China has become Japan's largest trading partner and is reliant on China as its largest market of Japanese goods manufactured in China. This benefits from a high-yen policy which costs less in yen for its Chinese investment and puts more spending power in the hands of Japan's aging population. So economicallyJapan stands to lose a great deal in the event of an all-out confrontation with China.
All the parties concerned - Japan, China and the United States - know full well that an all-out war should be ruled out as none wants one or can afford it.
However, a weakened Japanese Noda adminstration, fighting for political survival against right-wing activism, is unlikely to back down. Moreover, while the U.S. has repeatedly declared its neutrality on sovereignty over the disputed island, it has affirmed the application of the U.S -Japan Security Treaty to the disputed island which Japan claims is under its administration.
While anti-Japanese nationalism may come in handy to boost China's territorial claim, it would not be in China's interest to allow it to run riot. This is because social stability is paramount during China's imminent leadership transition at a time of weakening Chinese and global economies.
But geopolitically, Japana's right-wing politics seems to be handing over to China the best opportunity in decades of settling this territorial dispute once for all.
The current row with Japan and other rival territorial claimants provides perfect legitimacy for China to tighten military and adminstrative coverage of claimed territories in the South China Sea, which comprise China's vital sea lanes.
This also opens up the opportunity to set the records straight on the sovereignty issue. That's why China has now submitted historical documents supporting claimed lines of territorial demarcation to the United Nations.
The historical background is explained in a recent article in Foreign Policy - "Why the Japan-China island dispute is an American problem" Click here
If Japan keeps up the right-wing rhetoric, popular anger in China, already at boling point by recalling Japan's imperial past, could well push China to consider more draconian retaliatory measures e.g. unilateral specifc trade sanctions such as export of rare earths, in addition to curbing business opportunities of benefit to the Japanese economy.
All of this seems rather pointless over some small and unattractive island outcrop in the South China Sea.
But besides hidden gas and oil reserves, what is really at stake is the battle over geopolitical influence over these sea lanes between the world's extant superpower and its perceived challenger. Added to this is the no-small-matter of China's national pride in territorial integrity traumatized by centuries of foreign aggression.
In any case, this unstable standoff between Japan and China is unsustainable, especially for an economically-weakened Japan. Chances are that some sort of an accommodation will be worked out balancing the interests on all sides, including no less America's interests in the Asia-Pacific. See my Op-ed article Discord in Asia in the South China Morning Post here.
Stopping the row from escalating seems to suit all parties and necessity is often the mother of invention. Perhaps the current visit of American Defence Secretary Panetta to Beijing would at least set the tone for a more meaningful tripartite dialogue.
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