As tensions between China and Japan continue to escalate over the Diaoyu Islands dispute, economic repercussions have analysts worried about the regions already slowing economy, at a time when Europe is experiencing critical solvency issues and social unrest spreads globally.

What effect this has on the US economy — itself mired in huckster schemes of “Quantitative Easing”, monetary mortgage sharking and debt brinkmanship — remains to be seen, as the Federal Reserve wantonly inflates stock and real estate markets for the Obama re-election campaign.

Japan, a major trading partner with China, may be seriously underestimating the impact of an enraged Chinese citizenry that is boycotting everything from cars to designer clothes.

But Japan’s technological prowess is vast, and China must also be careful not to cut itself off from Japan’s vast technological resources.

Nervous overseas funds are starting to pull money out of Japan, spooked by a territorial spat with China that has prompted talk of corporate boycotts, weakened trade and even military action. . .

“It’s yet another headwind that neither of these two markets can afford. It could definitely get ugly,” said one New York-based fund manager who specialises in Japanese equities. . .

And while long-term investors are leaving, the short-sellers – investors who seek to profit from asset prices going down – are circling vulnerable companies with most to lose from a prolonged quarrel.
Funds retreat from Japan, short-sellers circling, in China spat – Reuters UK

Photo of China Protests

A “short seller” is someone who borrows money to “sell short” a stock in the hope that the price will fall, at which time the stock can be bought back at a profit. Many people view short-sellers as vultures, who unfairly prey on weak companies or vulnerable capital markets.

Short sellers counter that a free market has to allow for both buying and selling. Buying stock on margin is a common practice, so borrowing to sell stock should be no different. Short selling, they further argue, is a healthy market mechanism of price discovery that roots out hidden weaknesses and punishes incompetence.

. . .  the territorial dispute between the north Asian neighbors – believed to be the worst in decades – deepens.

“This could really be something that causes a huge economic dislocation,” Mike Splinter, chief

. . .  many observers are starting to draw a parallel with the disruption in the wake of the 2011 Fukushima disaster in Japan.executive officer at Applied Materials told CNBC. . .

. . .  Japanese companies operating in China have borne the brunt of a backlash after Japan bought the disputed islands, called Senkaku in Japan and Diaoyu in China, earlier this month, sparking anti-Japan protests across China.

Toyota Motor [TM  78.51    -1.74  (-2.17%)   ] will cut production of its premium Lexus vehicle by about 20 percent as anti-Japan protests hit sales in China, the Nikkei reported on Tuesday. Toyota’s sales fell about 30 percent after some of its stores in China were damaged during violent demonstrations over Japan government’s acquisition of three islands in the East China Sea, the business daily said.

Japanese capital flight is a growing concern. About 41 percent of Japanese firms see friction with China affecting their business plans, with some considering pulling out of the country and shifting operations elsewhere, a Reuters poll showed on September 20.

Much is at stake for both China and Japan. In 2011, bilateral trade grew 14.3 percent to a record $345 billion.

. . . The root of the crisis lies in Japan’s imperial expansion and wartime past, notably its perceived lack of atonement for atrocities committed during the Second World War.

“The Senkakus/Diaoyus are subject to long-running tension that periodically spikes owing to. . .  the rise of China. . . and renewed nationalism in both countries,” said Christian Le Mière, research fellow for Naval Forces and Maritime Security, at the International Institute for Strategic Studies in London.

But Chinese business may also suffer if the row worsens. “From a China point of view, in the longer run this could have an impact,” Jacques warned. “As they move up the value chain, it could be harder to get the equipment they need from the Japanese if the dispute becomes ‘tit-for-tat’.”
Instant View: Japan business mood worsens on global slowdown – BOJ tankan – Reuters

Japanese retailer Uniqlo put on a bold face by opening its “flagship” Shanghai store, knowing it would be well-protected by police. But the mega-rich Shanghai shoppers know what’s really important when national pride is at stake – getting the latest fashion bargains at hugely inflated prices.

TOKYO — Scores of Japanese-owned factories and stores in China were shuttered Tuesday as anti-Japan demonstrations erupted in dozens of cities.

At stake are billions of dollars in investments and far more in sales and trade between Japan and China, the world’s third- and second-largest economies. The two are so closely entwined that both would suffer from any long-term disruptions. . .

Big name brands and retailers appeared to be suffering the brunt of the latest mass outburst of anti-Japanese sentiment. . .

Pain from the protests was being felt in Tokyo, too, where business has slowed for the many shopkeepers catering to Chinese tourists. . .

Uniqlo, Asia’s biggest clothing retailer, had closed some of its outlets but opened its huge flagship store on Shanghai’s main Nanjing Rd. shopping street by the early afternoon. Amid calls for a boycott of Japanese products, the popular store was busy with shoppers. . .

