Background

The Senkaku Islands have been a source of dispute between China and Japan since the late 1970s, but the truth of the matter is that neither one of them actually gives a damn about the islands themselves. No one actually lives there. They are barren rock outcrops about a hundred miles away from anything of interest, but they grant an Exclusive Economic Zone (EEZ) which includes the Chunxiao field, which is believed to be rich in natural gas/petroleum but has yet to be developed because of the dispute.

Prior to 1895, the islands where unoccupied, although the People's Republic of China claims them on the basis that the surrounding waters have been exploited by Chinese fisherman for centuries. Bolstering this claim is the belief that the chain is historically connected to Okinawa, which between 1429-1879 was part of the Chinese vassal, Ryuku Kingdom. However, it should also be noted that from 1609 on, Okinawa was also a vassal of the Japanese Satsuma Domain.

The 1895 Sino-Japanese war resulted in the transfer of Chinese claims in the region, including Taiwan and Okinawa to the Japanese. That same year, Japan annexed the Senkaku islands, claiming that they were terra nullis and placed a small number of settlers on them. This situation persisted until the end of the Second World War, after which Taiwan was returned to China, and the US occupied Okinawa and the Senkakus. In 1972, the US returned both to Japan. At roughly the same time, the present dispute emerged as the gas/oil potential of the surrounding waters became known.

Every few years, there's a heated exchange over the islands that normally dies down after 2-3 months. Both Chinese and Japanese nationalists are passionately dedicated to the idea that the Senkaku islands are an integral part of their country. Beyond the possibility of mineral wealth, there are extremist groups on both sides that have fueled the dispute. Most recently in 2010, the arrest of Chinese fishermen after they rammed a Japan Coast Guard vessel attempting to remove them from the waters surrounding the islands led to a rapid escalation in the war of words between the country.

Although it is clear that the Chinese fishermen (likely acting as proxies for the Chinese government) were the aggressors in this case, ultimately it was the Japanese government that backed down. In 2010, the Chinese government began to lose control over the protests cum riots which occurred throughout the country against Japanese interests. Japanese nationalists loathed this, and having been looking for a way to force the Japanese national government to take a strong stand against persistent violations of their territorial waters by Chinese activists and fishing vessels. So they raised money to buy the damn islands.

Sarajevo on the Sea

Until this year, the Senkaku Islands were owned by the descendants of one of the Japanese families which settled the islands after 1895. Earlier this year, Shintaro Ishihara, governor of Tokyo prefecture and leader in the opposition LDP, raised private funds to purchase the islands from the family, and attach them to Tokyo prefecture. In order to preempt this, the Japanese national government made moves to purchase the islands themselves, eventually turning them over to the Japan Coast Guard earlier this week. This news provoked serious protests in China, and prompted the decision to send Chinese warships to patrol the islands. This is the CCP responding to the Chinese street. Better for Beijing to be with the protesters throwing rocks, then getting them thrown at them.



At any other time, this would be unnerving, but would ultimately be resolved because the leadership on both sides doesn't want open conflict even if the nationalist on the street do. Now the game is different. The Chinese leadership has had a deal with their people since Deng, economic prosperity in exchange for political quiescence. The party remains in power, but the people grow wealthy.

The problem today is the Chinese economy is experiencing a serious slowdown , and another round of stimulus is not in the offing, because the first round was financed through land deals by local governments which only inflated the real estate bubble which is now beginning to deflate. At the same time, the rapid rise in Chinese wage rates means that Mexico is reemerging as a preferred location to offshore production for the North American region.

Compounding the problem this presents for the Chinese leadership, labor protests have doubled over the past year, and faith in Beijing to rein in corrupt local officials has been hit hard by the Bo Xilai scandal. Bo was the long time governor of Chongqing, and a favorite for the next set of national leaders. Instead of stepping up to the inner circle, Bo has been deposed over corruption in Chongqing, and his wife is facing a suspended death sentence. The Party has been shamed.

In the wake of this meltdown in the party, it appears that the PLA, the Chinese military, is increasingly operating autonomously, much as Japan's Kwantung army did in the 1930s. This could literally have not come at a worse time. The 18th National Congress of the Communist Party of China is happening in October, leading to the selection of China's leaders for the next decade. The new leadership can not afford to appear anything less than resolute on pressing Chinese territorial claims, or they may lose the street. And if they lose the street, in all likelihood, the military will step in to restore order, and depose the new leadership.

In short, resolution of the escalating situation in the Senkakus will likely only be resolved by the Japanese backing down. The question is how far the Chinese leadership is going to be forced to take this by the PLA and Chinese nationalists. That the opening round of this dispute involved the dispatch of PLAN ships to the area, in apparent violation of Japanese sovereignty suggests that an outright occupation of the islands by China is not out of the question. The question is whether this something that the Japanese can accept, given that this is likely to embolden the street to push Beijing to follow up on Chinese claims to Okinawa as well.

The Senkaku dispute isn't going away, and US effort to keep this thing from going sideways by putting up surveillance drones to make sure that Chinese and Japanese ships don't come within dick-waving distance of one another aside, this thing is coming to a head before the election. Statements made by the US Secretary of Defense in Japan indicate as much.



CHINA and other Asian countries could end up at war over territorial disputes if governments keep up their "provocative behaviour", US Defence Secretary Leon Panetta has said. Speaking to reporters before arriving in Tokyo on a trip to Asia, Mr Panetta appealed for restraint amid mounting tensions over territorial rights in the East China Sea and the South China Sea. "I am concerned that when these countries engage in provocations of one kind or another over these various islands, that it raises the possibility that a misjudgment on one side or the other could result in violence, and could result in conflict," Mr Panetta said, when asked about a clash between Japan and China. "And that conflict would then have the potential of expanding."

If this thing begins to escalate, mark my words, this will be the major issue in October. Open, armed, conflict between China and Japan would embolden a number of other countries in the region to settle old scores. It's hard to imagine this not leading to shells flying across the DMZ in Korea, and the ASEAN countries making an effort to stop Chinese aggression in the Spratlys and Paracels. Even a limited conflict between Japan and China would severe JIT supply chains in the region, leading to prospect of empty store shelves in the US. And if the Chinese press a claim on Okinawa, that draws us in even further due to our military presence in the region. Since it's elements of Chinese civil society, rather than the Chinese state, that are likely to be at the forefront of how the dispute is handled normal hopes for cooler heads to find a way in which mutual face saving may occur seem more distant.

Photos from nationalist protests in China this weekend. I think my favorite is this one:





A banner on a store called pattad reads: "pattad firmly defends China's right to the Diaoyu Islands. / We will give a 15% discount to customers who yell THE DIAOYU ISLANDS BELONG TO CHINA! in the store / We will give a 20% discount to customers who yell JAPAN ALSO BELONGS TO CHINA!"

This is one of the tamer photos, FYI.

Another escalation.

