21 September 2012

When the world's second biggest economy and its third biggest economy rattle their sabres at each other, I think it's probably time for the rest of us to take notice.

China and Japan are growling at each other again, and as both countries are in the midst of what could be profound political changes, the risk of miscalculation is worryingly high.

They're arguing over a group of uninhabited islands in the East China Sea, north-east of Taiwan and west of the Japanese island of Okinawa. Both China and Japan have claims that go back a long way into history -- and both governments see the islands as a symbol of their sovereignty and of their regional power.

(It is not exactly irrelevant, of course, that the islands are close to strategically important shipping lanes, and the waters around them offer rich fishing grounds and are thought to contain potentially lucrative oil deposits -- this isn't only about politics and pride by any means.)

Japan calls them the Senkaku Islands and has controlled them since 1971, when they inherited them from the US, which had administered them since 1945. (Japan had originally annexed them in 1895 and the Americans gained control when Japan surrendered at the end of the Second World War.)

China calls them the Diaoyu Islands and says they've been part of China since as early as the 14th century and were ceded to Japan as part of Taiwan only after the first Sino-Japanese war. So the Beijing view is that when Taiwan was returned in the Treaty of San Francisco in 1951, the islands should have been returned as well.

(Oh yes, Taiwan also claims sovereignty over the islands -- but for now seems content to sit out the current dispute.)

This isn't the first time that Japan and China have faced each other down over these islands. Just two years ago, Japan seized a Chinese trawler that had collided with two coastguard vessels close to the islands, sparking a nasty diplomatic row.

This time, it's getting nastier. There have been huge anti-Japan demonstrations in several Chinese cities (this, remember, in a country where demonstrations generally don't happen unless the government wants them to), and many Japanese companies in China have had to shut down for fear of being attacked.

Two-way trade between China and Japan totals something like $345 billion -- that's not chicken feed, and however hot the diplomatic waters might get, each side knows that their economies need that trade to continue.

But here's the worrying thing. According to a poll carried out by Reuters, more than 40 per cent of Japanese companies see the current dispute as likely to affect their business plans. (And this is a poll that was carried out before the most recent protests.) If that means a big drop in Japanese investment in China, both countries will suffer.

And then there's the politics. The Japanese government has been keen to stay on good terms with Beijing, but it's not a popular stance, and more radical groups have been pressing for a tougher line. The current row stems from a plan by the controversial governor of Tokyo, Shintaro Ishihara, to buy the islands -- that's when the government stepped in and bought them instead, to stop him getting his hands on them.

If the ruling Democratic Party of Japan loses the election that's expected within the next 12 months, it will in all probability be replaced by the more hard-line Liberal Democratic Party, currently in the throes of a party leadership campaign in which the disputed islands have been a major issue.

As for China, the Communist party is on the brink of a major leadership change, and is only too aware of the political dynamics in Japan. So they may be calculating in Beijing that now is likely to be the best chance in quite a while to get what China wants.

And of course all Chinese know their history: how Japan occupied Manchuria in 1931 and invaded the rest of China in in 1937, and the story of the Nanking (or Nanjing) massacre in which anything up to 300,000 people were slaughtered. The Chinese think the Japanese still harbour imperial tendencies; the Japanese think the Chinese are building a new empire (admittedly of the 21st century variety, which thankfully involves far fewer wars and far fewer deaths).

A complicated dispute a long way away? Well, yes. But add to the mix US interests in the Asia-Pacific region -- the defence secretary Leon Panetta has been in the area all week -- and you have a pretty toxic brew.

Get a map out and see exactly where the islands are. You'll soon see why they matter so much to both Japan and China. And when you chart the routes that all those container ships from China use, bringing TVs, computers and smartphones to their impatient customers in the West (yes, sorry, that probably does mean you), well, you'll also see why it's not just a complicated dispute on the other side of the world.