Shinzo Abe is perceived as a nationalist who recently visited the Yasukuni Shrine and this week reportedly criticised China over its human rights record in Tibet. What does this mean for the ongoing territorial dispute between Japan and China over the Senkaku Islands, a dispute which has not yet been resolved even if it is not currently occupying the headlines?
The implications may not be quite as bad as they appear since the last time Shinzo Abe was Prime Minister in 2006, when he succeeded Junichiro Koizumi, he visited China in early October just 12 days after he took office. As such, he was able to improve relations with China after the significant deterioration that had occurred under Koizumi. Remember Koizumi visited the Yasukuni Shrine in his official capacity as Prime Minister on no less than six occasions.
Such a repeat exercise in appeasement by Abe is to be hoped for for those long Japanese export stocks since the Japanese appear to have miscalculated over the territorial dispute.
While they previously had de facto control over the islands, the consequence of Prime Minister Noda’s decision in early September to buy the islands outright has led China to lay down formally its territorial claim.
The result is that concrete positions have been taken and vessels are circling, be it Japanese coast guard boats or Chinese surveillance vessels, creating the continuing potential for incidents.
The other point is that the economic damage from the incident is not going away in terms of the hit to Japanese exports of consumer products into China. For example, China Reality Research (CRR) has released a report today showing a continuing plunge in Japanese camera sales in China.
Thus, the average sales of DSLR, hybrid and compact cameras in China, mostly Japanese brands, declined by 23%, 15% and 26% YoY respectively during August-October 2012, based on 20 digital camera dealers CRR visited this month. This is on top of the already severe damage done to the automakers. Thus, Japanese car sales in China plunged by 38.2%MoM and 59.4%YoY in October, according to the China Association of Automobile Manufacturers.
Common sense would suggest that a deal is possible after the leadership succession in China and the Japanese election is over. Still this is not a foregone conclusion since China has now taken a stance which means its “face” is on the line. In this sense a potential parallel is the Sino-British dispute over Hong Kong which created uncertainty in Hong Kong in the early 1980s, before the tensions were resolved by the Sino-British agreement of 1984 when Britain conceded to most of China’s claims. But the point to note is that China only made an issue of enforcing its territorial claims after Britain raised the issue of the leasehold structure over which it ruled Hong Kong.
Clearly, the Senkaku Islands are not Hong Kong. But the point to note is that once China has formally stated a position, the opportunity to negotiate is reduced. This should matter to Japan since China is its biggest trading partner, accounting for 20% of Japan’s total trade.
On the spat between China and Japan, one consequence is Japanese companies diversifying production elsewhere. Thus, Toyota Motor Corporation (NYSE:TM) (TYO:7203) (ETR:TOM) announced last week in Bangkok that it will raise its annual production in Thailand by 50% to 1m units in the near future of which half will be for exports. On a similar issue, the latest data from the Thai Board of Investment (BOI) shows a 70%YoY increase in foreign direct investment applications submitted to the BOI in the first nine months of this year to Bt433bn, with 64% of that accounted for by Japan whose FDI applications rose by 116%YoY to a record Bt276bn between January-September 2012.