Japan’s Pivot Away from the West Leads Back to China

[Chinese-Dragon]

I have seen you make this point several times before. It's important to have strong foreign currency reserves to hedge against hot money flows, but for a country running a large trade surplus like China, it's not an advantage. On the contrary, it's dead money that is not being used productively by China.

Well we are already saturated with investment, domestic investment has been running at about 50% of GDP for a decade now.

We are trying to move AWAY from an investment-fueled economic model. This is the whole point of our recent and upcoming economic reforms.

Which means that huge amounts of funds are going to start flowing overseas, as we start acquiring foreign assets on a large-scale.

 

[LeveragedBuyout]

The problem lies with the US. It wishes to stay the dominant power for eternity. As long Japan cannot break free from the Americans, it's foreign policies shall always be dictated by Uncle Sam. Trust me the American agenda is to counter China using Japan and it will not let an alliance form between CJK.

This is a misreading of both American history and American strategic interests. America wants to ensure a liberal trade regime, and China has proven so far that it will not preserve such a regime. If China were to improve its intellectual property protection, float its currency, and make better efforts to ensure the major shipping lanes in Asia were secured instead of escalating tensions in the SCS, you would see a far more relaxed American stance. As Calvin Coolidge once said, the business of America is business.

 

[Chinese-Dragon]

This is a misreading of both American history and American strategic interests. America wants to ensure a liberal trade regime, and China has proven so far that it will not preserve such a regime. If China were to improve its intellectual property protection, float its currency, and make better efforts to ensure the major shipping lanes in Asia were secured instead of escalating tensions in the SCS, you would see a far more relaxed American stance. As Calvin Coolidge once said, the business of America is business.

Big economic reforms are coming up within the next two years. Interest rate liberalization, currency liberalization and capital account reform.

But I'm willing to bet even when the Yuan is completely free floating, US-China relations are not going to improve.

US-China relations were great back in the 1970's, even though back then China was fully communist and still ruled by Mao.

Why is that? Because back then, despite large ideological differences, China was weak. And not a conceivable challenge to America in any domain, be it economic or diplomatic.

Today, China is much more liberalized, but much stronger. Hence US-China relations are much worse.

It's all about the balance of power. As China continues to increase in strength, tensions will inevitably flare up, that's the nature of the world. And I don't think there is much we can do about it, even our official policy of "China's peaceful rise" isn't helping much, despite us not having a war for over three decades.

 

[LeveragedBuyout]

Big economic reforms are coming up within the next two years. Interest rate liberalization, currency liberalization and capital account reform.

But I'm willing to bet even when the Yuan is completely free floating, US-China relations are not going to improve.

US-China relations were great back in the 1970's, even though back then China was fully communist and still ruled by Mao.

Why is that? Because back then, despite large ideological differences, China was weak. And not a conceivable challenge to America in any domain, be it economic or diplomatic.

Today, China is much more liberalized, but much stronger. Hence US-China relations are much worse.

It's all about the balance of power. As China continues to increase in strength, tensions will inevitably flare up, that's the nature of the world.

Time will tell, but I doubt it. When Japan was in the position that China is today, there were tensions, to be sure, but those centered precisely on the areas I mentioned--currency and trade. America acts like the world policeman because it doesn't see any other way to preserve the liberal trade regime. Before Pax Americana and the British Empire, mercantilism was the name of the game. If we return to a multi-polar world, my bet is that mercantilism will also make a comeback.

 

[Jlaw]

interest rate liberalization means lower rates which leads to currency liberalization which means more money printing.

 

[Aepsilons]

Time will tell, but I doubt it. When Japan was in the position that China is today, there were tensions, to be sure, but those centered precisely on the areas I mentioned--currency and trade. America acts like the world policeman because it doesn't see any other way to preserve the liberal trade regime. Before Pax Americana and the British Empire, mercantilism was the name of the game. If we return to a multi-polar world, my bet is that mercantilism will also make a comeback.

If i may also add; before the rise of the British Empire as the per-eminent force in the world during hte mid 18th century, we did have a multipolar world and as you would have it mercantilism was the driving force of these empire-states:

1) British Empire
2) French Empire
3) Russian Empire
4) Spanish Empire
5) Dutch Kingdom

 

[LeveragedBuyout]

If i may also add; before the rise of the British Empire as the per-eminent force in the world during hte mid 18th century, we did have a multipolar world and as you would have it mercantilism was the driving force of these empire-states:

1) British Empire
2) French Empire
3) Russian Empire
4) Spanish Empire
5) Dutch Kingdom

Indeed. That's why it frustrates me sometimes to see France (or more recently, Russia and China) rail against US hegemony and pray for a multi-polar world. A multi-polar world will be less stable and less wealthy, but you know the saying about those who don't learn history.

