5 Things You Should Know About the China-Japan Territory Dispute

By Jonah Loeb  SEP 28, 2012 3:00 PM

The latest chapter in a centuries-spanning conflict threatens to embroil the US.


MINYANVILLE ORIGINAL Yes, this is basically the plot of Terry Pratchett’s Jingo. There’s a tiny little group of islands southwest of Japan and to the east of China. Until recently, the islands (which Japan calls Senkaku and China calls Diaoyu) were privately-owned, but the audacious and incendiary Governor of Tokyo, Shoharo Ishihara, made an independent $26 million bid with funds he raised from his district. The Japanese government, in order to make sure the land was fully Japanese and not simply the property of Tokyo, matched the bid and bought the land.

The Chinese government, however, was instantly outraged, claiming that the islands have always belonged to China, and Japan’s bold move has sparked violent protests throughout China against Japanese businesses from sushi stands to automobile factories. The roots of the conflict go deep into the history of the two rival nations, but the results and implications are blossoming today—and could have a big impact on the future of not just the countries involved, but the United States as well.
1. This is about history in a big way. These are countries with a long and bitter rivalry; their first major military conflict occurred back in 1274, and they were pretty much constantly at war from about 1894 to 1945. The first Sino-Japanese war ended with China losing control of Korea, which strongly lessened public support for the Qing Dynasty. This eventually resulted in the 1911 Revolution, which toppled the dynasty and established the Republic of China. The Chinese government, insecure at the best of times, is not OK with the idea of losing a territory dispute with Japan, because history says that that might not end so well. They’ve even invoked history in their claim to the islands, declaring that Diaoyu has been a part of China “since ancient times.” Today is also the anniversary of Japan’s 1931 takeover and occupation of large portions of northeastern China, which doesn’t help matters.

2. This isn’t just about bragging rights. The Senkaku Islands were the subject of a 1969 UN report that suggested the islands might have vast oil reserves. They’re also located smack dab between Japan, China, and Taiwan, meaning that while they may currently be uninhabited, they could serve a vital purpose in several strategically important shipping lanes. One more commodity at issue here, and a much more important one, is the support of the United States.

In Japan, there is a growing perception that the US commitment to the countries’ alliance is less than wholehearted, and the Japanese government and people are viewing this dispute as an important time for the US to show its support as Defense Secretary Leon Panetta prepares to travel to the region.

3. The economic stakes are very, very high. Trade between the two countries rose 14.3% to $344.9 billion in 2011, and Japanese brands are ultra-visible in China: Massively popular automakers like Toyota (TM), Honda (HMC), and Nissan (NSANY) are certainly in the public eye, but so are major clothing brands like Uniqlo (FRCOF) and tech companies like Sharp (SHCAY) and Sony (SNE). The fact that the businesses are in double jeopardy—not only are factory closings a major drain in the short term, but anti-Japanese backlash could also have a huge long-term effect on sales—makes the problem even more dire. 4. Both countries' governments are being provocative. Tokyo Governor Shoharo Ishihara, an outspoken character with a long history of anti-Chinese comments, sparked the dispute by launching a public fundraiser to buy the islands from their private owners, forcing the Japanese government’s hand as China fought back against Ishihara’s bid.

The ownership debate in Japan has many scrambling for answers, while Ishihara continues to make inflammatory remarks: In response to news that Chinese patrols were circling the islands, he said, “We'd better shoo off those who walked into someone's home in dirty shoes; we should shoo them away.” Meanwhile, China’s government is publicly urging its citizens to remain calm and express “rational patriotism,” but many independent reports paint a different picture with stories of Chinese police walking alongside demonstrators and actively encouraging the vandalism of Japanese businesses.

5. It could have a major effect on the US presidential race. More and more American politicians, especially those on the right, have been spinning some pretty harsh anti-Chinese rhetoric for a while, and that’s only increased since this dispute started. Mitt Romney claims that he will declare China a “currency manipulator” if he’s elected, and China is therefore as suspicious of the United States as it is angry at Japan.

American fears about China are largely over-hyped, but this is a moment at which relations between our countries are particularly volatile; the territorial dispute, the Communist Party’s leadership transition, and the global economic crisis have combined to form a perfect storm. The recent US decision to expand its shared missile defense system with Japan by installing a new high-power radar system right in China's backyard is just the icing on a very precarious cake.
No positions in stocks mentioned.