The past two days have witnessed a distinct change in the otherwise frosty (if not downright hostile) relationship between Japan and China over the issue of the Senkaku Islands. As for what has predicated this change, while both sides are acutely aware that any deterioration in bilateral relations between them could undermine trade links and add to the atmosphere of mistrust that permeates the relations (to use a tortured metaphor) between East Asian states, it appears that hints from the Obama administration (E - firewalled), together with a series of visits to China by Japanese politicians, has brought the situation back down to more manageable levels without necessarily leading to a resolution.

It’s not often that one can give credit to former PM Hatoyama Yukio for actually performing a service that results in an improvement in bilateral relations, however it seems that his visit to China two weeks ago, coupled with visits from New Komeito leader Yamaguchi Natsuo to Beijing on Friday last week and former PM Murayama Tomiichi (he of the 1995 apology for the “invasion” of China and South Korea) have placated the Chinese somewhat. While some might accuse Hatoyama of merely pandering to the prejudices of the CCP (his visit to the Nanjing Massacre Memorial certainly provided China’s media with photo opportunities of a contrite former Japanese PM atoning for Japan’s sins. His description of the Senkaku Islands as a “region of dispute” also markedly differed to the stance taken by successive Japanese governments), his visit did lead to a marked change in attitude by the CCP following the appearance on Weibo of comments in support of the visit by ordinary Chinese (J).

Not a week after that visit, former PM Murayama was in Beijing attending a meeting of the China-Japan Friendship Society in the company of Tang Jiaxuan, former Central Committee member and head of the Chinese Ministry of Foreign Affairs. From the content of media reports, it appears that Tang expressed China’s concerns about the “revisionist” position that the Abe Cabinet seemed to be taking in relation to historical issues, while also noting that dialogue was necessary to control the territorial dispute.  Murayama responded by stating that there were no moves to change Japan’s acknowledgement of its past deeds and that Japan was committed to maintaining its relations with China (J).     

Meanwhile Xi Jinping, newly elected Secretary General of the CCP, during his meeting with MP Yamaguchi, commented that China was also committed to its relationship with Japan, and that both sides had to “look at the broader picture and push relations forward”. So what we have are Japanese politicians expressing regret for past actions, offering letters from PM Abe to SC Xi urging cooperation, and the Chinese discussing the need for dialogue to overcome the standoff over territorial issues.

The impetus behind this diplomatic activity appears to have been the possibility of the US being dragged into the dispute and concern that this would lead to armed conflict. Following the US Senate’s resolution confirming that the Senkaku Islands are considered to be under Japanese control and therefore subject to the provisions of the US-Japan security treaty (E), the Obama administration appears to have dropped some none-too-subtle hints to Japan that it had to reel in its more inflammatory stance towards China and find a means of working with the CCP to at least address the issues between both sides (which may account for the absence of any reference to China in PM Abe’s inaugural address to Parliament on Monday - E). For their part, the CCP, possibly out of concern of what repeated incursions by Chinese coast guard vessels and aircraft into the area around the islands might provoke, have indicated their willingness to talk (although it hasn’t halted the incursions, the latest of which was on Saturday the 26th (J).     

It is possible that the moves by the CCP towards dialogue are a response on the part of China’s diplomatic community to concerns regarding China’s intentions. While hawks in China’s foreign relations think tanks and military institutes have hinted at attempts by the US and Japan to encircle China through increased regional defence ties (E) and threatened retaliation, China’s diplomats have sought to assuage the fears of the region through bilateral talks, perhaps realising (although it seems unlikely that a state with China’s heritage would fail to observe foreign reactions to its actions) that belligerence on the part of a rising power provokes alarm, alarm that could in turn affect China’s influence in bodies such as the UN and the willingness of other states to pursue FTAs with China vital to economic growth (and in the current global economic climate, this is a pressing issue for an export-driven economy like China’s).   

Nevertheless, after weeks of bluster, claim, counter-claim, and thinly veiled threats, China and Japan are at least sounding out the other for dialogue. Whether this trend will then extend to states surrounding the South China Sea, or South Korea, or Taiwan, is unknown, although the absence of a formal defence alliance between these states and the US makes the prospect of a compromise less likely.

This week has seen a myriad of opinion pieces flooding the financial media in relation to the decision on Tuesday by the Bank of Japan (BoJ) to engage in an open-ended bond buying program (called Open Ended Asset Purchasing)  and increase the inflation target for the Japanese economy to 2%. In a statement released by the BoJ, it said that…”The bank recognises that Japan’s economy faces the critical challenge of overcoming deflation as early as possible and returning to the sustainable growth path with price stability.” The reaction of commentators to this announcement was mixed, to say the very least. While some recognised that PM Abe was at last pursuing a more aggressive monetary policy in an effort to halt deflation, weaken the yen against the dollar (by a ratio of Y100 to $1), boost exports and haul Japan out of two decades of economic stagnation, most saw the move as being one of considerable risk and liable to exacerbate the problems it was meant to solve.

