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Japan could benefit from a 'cold war 2.0'

Sino-American rivalry might end decades of economic stagnation

| Japan
For Japan, confrontation with China could mean a decisive end to deflation.   © Reuters

"The Cold War is over and Japan won." That was the verdict of revisionist Japan scholar Chalmers Johnson in 1991. It may be something of an exaggeration, but it remains the case that Japan prospered mightily in the decades between the Korean War and the fall of the Berlin Wall.

In the subsequent two decades, not so much. As far as Japan was concerned, the "end of history" supposedly ushered in with the end of the Cold War, as celebrated by political scientist Francis Fukuyama, represented an era of economic malaise, political confusion and diminution of international stature.

But in the last seven years, at a time of mounting regional tensions, Japan has recovered some of its old mojo. Economic conditions have improved markedly. Japan's cultural and commercial footprint has grown thanks to tourism and success stories such as retailer Uniqlo. Japanese politics has been stable under Prime Minister Shinzo Abe, who was described by Australian Prime Minister Scott Morrison as the senior figure in the region, with "a real wisdom about him."

Correlation is not causation. Japan's recovery from the devastation of war was something that was bound to happen one way or the other and the subsequent Godzilla-sized bubble and bust was largely self-inflicted. Yet there can be little doubt that the start of the Cold War had an enormous impact on U.S.-Japan relations. The idea, widely held by influential Americans in the early postwar years, that Japan (and Germany) should be returned to a pastoral, pre-industrial state no longer made sense. Instead, access to the enormous U.S. consumer market helped Japan to develop into a bulwark of capitalist prosperity on the Soviet Union's eastern flank.

Today's world is very different, but the increasingly fractious relations between the U.S. and China have triggered a spate of Cold War comparisons. Testifying before the Senate Intelligence Committee, Christopher Wray, the head of the U.S. Federal Bureau of Investigation, described the China threat as "not just a whole-of-government threat but a whole-of-society threat" which will require "a whole-of-society response by us." Meanwhile, China's ambassador to the EU speaks of the U.S. blacklisting of Huawei in terms of "a digital Iron Curtain," and President Xi Jinping calls for China to embark on "a new long march."

All of this suggests that the confrontation between China and the U.S. will long outlast the bandwidth-hogging presence of President Donald Trump. No doubt there will be phases of detente and compromise, but the fundamental incompatibility of national interests will ensure that the strategic rivalry persists. China cannot achieve regional hegemony while the U.S. has a powerful military and commercial presence in East Asia.

Just as in the original Cold War, there will be alliances and non-aligned countries. Geographical distance from China will likely be a crucial factor. For European countries, the commercial opportunities of the Chinese market will far outweigh any sense of threat. For China's Asian neighbors, the risks are more evenly balanced. Many would prefer to hedge their bets, but ultimately they may have to choose between the U.S. and China when it comes to payment systems, internet regulation, communications infrastructure, and sources of finance.

For Japan, there is no choice at all. Ever since the dispute with Beijing over ownership of the Senkaku Islands flared up in 2012 -- with riots, arson attacks and consumer boycotts orchestrated by the Chinese authorities -- Japan's pro-China business lobby has been on the back foot. Some Japanese companies have hedged their bets by pouring direct investment into alternative destinations, such as Vietnam and Myanmar, and repatriating production to new facilities in Japan, as companies such as Casio, Honda and Unicharm are doing.

Demonstrators damage a Japanese-funded shopping center during a protest in Qingdao, China on Sep. 15, 2012.   © Reuters

Chinese integration in the global economy makes a total rollback of trade and investment flows impossible. Instead, what we will likely see is a cordoning-off of sensitive areas, particularly high tech, and the development of competing, incompatible standards on either side of the new digital curtain.

U.S. and Japanese companies that have supplied leading-edge products to Chinese customers by selling them robotics, semiconductor manufacturing equipment and highly specialized processing devices may find themselves subject to the equivalent of the Cold War-era Coordinating Committee for Multilateral Export Controls.

If Team China is set on achieving autarky in key industrial sectors, as the "Made in China 2025" program indicates, then Team U.S.-Japan may decide to do the same. In times of war, both hot and cold, strategic goals override free market ideology. Japan, of course, is no stranger to government-led industrial policy initiatives, but neither is the U.S., with the Apollo space program being the classic example.

If globalization was deflationary, could de-globalization, which would include repatriating production, targeting self-sufficiency in key areas, and sponsoring public-private initiatives, prove to be inflationary? Admittedly, that is not how it looks at the moment, as the prospect of tariffs has driven bond yields down to vanishing point.

That may not last, though. Conflict is usually inflationary. Indeed, it is World War II that is usually credited with ending deflationary conditions in the U.S. and elsewhere. For the U.S., confrontation with China is likely to mean more government spending on big projects, a reversal of the "peace dividend," and import substitution leading to higher input prices. For Japan it could well mean a decisive end to deflation.

The emergence of a powerful, expansionary China represents a multi-level existential threat to Japanese autonomy. The response needs to be multi-level too. Japan will need to do whatever it takes to keep the U.S. engaged in Asia. Beyond that, Japan needs to continue and strengthen the proactive diplomacy that has marked the Abe years and expand exchanges, partnerships and alliances with the many sympathetic countries in the region.

The last Cold War was marked by spying, subversion and proxy wars. The new one is unlikely to be different. Indeed, North Korea could be considered as playing the part of Cuba in a long-drawn out missile crisis. Japan will need to have the intelligence resources to compete. In terms of soft power projection, it needs a smart public relations strategy to focus the world's attention on contemporary realities, not -- as China and its sympathizers would prefer -- on the events of 80 years ago.

Cold War 2.0 will have costs for everyone, Japan included. But strategically it could be a 21st century version of the "wind of the gods" that saved Japan from Kublai Khan's Mongol fleet in the 13th century. At the same time, it could bring an end to the long period of zero interest rates and change the psychological climate too, as necessity becomes the midwife to a more outward-looking, assertive Japan.

Peter Tasker is an analyst with Tokyo-based Arcus Research

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