Japan Can't Afford Fight with China

I was in Beijing late last month, shortly after news broke that China had passed Japan as the world’s second-largest economy. The official line in the Chinese media: No gloating over passing China’s longtime rival. For instance, when Premier Wen Jiabao met with Japanese foreign minister Katsuya Okada in Beijing on August 29, leaders about ways the two countries could work together. Wen talked about enhancing bilateral cooperation and Okada was upbeat, too. “During the meeting on Sunday, Okada said the future of China and Japan was becoming increasingly integrated,” the official English-language China Daily reported. ” ‘Not only do Japanese companies position it (China) as a manufacturing base, more importantly, they regard it as a very important consumer market,’ Okada said.” Reflecting Beijing’s don’t-kick-them-when-they’re-down approach, on August 31 the China Daily followed up with this headline: “China, Japan can herald ‘golden age for Asia’”

The era of good feeling didn’t last long. Less than a month later, Sino-Japanese relations are at their worst point in years. Beijing has cut senior-level government contacts and Japan’s top spokesman has warned against “extreme” nationalist sentiment. The two sides are fighting over Japan’s detention of a Chinese shipping-boat captain following a Sept. 7 collision near islands in the South China Sea administered by Japan but also claimed by China and Taiwan. My colleagues at Bloomberg News report investors in Tokyo are nervous the fight could hurt Japanese companies that do business in China. “There’s a possibility Japan would try to implement sanctions on China, which would be bad for related companies in Japan,” Daiwa Securities Capital Markets general manager Kazuhiro Takahashi told Bloomberg.

I don’t see that happening. Japanese Prime Minister Naoto Kan’s government last week declared war on currency traders, intervening in the markets to strengthen the yen for the first time in six years. That yen battle is far from over, and the fortunes of Japanese exporters like Sony, Honda and Toyota are up in the air as it plays out. The last thing the Japanese need now is to open a second front and invite Chinese retaliation against Japanese exporters. The Chinese captain is currently scheduled to be in detention until Sept. 29. Chances are, he’ll be on his way back to China soon after that.

Read the original story at BusinessWeek Eye on Asia Blog