 

[Aepsilons]

Back in 2009, China and Japan talked about creating an 'East Asian Community'. This is a good read:



China and Japan begin talks on building alliance
By Julian Ryall in Tokyo and Malcolm Moore in Shanghai

5:00AM BST 05 Oct 2009


But in a move that will send shock waves around the world, the two countries have begun talks on forging a new union that could make them the most powerful force in the world.

Tokyo and Beijing are discussing plans to create an "East Asian Community," similar to the European Union, that would improve economic and political relationships in the region.

The proposals are in the very early stages, but initial areas of co-operation could include visa-free travel, public health, energy and the environment before gradually moving on to more thorny political issues and common policies on agriculture or defence.

Eventually, East Asia might even have its own common currency.

The rapid pace of the apparent détente – since the election of the Democratic Party of Japan on August 30 – has come as a surprise given the generations of ill-will that has grown between the two nations.


Efforts by the new Japanese prime minister, Yukio Hatoyama, to build new relationships with Japan's Asian neighbours – frequently strained by previous right-wing governments – is being seen as another sign that the administration is turning its back on Washington, Tokyo's staunchest ally since the end of World War II.

The implications of an East Asian economic alliance for the rest of the world would be far-reaching. Japan is currently the second-largest economy in the world and China is in third place – although those two positions are expected to reverse in the next few years.

Robert Dujarric, director of the Institute of Contemporary Studies at Temple University, Japan, said: "I think Japan is looking for a way to improve the atmosphere with China, show Japanese leadership and co-operation, as well as improve economic ties and resolve pending territorial issues."

But Dujarric believes there are benefits that the West could reap from a closer relationship between Japan and the rest of Asia.

"The US supports the 'stakeholder' theory, that China has to be given a stake in the world order, and this would help," he said.

Tension between the nations dates back to 1894 when Japan invaded China and defeated the nation's military within nine months. In 1937, the Japanese emperor's army returned and initially swept all before it, capturing Shanghai, Beijing and Nanjing, where an estimated 300,000 Chinese civilians were slaughtered by Japanese troops.

Some in Japan continue to deny the event ever happened, which has done nothing to build bridges between the two nations.

In China, public resentment over Japan's colonial rule has proved a major obstacle to improved Sino-Japanese relations.

A poll by the People's Daily newspaper suggested two thirds of people were in favour of further Asian integration but there is a sense the Communist leadership in China will not risk the wrath of the people by jumping into a hasty arrangement with Japan.

Yang Jiechi, the foreign minister, said: "China will continue its receptive attitude on East Asian co-operation with relevant sides. China was among the first batch of countries to advocate and support the construction of an East Asian community and has actively engaged in East Asian co-operation and its integration process."

The Chinese media has observed that it was the Japanese who wanted to revive the process, probably as part of a strategy to gain more influence in East Asia.

Zhou Yongsheng, a professor of Japanese studies at China Foreign Affairs University, said: "Japan was not interested in the plan at first, but after the global financial crisis it realised that the impetus of its economy lies with China and some newly emerging countries in the region."

There is also Chinese resistance to the idea of a wider coalition, possibly involving its other traditional rival India.

Lu Yaodong, the vice-director of Foreign Affairs at the Japanese Research Institute at the Chinese Academy of Social Science told the 21st Century Business Herald newspaper: "The proposal of the East Asia union by the Japanese indicates that Japan establish a leading status in East Asia."

Mr Hatoyama is believed to have put the proposal to Chinese President Hu Jintao at their first meeting, in New York on September 21, just days after taking office.

The issue again came up when Foreign Minister Katsuya Okada met his Chinese counterpart, Yang Jiechi, in Shanghai last week, and will be on the agenda when the leaders of Japan, China and South Korea meet in Beijing on October 10.



Reference: The Telegraph

 

[Chinese-Dragon]

Time will tell, but I doubt it. When Japan was in the position that China is today, there were tensions, to be sure, but those centered precisely on the areas I mentioned--currency and trade. America acts like the world policeman because it doesn't see any other way to preserve the liberal trade regime. Before Pax Americana and the British Empire, mercantilism was the name of the game. If we return to a multi-polar world, my bet is that mercantilism will also make a comeback.

Do you mean Neo-mercantilism?

Usually this term is used for three countries: China, Japan, and Singapore.

