Japan counts the cost of the islands spat
As its row with China over the islands in East China Sea shows no sign of resolution, Japan faces the prospect of a prolonged recession
The last time a dispute between Japan and China blew up in 2010 over eight uninhabited islands, the economic fallout lasted less than a month. This time, the spat is prolonging a recession in the world's third-largest economy.
Four months after Chinese consumers staged a boycott of Japanese products over the islands in the East China Sea, sales of Japanese cars in China have yet to recover, Chinese factories began to favour South Korean component suppliers, and the United States has displaced China as Japan's largest export market.
"The spats have become increasingly costly as Japan's dependence on China as an export market has risen," said Tony Nash, a Singapore-based managing director at IHS. "Nationalism around the issue has resulted in lower demand for Japanese products in China and even Chinese firms sourcing products from Korean suppliers."
As China's confidence in asserting its territorial claims has grown, and trade between the two nations has tripled since 2000 to more than US$300 billion, the commercial cost of failing to resolve the dispute keeps rising. The latest flare-up came after property developer Kunioki Kurihara sold three of the islands to the Japanese government for 2.05 billion yen (HK$181.73 million) in September, a transaction Xi Jinping, the new head of the Communist Party, called "a farce".
The fallout from the sale might have cut Japan's growth in the latest quarter by about one percentage point, JP Morgan Chase estimated. That would be enough to keep the economy in recession after two quarters of contraction up to September 30. Gross domestic product may have shrunk an annualised 0.5 per cent in the final three months of last year, according to the median forecast in a survey.
The stand-off over the islands, known as Senkakus in Japan and Diaoyus in China, contributed to declines in Japan's shipments to China for six months to November. Japan's industrial output fell 1.7 per cent in November to the lowest level since the aftermath of the 2011 earthquake.
With each round of political disputes, the economic effect has grown. When then Japanese prime minister Junichiro Koizumi visited a Tokyo shrine where war criminals are among those honoured in 2005, Chinese people and politicians protested. Yet trade between the two rose more than 12 per cent that year.