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     Apr 26, '13

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Japan stirs Campbell's US 'pivot' soup
By Peter Lee

Oscar Wilde wrote, "When the gods wish to punish us, they answer our prayers." Perhaps this is how Kurt Campbell feels today.

Campbell, after all, as assistant secretary for East Asia in Hillary Clinton's State Department, was a key architect and proponent of the "pivot to Asia", which was meant to elicit satisfactory behavior from China - and, in the process, demonstrate US leadership and relevance - by confronting the PRC with a phalanx of Pacific democracies (plus Vietnam of course) determined to impose liberal security, economic, and human rights norms on the rogue superpower.

The inevitable result of US backing has been an increased

willingness of the Philippines, Vietnam, and Japan to stand up to China, which has contributed a virtuous cycle of Chinese hostility and a further defensive cleaving of the smaller nations to the United States.

The less-than-desirable by-product has been the tendency of the pivot's designated junior partners to tug at the dragon's whiskers for national and domestic political reasons, secure in the knowledge that the United States must back them up, even if the confrontation runs contrary to long-term US interests and objectives for the region.

In the case of Japan, adventurism has gotten out of hand, and the US is responding with anxiety, a shift in policy, and a sea-change in nomenclature.

History will judge if Prime Minister Shinzo Abe is the architect of Japan's renaissance, or merely an opportunistic and short-sighted nationalist. In any case, he has already demonstrated a willingness to stir the Pacific pot in ways that excite the anxiety of the United States.

The United States' discomfort at Japan's eagerness to hype the Senkaku/Diaoyutai Island dispute as a useful point of friction with China has become palpable.

Kurt Campbell, now ensconced in the private sector on the board of the Center for a New American Security think tank, chose to reveal to the Kyodo News Agency that the US government had advised Japan against the nationalization of three of the Senkaku Islands, the provocation that sparked this year's Sino-Japanese brouhaha:
The Japanese government consulted with the State Department prior to the purchase, Campbell revealed, and was given "very strong advice not to go in this direction."

The US government, in urging Japan not to follow through with the purchase, stressed the action could "trigger a crisis" with China, which claims the islands for itself.

"Even though we warned Japan, Japan decided to go in a different direction, and they thought they had gained the support of China, or some did, which we were certain that they had not," Campbell said. [1]
Stroking the Senkaku fetish might be excused as an unavoidable political imperative for Abe, given the rise in anti-Chinese feeling in Japan. However, under Abe the Japanese government has unilaterally undertaken a series of other moves to strengthen the hands of Pacific nations seeking to counter China.

In recent months, the Japanese government has agreed to provide 10 patrol boats to the Philippines; enticed Taiwan to abandon its anti-Japanese stance on the Senkakus (which, as a matter of proximity, really belong to Taiwan) by granting Taiwanese fishing vessels the right to fish near the islands (though not within the 12 mile limit); offered its economic good offices as an alternative to China as a destination for Mongolian coal; and scheduled talks with Vietnam on cooperation in "maritime security", also known as the provision of patrol boats along the Philippine model.

The spectacle of the Japanese government cutting all sorts of anti-China deals in Asia on its own kick raises the specter of an independent Japanese security policy and, with it, the kind of destabilization that the US pivot to Asia was meant to pre-empt.

As Peter Ennis reported in Dispatch Japan, the Obama administration was determined to reign in Prime Minister Abe's anti-China shenanigans during his March visit to Washington:
In a brief Oval Office appearance with Abe, Obama spoke not one word about the Senkakus, China, Okinawa, or even a "joint vision" of the sort announced with Noda. Abe tried his best to criticize China, very indirectly, but adhered to US desires to not rile-up Beijing. ...

Neither Obama nor Secretary of State John Kerry took the seemingly easy step of reiterating the January 18 statement by then-Secretary of State Clinton outlining American opposition to any effort at unilateral change of Japan's administrative control of the Senkakus. This was a far-cry from Abe's initial desire for a strong statement from Obama specifically mentioning China. ...

Obama embraced the US-Japan alliance, but did not embrace Abe. [2]
Unfortunately for the United States - and the pivot - it looks like the Japanese military cat is permanently out of the bag, as a result of Japan's growing unwillingness to accept the second-class military status imposed upon it by its defeat in World War II.

The Abe government is determined to revise Japan's "pacifist" constitution and dilute its restrictions on military operations outside Japan's borders once the LDP gains expected dominance of the Diet's upper as well as lower house - and the ability to unilaterally amend the constitution - following elections in July.

Actually, a lot of nibbling has already taken place. Recently, the Japanese cabinet decided that Japanese ground forces could be dispatched overseas "to assist in the evacuation of Japanese nationals" from danger zones. Defense Minister Itsunori Onodera asserted Japan's legal right to engage in preemptive strike to forestall an imminent attack, while stating that Japan had not developed that capability "as yet".

During Prime Minister Abe's visit to the United States, the Japanese team also touted the concept of "collective self-defense", which states that the Japanese self-defense forces could come to the defense of an ally, ie fight a war outside Japan's borders as long as it was "defending an ally". To demonstrate the benefits of the collective self-defense posture, the Japanese team also suggested that Japan's missile defense network would be pleased to knock down a North Korean missile headed for the United States.

