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Senkakus/Diaoyu islands dispute turns ugly, hitting Toyota where it hurts

Senkakus/Diaoyu islands: demonstrations in China hit Japan's manufacturing sector Ian Fraser

Anti-Japanese sentiment in China, whipped up by a dispute over the ownership of an obsure group of islands in the East China Sea, has been welling up in recent weeks. The economic fallout looks like it could be serious, with Japanese manufacturers with operations in the People's Republic among the biggest victims. Some are even predicting the current dispute could flare up into a full-scale war.

Matters came to a head two weeks ago when Japan bought several of the disputed Senkakus islands from a private landlord. This sparked protests and looting in dozens of Chinese cities, amid a resurgence of the suspicion and even hatred of Japan that has been smoldering in China since the World War Two.

Ironically, Japan claims that it bought some of the Senkakus islands -- known as the Diaoyu in China -- in order to calm things down after Tokyo's governor announced he wanted to raise funds to not just buy but also develop the islands. (Tokyo's governor, the far-right politician and author Shintaro Ishihara, has been a long-term critic of the People's Republic of China, and deliberately angered it by inviting the Dalai Lama and Taiwanese (R.O.C) president Lee Teng-hui to Tokyo). However the Japanese government's move only inflamed the dispute, making it likely that Beijing will send Naval vessels to challenge Japanese control of the islands.

Dutch writer and academic Ian Bururmu has explored the historic origins of the dispute for Project Syndicate, adding:

China, Korea, and Japan, whose economic interests are closely entwined, have every reason to avoid a serious conflict. And yet all three are doing their best to bring one about. For entirely domestic reasons, each country is manipulating the history of a devastating war, triggering passions that can only cause more damage. Politicians, commentators, activists, and journalists in each country are talking endlessly about the past. But they are manipulating memories for political ends. The last thing that interests any of them is the truth.

Japanese exporters are particularly concerned that the protests in China have extended to the vandalization of car dealerships and electronics plants there, with a  Toyota outlet and Panasonic factory in the eastern city of Qingdao being set on fire. The attacks caused Japan's leading car makers, including Toyota and Nissan, to temporarily close dealerships across the People's Republic, at the same time as scaling back their automobile production there, though the BBC has reported this has since been resumed.

However there are fears that reduced production, coupled with reduced demand for Japanese-branded goods, will cause sales targets to be missed. A Beijing-based Toyota executive told Reuters the company will probably miss its target of selling one million cars in China this year. In 2011, Toyota, together with its local Chinese partners sold about 900,000 cars. The executive said:

"Unlike before, when sales recovered fairly quickly, things seem very different this time. But it's still very difficult to gauge what kind of long-term fallout we are going to have." The executive, involved with sales and marketing of Lexus, said all Lexus outlets in China had reopened and were operating normally. "But customers are expressing fears about owning Japanese-branded cars and that worries me a bit."

Koji Endo, auto analyst at Advanced Research Japan told Reuters:

"The last time we had protests like this in 2010, the effects only lasted about a month, but I think this time is going to be different. This is going to have a serious impact."

In the car manufacturing sector, Japanese players had roughly 19% of the Chinese passenger car market in August, before the protests erupted. That was down one percentage point from 20% in July, according to China Association of Automobile Manufacturers.

The tensions between Asia's two biggest economies have also disrupted other sectors including retail and electronics manufacturing. Japanese companies in these sectors have been investing heavily in China to overcome shrinking demand at home.

On September 18, thousands of Chinese employees of a Japanese-affiliated electronics manufacturer took part in anti-Japan demonstrations. According to a report in newspaper Asahi Shimbun:

"No sooner had they returned to work than they started demanding a wage hike at two plants operated by the company."

The newspaper suggested that protesting Chinese workers may be shooting themselves in the foot:

"If employees at Japanese-affiliated companies resort to violence to demand wage hikes, those practices could easily spread to non-Japanese companies. A rise in unemployment is a serious threat to the decelerating Chinese economy."

The economic relationship between the two countries has evolved in recent years, to the extent that some argue Japan is now more dependent on China than China is on Japan. This may make Tokyo wonder about the strategic significance of owning the islands. Kazuo Yukawa, a professor at Asia University in Tokyo, told the New York Times:

“China and Japan need each other, but honestly speaking, Japan needs China more. So Japanese feel torn. They want to defend their territory, but few would say to do so at the expense of business.”

The fallout from the islands dispute has also extended to air travel, with All Nippon Airways announcing on September 26 that 40,000 seat-reservations have been cancelled for flights between Japan and China from September to November.

Further reading on China and Japan:

Tags: All Nippon Airways , auto sector , automobiles , Beijing , car manufacturing , cars , China , Diaoyu , emerging markets , Global trade , Ian Bururmu , international differences , intra regional trade , Japan , Japanese economy , Japanese exporters , Kazuo Yukawa , Koji Endo , Korea , Nissan , Panasonic , Qingdao , Senkakus islands , South Korea , Toyota , trade dispute , trade war
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