China escalates Japan spat with threats of economic reprisal

Those measures put millions of Chinese tourists — about a quarter of all visitors to Japan annually — on the line, triggering slides in the shares in tourism and travel-related stocks, with Shiseido Co. falling as much as 11% on Monday. Hong Kong also updated its travel advisory for Japan.

Japan is dispatching a senior diplomat to China on Monday in a bid to smooth tensions, public broadcaster NHK reported citing a senior official at the country’s Ministry of Foreign Affairs. The upcoming G-20 leaders’ summit this weekend in South Africa could provide Takaichi a venue to meet with Chinese Premier Li Qiang and mend fences, although no sitdown is confirmed.

“This is about setting the terms early in Takaichi’s term, deterring other countries from similar rhetoric, and discouraging Tokyo from taking further steps,” said Bloomberg Economics’ Jennifer Welch. “Japan is a relatively easy target and tourism an easy lever to pull.”

Takaichi has so far defended her remarks over Taiwan, while Tokyo has said its stance is unchanged from previous administrations. On Monday, Japan’s Chief Cabinet Secretary Minoru Kihara called China’s travel warning unacceptable.

China’s fallout with Japan comes shortly after Europe welcomed a Taiwanese vice president for the first time since 2002 outside transits, sparking anger from Beijing. That came amid a flurry of diplomatic outreach between Taiwan and the European Union, which runs against Beijing’s strategy of isolating the global chip hub.

For Tokyo, the economic stakes are substantial. China is Japan’s largest trading partner, and Yuyuantantian’s commentary explicitly noted that Japanese manufacturers depend heavily on Chinese imports for critical materials. An earlier dispute between China and Japan in 2012 over disputed islands saw a months-long boycott of Japanese goods that affected trade.

China’s travel advisory could slice as much as 2.2 trillion yen ($14.2 billion) off Japan’s economy, or 0.36 percentage point of gross domestic product, according to an estimate by Takahide Kiuchi, an executive economist at Nomura Research Institute and former Bank of Japan board member.

Kiuchi said his estimate draws on similar cases in the past. In 2012, when China urged its citizens to avoid visiting Japan after Japan nationalized contested islands known as the Senkaku in Japan and the Diaoyu in China, the number of Chinese visitors fell by about 25% from the previous year. In little more than three months that contributed to a fall of more than 10% in annual exports.

“It is reasonable to assume modest negative impact on Japan’s service sector activity in next few months,” said Homin Lee, a macro strategist at Lombard Odier Singapore. “Clearly, retail, leisure, real estate, and airline names closely associated with Chinese visitors to Japan will be weighed down by the episode.”

Over the weekend, Beijing also sailed four armed Chinese Coast Guard vessels through disputed waters controlled by Japan before leaving, in another sign of tension.

China has already displayed its willingness to take economic retaliation against regional neighbors over political spats. In 2017, Beijing deployed trade weapons against South Korea over the THAAD missile defense system that China complained would disrupt the region’s strategic balance.

That saw China suspend sales of package tours to South Korea and hinder the operations of Korean companies. The row shaved 0.4 percentage points off South Korea’s gross domestic product expansion in 2017, according to Bank of Korea estimates.

The confrontation represents an abrupt turnaround in ties after Takaichi met Xi on the sidelines of the APEC summit in South Korea, and pledged to “deepen their personal relationship.” She also used that meeting to raise concerns over Beijing’s export curbs on rare earth critical to making everything from electric vehicles to smartphones.

Still, Takaichi has a history of being friendly to Taiwan, meaning that she came to office already facing skepticism from Beijing. China is highly sensitive to remarks around Taiwan, the self-ruled island it’s vowed to claim someday, by force if necessary.

“Because she is early in her tenure and because her position is not quite stable yet, China sees itself as able to more fully test the boundaries,” said Dylan Loh, associate professor at Nanyang Technological University in Singapore. “But by no means are the reactions in Beijing inauthentic, quite the contrary,” he added.

The standoff with China represents Takaichi’s first major foreign policy challenge since she became prime minister in October.

While she has relatively high approval ratings, surveys show the public is split on the idea of Japan becoming involved in any conflict over Taiwan. A Kyodo News poll taken over the weekend showed that 48.8% of respondents agreed that Japan could exercise collective self-defense in such a scenario, while 44.2% disagreed. Any further escalation of the spat with China, particularly economic retaliation by Beijing, could also increase the challenge for Takaichi of trying to address inflation and a slowing economy through stimulus measures.

Tokyo has for years been concerned about any attempt by China to seize democratically-governed Taiwan, because of its close proximity. Yonaguni, the closest Japanese island to Taiwan, is around 100 kilometers (62 miles) east of the Taiwanese coast line.

Sitting Japanese prime ministers have avoided discussing the details of potential conflicts over Taiwan and instead called for the status quo to be maintained, reflecting the sensitivities.

Takaichi deviated from that in her statement this month, in which she suggested military force used in any Taiwan conflict could be considered a “survival-threatening situation” — a classification that would provide a legal justification for Japan to support friendly countries that choose to respond.

China’s Foreign Ministry summoned Japan’s ambassador using the term “on instruction” — language that Yuyuantantian said indicates the intervention came from more senior leaders and was more than a routine diplomatic protest.

Ties between Beijing and Tokyo have been rocky for decades over historical issues, including Japan’s invasion in the 1930s, as well as long-running territorial spats over disputed islands.

Taiwan President Lai Ching-te on Monday accused Beijing of undermining peace and stability in the Indo-Pacific region with its attacks on Japan, calling on the international community to pay attention and urging China to exercise restraint.

The US has so far issued no official response to the China-Japan dispute. Both Washington and Tokyo have historically avoided explicit statements about defending Taiwan militarily.