The Obama administration, while undoubtedly appreciative of the offer to shelter beneath Japan's missile defense umbrella, was perhaps more worried about Japan knocking down something else and starting World War III, and demurred.

In a relatively unnoticed but equally significant development, the Obama administration also objected strongly to Japan's plans to process its spent fuel rods domestically and enlarge its sizable stockpile of bomb-worthy plutonium metal. [3] Another indication that Japan has slipped the leash is in the area of "Abenomics".

It is safe to say that no governments outside of Japan are enthusiastic about the keystone of Prime Minister Abe's national economic rebirth strategy: a wild bet on quantitative easing twice the size of the US effort, one that will inject US$1.4 trillion into the economy over two years and double Japan's money supply.

Officially, the objective of the policy is to boost inflation to 2%, thereby baking inflationary expectations into the economy, and stampeding "Mrs Watanabe", the prototypical Japanese saver, into buying a new car or bedpan-emptying robot right away, instead of waiting for another 20 years of continued deflation to bring the price within reach. Nobody knows if that will work.

Unofficially, the objective of the policy seems to be to drive down the yen and boost Japanese exports, which is already working.

To cite Oscar Wilde once again, export promotion is the quantitative easing consequence that dares not speak its name. Nobody who engages in quantitative easing - the United States, the European Union, or, now Japan - admits that the objective is to weaken the currency and keep factories humming with exports. Because once one country weakens its currency, everybody else will, and we're down the slippery slope.

Given the fait accompli Abe delivered to the financial markets, the Group of 20 decided to give Japan the benefit of the doubt with this less than ringing endorsement of its motives at the April 19 meeting of finance ministers in Washington:
Japan's recent policy actions are intended to stop deflation and support domestic demand.
Full stop.

The G-20 had a lot more to say about quantitative easing, as long as it didn't have to talk directly about Japan:
We will refrain from competitive devaluation and will not target our exchange rates for competitive purposes, and we will resist all forms of protectionism and keep our markets open. We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability. Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates of central banks. We will be mindful of unintended negative side effects stemming from extended periods of monetary easing.
Concerned readers will be shocked, shocked! to learn that Japanese officials and sympathetic media outlets spun the G-20's leeriness about quantitative easing and its one-sentence shirking of criticism of Japanese policy into an endorsement of Abenomics. As in:
G-20 understood Japan's policies to revive economy - BOJ's Kuroda. [4]
The Japan Times headlined with "G-20 finance chiefs back aggressive easing regime" and continued with a strategic use of the passive voice:
Those comments were viewed as giving a green light to Japan's program, which has driven the value of the yen down by more than 20 percent against the dollar since October. [5]
As reported by the Guardian, concern over Japan's Abenomics plans was already widely acknowledged back in February:
Japan will escape censure from the G20 group of nations meeting in Moscow this weekend despite widespread unease at Tokyo's aggressive intervention into currency markets to drive down the value of the yen.

It is understood that pressure from the International Monetary Fund (IMF) and several prominent G20 members has kept any reference to Japan's attempts to depress the yen out of a communique due to be released on Saturday.

A draft communique seen by Reuters suggests that Tokyo would not be singled out for criticism, as had been suggested.

An unnamed delegate was quoted as saying: "There wasn't anybody putting Japan on the spot. That's quite frankly a bit of a surprise." [6]
For its part, in order to avoid explicit criticism in the Washington meeting, the Bank of Japan declared it would print money by purchasing Japanese government bonds, not directly purchasing foreign securities and thereby explicitly strengthening foreign currencies. [7]

Nevertheless, in the real world, a lot of that money is going to end up in foreign markets (and strengthening foreign currencies) anyway, simply getting laundered through private securities firms instead of flooding out direct from the BOJ. Bill Gross, the bond guru of Pimco - and Japanese QE skeptic-told the Wall Street Journal:
"This BOJ printing seeps out daily into global markets as Japanese institutions which have sold their Japanese government bonds to the BOJ look for higher yielding replacements," said Mr Gross in an email interview Tuesday afternoon with The Wall Street Journal. "Ten-year Treasurys to us look very low-yielding, but to them they yield 125 basis points more." [8]
It is not out of line to speculate that Japan's announcement of its decision to join negotiations on the Obama administration's cherished Trans Pacific Partnership trade pact was also timed to ensure US forbearance on Japan's massive program of quantitative easing.

Japan may be enjoying some success in its public relations campaign to paper over widespread unease about its quantitative easing program, but massaging the national and financial press is not going to alleviate private US concerns about the immediate and less than beneficial impact of Prime Minister Abe's diplomatic and economic initiatives on another important pivot partner, South Korea.

In the framework of the pivot, Japan's disregard for the sensibilities and interests of the Republic of Korea, a frontline state in any effort to restrain North Korea and counter China, is well-nigh inexplicable.

Continued 1 2

China: Pivot 'partner' or pinata?
(Apr 10, '13)

China checks the US picket line
(Dec 22, '12)



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