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Friday, November 7, 2014

Factors Which Could Lead to Improvements in Sino-Japanese Relations in the East China Sea

On November 7th China and Japan issued a carefully worded statement which indicates that Beijing and Tokyo are seeking to ease the tensions between the two countries which have risen dramatically since 2012 when Japan nationalized the islands in the Easy China Sea known as Senkaku to the Japanese and Diaoyu to the Chinese. The statement admitted that "Different Positions" exist in regard to who has sovereignty over the islands and announced plans to create a "Crisis Management Mechanism" to try and prevent the situation from worsening. A mechanism such as this could ideally set the stage for some form of formal agreement as to the legal status of the islands. A victory for China is that the original draft of the statement apparently stated that Japan had sovereignty over the islands but was aware of China’s claims. If Japan had refused to modify this wording it would have greatly complicated discussions and made it less likely that Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe would meet during the APEC Summit in Beijing, that is currently under way, to discuss the matter further. Japan's apparent concession here indicates that Tokyo is serious about finding a resolution.

Both Japan and China have incentives to resolve this dispute. China has seen a significant drop in Japanese investment which is problematic during at time when the economic implications of potential shifts, such as reigning in China’s Shadow Banking Sector and reforming its Real Estate Market amongst other things, could severally compromise the growth rates that China has seen in recent decades and lead to an increase in social instability. (In theory China could refuse to make any meaningful reforms but that could lead to even worse consequences in the long-term). Japan meanwhile is facing its own degree of economic uncertainty as an increase in consumption taxes has limited economic growth, and the deflation of the Yen, while good for Japanese exporters, has negatively impacted the wealth of much of the Japanese populace. Both countries also have negative demographic trajectories which, barring a dramatic change to immigration policy, will lead to a context in which relatively fewer workers will be supporting a rapidly graying population. All of this comes at a time when China is working to transform its Navy into a Blue Water Navy, Japan is seeking to remilitarize, and the United State has made it clear that it will back Japan in the event of any military disputes.

It is pretty clear that both Beijing and Tokyo have a variety of pressing concerns. Resolving the disputes over the islands would afford both China and Japan more bandwidth to address these obstacles. A resolution could also afford Tokyo a degree of flexibility as Japan’s activities in the East China Sea are similar to those of China in the South China Sea. In January 2013 the Philippines filed a lawsuit against China in the Permanent Court of Arbitration alleging violations of the United Nations’ Convention on the Law of the Sea. If the court findings favor The Philippines it could set a legal precedent that Beijing could use against Tokyo. Such a finding would not be an issue for the Japanese if the dispute over the islands were already resolved.

Despite the incentives to find a resolution the islands enflame nationalist sentiment in both countries. If either side is perceived as giving in too much there could be political consequences. It is also not impossible that any resolution in the East China Sea could be used as a template to resolve disputes in the South China Sea, thus, Beijing will not want to set any precedents that could be used against China. After all, Japan (backed by the US) and China are far more evenly matched than China and countries such as The Philippines and Vietnam. Beijing has no interest in setting precedents which weaker countries can use to the detriment of Chinese interests. In the next week we shall see how this potential compromise progresses. How far it goes and what each side is willing to give up will be telling not just for the Senkaku/Diaoyu Islands but also for disputes in the broader Western Pacific Region.