However, none of these three countries has been in any sort of war for the past three decades at least.

So, is it really such a bad system?

 

[LeveragedBuyout]

Do you mean Neo-mercantilism?

Usually this term is used for three countries: China, Japan, and Singapore.

However, none of these three countries has been in any sort of war for the past three decades at least.

So, is it really such a bad system?

I know that stating the following is going to sound condescending, but my intention is not to offend.

With that qualification out of the way, neo-mercantilism has worked for China, Japan, and Singapore because the US has tolerated it and allowed it to work. If the US retaliated with the same model against these countries, trade between us would be severely disrupted, with dire effects for the world economy. Instead, the US grudgingly runs a gigantic trade deficit with all of these countries in order to keep the peace. That forbearance is why the US still has the world's reserve currency, but it is also why you have such a vast foreign currency reserve. We are locked in a tight embrace, and need each other.

The elites of all of these countries are aware of this, which is why despite all of the invective hurled around the internet by young keyboard warriors, the leadership of China has been very low-key about the US trade and budget deficits. Just like Japan before it in the 1980s, the sclerotic US growth is now starting to affect China as well, so this state of affairs cannot last much longer. Chinese leadership recognizes this, which is one of the main drivers of Xi Jingping's reform program. We, the US and the rest of the world, depend on China to pull us out of the muck, because the US no longer has the strength to do so.

 

[Chinese-Dragon]

I know that stating the following is going to sound condescending, but my intention is not to offend.

With that qualification out of the way, neo-mercantilism has worked for China, Japan, and Singapore because the US has tolerated it and allowed it to work. If the US retaliated with the same model against these countries, trade between us would be severely disrupted, with dire effects for the world economy. Instead, the US grudgingly runs a gigantic trade deficit with all of these countries in order to keep the peace. That forbearance is why the US still has the world's reserve currency, but it is also why you have such a vast foreign currency reserve. We are locked in a tight embrace, and need each other.

That doesn't sound like something that America would do. Why would they hurt their own interests for our benefit?

The elites of all of these countries are aware of this, which is why despite all of the invective hurled around the internet by young keyboard warriors, the leadership of China has been very low-key about the US trade and budget deficits. Just like Japan before it in the 1980s, the sclerotic US growth is now starting to affect China as well, so this state of affairs cannot last much longer. Chinese leadership recognizes this, which is one of the main drivers of Xi Jingping's reform program. We, the US and the rest of the world, depend on China to pull us out of the muck, because the US no longer has the strength to do so.

China's large-scale economic reforms over the next few years are essential to the stability of the domestic Chinese economy. There is nothing we can do for other countries, if they are having economic problems they need to reform too.

 

[LeveragedBuyout]

That doesn't sound like something that America would do. Why would they hurt their own interests for our benefit?



China's large-scale economic reforms over the next few years are essential to the stability of the domestic Chinese economy. There is nothing we can do for other countries, if they are having economic problems they need to reform too.

It's not just for China's benefit, it's for the benefit of the liberal (free) trade regime, which in turn benefits everyone (including the US). That said, this situation cannot last forever, as at least theoretically, the market will demand higher interest rates as an incentive to push more capital inflows into the US (another way of saying financing the trade deficit).

Why has it lasted this long? Because the US has the reserve currency, and is able to monetize its debts.

Why does the US allow this? Because as long as trade is free, the US can grow its exports, and thus generate revenue for the economy, and shrink its fiscal deficits. But with the left wing controlling the levers of power for decades in the US, our fiscal situation has greatly deteriorated. Economic reform is not a realistic proposition at this time, so the fiscal deficits are not shrinking as fast as they need to. But when both the trade deficit and fiscal deficits can no longer be controlled, the result is trade barriers to reduce the trade deficit, and austerity to reduce the fiscal deficit. Result? You guessed it, the Great Depression II.

For a great case study on the British Empire going into the Great Depression, please see:

Retreating from Globalisation: the British empire/commonwealth experience between the wars

This is why there has been talk of "rebalancing" the Chinese economy for a few years, now. As you stated, the investment-based economy no longer works. Moreover, it can't last much longer, because those investments are essentially being financed by America's trade deficit. In the 1920s, Britain and America couldn't solve this without austerity and trade barriers, which caused the Great Depression. When Japan was dominating in the 1980s, the Plaza Accord was executed to try and solve this. It saved the US, but caused a massive real estate bubble in Japan, which it is still recovering from to this day.

