Risks in Japan’s Relations with China, South Korea, and Taiwan eurasia group

eurasia group
Defining the Business of Politics.
™
Risks in Japan’s Relations with
China, South Korea, and Taiwan
eurasia group
Defining the Business of Politics.
™
Risks in Japan’s Relations with
China, South Korea, and Taiwan
22 August 2013
Nick Consonery
Senior Analyst, Asia
+1 202.903.0028
[email protected]
Contents
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Japan. .
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Introduction. .
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John Green
Director, Research
+1 212.500.4788
[email protected]
Scott Seaman
Senior Analyst, Asia
+1 202.903.0016
[email protected]
Sean West
Director, United States
+1 646.291.4038
[email protected]
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Domestic politics . .
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Foreign policy. .
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Economics and trade . .
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The US rebalancing toward Asia . .
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Japan and China . .
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Introduction. .
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Domestic politics. .
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Foreign policy. .
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Economics and trade . .
Japan and South Korea. .
Introduction. .
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Domestic politics. .
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Economics and trade . .
Japan and Taiwan. .
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Domestic politics. .
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Prepared for PricewaterhouseCoopers Aarata
This confidential report is intended solely for the internal use of PricewaterhouseCoopers Aarata and is based on the opinions of Eurasia
Group analysts and various in-country specialists. Eurasia Group is a private research and consulting firm that maintains no affiliations with
governments or political parties.
© 2013 Eurasia Group, 149 Fifth Avenue, 15th Floor, New York, NY 10010
10
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Defining the Business of Politics.
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Key takeaways
• The Japanese government’s more assertive economic and security policies are creating
challenges for the country’s maintenance of positive relations with China, South Korea,
and Taiwan.
• The US rebalancing toward Asia will strengthen its bilateral alliance and economic ties
with Japan, but Prime Minister Shinzo Abe’s nationalist rhetoric and tougher stance on
security issues will continue to complicate US relations with China and South Korea.
• Tensions between Japan and China will persist, but the trajectory for bilateral engagement is
improving as both countries are working to put relations on a more stable footing.
• Growing economic interdependence and an alignment of strategic interests support
efforts by Japan and South Korea to improve relations, though President Park Guenhye’s focus on deepening ties with China may slow and complicate those efforts.
• Japan and Taiwan have a comparatively good relationship that will likely remain so; Taiwan
is more concerned about economic competition with South Korea than with Japan.
Japan
Introduction
The government led by Abe and his Liberal Democratic Party is implementing ambitious plans to
reinvigorate Japan’s economy and strengthen its defense and security positions. While much of this
policy agenda focuses on promoting domestic change, it is also generating a wide range of political and
economic externalities that create new challenges for relations with China, South Korea, and Taiwan, as
well as many other countries in Asia and around the world.
Real GDP
Annual percentage change
15
China
12
Taiwan
9
South Korea
6
United States
3
Japan
0
-3
-6
05
20
06
20
07
20
08
20
09
20
10
20
11
20
*
*
*
12 013 014 018
2
2
2
20
*Estimates
Source: IMF
Risks in Japan’s Relations with China, South Korea, and Taiwan
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Domestic politics
While Japan’s shift to the right is overstated, there is no question that Abe is
taking a tougher stance on foreign policy issues and other changes that increase
the risk of heightened tensions with Japan’s Asian neighbors. Although Abe made
it clear after the upper house election in July that he intends to remain focused on
economic matters, he and other right-leaning politicians will continue to promote
discussions on controversial issues such as constitutional revision and educational
reform. Even if Abe’s government takes a measured, incremental approach to
introducing changes in these areas, the fact that Abe’s government pursues them
will ratchet up political pressure on governments in China, South Korea, and
Taiwan to highlight—and vigorously protest—a perceived rise in militarism and
historical revisionism in Japan.
