Japan reported lower than expected GDP growth for the final quarter of 2013 today, posting 1% growth versus analyst expectations of 2.8%. This is unsettling news given that Prime Minister Shinzo Abe’s massive growth-oriented “Abenomics” policies, involving massive monetary and economic stimulus, resulted in 2013 being the Japan’s best year for its stock market in over four decades.
Japan has two objectives it is trying to tackle simultaneously: anemic growth as well as its towering national debt. This is a terrible place to be in because the economy really is in between a rock and a hard place. Standard approaches to encouraging growth include reducing interest rates and injecting stimulus packages. But to implement these ideas it would need to either borrow the money, thus increasing debt, or print more of it, which would reduce the value of the Japanese Yen and so its ability to pay back its international creditors.
Worst of all would be if the country’s increasing debt resulted in a further downgrade of its sovereign credit rating, which currently stands at AA- (two notches down from the top rating of AAA) and is on a negative trend according to Standard & Poor. That would increase Japan’s borrowing cost across the board, further reducing the efficiency of the national economy. That is why Mr. Abe’s regime is increasing the Japanese sales tax for the first time since 1997 from 5% to 8% this April. Unfortunately that is going to have an inverse effect of national consumption which is a key driver of growth.
Into this picture comes an increasingly forceful China, seeking ways to redefine its geopolitical footprint and accurately reflect its growing clout.
November 2013 China declared that it would begin enforcing a new East China Sea Air Defence Identification Zone that cut deeply into existing Identification Zones being maintained by Japan and South Korea. In addition the new zone covers the highly contentious Senkaku (Japanese name) / Diaoyu (Chinese name) islands which have been historically controlled by Japan, and potentially contain vast underwater energy reserves. These five uninhabited islets and three barren rocks are of great strategic, and increasingly nationalistic importance, lying 170km off the Japanese coast, and 330km off the Chinese coast. China has active border disputes with Japan, South Korea, Taiwan, Vietnam, Malaysia, and The Philippines among others.
January 2014 Japanese Prime Minister Shinzo Abe, while speaking at the World Economic Forum in Switzerland, referred to a similar situation in 1914 when close economic ties between England and Germany in 1914 were not enough to overcome the strategic rivalry between the two countries.
February 2014 President Benigno Aquino of the Philippines compared China’s increasingly vocal territorial ambitions to that of 1930s Germany. In 2012 the Philippines lost an island in the South China Sea known as Scarborough Shoal after China refused to move its military forces following a standoff.
Both China and Japan have seen a fall in bilateral trade in recent years that suggests a decoupling of the two economies. Though neither side is interested in war, it is important to remember that WWI was a result of entangling alliances rather than the expansionist aggression of WWII Germany. With such strong nationalist posturing, it is entirely possible for elements within either government to tip the balance towards chaos. For China, it would be a bid to cement its new role on the world stage as Japan did through the Russo-Japanese war of 1904, where Japan’s rapid modernization through the Meiji Restoration absolutely crushed Russian forces.
If China is unable to sustain adequate economic growth to quell its well documented internal discord, jingoistic posturing may be the only way to maintain unity across this broad and diverse land. Japan, facing decades of economic woes, may be unable to face the rise of a powerful China and its new secondary role in the region. In such situations, what is presently diplomatic posturing may turn into nationalistic brinkmanship with frightening speed. Whoever has less to lose at that point may find war to be an appropriate tool in the geopolitical toolkit. And China will have a lot to lose.
Though the world of 2014 is very different from the world of 1914, it is important to remember that WWI disrupted what was, up until that point an unheralded era of globalization, international trade, and multilateral peace agreements.
China’s military expenditure in 2014 is set to eclipse the combined budgets of Britain, France, and Germany. However, it will still be less than 50% of the amount spent by the United States over the same period.