Some of the more astute foreign observations noted that interest rates on 10-year government bonds in Japan yield less than 1%, a situation supported by nearly a decade of domestic price deflation and the strength of the yen against other currencies (this state of affairs went into overdrive in the wake of the GFC, when Japan became a haven for investors seeking shelter from more volatile currencies). As the yen rose in value, yields on Japanese bonds also rose, with the real interest rate higher than the nominal rate. However the decision by the Abe government to inject the economy with a continuous series of quantitative easing measures, which would assist Japan in meeting its 2% inflation target, will weaken the yen against other currencies and drive up domestic prices, thereby bringing about the inflation that Abe desires.

Placing aside questions of whether such currency manipulation will result in similar measures being taken by other governments (the US among them), the real risk in this strategy amounts to two things: rapid inflation, and a burgeoning public debt. The continuous monetisation of debt by the BoJ could lead to an exodus in investors, as increased inflation, coupled with a weaker yen, will threaten the interest rate on Japanese bonds. Furthermore, increased interest rates will result in a dramatic expansion in public debt. As is often pointed out, with an overall government debt to GDP ratio of 230% (higher than any other developed nation), a growth in the cost of borrowing by the government could mean that the annual budget deficit will expand from its current 10% of GDP to 20% over the course of 12 months.  This in turn will create an unsustainable situation; rising interest rates, coupled with expanding debt.

Rising interest rates would place at risk those government bonds held by Japan’s banks (around 90% of JGBs are held in Japan’s banking institutions), which would gradually lose their value and rate of return, and that would impact upon household savings just as the household saving rate continues to decline (less than 2% as of late 2012). With a reduced pool of finances to drawn upon and an increasing debt ratio, the Abe government may have no other resource than to sell off its debt to foreign buyers, and that will place Japan in the hands of international regulators who will have no hesitation in imposing penalties should Japan default on its debts as a result of a rapidly escalating inflation rate.

Another, more pressing, reason for Abe’s injection of funds into the economy appears to be the desire to not only to reinforce support among traditional LDP rural constituencies and financiers (namely construction groups), but to ensure that the public is sufficiently impressed to vote for a majority of Coalition MPs standing for seats in the House of Councillors election this year. As LDP President Ishiba Shigeru put it, if the Coalition loses the House of Councillors, then the victory in the House of Representatives in December will have been for naught (J).  While one might say that the cash injection was merely to improve the LDP’s electoral prospects, the public announcement of a 2% inflation target and continuous easing strategy hints at a long-term strategy imbedded within a short-term policy. Speaking hypothetically, a rise in exports could revive the employment market in Japan. Recognition of stimulus measures that generate jobs could then convince voters of Abe’s suitability to continue his reforms. An improved economy, coupled with regional tensions, may then see the LDP take control of the House of Councillors and give approval for constitutional revision.  Abe, having fulfilled the task he first set out to achieve in 2007, could then be assured of his place in history.  Far-fetched? Not necessarily, however should inflation rise beyond expectations, wiping out savings and bond returns before the economy has a chance to improve, then Abe will be remembered for very different reasons indeed.

On Sunday, the somewhat heat-blasted inlets and estuaries of Sydney were graced with the figure of Foreign Minister Fumio Kishida, here as part of a push by the Abe government to re-awaken awareness within a number of regional partners the importance of Japan to the Asia Pacific and what the future may hold in terms of closer economic and security ties. From the details of the joint media conference that followed the talks between Kishida and Foreign Minister Bob Carr, it appears that security concerns pretty much blew all other issues out of the water, including those related to the possibility of an EPA (an FTA by any other name) agreement between both countries. Interestingly enough, Senator Carr was quite candid in his comments regarding Japan’s relationship with South Korea, and responded to reporter questions on rumours that Abe Shinzo was planning to rescind Japan’s 1993 apology to ‘comfort women’ by saying that the apology had to remain as is, prompting Foreign Minister Kishida to give his assurances that Abe had no such plans in mind (E- firewall exists for this article).