. . . many employees of Japanese retailers, automakers and other companies were staying home Tuesday as thousands of anti-Japanese protesters marched in Beijing. The Japanese school in Beijing was closed on Monday, a Japanese public holiday, and on Tuesday. Staff said they were uncertain what would happen on Wednesday.
China Japan Protests: Japanese Businesses In China Hit As Demonstrations Rage – Huffington Post
Chinese and Japanese political officials are in a firm standoff on both sides of the issue. Japanese politicians must look decisive and patriotic for the upcoming elections, and they cannot back down. The Chinese will not allow themselves to relent or be in an inferior position to the Japanese in light of contemporary history, and because they firmly believe the historical record regarding sovereignty is on their side.

. . .  China’s [foreign minister] Yang Jiechi . . .  said China “will not tolerate” Japan’s claims to islands in the East China Sea. . .  amid the worst diplomatic crisis since 2005. Nissan Motor Co.  said today it’s halting production in China to reflect falling demand, and All Nippon Airways Co. said 40,000 seats have been canceled on its China flights. . .

“China will continue to take firm measures to safeguard its territorial integrity and sovereignty,” Yang told Gemba, according to the Chinese Foreign Ministry statement.

. . . Japan Airlines Co. had 15,500 cancellations as of Sept. 24.

. . . Nissan, the top Japanese seller of vehicles in China, said today its August output in China fell by 8.9 percent from a year earlier to 86,488 units. Chinese production dropped 18 percent to 67,625 vehicles at Toyota Motor Corp. and declined 10 percent at Honda Motor Co.

. . . Thousands of people have taken part in anti-Japanese protests across cities across China over the island dispute. Protesters threw bottles and eggs at the Japanese embassy in Beijing this month, while demonstrators also caused minor damage to the official vehicle of U.S. Ambassador Gary Locke.

. . . Xinhua published a 5,200-word White Paper from China’s State Council Information Office outlining China’s claim to the islands, referring to documents dating to the Ming Dynasty in 1561.

“No matter what unilateral step Japan takes over Diaoyu Dao, it will not change the fact that Diaoyu Dao belongs to China,” the paper said, referring to the islands’ full Chinese name.
China-Japan Ministers Hold ‘Severe’ Talks as Spat Damages Trade – Businessweek

Australian’s former prime minister Kevin Rudd shows his deep understanding of the issue when he suggests that both sides explore the “resources” surrounding the islands, such as underwater oil and shipping lanes. Is that what this is really all about — money and resources? Or is it about historical sovereignty as political leaders assert?

Australia’s former prime minister and longtime China watcher Kevin Rudd told CNBC that China and Japan can solve their dispute over the East China Sea islands by jointly exploring and sharing resources around these islands.

Speaking to CNBC’s Bernie Lo, Rudd said, “If we can possibly agree on a joint exploration extraction entity which distributes the wealth resources which lie there around the region, that might help solve the sovereignty question.”

He added that “this will buy time for now,” and the nations can wait for the next generation of leaders to find a solution to the problem.

[Editor’s Note: This is a tactic of the “kick the can down the road” political strategy that has worked so well in financial markets, where foreign reserve banks print money to pay to solve problems that were created by artificial monetary stimulus and irresponsible credit expansion.]

China, Japan Should Jointly Explore Disputed Islands: Kevin Rudd – CNBC.comchinese riot over diaoyu islands

Tensions between the two nations come at a time when China is preparing for a once-in-a-decade political transition. . . Rudd said that the economic reforms in China will likely continue, with Xi Jinping emerging as the head of the new central policy-making committee within the government.

“What I sense is an overall reformist direction to leadership…not just preserving where they’ve gone on reforming the economy so far, but taking new steps as well in order to boost growth, bolster growth and critically bolster employment,” he added.

It would be nice if “reforms” were extended to education, healthcare, political and legal sectors as well.

But with a national election approaching in Japan, and a change of leadership in China, politicians on both sides have refused to step back from the brink, afraid that they will appear weak.

“There is a danger of China and Japan having a military conflict,” said Yan Xuetong, one of China’s most influential foreign policy strategists, and a noted hawk.

“One country must make a concession. But I do not see Japan making concessions. I do not see either side making concessions. Both sides want to solve the situation peacefully, but neither side can provide the right approach,” he added.

He warned that unless one side backs down, there could be a repeat of the Falklands Conflict in Asia.

“Generally speaking, according to the theory of international relations, unless one country makes concessions to the other, the escalation of a conflict between two countries will not stop until there is a military clash, like between the UK and Argentina,” he said.

He added: “China takes a very tolerant policy elsewhere, with smaller powers. But the case of Japan is different. There is history between us. Japan is a big power. It regards itself as a regional, and sometimes a world power. So China can very naturally regard Japan as an equal. And if we are equal, you cannot poke us. You cannot make a mistake.”
Conflict Looms Between China And Japan – Business Insider  

No poking allowed, especially in the face.

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