume that Britain lacked both the resources and will to recapture a remote and valueless group of islands. Likewise the gap in the economic performance of China and Japan explains China’s growing assertiveness and also raises questions about the long-term commitment of the US to Japanese interests.
The lesson for Japan is that if it wants to avoid unsplendid, vulnerable isolation, it needs to break out of its long deflationary funk and recover some growth momentum. That means bold use of fiscal and monetary policy, speedier restructuring of industries that are suffering from chronic overcapacity and a strategy to position Tokyo as a global hub of fashion, finance and design.
Who knows – if the parallel with the Britain in the 1980s holds, the Nikkei Index might even embark on a bull market.