General government gross debt
250
Japan
United States
Percent of GDP
200
South Korea
China
150
100
50
0
06 007 008 009 010 011 012 013 014 015 016 017 018
2
2
2
2
2
2
2
2
2
2
2
2
20
Note: The 2013–2018 figures are estimates. Chinese public debt data up to 2009 include
only central government debt.
Source: IMF
Foreign policy
Both a greater emphasis on advancing policy areas of interest to right-of-center
political groups and Abe’s plans to enhance Japan’s defense and security capabilities
will likely complicate efforts to manage territorial disputes with China and Taiwan
over the Senkaku/Daioyu islands and with South Korea over Takeshima/Dokdo
Island. But other pressing security dilemmas such as the chronic threat of North
Korean belligerence, as well as Japan’s changing domestic political and economic
dynamics, will prompt governments in Japan and elsewhere to consider refocusing
their attention and resources. It is unclear whether a significant recalibration of
foreign policy priorities will result. Yet conditions in and around these countries will
remain in flux, creating potential flash and inflection points.
Abe’s efforts to strengthen the security alliance with the US are motivated in
large part by a desire to counterbalance the growing influence of China and help
Japan respond to other threats in the region. His diplomatic overtures to South and
Risks in Japan’s Relations with China, South Korea, and Taiwan
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Southeast Asia as well as countries such as Mongolia and Russia reflect similar motivations, though
Abe and the Japanese business community are also keenly interested in creating new commercial
opportunities in the region outside of the China market. It is unclear, however, to what extent and
how quickly Japanese businesses can diversify their operations and investments away from China to
other parts of Asia, and what geopolitical changes would result from such a shift.
Economics and trade
Abe is promoting a combination of monetary easing, fiscal stimulus, and structural and regulatory reform that make up the core of his economic policy agenda as a means to defeat deflation,
enhance the competitiveness of Japanese industries, and generate sustainable, long-term growth.
While it is still unclear whether so-called Abenomics will deliver as advertised, some of its effects
are already influencing Japan’s relations with countries in Asia and elsewhere and will keep doing
so for many years.
Consumer prices
6
China
Annual percentage change
5
South Korea
4
Taiwan
3
United States
2
Japan
1
0
-1
-2
05
20
06
20
07
20
08
20
09
20
10
20
11
20
*
*
*
12 013 014 018
2
2
2
20
*Estimates
Source: IMF
In the near term, looser monetary policy and a weaker yen will continue to fuel concerns in
China, South Korea, and Taiwan about the risks posed by cheaper Japanese exports, especially in
sectors such as consumer electronics and automobiles, where these countries’ firms often compete
head-to-head with Japanese rivals. While a full-blown currency war is unlikely, a further drop in
the value of the yen would increase pressure on Japan’s competitors to introduce countermeasures
to shield domestic companies. In addition, Japan’s participation in negotiations for the TransPacific Partnership (TPP) trade agreement has generated momentum behind the efforts of Japan,
China, and South Korea to hammer out a trilateral trade deal. That said, the ebb and flow of
tensions between these countries and Japan in other areas will affect the pace and outlook for
success of this latter endeavor.
