TOKYO, SEPTEMBER 24, 2012 (INQUIRER) By Patrice Novotny Agence France-Presse - While Chinese state media has warned Japan that it will suffer economically for nationalizing disputed islands, analysts say China has too much to lose to impose any serious sanctions.

The world’s second- and third-largest economies have been involved in a steadily degenerating spat over who owns an unpopulated – but possibly resource-rich – archipelago in the East China Sea.

Violent protests shook Chinese cities over several days until Tuesday, with Japanese shops and businesses the focus of angry mobs demonstrating over Tokyo’s purchase of the Senkakus from their private owners.

Japan controls the islands, but Beijing claims them as the Diaoyus.

Commentators said the demonstrations appeared to have at least tacit blessing from the authorities, an impression backed up by comments made by the state media.

The People’s Daily newspaper, a Communist Party mouthpiece, warned Beijing would not back down.

“Amidst a struggle that touches on territorial sovereignty, if Japan continues its provocations China will inevitably take on the fight,” the paper said. “Japan’s economy lacks immunity to Chinese economic measures.”

It did add that given the interdependency of the two countries, sanctions would be a “double-edged sword” for China.

But, in an apparent reference to Japan’s “lost decade” after the bursting of its stock and real estate bubbles, the paper asked: “Would Japan rather lose another 10 years and even be ready to fall back 20 years?”

As well as straight tariff barriers that any economy has at its disposal in a trade spat, China has form in just making life difficult for importers.

In May, when Manila and Beijing were involved in a stand-off over different disputed islands, Philippine fruit exporters complained their shipments were left rotting in Chinese ports, supposedly because pests had been discovered in some produce, prompting stricter and more cumbersome quarantine inspections.

On paper, China appears to have the upper hand – its economy has been on a rapid upward trajectory for years while Japan has been treading water since around 1990.

In 2010 the Middle Kingdom overtook its smaller neighbor to become the world’s second-largest economy; Japan is only its fourth-largest trading partner after the US, the EU and Asean.

With a vast population that is rapidly learning consumerism, China is Japan’s single biggest market.

But economists agree that with two way-trade worth $342.9 billion last year, according to Chinese figures, Beijing can ill afford the economic cost of a full-fledged scrap with Tokyo.

Jeremy Stevens, Beijing-based economist for South Africa’s Standard Bank Group, said given the high economic stakes, a rational outcome to the current face-off is likely as “both sides recognize that a rupture will hurt both.”

“Global supply chains are so interconnected, multifaceted and complex that it would be crazy not to appreciate that China and Japan are reliant on one another in bi-directional and mutually beneficial ways,” he said.

“As such, we expect clear eyes and minds to prevail.”

While the Made in China tag abounds on consumer goods the world over, the components that go into making the finished product are not all homegrown.

The mobile phones, televisions and video cameras that fill shipping containers leaving Chinese ports are frequently assembled from precision parts made by Japan’s finely honed hi-tech industries.

So retribution on Japanese firms could easily rebound on the Chinese companies that are dependent on know-how on the other side of the East China Sea, said Professor Ivan Tselichtchev of Niigata University of Management.

“Weakening Japan economically after all goes against the economic interests of China itself, and Chinese leaders are too pragmatic and too smart not to understand it,” he said.

Chinese threats are “mostly rhetoric and psychological pressure,” he said.

“There will be no big ‘economic retaliation’ from the Chinese side. It will exert pressure mostly in other areas.

“However, I will not be surprised if it takes some symbolic steps on the economic front to show its discontent, say, halts this or that particular investment project or blocks a particular export-import transaction.”

Which is exactly what Japanese firms said Friday was starting to happen.

Trading houses Itochu and Sojitz said customs inspections on Japanese goods were being ramped up at major Chinese ports, not enough to stop them, but enough to cost time and cause inconvenience.

During the last major diplomatic bust-up over the islands, China dammed exports of rare earths, minerals vital in the manufacture of the hi-tech products that are the mainstay of Japan’s economy.

But, say industry watchers, there has been no sign of similar action this time around.

Zhou Yongsheng, professor of international relations at China Foreign Affairs University in Beijing, said Chinese rhetoric might yet tip over into concrete action, in the form of a trade war, but it was unlikely.

“Trade sanctions are definitely a double-edged sword… particularly if the other side takes counter-measures,” he said. “Trade sanctions would be a lose-lose policy.”

China-Japan tension escalates PUBLISHED: 10 hours 34 MINUTES AGO | UPDATE: 10 hours 31 MINUTES AGO Manoeuvres Lisa Murray AFR correspondent Shanghai

China has lodged a “strong protest” with the Japanese government after activists landed on contested East China Sea islands, escalating a dispute that has emerged as the region’s most dangerous maritime flashpoint.

A spokesman for the Foreign Ministry said the landings on the islands, known as Senkaku in Japan and Diaoyu in China, were “a severe infringement” on the country’s territorial sovereignty, according to the state-run news website, Xinhua.

About 800 Japanese protesters marched outside the Chinese embassy in Tokyo at the weekend in response to a wave of anti-Japan protests across China last week. The dispute is also affecting Japan and China’s economic and trade ties. Japanese companies said they had faced increased scrutiny from customs officials over the past few weeks and both countries reported a drop in tourism related to the dispute.

Meanwhile, Japan’s ground self-defence force and the US Marine Corp conducted a joint drill on the western Pacific island of Guam over the weekend, aimed at defending remote islands from invasion, according to Japan’s Kyodo news service. The drill, observed by media organisations, came just one day after US Assistant Secretary of State Kurt Campbell confirmed the islands were “clearly” covered by its security treaty with Japan.

There were some reports over the weekend of efforts to ease tensions between the two countries, which mark their 40th anniversary of diplomatic relations this week. These may take place on the sidelines of the general debate session of the UN General Assembly in New York or via a Chinese delegation that is reportedly heading to Tokyo this week.

The recent flare-up in the dispute was triggered by Japan’s decision to buy back the islands from their private owner. Some analysts believe it was an attempt to head off a potentially more dangerous confrontation between Chinese officials and Tokyo’s outspoken governor, Shintaro Ishihara, who flagged the nationalisation plan earlier this year and was raising funds to buy the islands. But the government under­estimated the backlash in China.

Linda Jakobson, the East Asia program director at the Lowy Institute, said the timing could not have been worse. “I think the Japanese Prime Minister was poorly advised about the fragility of the political situation in China today,” she said.

“I sincerely worry that a maritime incident before the Party Congress could force the hand of Beijing’s leadership team to be tougher in its response than it would be once [Vice-President] Xi Jinping has entrenched himself in power.”

Some analysts suggest that Australia should take a more active role in resolving the dispute. The head of ANU’s strategic and defence studies centre, Brendan Taylor, said the government could propose a trilateral security dialogue among Canberra, Beijing and Tokyo. “I think the dialogue would appeal to China because it would pull two allies away from the US and allow it to talk to them separately,” Dr Taylor said.

But Dr Jakobson said it would be difficult for Australia to broker a resolution because of its strong alignment with the US, and Indonesia might be a better option.

Zhao Gancheng, a director at the Shanghai Institute for International Studies said Australia needed to act now if it were to have a meaningful impact.

“This is a very critical time and a potentially dangerous situation,” he said.

“I believe that it is not in the interests of either side to have a military confrontation but they need to do something now to move ahead.”

Chief News Editor: Sol Jose Vanzi

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