Read the second and the third part of the article.
Download the pdf version of the article in the FX Trader Magazine
時間過得就像流水 Time passes like water – Chinese Proverb
The investment community and the blogosphere alike have raised questions over whether tensions were just those… tensions, or if there was any potential for armed conflict. Asian Second World War scars have not healed as smoothly as those in Europe, a fact that can be seen on the Seoul subway where full wall adverts in English are placed to educate visitors of the crimes committed by the Japanese Imperial Army during its occupation of mainland Asia.
"Asian Second World War scars have not healed as smoothly as those in Europe."
There is little love lost across the water in Tokyo, where new Prime Minister Shinzo Abe has caused controversy by visiting the controversial Yasukuni war memorial. The LDP has even hinted interest in re-writing an apology for its aggressive colonization of East Asia. However, despite the anti-Japanese sentiment in the region, there appears to be an understanding that the counterbalance to the growing tide of Chinese influence in the region needs to be strengthened, a point highlighted by the recent Philippine Government’s call for a comprehensive Japanese rearmament.The point however, raises an interesting observation on the nature of the tension between Japan and China. Japan is not fully armed and on its own, completely unable to take part in any form of sustained conflict against Chinese military forces. Any action would require direct American support and approval and be almost completely unthinkable at this juncture. Conversely, China has marched straight to the top of the regional food chain via rapid economic development and ever-deepening trade relationships with its neighbors. China, Japan and South Korea are estimated to account for close to 20% of global GDP at recent estimates. So, with this being the case, why were Japanese and Chinese leaders being so brazen in stoking tensions over a small collection of islands?
The History
The Senkaku/Diaoyu Islands are seen as being strategically important. They are tactically positioned between Japan, China and Taiwan, have rich fishing waters and are believed to hold significant oil reserves. They have been administered by Japan since 1895, and owned by private Japanese owners over the period. At the point of nationalisation, Japan stated that they had observed the islands for ten years to ensure that they were uninhabited before taking action.After the end of the Second World War, Japan was forced to renounce a collection of territories and islands under the Treaty of San Francisco in 1951 which transferred the islands to under US trusteeship. In 1971, the islands were returned to Japan. A key foundation of Japan´s argument is that China had no objections to the Treaty of San Francisco, but only took interest in the islands when the prospect of oil reserves was revealed. Conversely, China claims that over the long stretch of pre-colonial history, the islands have historically been theirs. Further, China claims that under the “Cairo Declaration” of 1943 and the subsequent “Potsdam Declaration” of 1945, the Senkaku Islands, as islands appertaining to Taiwan, reverted to China along with Taiwan.
"Japan's argument is that China had no objections to the Treaty of San Francisco, but only took interest in the islands when the prospect of oil reserves was revealed."
Tensions started to surface in the mid 1990’s when Chinese activists made attempts to land on the island. These moves were swiftly met by Japanese authorities who arrested and then evicted them. The conflict took a new turn in the early noughties when the Chinese Government is reported to have concluded exploration agreements with leading oil development companies for the exploration and production of gas projects in the East China Sea in 2003. The Japanese Government is said to expressed concern that the areas in question overlapped with Japan’s exclusive economic zone. Requests for information from Beijing were rejected and in 2004, the Japanese government confirmed that China had started drilling just 4km from Japanese waters.After a period of relative calm, the issue flared up again in 2010 when a Chinese fishing boat was caught in Japanese waters and violently resisted arrest from the Japanese coastal patrol. Eventually the Chinese captain was taken into custody, stirring up the diplomatic issue once again and leading to a tit-for-tat diplomatic response by the Chinese. The Japanese eventually released the Chinese fisherman following the reported arrest of four Japanese men who had been working on a Government funded project in China on contentious charges. Since then, tensions calmed until mid 2012 when the Japanese Government officially purchased three of the islands from their private Japanese owners.
However, the end of 2012 saw both the Japanese General Election and the transition of power in the Chinese Communist Party. As both dates drew closer, tensions soared to unprecedented levels. Further, both nations have been experiencing times of economic uncertainty, albeit with differing levels of severity and instability.
-----
Read next chapter
Recommended Content
Editors’ Picks
EUR/USD stays below 1.0800 after upbeat US data
EUR/USD stays under bearish pressure and trades slightly below 1.0800 in the American session on Thursday. The data from the US showed that the real GDP growth for the fourth quarter got revised higher to 3.4% from 3.2%, supporting the USD and weighing on the pair.
GBP/USD stays in daily range above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth helps the USD stay resilient against its rivals and limits the pair's upside.
Gold clings to strong daily gains above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays above 4.2% after upbeat US data and makes it difficult for XAU/USD to preserve its bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.