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Value of Japan’s imports and exports 2012
United States
23%
36%
Exports
37%
Imports
$393 billion
$330 billion
12%
Taiwan
57%
China
7%
12%
16%
South Korea
Source: JETRO
Japanese foreign exchange rates against different currencies
105
100
95
Index
90
85
US dollar
South Korean won
80
Taiwan dollar
75
70
Chinese yuan
n
Ja
b
Fe
ar
M
r
r
y
y
v
c n
l
l
g
g
p ct
b ar
n
n
Ap Ma Ju Ju Au Se O No De Ja Fe M Ap Ma Ju Ju Au
2012
2013
Source: Bloomberg
In the longer term, Abenomics—whether it succeeds or fails—will have a large impact on
Japan’s political and economic relations with Asia and the rest of the world. If stronger growth
remains on track, Japan’s demand for imports will climb, providing benefits for many exporters in
other countries. However, a sustained resurgence in Japan’s economic strength could threaten the
interests of economically and politically influential groups in countries throughout Asia, thereby
ramping up pressure for protectionism that distorts trade and investment flows. But if Abenomics
produces only a short-lived boost, a later economic downturn would undercut demand in Japan
and accelerate movement of Japanese FDI and portfolio investments to markets elsewhere, many
of them in Asia. The inevitable push and pull of Abe’s economic initiatives creates a host of new
forces that will shape—for better or worse—Japan’s relations with China, South Korea, Taiwan,
and countries throughout the world. Risks in Japan’s Relations with China, South Korea, and Taiwan
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The US rebalancing toward Asia
The administration of President Barack Obama sees the Asia-Pacific region as one full of economic opportunity
and geopolitical risk. As its clout has expanded, China has charted a more aggressive course in managing its territorial disputes with Japan and several Southeast Asian countries. At the same time, the rapid growth of economies in China, South Korea, and Southeast Asia has made the Asia-Pacific region the driver of global growth. This
intersection of risk and opportunity has motivated one of the Obama administration’s most important foreign
policy initiatives—originally called the strategic pivot to Asia, but rebranded in recent months as a rebalancing
toward Asia.
This initiative has both security and economic elements. The TPP, a trade deal that would include at least 12
countries and 40% of global GDP, sits at the nexus of both elements. In addition to lowering tariffs, the TPP will
tackle issues such as regulatory coherence and rules to reduce the market distortions often created by stateowned enterprises. But the TPP’s benefits go beyond the economic realm. It will also give the US a platform to
strengthen security relationships with old allies such as Japan and South Korea and build relationships with new
friends such as Vietnam. Concurrent with closer alliances, the US will gradually move military hardware to the
region from other areas, such as Europe, where security concerns have declined. However, the rebalancing may
ultimately be less significant than planned, as growing budgetary constraints force the US military to reduce the
size of its naval and ground forces and reallocate these now scarcer resources globally.
The US rebalancing toward Asia is a positive development for Japan. It will promote stability in the region
and provide Japan with new opportunities in the US market. In particular, the rebalancing should reassure
Japanese officials that the US would defend Japan if it were to come under attack by another country, including
China. The US has made it clear that while it does not maintain a position on the sovereignty issue, it considers
Japan’s administrative control of the Senkaku/Diaoyu islands to be covered by the US-Japan security treaty.
Nevertheless, it still expects Japan to do whatever it can to settle this dispute as peacefully as possible.
A central security component of rebalancing is strengthening the US-Japan-South Korea trilateral relationship. The US has made it clear that it regards the Japan-South Korea relationship as Japan’s most important in the
region. After taking office after last December’s lower house election, Abe softened his rhetoric on issues such
as the territorial dispute with South Korea over Takeshima/Dokdo Island and revision of the Kohno Statement on
Korean comfort women. But if Abe sharpens his focus on issues that inflame negative emotions in neighboring
countries, the US will have a more difficult time balancing the interests of Japan and South Korea as key allies and
managing its already challenging relations with China.
Any impact that the US rebalancing has on Japan-Taiwan relations will be more modest and center on trade.
Taiwan has expressed interest in eventually joining the TPP, a move that the US supports in principle. Yet given
Chinese sensitivity and the need for market reforms in Taiwan, its membership is unlikely to occur for several years.
Should Taiwan eventually join, it would further expand Japanese market access in the region.
The rebalancing is good news for Japanese security and trade ties. But it will also push Japan to play a larger
role in regional leadership.
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Japan and China
Introduction
China’s relationship with Japan has been particularly troubled since September
2012, when Beijing reacted strongly to Tokyo’s purchase of three islets in the
Senkaku/Diaoyu chain from private Japanese owners. Beijing’s subsequent
decision to stoke nationalist sentiment within China and to implement a
maritime strategy designed to challenge Japan’s administrative control of the
islands elevated geopolitical and business risk in Japan-China relations and across
Asia. Nevertheless, the rise in tensions between Japan and China appears to have
peaked in recent months, with important changes in both sides’ behavior indicating that a further downturn in relations has become less likely.