Senator Carr also emphasised the fact that it would not be in the interests of the region to have two of Australia’s largest trading partners at loggerheads, and that they should instead resolve their difficulties. What this tells us is that the Australian government has been paying attention to the territorial conflicts involving its neighbours to the north, and hasn’t been all that impressed with the manner in which they’ve been handled by each respective government.  As Japan and South Korea are both allies of the US, and given the need for solidarity between ‘democracies’ in the face of the challenge posed by China, Australia may have been echoing American sentiment by asking both Japan and South Korea to reach an agreement on territorial issues and other concerns lest it harm the potential for a future coalition against China.

On the question of China, Senator Carr was understandably diplomatic, reiterating an often-used justification which says that ties between Australia and its regional partners aren’t aimed at containing China (which no-one believes for an instant), and that international relations isn’t a zero sum game (unless, of course, a state acts in a manner that makes any other diplomatic measures untenable, in which case it very much becomes a zero sum game). Given the fact that most Australian observers have heard this rhetoric from Senator Carr (and his predecessor Kevin Rudd, not to mention PM Gillard and Defence Minister Smith) on numerous occasions, the sole reason it keeps getting dragged out into public debate is because within the recesses of the ALP (make that both sides of politics) there is a fear that unless they approach China with a high degree of discretion, they will upset the Chinese sufficiently that the mining boom will cease and Australia will be left high and dry with smaller export ratios and fewer coffers for infrastructure spending and growing unemployment. Of course, whether the Chinese swallow such rhetoric is difficult to judge, yet its re-emergence in think tank symposia and editorial commentary by Chinese intellectuals indicates that the Chinese don’t believe it either (E and E), but give Australia the benefit of the doubt for appearance’s sake.

Foreign Minister Kishida’s visit also resulted in yet another op-ed from the Chinese Consul General to Sydney Duan Jielong. Although Consul Duan’s op-ed in Monday’s the Australian (E) was aimed at Japan’s Consul General to Sydney, Dr Masahiro Kohara (one imagines these two won’t be sharing any pleasantries at diplomatic community functions in the near future), the timing of the article with Kishida’s visit gave China some leeway to make its views about the Senkaku Islands known to an Australian audience without drawing too much attention to the issue (things might be very different if, say, Ambassador Chen Yuming fired off a missive on Japan’s attempt to “undermine the post-war international order”).  Without wanting to be drawn into the rival claims to sovereignty over the islands, it is interesting to note that by advocating the Postdam Proclamation (or Declaration) as the reason for Japan’s surrender of sovereignty over the Senkaku Islands, Duan is basically supporting the US position on the islands. The proclamation says that in relation to territories… “(8) The terms of the Cairo declaration shall be carried out and Japanese sovereignty shall be limited to the islands of Honshu, Hokkaido, Kyushu, Shikoku and such minor islands as we determine” (E, we in this case meaning the US, the British Empire, and the Republic of China, i.e the Guomindang, not the CCP. Incidentally the paragraph does not say, as Duan claims,that “all of the territories that were taken from China shall be restored to China”- indeed China is not mentioned at all. As for the Cairo Declaration, it was a statement of intent which said that all territories Japan had stolen from the Chinese would be restored to the Republic of China. It made no mention of the Senkaku Islands, neither did it state that those territories returned would be transferred from the control of the Republic of China to the People’s Republic of China -E). 

In the aftermath of WWII, the Senkaku Islands came under the control of US forces, where they remained until the reversion of Okinawa and adjacent islands to Japanese sovereignty in 1972.  The Postdam Proclamation, which is more of an ultimatum than a bilateral agreement of surrender (with lines such as “(13) The alternative for Japan is prompt and utter destruction”), was not intended to demarcate Japan’s territorial sovereignty in perpetuity (given the fact that the islands to which Japan still had claim had not been established by the time the Proclamation was issued). In the Japanese Instrument of Surrender signed in September 1945, it states… “We hereby undertake for the Emperor, the Japanese Government, and their successors to carry out the provisions of the Potsdam Declaration in good faith, and to issue whatever orders and take whatever action may be required by the Supreme Commander for the Allied Powers or by any other designated representative of the Allied Powers for the purpose of giving effect to that declaration” (E). In other words, Japan was to undertake the provisions of the Potsdam Proclamation in the manner dictated by the Allied powers (and not according to its own interpretation).

In examining which islands would be included as Japanese territory in the return of Okinawa in 1972 the US, as one of the draftees of the Postdam Proclamation, and without the objections of either the Republic of China or the British Empire (which had long since dissolved), established that the Senkaku Islands were under Japanese control.  This was implicitly understood by both the US and Japan before being made explicit in a revision of the 2013 National Defence Authorization Act in December last year (E). Hence Consul Duan, by stating that the Postdam Proclamation determined Japanese territorial sovereignty, gives credence to the authority wielded by the US and its allies in the closing days of WWII and their judgment on what constituted Japanese territory. This is, it is safe to say, probably not what Consul Duan intended when he wrote his op-ed.  

