In the near term, China and Japan are unlikely to negotiate a return to stability. A continued push by Beijing to weaken Japan’s administrative control over the disputed islands sustains the risk of an accident; but military confrontation is unlikely given Japan’s alliance with the US. However, risks surrounding the Japan/China relationship remain high – particularly on the economic side. China sees real domestic and geopolitical benefits from pursuing such an approach. Beijing has in recent years been willing to use its economic leverage to pressure Japan, and it is better situated to navigate the economic risks surrounding a slowdown in bilateral trade and investment flows. For now, downside risks to Japanese consumer brands in China in particular will remain high until diplomatic entreaties lead to a real change in at-sea behaviour.
Nicholas Consonery is an Asia analyst at Eurasia Group.
Historically, spats between Japan and China have been short-lived. The two nations need each other. China needs Japan’s technology and inward investment; Japan needs China’s growing market for consumer and capital goods, and services. As long as Japan continues to make things that the Chinese want, they will buy them. One example is Japanese camera sales, which were initially affected by the dispute. But Canon and Nikon have a large market share in digital cameras, and the Chinese don’t have many other choices. If you produce goods that people want, and you make them competitively, then you have little to fear from politics as long as markets are open. It is unclear how this dispute will be resolved. But within weeks of the consumer boycotts of Japanese goods, Chinese consumers once again returned to Japanese brands, suggesting the impact will be short-lived.
Paul Chesson is head of Japanese equities at Invesco Perpetual.