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

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

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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.
No positions in stocks mentioned.
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