Prime Minister Shinzo Abe is about to make history. In late October, he will go to China with the primary purpose of holding formal talks with Chinese leaders, including President Xi Jinping. A top-level bilateral summit with China has not taken place since Prime Minister Yoshihiko Noda went to Beijing in December 2011.
While both leaders have met seven times on the sidelines of various multilateral events, like the regular Group of 20 or Asia-Pacific Economic Cooperation summits, all of the meetings lasted less than an hour. In contrast, the upcoming bilateral talks are poised to mark the start of a fundamental new chapter in Japan-China relations. Abe and Xi have a chance to lay the foundations for a Pax Sinae-Nipponica era.
Timing matters. For Abe, much of his early domestic credibility and popularity stemmed from his “tough on China” stance. In fact, Abe’s unexpected comeback to win the Liberal Democratic Party presidential election in September 2012 may be traced to his outspoken patriotism in the face of the bitter disputes over the sovereignty of the Senkaku Islands in the East China Sea. In 2012, Abe captured the imagination of Japan’s ruling elite by presenting himself as the only candidate willing to stand up and ensure that Japan would not slip-slide into becoming a colony of China. It was no coincidence that Abe never sought to have a substantial bilateral meeting with Xi until now.
A stronger Japan
What has changed since 2012 is that Japan’s relative position has strengthened significantly. Most importantly, on the economic front, Japan in 2012 was ensnared in deflation and corporate Japan appeared dangerously close to becoming an irrelevant has-been. In contrast, today’s economy is experiencing sustained growth and corporate Japan is not just enjoying record profitability but also expanding market share and relevance in global markets in general and Asian markets in particular.
To wit — Japan’s banks have been the biggest creditor in non-China Asia for two years running; and 1 out of 5 industrial workers in Thailand now works for a Japanese company. For Abe, the fact that Japan Inc. is back to being a credible global competitor is an absolutely necessary condition for negotiating with China’s leaders. Clear speak — Japan’s economic revival has strengthened Japan’s negotiating power with China. No doubt, Xi will respect Abe for the success of his Abenomics.
On the diplomatic front, Japan’s relative position has also strengthened significantly. Abe has invested a lot of his political capital in strengthening not only Japan’s security alliance with the United States but actually boosting spending on the Self-Defense Forces. The security/defense lines and parameters are clearer than ever. At the same time, the increasingly open all-out rivalry between the U.S. and China actually elevates the relevance of the Japan-China relationship — and not in a “us versus them” way.
On multiple fronts, Japan will emerge as an increasingly more powerful mediator between the two global superpowers. Buying missiles and cybersecurity systems from the U.S. and, at the same time, investing in Asian infrastructure together with China is not a contradiction but a Machiavellian strategy to ensure Japan’s future prosperity and global relevance.
Boost economic cooperation
Of course, the key task ahead is for Abe to actually create a more tangible and substantive Japan-China relationship. The best starting point is economic cooperation in general, and joint development of Asian infrastructure and economic nation-building in particular. Specifically, the following five pillars could build a credible foundation for not just better Japan-China relations but the start of a Pax Sinae-Nipponica era in Asia.
First, Abe should work overtime to ensure that Japan becomes a partner with China in its “Belt and Road” initiative. This is the world’s most substantial infrastructure development plan to connect all of Eurasia, with as much as $900 billion earmarked to be invested every year for 10 years.
If Japan could get a 10 percent share of the annual project budget, this creates new business activity equivalent to almost 2 percent of Japan’s annual GDP. Put into perspective, this is about the same as the tax revenue gain projected from next year’s consumption hike; but rather than a tax on the private sector, Japan’s participation in “Belt and Road” projects would create new business, new jobs and new profits.
Make no mistake — from Japan’s national industrial policy perspective, China’s investment push is the single most powerful growth story out there, and it would seem irresponsible for Team Abe not to try to get Japanese companies involved. The fact that many Asian/Eurasian countries have become somewhat wary of a “China-only” development push actually has opened doors for more cooperative project leadership. China’s leadership is fully aware of the “debt trap diplomacy” criticism that several of the “Belt and Road” projects have created. If Japan were to partner with China, much of this criticism could be buffered and overcome.
Second, Japan should join the China-led Asian Infrastructure Investment Bank. Set up in late 2015 as a competitor to the U.S.-led Asian Development Bank, the AIIB will become increasingly powerful as the gatekeeper and project financier to Asian nation building projects. Germany, the United Kingdom and many other U.S. allies are members, and it is high time for Japan to get involved as well. Again, the issue is not just economic merit, but a proactive engagement by Japan’s financial elite with their Chinese counterparts.
Third, the creation of a new special economic zone in North Korea, specifically geared to Japan-China-Korea joint investment projects. Here again, the potential for a joint development zone is enormous. It mitigates potential fears from North Korean leaders that China dictates and dominates. For obvious reasons, North Korea’s future economic development remains uncertain, but Japan-China cooperation and cooperative leadership would immediately create a new benchmark for best practice in North Korea’s long road ahead of nation building.
Fourth, engaging China more aggressively into the Japan-led Trans-Pacific Partnership talks for the creation of a multilateral Pacific free trade agreement. Here, China appears to have opened a door by repeatedly claiming to be the protector and leader guaranteeing global free trade. Sooner or later, these statements will start to loose credibility if not followed up by concrete multilateral engagement.
The Japan-led TPP offers an excellent framework that has already progressed and received buy-in from the key economic powerhouses around the Pacific. For China to lead and protect free trade credibly, it will have to cooperate and concede rather than just seek to impose. If Japan can persuade China to come to the TPP table and discuss a future framework to deal with the China-specific issues of state-owned enterprises, it would surely raise China’s standing in the world as well as demonstrate Japan’s new role as global deal-maker.
Fifth, the development of an intra-Asia water and energy supply grid. In coming decades, the limits imposed to Chinese and Asian growth stemming from both water and energy supply bottleneck are poised to become existential threats. Many experts predict future wars because of this, particularly in the Asia-Pacific region.
If Japan and China could overcome their purely domestically focused water and energy policies, and develop frameworks for transnational pipelines and transmission, the resulting rise in co-dependence could surely become an anchor for more credible peace and stability. In the 20th century, “coal and steel” was the basis for the German-French alliance to make future war impossible. In the 21st century, “water and energy” could do the same for Asia, with Japan and China creating the center of the alliance.
Now, I realize that some of these thoughts seem incredible and unrealistic. At the same time, the established framework of global economic and diplomatic cooperation is breaking apart. Rather than being sucked into a vacuum, I am hopeful that both Japanese and Chinese leaders are pragmatic and forward looking. The time is now to create the foundations for a new Asian order. For many reasons, Pax Nipponica or Pax Sinae cannot work; but Pax Sinae-Nipponica would almost certainly be very welcomed by the Asia-Pacific region as it symbolizes inclusion rather than top-down imposition.
Based in Tokyo, Jesper Koll is WisdomTree’s head of Japan. Researching and investing in Japan since 1986, he is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog .
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