The nationalist protests in China fuelled by anger against Japan are already causing damage to the economy as Japanese factories in China close their doors for safety reasons.(For more background on the origins of the dispute between the two countries, read this.)
More important than just the short-term implications of the protests and the factory closings, however, are the seeds for long-term damage already being sown by this week’s events.
That’s JP Morgan strategist Hajime Kitano’s take. In a note to clients, he points out that the deteriorating relations between China and Japan are already throwing a wrench in the Japanese government’s long-term energy security strategy.
Japan is trying to dramatically reduce its dependence on nuclear power following the disaster at the Fukushima nuclear plant after a massive earthquake in 2011.
However, it’s getting a lot of flak on various fronts – including from the U.S. and the financial world – for trying to wean itself off nuclear. So, it’s no surprise that the Japanese government decided today to backpedal on its ambitions to achieve “zero-nuclear” status by 2040.
Kitano thinks there might be something much larger at work here underneath the surface, though – he says it could be more of a hedge against further deterioration in relations between Japan and China, arguably a far more troubling sign.
From Kitano’s note:
We think that the decision to ‘make the zero nuclear policy ambiguous’ may have something to do with the increased tension between Japan and China over the territorial dispute, in addition to the opposition ‘from sources including the financial world and the U.S.’ The ‘three Es’ are naturally important when deciding energy strategy: (1) energy security, (2) the economy, and (3) the environment. We think that aiming for ‘zero nuclear’ in the 2030s would inevitably increase dependence on Middle East.
China of course plays the lead role in Asia, in our view. U.S. dependence on the Middle East is expected to fall, while China’s dependence on the Middle East rises. It is thus common sense to expect Japan’s dependence on China to rise in terms of energy security, if Japan aims for ‘zero nuclear.’ This makes strengthening of relations with China a necessary precondition for targeting ‘zero nuclear.’ In other words, ‘zero nuclear’ is impractical as long as relations with China remain poor.
The Japanese government thus looks likely to forego a Cabinet decision on ‘zero nuclear’ amid deterioration in Japan-China relations. Whether one views these two events occurring simultaneously as coincidental or inevitable depends on one’s imagination. If they are ‘inevitable,’ effective revision of ‘zero nuclear’ raises the possibility of ‘Japan-China relations’ also starting to improve, as we see it. The 1960 U.S.-Japan Security Treaty struggle may serve as a ‘precedent’ for this. The ‘Security Treaty’ was likely to have been opposed, but demonstrations ended owing to ‘Prime Minister Nobusuke Kishi’s resignation.’ Is it going too far to say ‘Security Treaty = territorial dispute,’ and ‘Kishi = zero nuclear’?
In other words, Japan is going to need to get oil from the Middle East if it shutters its nuclear industry – and there’s a big country situated in between the Middle East and Japan called China. So, as long as it looks like things are going to remain rocky between the two countries, Japan may be worried that its plan to transition away from nuclear energy is in jeopardy.
Kitano has weighed in on interesting connections between land disputes and the economics of the region before: How A Land Dispute Between Japan And Korea Could Be Sparked All Thanks To Low Market Volatility >
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