Domestic politics
China’s leadership remains under considerable domestic pressure to defend a
growing array of interests. Beijing will still need to be responsive to a nationalistic
population and to the strategic goals of the military. The nationalism will remain
primarily directed at Japan because of perceived historical transgressions and the
Communist Party’s legitimacy, which depends in large part on its ability to portray
itself as the primary defender of China’s sovereignty and national interests. The
government will be unwilling to change its position on territorial disputes and will
likely continue to test Japan’s control of the Senkaku/Diaoyu islands. That said, the
new leadership is seeking to be less constrained by nationalistic fervor and senses
space to pursue a more positive tenor in relations with Japan.
Foreign policy
The deployment of additional Chinese and Japanese military assets to the East
China Sea has increased the danger of a miscalculation or accident at sea sparking
a crisis, and Japanese companies remain concerned that a new bilateral flare-up
could prompt Chinese boycotts of Japanese products or attacks on Japanese assets
in China similar to those that occurred last fall. However, the new government led
by President Xi Jinping is moving away from the stridently nationalist and more
assertive foreign policy approach in the Asia-Pacific region toward a softer tack.
Examples of this shift include new and expanded military engagements with the US
and mounting pressure on North Korea to restrain its provocative behavior.
There are also strong indications that China and Japan are working to
circumvent their diplomatic impasse over the Senkaku/Diaoyu islands in the
hopes of stabilizing bilateral relations without completely resolving this dispute.
Abe sent Vice Foreign Minister Akitaka Saiki to Beijing in late July to talk with
his counterpart there, and the Chinese government’s decision to arrange a meeting for Saiki at a higher level with Foreign Minister Wang Yi demonstrated the
importance it attached to his visit. Abe’s decision to send a representative to the
Yasukuni Shrine on 15 August instead of visiting himself indicated a similar willingness from Japan to take political risks at home in order to keep the door open
to improving the bilateral dialogue. Though China and South Korea protested
Risks in Japan’s Relations with China, South Korea, and Taiwan
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when other Japanese politicians visited the shrine and criticized the speech to commemorate the
end of World War II that Abe made at a separate venue, their reaction as a whole was relatively
mild. Yet despite these efforts to gently push the Japan-China relationship in a more positive
direction, there remains a risk of an intentional or inadvertent provocation rekindling tensions. Overall, China’s less confrontational approach to relations with Japan and other countries in
Asia is driven by a greater recognition among Chinese policymakers that more assertive positions
regarding diplomatic and territorial disputes since 2010 have created a backlash in the region
that damages China’s medium-term interests, especially by creating new opportunities for the
US to solidify its presence there. Moreover, China’s new leaders appear to believe that heightened
regional tensions risk undermining efforts to achieve national security and development goals as
well as make progress in the government’s domestic policy agenda, which is their primary focus.
Japan is a case in point, as losses in China related to the dispute over the Senkaku/Diaoyu islands
have diminished Japanese corporate enthusiasm for new investments in China; those investments
have been an important driver of job creation in China for decades. Economics and trade
Economics will continue to promote stability in Japan-China relations by limiting the government’s tolerance of the chronic tensions that significantly hinder bilateral trade and investment
flows. This dynamic, at the same time, reduces the willingness on both sides to pursue retributive
trade measures, though the size of its market makes China more willing than Japan to employ
trade restrictions as leverage in their disputes. Moreover, market concerns that Abenomics will
aggravate bilateral tensions are likely overstated. While Chinese policymakers worry that Japan’s
monetary easing will enhance inflationary pressures and capital inflows into China, inflation indicators in China are trending downward at the moment. Also, given China’s active interventions in
foreign exchange markets to offset appreciation pressure on the renminbi, it is in a weak position
to criticize Japan as a potential currency manipulator. Lastly, Japan’s strong demand for Chinese
exports suggests that it is in China’s interest for Abenomics to succeed in producing a more robust
and rapid economic recovery in Japan.