Will China be able to smoothly assume leadership of the liberal trade order from the US, or will its mercantilist policies essentially cause the liberal trade order to grind to a halt again? China (and the rest of the world) can't afford for the US to collapse, so we all need Xi Jinping's reforms to be successful.

I hope you can see that I fervently wish China to succeed.

 

[Chinese-Dragon]

It's not just for China's benefit, it's for the benefit of the liberal (free) trade regime, which in turn benefits everyone (including the US). That said, this situation cannot last forever, as at least theoretically, the market will demand higher interest rates as an incentive to push more capital inflows into the US (another way of saying financing the trade deficit).

Why has it lasted this long? Because the US has the reserve currency, and is able to monetize its debts.

Why does the US allow this? Because as long as trade is free, the US can grow its exports, and thus generate revenue for the economy, and shrink its fiscal deficits. But with the left wing controlling the levers of power for decades in the US, our fiscal situation has greatly deteriorated. Economic reform is not a realistic proposition at this time, so the fiscal deficits are not shrinking as fast as they need to. But when both the trade deficit and fiscal deficits can no longer be controlled, the result is trade barriers to reduce the trade deficit, and austerity to reduce the fiscal deficit. Result? You guessed it, the Great Depression II.

For a great case study on the British Empire going into the Great Depression, please see:

Retreating from Globalisation: the British empire/commonwealth experience between the wars

This is why there has been talk of "rebalancing" the Chinese economy for a few years, now. As you stated, the investment-based economy no longer works. Moreover, it can't last much longer, because those investments are essentially being financed by America's trade deficit. In the 1920s, Britain and America couldn't solve this without austerity and trade barriers, which caused the Great Depression. When Japan was dominating in the 1980s, the Plaza Accord was executed to try and solve this. It saved the US, but caused a massive real estate bubble in Japan, which it is still recovering from to this day.

Will China be able to smoothly assume leadership of the liberal trade order from the US, or will its mercantilist policies essentially cause the liberal trade order to grind to a halt again? China (and the rest of the world) can't afford for the US to collapse, so we all need Xi Jinping's reforms to be successful.

I hope you can see that I fervently wish China to succeed.

Thanks for the highly informative post.

I also wish Xi Jinping's reforms succeed, the future of our economy depends on it. Depending on how it goes, it could be the best or worst thing to happen to China in the modern era.

 

[LeveragedBuyout]

Thanks for the highly informative post.

I also wish Xi Jinping's reforms succeed, the future of our economy depends on it. Depending on how it goes, it could be the best or worst thing to happen to China in the modern era.

I appreciate the positive rating, thank you. If China's re-balancing works, then the world will look to it as the new hegemon; if not, it will resemble the failed hand-off between the British Empire and the US, and we will see worldwide economic damage. We still have time, but not much time. I hope you're ready!

 

[Genesis]

Hypothetically speaking, if Japan and China were say, strategic allies? The combined might of the Japanese Navy and the PLAAN could -- dominate not only Asia-Pacific, but perhaps into the IOR and beyond.

China's huge man power and growing technological sector + Japan's technological innovative capacity.

The possibilities are limitless.

ah innovation. What is it do you know?

For example fighter planes. When fighters first came onto the scene, there was no need for stealth, there was no radar, then there needed something to detect the fighters, and in came radars. With radars, came the need for stealth, and here we are.


China for a long time was on the back end of the technological ladder. China is innovative, but lacks certain characteristics.

For example, how is China suppose to invent stealth when we didn't even have a credible fighter in the fourth gen. Did we suddenly grow innovative as we do have the fifth gen fighter?

Hell no, we understand the principles of advanced radars, and we have developed a need for stealth. Hence stealth.

Innovation is not a procedure, it takes genius, but within reason. A caveman can never invent stealth, but the same men given the education and background and need might.


If all Japan has is innovation, then Japan doesn't have anything at all. During the first Korea invasion, Japan was at a military all time high, just after the sengoku Jidai. However, they were badly defeated at Korea. China at that time was facing unprecedented inflation, ironically due to Japan and Spain's silver and gold trade. The first paper money and etc.

China needs to be so weak and so backwards like the Qing dynasty for Japan to be the key nation in Asia.


I am afraid within our foreseeable future that will not happen again.


Japan is strong is like UK is strong, compared to his big brother US, UK is nothing but a distraction. Today Japan is not that helpless, but with current projections. 20 years....


The question becomes, can Japan accept this role peacefully? My money is no, just as we didn't accept Japan as superior until we lost, nor will Japan accept our superiority without a lost. Not a great ending, but it is unfortunately the only ending possible.