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     Dec 1, 2012

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Is China trying to implode Japan's economy?
By Peter Lee

At the opposite end of the expert opinion spectrum, ex-Morgan Stanley banker Andy Xie, in his column for the liberal and independently minded Caixin financial news outlet, took his own thoughtful look at the vulnerabilities of the Japanese economy, especially as they related to China.

Xie sees Japan-apocalypse, as an aging Japan can no longer provide the savings needed to cover the government's immense fiscal deficits and cope with the dismaying slide into trade deficits created by the overvalued yen. That means Japan will have to peddle debt instruments to those patient, kind, and competent


Good Samaritans of the international investment community:
What foreign investors think of Japan will begin to matter to its bond market. Foreign investors are unlikely to buy into Japan's crazy policy combination
Finally! This could be the time to successfully short the Japanese yen! (Actually, as Xie points out, the most obvious economic solution to Japan's problems - a major devaluation of the yen - would impoverish Japan's huge elder class and is probably politically out of reach.) As for the China factor, Xie wrote:
The dispute with China may be the last straw in punching a hole in Japan's unstable equilibrium. As China is the largest market for Japanese companies and the only major growing market, its [Japan's] trade deficit could mushroom into 2013. The market's view of the yen may flip from a safe haven to a structurally weak one. It could trigger a huge reversal in the capital flow, causing the yen to switch down to a new equilibrium level of 30 to 40% below where it is now.

... the territorial dispute with China kills Japan's dream of growing out of its problems. The dispute is unlikely to be resolved soon. Also, once Chinese consumers switch to other car manufacturers, coming back may become quite difficult. In the short term, weak Chinese demand will accelerate Japan's contraction. There isn't another force to offset it.
Regardless of whether the CCP leadership in Zhongnanhai reads China Daily and/or Caixin, there appears to be a recognition that prolonging the Senkaku dispute has the potential to inflict some significant damage on the Japanese economy.

The Chinese media provides further food for thought for Japanese analysts wondering whether the PRC is piling on the pressure simply to force concessions from the incoming LDP government, or is perhaps gunning for bigger game.

As Xie's piece indicates, auto sales are a pillar of Japan's economic relationship with China. Right now, Japanese auto sales in China are in free fall due to some combination of official discouragement, popular distaste, and personal risk-averse behavior. According to Chinese media, Toyota's local Chinese partner announced it would pay repair fees for Toyotas damaged in anti-Japanese protests. This is unlikely to lead to a sales turnaround, as it advertises to potential Chinese customers that there is an immediate risk to their persons and property in driving a Japanese-marque wagon. [7]

China Daily ran a gloating article on the collapse in Japanese auto sales in China. In a chart it compared the Japanese drop-off in October year-to-year to a rise in sales for some other suppliers:
  • Mazda: down 45%
  • Honda: down 54%
  • Nissan: down 41%
  • Toyota: down 44%

    Contrasted with:
  • GM: up 14%
  • Ford: up 48% [8]

    The interesting element of this graphic is that the only non-Japanese suppliers listed are both Americans. The largest foreign player in China auto sales - Germany's Volkswagen, whose share is equal to the four Japanese makers combined and experienced a huge jump in sales at Japanese expense in October - was ignored. Also ignored was South Korea's Hyundai, the third-largest in the market, and which also posted a healthy boost in sales. [9]

    The implied message here is that Japan's loss can be America's gain, an interesting exercise in wedging that invites the United States to deepen its economic engagement with the rising regional power, while decoupling from the fading regional power that is locked in a zero-sum strategic battle with its local adversary.

    Even if the PRC government isn't serious about trying to crater the Japanese economy, and instead will make nice with LDP leader Shinzo Abe in a few months, tension - and the urge to escalate tensions in what is perhaps mistakenly perceived as a virtuous cycle by each practitioner - is increasingly baked into the East Asian geostrategic cake.

    The US pivot to Asia is predicated on the beneficial role of tensions with China in creating a strong alliance of democracies, near democracies, and Communist dictatorships like Vietnam - which are so darn useful they have to be included somehow.

    The Chinese insistence on punishing Japan for its central role in the pivot is based on the idea that, when push comes to shove, the decisive realities in East Asian are economic and Chinese, rather than military, democratic, and American.

    Both sides believe they have the winning strategy, with the result that East Asian geopolitical dealings are drifting away from creating an environment of peace, stability and shared prosperity to fostering the emergence of a contested zone in which the major powers continually and maliciously stress-test their counterparts for economic and political weakness.

    That's a recipe for increased polarization, escalation, and the widespread adoption of zero-sum strategies that assume that one country's gains must come at another country's expense - and threaten to become exercises in wishful thinking (or wishful schadenfreude).

    Michael Cucek, an incisive and informed commentator on the Japanese political scene, is a concerned witness to the United States' slow economic and strategic drift away from Japan - and a proponent of the accentuation of the adversarial relationship between the PRC and Japan that underpins the "pivot to Asia".

    On his blog, he turns the spotlight away from Japan's economic and geopolitical predicament to China's own structural problems, and predicts that Japan will merrily make lemonade from the lemons of Sino-Japanese estrangement:
    ... [R]uminations on how to accommodate China's continued rise are predicated on just that: China's continued rise. Despite the glaring examples of the collapse of the Bubble in 1989 and the Great Recession (2008 - continuing), policy wonks are failing to check to see if indeed there is a floor beneath them, relying on an axiomatic faith in China's not hitting a wall.

    China's investment-as-a-percentage-of-GDP ratio of 50% is unsustainable, however. In order to preserve the illusion of prosperity in the face a global recession and a once-in-a-decade leadership handover, the government of China has greenlighted an immense extension in credit. The bills will come due, sooner than most big thinkers are willing to admit.

    When the Great Reckoning comes for the People's Republic, the governments and economies with the fewest strong ties to China will be the lucky ones. [10]
    In other words, the hope is that China will fall on its behind before Japan does. However, as they say, hope is not a plan.

    Japan has hope. But, it seems, China has a plan. And it looks like it's working.

    1. Chinese vessels sail near Senkakus for 20th day, House of Japan, Nov 10, 2012.
    2. Chinese vessels near Senkakus 30 days in a row, House of Japan, Nov 19, 2012.
    3. Senkaku issue still murky as governments reshuffle in China, Japan, Asahi Shimbun, Nov 16, 2012.
    4. How debts and double-dealing sparked Japan-China islets row, Reuters, Nov 11, 2012.
    5. China pushes back against Japan, Asia Times Online, Sep 29, 2012.
    6. Japan itself to blame for its woes, China Daily, Nov 20, 2012.
    7. Toyota to pay repair fees for cars damaged in anti-Japan protests, Sina, Oct 9, 2012.
    8. US auto giants see sales surge in October, China Daily, Nov 6, 2012.
    9. Volkswagen aiming for 3,000 dealers in China, China Car Times, Nov 19, 2012.
    10. Random Thoughts On The US Election And The Chinese Leadership Changeover, Shisaku, Nov 7, 2012.

    Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy.

    (Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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