That said, Japanese and other foreign firms will remain exposed to a heightened level of political
risk surrounding China-Japan relations. Though looking less likely now, a new spike in tensions around
territorial disputes could nonetheless reignite boycotts of Japanese products in China, and the Chinese
government or even corporate actors might take steps to hamper trade relations between the two countries. An uptick in friction could likewise threaten to spill over into the corporate regulatory realm—in
particular by leading to slowdowns in China’s antimonopoly review process. The commerce ministry
reportedly froze approvals for any international M&A deals involving Japanese firms for a number
of months during the period of amplified bilateral tensions last year. That freeze fueled corporate and
investor unease that China might use this regulatory process for political purposes.
Japan and South Korea
Introduction
South Korea and Japan have suffered periodic bouts of bilateral tensions, and this pattern is likely
to persist. But with the two countries’ economies becoming more interdependent and their strategic
interests increasingly converging—particularly with respect to North Korea–related risks—South
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Korea has a solid interest in improving cooperation with Japan and avoiding actions
that risk seriously damaging bilateral relations or trade and investment flows.
Domestic politics
Nationalism directed against Japan is an essential part of the Korean identity. Issues
such as South Korea’s claim over the disputed island of Takeshima/Dokdo, Japanese
history textbooks, and especially the demands for an apology and compensation for
former Korean comfort women remain hot-button national issues. As the daughter
of former president Park Chung-hee, Park is under heavy pressure to avoid appearing to be overly favorable toward Japan. Her father was an officer in Japan’s army,
was fluent in Japanese, and signed a treaty to normalize relations with Japan in
1965. While normalization helped lead to South Korea’s rapid economic development, most South Koreans still feel it failed to properly address suffering imposed
by Japan’s occupation. Even now, President Park’s domestic political foes brand her
father as “pro-Japan,” a powerful stigma for South Korean politicians. As a result, Park must walk a fine line between appearing too close to Japan
while still maintaining effective cooperation. She has a history as an advocate
for comfort women seeking restitution from Japan. Yet she is likely to exercise
restraint and refrain from deliberately stoking nationalism for political purposes
as her predecessor Lee Myung-bak did with his visit to Takeshima/Dokdo in
2012. Only if the actions or rhetoric of Japanese politicians offend the South
Korean public will Park respond by making statements critical of Japan as she did
on 15 August when she repeated her criticism of Japanese politicians for visiting
Yasukuni Shrine. But her criticism was softer than in previous statements, perhaps
because Abe did not go himself. Frictions could worsen if Japanese political
leaders take actions that go beyond the usual visits to this shrine—such as revising
or withdrawing the 1993 Kohno Statement. Such a move would provoke demonstrations and boycotts in South Korea of Japanese goods and firms.
Foreign policy
Park will try to strike a delicate balance between improving bilateral relations with
Japan and cultivating closer relations with China. While Park seeks to improve relations with Japan, she will not do so at the risk of alienating China, which has become
South Korea’s top trading partner. Park has said a main goal of her administration is to
negotiate a free-trade agreement with China. Symbolic of her intention to chart a new
course for South Korea’s foreign policy, Park met with China’s ambassador to South
Korea before meeting with the Japanese ambassador, and met with Xi when she has yet
to meet with Abe—a reversal of the diplomatic pecking order in the past. Park speaks
fluent Chinese and was the previous government’s special envoy to Beijing, which
equips her to work well with the new Chinese leadership.
Economics and trade
Economic relations between Japan and South Korea are likely to be a stabilizing
force in the bilateral relationship despite occasional flare-ups over historical and
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territorial disputes. While China is South Korea’s most important economic
partner, Japanese and South Korean firms also have close relationships. South
Korea continues to rely on FDI from Japan, and Japan’s niche technologies are
needed to complete many South Korean consumer products for export. Japan’s
FDI in South Korea more than doubled from 2001 to 2012 to reach $4.54
billion, compared to the $4.01 billion that South Korea received from China,
Taiwan, Hong Kong, Singapore, and Malaysia combined. Concerns that Abenomics will exacerbate bilateral tensions are likely overblown.