The new year is here, and with it a new government for Japan in the form of the Abe Cabinet (sworn in on December 26th). As per predictions on the direction the new government would take on security issues, on Tuesday it was announced that for the first time in 11 years the Japanese defence budget would exceed the amount put forward for the previous year (J). Not only this, reports also mentioned that the 2013 budget would concentrate on the acquisition of more personnel along with greater purchases of defence equipment (surveillance vessels, PAC-3 anti-missile batteries, radar upgrades, next-generation surveillance aircraft, and F-15 upgrades) to the tune of US$2.1 billion (J, E) – this would constitute a complete revision of previous defence spending plans with an emphasis on capability, and not just administrative costs.

This news was accompanied by a report in the Sankei Shimbun on Wednesday that revealed that a Chinese military surveillance plane had repeatedly flown close to airspace over the Senkaku Islands in September of last year (shortly after the Noda government had announced its plan to nationalise the islands) (J). In relation to incursions, another report in the Yomiuri Shimbun on Monday stated that Chinese maritime authority vessels had again entered Japanese territorial waters around the Senkaku Islands, prompting newly appointed Defence Minister Onodera to contact his US counterpart and reiterate the solidarity of both nations on the issue of control over the islands (J). In the midst of almost daily updates on increased tensions between China and Japan, the Guardian made note that both China and Japan have both sought to upgrade their drone (UAV) capabilities, with Japan making overtures to the US in order to acquire at least 4 Global Hawk aircraft to monitor its maritime borders in the Ryukyu Island chain (E) thereby increasing the risk of a drone conflict near the Senkaku Islands.

Not to be outdone in the activity stakes, newly appointed Foreign Minister Kishida Fumio announced on Tuesday that he would be embarking on a tour of Asia-Pacific nations to discuss economic and security issues with the Philippines, Singapore, Brunei, and Australia (J).  Given the fact that three of these nations are currently involved in TPP negotiations, Foreign Minister Kishida may indeed be carrying a message on behalf of the Abe government that will provide some further indication on whether Japan plans to join the TPP (although given the fact that those nations already involved in negotiations could possibly reach a conclusion to those negotiations by October this year (E), Japan has definitely left it very late to signal any resolution to join the partnership. That being said, no economic gathering would refuse to admit Japan as a member, however it might object if Japan attempted to make new demands regarding tariffs, market access, and intellectual property rights).

So what we have here is the potential for greater escalation in tension between Japan and China, with neither side conceding any ground and indeed announcing their claims using language that makes it clear that they are not willing to discuss their territorial concerns.  In his visit to Australia on Sunday, in addition to his economic agenda, Foreign Minister Kishida may also try to extract from Australia some form of understanding on Japan’s territorial position and the need for closer security ties (on the latter he is likely to be rewarded, but given that Australia has no position on territorial disputes between other nations other than to emphasise the need for a collective code of conduct, he is likely to be disappointed in the Australian response – on this point see this article by Rick Wallace of the Australian, although be warned the article is behind a firewall – E).     

Given the stance that the Abe government has taken on territorial issues, its decision to begin talks with the incoming Park government of South Korea augurs well for further dialogue concerning Takeshima, however just how successfully such talks are negotiated will have long-term consequences for Park-Abe relations and the ability of both sides to transcend their aversions to one another.  Since other missions to the US, Europe and Russia planned for this month are also aimed at the resolution of existing issues, the formation of new ties, the signing of agreements, and further dialogue, the Abe government is going all out in its efforts to dispel the uncertainties of the DPJ era and give a clear indication of where Japan stands in its foreign relations and what other nations can expect from the second Abe Cabinet.

In the case of Australia, given Abe Shinzo’s personal interest in improving relations with Australia and emphasising defence and economic ties between both nations, it is entirely likely that this year will see an increase in bilateral talks and visits between ministers and senior bureaucrats in order to lay the groundwork for future cooperation. After all, it was Abe Shinzo’s grandfather who approached Australia in the 1950s to restore relations and implement fifty years of economic cooperation, and Abe is nothing if not determined to either equal or surpass his grandfather’s legacy in shaping Japan’s destiny for the next sixty years.  Whether he succeeds or not depends upon his own abilities (which are not great), but if he does manage to re-invigorate Japan’s diplomatic machinery, defensive posture, and economic fortunes,  then he will secure a more favourable legacy than that of the LDP’s last poster boy, Koizumi Junichiro.