The Japan-China dispute is taking its toll; finger now pointed at the US

The Japan-China tensions are taking their toll on the Japanese economy. The latest industrial production numbers, which include the period of escalating rift between the two nations, look quite dismal.

Source: tradingeconomics.com

In fact both production and shipments are down significantly - the worst decline since the March 2011 tsunami disaster.

Source: Ministry of Economy, Trade and Industry

In response, BOJ launched another round of QE - as was widely expected. As usual a central bank is asked to solve problems that should be left to the governments (similar to the Fed with the fiscal cliff and the ECB with the sovereign debt crisis).

WSJ: - The central bank's policy board decided Tuesday to increase the BOJ's asset purchases to ¥91 trillion ($1.14 trillion) from ¥80 trillion, and to introduce a new lending facility designed to stimulate loans by banks. The fresh measures marked the first time since May 2003 that the BOJ has taken easing steps two months in a row. The bank said it took action to keep Japan's economic policy on the path "to sustainable growth with price stability."

The BOJ also downgraded its assessment of the economy, noting declines in both exports and output, key drivers of the country's economic growth. "Japan's economy has been weakening somewhat," it said in a statement, compared with its previous description of economic activity as "leveling off more or less."

In the mean time the conflict between the two nations continues to brew - particularly with respect to the disputed islands (see discussion).

CBS: - Chinese patrol boats confronted Japanese vessels near a disputed East China Sea archipelago early Tuesday, the latest in a series of such encounters following Tokyo's nationalization of the islands last month.

Four ships from China Marine Surveillance entered waters near the islands at 10 a.m. (0200 GMT), according to a statement from the State Oceanic Administration that commands the service. The ships conducted surveillance on the on Japanese Coast Guard vessels in the area, "sternly expressed" China's sovereignty claim over the islands and "carried out expulsion measures," the administration said.

Some now believe the real reason behind the conflict has to do with oil and gas reserves under the East China Sea. A worrying new development in the conflict however was an influential former Chinese diplomat accusing the US of instigating these tensions between China and Japan.

NYT: - A longtime Chinese diplomat warned Tuesday that the United States is using Japan as a strategic tool in its effort to mount a comeback in Asia, a policy that he said is serving to heighten tensions between China and Japan.

... the thrust of his speech was more hard-hitting, particularly regarding the United States. Some in China and Japan see the issue of the islands “as a time bomb planted by the U.S. between China and Japan,” he said. “That time bomb is now exploding or about to explode.”

Mr. Chen accused the United States of encouraging the right wing in Japan, and fanning a rise of militarism.

“The U.S. is urging Japan to play a greater role in the region in security terms, not just in economic terms,” he said during his speech at the Foreign Correspondents’ Club in Hong Kong. That “suits the purpose of the right wing in Japan more than perfectly — their long-held dream is now possible to be realized.”

This accusation that the US is behind the rift between the two nations was echoed by a Chinese newspaper on Monday. China apparently was rankled by the recent US-Japan-India meeting that excluded Beijing.

The Hindu: - Chinese state media outlets and strategic analysts have expressed wariness at the India, Japan and the U.S. trilateral meet held in New Delhi on Monday describing it as aimed at exerting pressure on China over its regional ambitions.

[The Communist Party-run Global Times] newspaper said the U.S. was “trying to ensnare China in the Asia-Pacific region”, even as the business community in Washington was becoming increasingly “integrated” with China. “The U.S. often holds an ambiguous strategy on China. It seems Washington hasn’t made it clear how it should deal with China’s rise.”

With Japan now economically "stressed" and China trying to assert its dominance in Asia-Pacific, these developments could destabilize the region. The alleged involvement of the US in the conflict has the potential of making the situation even more dangerous. And none of this is good news for economic growth in the region.

SoberLook.com