Although the Park administration would prefer that the won not appreciate against
the yen, South Korea has limited options in dealing with this issue. A G20 joint
statement earlier this year appears to condone the yen’s depreciation, making it
unlikely that South Korea would receive much international support for an effort to
fight it. Moreover, there are economic benefits associated with a stronger won that
are consistent with Park’s so-called economic democratization agenda, including less
expensive imports, more consumer purchasing power, and the encouragement of
more domestic-oriented production. Park has stressed her desire to help small and
medium-sized businesses that are less vulnerable to a strong won than are the exportoriented chaebols (large conglomerates). For the foreseeable future, the government is
likely to adopt a wait-and-see attitude concerning the won’s appreciation. Japan and Taiwan
Introduction
Diplomatic relations between Taiwan and Japan have been largely positive in recent
years and are likely to remain so, though sporadic tensions surrounding their territorial dispute over the Senkaku/Diaoyu islands (called Diaoyutai in Taiwan) may
flare up from time to time. Japan and Taiwan will nonetheless retain generally close
economic, political, and even cultural links, and trade and investment flows are
expected to increase as both governments push for more bilateral liberalization.
Domestic politics
Politics in Taiwan are conducive to maintaining a positive relationship with Japan.
While Japan’s colonialist past haunts its relations with other regional powers such as
China and South Korea, the Taiwanese have a less negative view of Japan’s governance
of their island (1895–1945). And while nationalism is growing among Taiwanese
youth, that sentiment is directed much more toward mainland China than Japan. Foreign policy
Taiwanese President Ma Ying-jeou has prioritized improving relations with mainland
China as his signature policy. But he also has worked to expand Taiwan’s diplomatic
and trade relations with other countries, Japan in particular. In 2011, Taiwan and
Japan signed a bilateral investment agreement and signaled an interest in eventually
entering into trade liberalization talks. While the window for such talks has not yet
opened, the overall trajectory of Taiwan-Japan relations will remain positive. Risks in Japan’s Relations with China, South Korea, and Taiwan
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The major, if outlying, risk of tension in the relationship is generated by the unsettled issue of
sovereignty over the Senkaku/Diaoyu/Diaoyutai islands. Yet whereas this dispute carries a significant
risk for Japan-China relations, the risk to Japan-Taiwan relations is smaller. This difference was apparent
earlier this year, when China-Japan tensions surrounding the issue spiked, but Japan successfully calmed
tensions with Taiwan by concluding an agreement with it concerning fishing rights in disputed waters. Economics and trade
To be sure, the recent depreciation of the yen complicates Taiwan’s economic environment. The
island’s exports are underperforming this year, and that weakness is raising concerns that its
economy will continue to languish this year, after expanding by just 1.26% in 2012.
However, Taiwan’s fear regarding Japanese economic policies has more to do with South
Korea than with Japan. In particular, Taiwan is worried that yen depreciation is motivating the
South Korean government to take steps—such as interest rate cuts and currency intervention—to
depreciate the won in order to keep pace with the yen. While South Korea might look to Japan,
Taiwan looks to South Korea as its biggest direct competitor in global export markets and is worried
that South Korea’s efforts to counter a weaker yen will directly harm Taiwan’s economy. While this
dynamic is unlikely to cause friction in Japan-Taiwan relations, Taiwan is likely to intervene in
currency markets more aggressively to maintain competitiveness relative to South Korea.
Japan’s total outward FDI
300
United States
Billions of dollars
250
China
200
South Korea
150
Taiwan
100
50
0
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
Japan’s total inward FDI
80
Billions of dollars
70
60
50
40
30
20
10
0
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
Source: JETRO
Risks in Japan’s Relations with China, South Korea, and Taiwan
Prepared for PricewaterhouseCoopers Aarata | 22 August 2013
10