China punishes Japan over the disputed island – Sober Look

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Is the tiny island with nothing on it but some goats worth damaging the fragile economy of Japan? Apparently so. China is now squeezing Japan economically in retaliation for staking claim to this tiny piece of land. The rising tide of nationalism in China is becoming a major headache for Japan.

AP: – Sales of Japanese cars in China are in a free-fall. At the China Open last weekend, a representative of Sony Corp., which is a sponsor of the tennis tournament, was loudly booed at the title presentation for the women’s final. Chinese tourists are cancelling trips to Japan in droves. And some analysts say Japan’s economy will shrink in the last three months of the year.

The business and economic shockwaves come after Japan last month nationalized the tiny islands, called Senkaku in Japan and Diaoyu in China, which were already under Tokyo’s control but are also claimed by Beijing. The move set off violent protests in China, and a widespread call to boycott Japanese goods. Toyota Motor Corp. and Honda Motor Co. dealerships were burned down in one city.

This could not have come at a worse time for Japan, which is already running a trade deficit due to fuel imports (that replaced lost nuclear power). The nation’s industrial production is in decline.

Japan’s Industrial Production (YoY; Bloomberg)

And yesterday’s IMF report (see discussion) has increased it’s projected probability of Japan entering a deflationary environment – again. In response BOJ will continue its balance sheet expansion, as the nation – just as the other developed economies – looks to its central bank to fix its structural problems.

Source: IMF

In the mean time hostilities against Japanese businesses in China are continuing. It’s a market Japan can not afford to lose – particularly now. But that is the cost of national pride.

AP: – Japanese supermarket chain Aeon Co. said damage at one of its stores had totaled 700 million yen ($8.8 million) as looters smashed windows, broke in and ran amok, toppling shelves and kicking merchandise. That doesn’t account for the loss of sales from the store’s closure or boycotting consumers.

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