Saturday, April 13, 2013

China’s Unlikely Rival: Japan

Of all the nightmares Chinese President Xi Jinping figured he would have to face, a resurgent Japan Inc. surely wasn’t among them.
A major slowdown in the Chinese economy? Yes. Social instability? Absolutely. Debilitating pollution? Check. Rampant corruption eating away at the Communist Party’s legitimacy? You bet. 
An economically vibrant Japan emboldened to challenge China for leadership in Asia? Hardly. With an assertive Shinzo Abe at the helm, though, Japan may be poised to do just that, in ways that could upend the dynamics of Asia’s future.
About William Pesek»William Pesek
William Pesek is based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region. ... MORE
The emphasis here is on “may.” For all the excitement over “Abenomics,” it’s still a vague and unimaginative blueprint to end Japan’s 20-year funk. Still, let’s say the optimists prove right and Abe ends deflation and restores Japan’s economic clout in the region. 
It’s doubtful that the steady, “peaceful” rise to dominance envisioned by China includes sharing power with a renascent Japan. The Japanese recovery the world has long sought could well make Asia a much more dangerous place.
This is the minefield into which John Kerry will wander as he embarks on his maiden trip to Asia as U.S. secretary of state. In Seoul today, Kerry will grapple with North Korea’s threats and try to reassure a key U.S. ally. In Beijing and Tokyo after that, he will encounter Asia’s budding Cold War firsthand.
Love Fest
Kerry’s Beijing stop will be contentious as he prods Chinese officials to rein in North Korea’s Kim Jong Un, revise currency policies that Washington deems unfair, and shut down an army of hackers attacking computer networks around the globe. 
Tokyo will be a love fest, with Abe keen on strengthening the U.S.-Japan alliance. The contrast won’t be lost on Xi, who just began his 10-year term as Chinese leader.
The yen’s 22 percent plunge against the U.S. dollar over the past six months, a drop that began with Abe’s candidacy, is bad news for Chinese exporters. While China’s economy is bigger, Japan’s still generates $5.9 trillion worth of output and features a stable of globally active technology, transport and pharmaceutical companies. 
Amid weak global growth and rising Chinese wages, a more competitive Japan could reclaim the export-market share that China now takes for granted. 
By opening the monetary floodgates as never before, Abe’s new Bank of Japan chief, Haruhiko Kuroda, could push the yen much lower still. China might even feel compelled to devalue theyuan, which would enrage the U.S.
Even more than Japan’s gross domestic product, though, the confidence that a recovery would lend to Abe, who has never forgotten his nationalist roots, is something that Xi should fear. The optimism the Japanese prime minister has managed to generate with his policies has driven his approval ratings into the 70 percent range. His Liberal Democratic Party seems headed for a big win in upper-house elections in July.
Once secure in his premiership, Abe may well rediscover his obsession with creating a “Beautiful Japan.” That’s the catchall phrase that Abe trotted out early in his first stint as prime minister in 2006. The euphemism encompasses a wide range of controversial policies -- from downplaying or denying Japan’s atrocities during World War II, to inserting more patriotism into school curriculums, rewriting Japan’s pacifist postwar constitution and generally flexing muscles in Asia.

Stiffening Spine

It’s hard to exaggerate how devastated the political establishment in Tokyo was to see China’s economy surpass Japan’s in 2010. That Japan shares the same credit rating as China is a deeply sore point for the conservative lawmakers who make up Abe’s LDP. 
Abe is anxious to restore the pride drained by two decades of economic stagnation, and in the postwar period before that. Visiting Washington in February, he pledged to “bring back a strong Japan.” He went even further in a speech to the U.S. foreign-policy establishment: “Japan is not, and will never be, a tier-two country,” he declared ominously.
Anyone who thinks this process will go smoothly is dreaming. “This could be destabilizing in the region and further undermine prospects for improving relations,” says Jeff Kingston, the head of Asian studies at the Tokyo campus of Temple University.
It also would complicate U.S. President Barack Obama’s pivot toward Asia. No economic relationship is more important than that between the U.S. and China, the “Group of Two.” Yet no friendship in the region matters more to Washington than its bond with Tokyo. 
A sustained period of heightened acrimony between China and Japan, already at odds over disputed islands, means even less cooperation on trade, currencies and security. An emboldened Japan would be more prickly about outside advice, including from the U.S. Worse, it could overplay its hand, nudging its American ally into a confrontation with nuclear- armed China.
There’s plenty of blame to go around, of course. China’s periodic displays of great-power vanity raise hackles throughout Asia. Its heavy-handed approach to territorial disputes and trade has undercut efforts to develop a more stable regional consensus and institutions like those that ended conflict in Europe after World War II. If a crisis develops in Asia, leaders really have nowhere to go to settle disputes and step back from the brink.
Even if China’s new leader wanted to strengthen ties with Japan, a plethora of domestic challenges may limit his maneuvering room. Xi must address official corruption, a widening gap between rich and poor, an increasingly activist media and pollution that’s choking Beijing. 
As problems mount, there will be a natural inclination to lash out internationally. Japan, China’s wartime colonizer, is an obvious target. Ceding ground to Tokyo would be devastating for Xi’s standing in Beijing.

Truce Time

China and Japan must be careful not to back each other into a corner. Both nations should keep economics and politics as separate as possible. They should agree to regularly scheduled summit meetings, as do Beijing and Washington. 
Pledging to increase bilateral financial and trade ties would help ensure economic interests survive any geopolitical differences. Also, it’s time to decide on a framework to negotiate a truce involving a group of islands that Japan calls Senkaku and China calls Diaoyu.
As Kerry traverses the region this weekend, he’s sure to seek some kind of diplomatic mechanism for scaling down tensions on the Korean Peninsula. He should worry just as much about reconciling the ambitions of North Asia’s two giants, before the region faces a true nightmare.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
To contact the writer of this article: William Pesek in Tokyo

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