Emerging Market Insider

Why China and Japan Are Likely Going to War

By on March 14, 2013

Geopolitical instability and regional warfare in the 21st century is often associated with the Middle East. However, the rise of China and other East Asian economies has also lead to the rise of nationalistic ambitions that have radically shifted the global balance of power.  Tensions between the rising power of the region, China, and the fading power of Japan have begun to escalate as a result of these shifts. Due to demographic factors, historical ethnic rivalry, and economic instability, East Asia has become a geopolitical powder keg that resembles Western Europe in 1913.  This tenuous situations along with power transitions historical track record of being the product of wars, I expect Japan, the Koreas, Taiwan and China to be the main combatants of the next major war in world history. If the United States some how gets involved, expect a World War.

The first driver for an East Asian war is the demographics of China and Japan.  Demographically. Japan has been rapidly ageing and the population has started to decline. Due to cultural attitudes towards immigration a low birth rate that is unlikely to rise, Japan’s population has begun to decline. A declining and ageing population has caused Japan’s economy to stagnate, high paying career opportunities for Japanese youth to decline, and will prevent Japan from exerting the same economic influence than it has in the past. If these trends continued with any counter action, Japan will likely become a client state of China because its economy will continue to hollow out. Japan’s impending debt crisis will also start to send the country down. The economic losses from the debt crisis will likely revert Japan’s economic development down to the rest of its Asian neighbors. As a result, Japan is in a desperate situation where war seems like the easiest solution. First, war is the ultimate form of Keynesian stimulus and war spending would provide a boost to local manufacturing and inflation. Government financing is cheap for Japan, so this also will make going to war less costly than during other times. Japan is also at peak population and peak workforce levels, so delaying conflict will only make them a weakened combatant in the future. Patriotism from a war can also delay a debt crisis, as nationalism will surge JGB purchases.

When it comes to China, war can be used to preserve the power of the current Communist party regime.  China’s economy is slowing down as the investment based growth model is topping out. The transition to a consumer-based society will be economically painful, and a by-product of this slowdown is likely instability. Since the loyalty to the current regime is dependent on continuously increasing economic prosperity, any fall of standard of living by the recent middle class will result in massive protests. Without the guarantee of prosperity, the people have little reason to trust a n unelected government to work in their best interests.  Increased frustration from the Chinese population is being exemplified by increased protests related to the environment, pro-democracy movements, and more recently worker dissent since Chinese new year 2013. By refocusing the citizenry’s frustration away from the party and towards a common foreign foe, the Chinese elites can maintain hold of power.

The other demographic factor that will increase Chinese aggression is its disproportionately high male population. The sex ratio at birth in China is 1.2 males for every female and by 2020 there will be 30 million more men than women reaching adulthood. This excess amount of young, single men is dangerous for political stability. If the economy turns downward, these risks accelerate, as angry young men with nothing to lose are more likely to be violent. China has been searching for solutions to the gender issue, but the most plausible one is likely conscription.  In order to rationalize a massive draft, a war would be needed. The war would partially rectify the one child policy because the loss of lives in war will be skewed towards male combatants. Keeping young men busy fighting a war also will be perceived as a tool to contain domestic unrest and other social problems. Although both countries face nearly opposite demographic issues, military aggression is a likely political solution for Japan and China.

Ethnic rivalry will also likely drive China and Japan to war. The Chinese, Koreans, and the Japanese have immense hatred for each other in a way that resembles the English, French, and Germans during the turn of the 20th century. Japan like the UK back then, is the waning established island power looking to maintain its standing, while China and South Korea are rising continental powers that have successfully challenged and outcompeted Japan economically. This tension along with historical ethnic hated which dates back to World War II atrocities make the situation dicey.

Current leadership does not help ease these rivalries. South Korea’s recently elected president is a neoconservative leader who was elected on increasing militarization measures and is the daughter of a military dictator. Shinzo Abe is more famous for his monetary policy, but the second anchor to agenda is remilitarization. Japan’s recently passed a stimulus package is primarily focused on expanding the Japanese navy and air force. Abe has also taken more aggressive stances on the Daiyou and Senkaku islands and is working with the US to remove the military size limits from the Japanese constitution. Chinese leaders are not necessarily bellicose, but Chinese military spending has been increasing at a pace of 10.7% per year. China also has been more aggressive about maritime claims since the leadership transition, which may indicate more future aggression.

The third factor driving China and Japan to go to war is economic weakness. Both countries rely on exports to the West, and sluggish Western economies have made this model increasingly ineffective. Transitioning away to this voluntary or by financial reality will be painful for both China and Japan. As I mentioned previously, Japanese debt levels will be a driver of war. Winners of wars historically pay for debts from the plunder of losing countries, and seizing China’s foreign reserves, is the only possible way Japan can honestly pay its debts.  China, on the other had, can use this war as a legal ramification to seize Taiwan and continue its stimulus  (and high GDP byproduct) without the negative consequences of local asset bubbles.  Defeating Japan and its allies will also allow China to completely dictate the terms of trade for all of East Asia which can create a longer term base for prosperity and geopolitical hegemony.

Overall, the combination of ethnic, political, and economic tensions are sewing the seeds for a war in East Asia. What will ultimately be the Franz Ferdinand moment that will trigger this war? A number of things can. The controversy in the Daiyou/Senakaku islands seems petty to outsiders, but wars historically have been started on smaller issues. However, I think the likely trigger is North Korea. If North Korea collapses under its own weight or makes a reckless aggressive action towards South Korea, China’s entangling alliance to the country will be enough to drive them into a war to react against the retaliation of South Korea and Japan.  Similar to Serbia, 100 years before, North Korea is a wild card that is insignificant itself, but location gives it the ability to cause major disruption.

About Nicholas Pardini

Nicholas Pardini is founder of Emerging Market Insider and the managing partner of the Singapore based equity long/short fund Nomadic Capital Partners. The fund specializes in emerging market equities. He graduated from UC Santa Barbara with an economics degree in three years. Before launching Nomadic Capital Partners in January of 2011, he worked as a proprietary trader and attended a Masters in Finance program at Villanova. His investment specialty is in top down macro based fundamental analysis of equities and the global economy. Nicholas publishes portions of Nomadic's research here on Emerging Market Insider. His analysis has been mentioned on prominent media outlets such as USA Today, NHK Japan, CBS News, CNBC.com, Seeking Alpha, and ZeroHedge
  • Vinsanity

    I don’t think South Korea is going to part of the factor that triggers a war but if that really happen. There’ll be good money.

  • Pingback: Investment Strategy for East Asian War | Emerging Market Insider

  • Daniel Dr

    This is very inappropriate title for the headline.This only scary ordinary people and exaggerate the problem.I am 10 years in Japan and I KNOW by everyday contact with Japanese that nobody wants a WAR.The current situation is a by-product of a few sick minds on both sides and this is the evil.There are hundreds Chinese here in Japan as well as many Japanese in China.Please don’t spread such opinions as “WAR is coming ” because only small groups fight for power and influence.

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