Lessons for Tokyo from 1980s Britain

By Peter Tasker

The situation feels familiar. The casus belli is a little-known group of islands. The country in possession is perceived, not least by itself, as being in long-term economic decline. The claimant considers the islands to be a symbol of national humiliation stretching back into the 19th century.
 
Like Argentina in 1982, China is ruled by an unelected cabal at the apex of an organisation designed for a bygone era. Like Britain, Japan is an ally of the US and unsure how much support to expect from its superpower friend.
 
There are clear differences too. Even at its 1970s low point, Britain’s economy was much larger than Argentina’s, whereas China has recently displaced Japan as the world’s second-biggest economy. Moreover, Japan’s armed forces have not fired a shot in anger in 60 years and the defence budget has rarely topped 1 per cent of output. China is a nuclear power with military expenditure at least double Japan’s.
 
Unlike Britain and Argentina, China and Japan are not at opposite ends of the earth. They are neighbours, with a thriving trade. That means there is more at stake – making it less likely that the face-off could escalate into a military clash, but far more devastating if it did.
 
History is replete with examples of misjudgements leading to disaster. Before August 1914, optimists believed the burgeoning trade between Germany and Britain made war too ruinous for either side to contemplate. So the first priority must be to defuse tensions and restore a semblance of normality. But it will only be a semblance. This latest revival of an old grudge has raised too many questions about Sino-Japanese relations.
 
Photographs of Chinese protesters holding signs reading “Exterminate the Japanese” will not be forgotten quickly in Japan. Neither will the claims – made by officials in respectable Chinese media – that Japan’s sovereignty over Okinawa is questionable. That is like questioning US sovereignty over Hawaii. Arson at a Panasonic (formerly Matsushita) factory was especially symbolic. In 1978, Deng Xiaoping himself visited the company’s founder and asked for help in modernising the Chinese economy. From Japan’s perspective, what the rioters torched was not just production capacity but a whole era of Deng-inspired pragmatism.
 
The economic risk can be hedged over time. Much of the output of Japanese manufacturers in China is for export to developed countries. This kind of production was always likely to shift to cheaper locations once Chinese labour costs lost competitiveness. It would be no surprise if recent events – including this week’s outbreak of labour unrest at Foxconn – were to expedite the process. Indeed, Toyo Tire and Rubber, a Toyota supplier, is already reviewing its options. Onshoring is one – especially if more aggressive monetary policy were to hit the yen – but rarely can the smiles of Thailand have looked more inviting.
 
The strategic issues run deeper. The concept of “soft power” has been found seriously wanting. The success of sushi and J-pop bands in China proved no more helpful than the popularity of Boy George and Chariots of Fire were in deterring Argentine general Leopoldo Galtieri. The argument for more hard power – increased defence spending – is likely to gain traction, as will nationalist voices on the right who have been sceptical about engagement with China. The idea of playing down the Japan-US military alliance and shifting to a more “pan-Asian” strategy now seems naive.
 
Less clear is the impact on Japan’s standing in the world. The Falklands war is inextricably associated with Thatcherism. The economic disasters of the 1970s caused Argentina to assume Britain lacked both resources and will to recapture a remote and valueless group of islands. Likewise the gap in the economic performance of China and Japan explains China’s growing assertiveness and raises questions about US commitment to Japanese interests.
 
The lesson for Japan is that, if it wants to avoid unsplendid isolation, it needs to break out of its long deflationary malaise and recover growth momentum. That means bold use of fiscal and monetary policy, speedier restructuring of industries suffering from chronic overcapacity and a strategy to position Tokyo as a global hub of fashion, finance and design. Who knows – if the parallel with 1980s Britain holds, Japan might yet embark on a bull market.
 
The writer is a Tokyo-based analyst at Arcus Research

Copyright The Financial Times Limited 2012.