Japanese Prime Minister Yoshihiko Noda called for talks to contain economic damage from a diplomatic dispute with China as Japan’s largest trading partner downgraded its delegation to an annual gathering in Tokyo.
“These are the second and third largest economies in the world and our interdependence is deepening,” Noda, 55, said yesterday in an interview at his office in Tokyo. “If our ties cool, particularly economic ones, then it isn’t a question of one or the other country suffering. Both countries lose out.”
Noda’s call reflects rising concern that tensions over Japan’s nationalization last month of islands claimed by both nations will hurt trade. The International Monetary Fund, holding its annual meetings in Tokyo this week, said an escalation in strains may affect world growth. China’s central bank governor and finance minister are skipping the gathering.
China’s backlash against the move saw Toyota Motor Corp. (7203) and Nissan Motor Co. suffer their biggest month drop in Chinese car sales since at least 2008 in September. JPMorgan Chase & Co. sees a 0.8 percentage-point hit to Japan’s gross domestic product from the China dispute this quarter.
“We need talks through various channels to make sure there is no effect on the broader relationship,” Noda said. “There has been an effect on individual industries. The overall effect will depend on the talks we have going forward and the efforts we make.”
Asked about Noda’s comments, a Chinese official today said Japan was “fully responsible” for causing “an unprecedented grave situation” in ties.
Japan should “correct its wrongdoing of violating China’s sovereignty and return to the track of solving the issue through dialogue and negotiation,” Foreign Ministry spokesman Hong Lei told reporters in Beijing.
The conflict contributed to a drop in Japanese stocks in the past month, with the Nikkei 225 Stock Average (NKY) down 3.6 percent since Sept. 10, when Noda’s administration announced the deal to buy the islands, known as Senkaku in Japanese and Diaoyu in Chinese. The spat has added to economic strains from Europe’s crisis and a fading in reconstruction spending from last year’s earthquake and tsunami disaster.
“This is the last thing Japan needs right now, given the overseas slowdown and the sluggish economy,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo and a former central bank official. “The dispute has become much more serious than we initially expected.”
At stake for China are ties with its second-largest provider of foreign direct investment. Japanese companies poured in $5.1 billion in the first eight months of 2012, second only to Hong Kong, according to the Chinese Ministry of Commerce.
“If the territorial dispute escalates further, it could become a risk for both Japan and China’s economies, and eventually for the global economy,” Naoyuki Shinohara, an IMF deputy managing director, said in an interview in Tokyo Oct. 9.
Japan’s prime minister said his government won’t compromise on its ownership claim, reiterating comments he made last month in New York. China denounced the position as “outrageous,” and has increased the dispatching of patrol boats into the waters claimed by Japan.
“There is no doubt that the Senkaku islands are Japan’s inherent territory in terms of history and international law,” Noda said. “There is no problem of sovereignty.”
China maintains that it’s owned the East China Sea islands for centuries. Japan argues it took control of them in 1895, lost authority after World War II, and had them returned by the U.S. in 1972.
Fishing and energy rights are at stake in the conflict, and the two countries have failed to implement a June 2008 deal to develop a natural gas field in the area. The East China Sea may hold as much as 160 billion barrels of oil, according to Chinese studies cited by the U.S. Energy Information Agency.
China is the world’s largest energy consumer and its onshore oil fields cannot keep pace with economic growth. Control over the disputed area would help it avoid the energy model of Japan, which imports virtually all its petroleum.
Political transitions in both countries may prolong the worst bilateral crisis since at least 2005. Chinese President Hu Jintao is poised to hand power to the next generation of China’s leaders, and Noda faces elections as soon as this year.
Turning to exchange rates, Noda said his government will act against disorderly gains in the yen, and urged policy makers to follow through on pledges to rebalance global demand. The yen is about 4 percent from a postwar high against the dollar, which undercuts exporters like Sony Corp. and forced Japan a year ago to conduct record foreign exchange intervention.
“We have to observe the market closely to see whether there are excessive or disorderly moves” in the currency market, he said. The yen’s strength is a “serious problem,” is out of step with Japan’s economic performance and “when necessary, we will take decisive action,” he said.
Japanese authorities have refrained from intervening in the currency market this year after selling at least 14.3 trillion yen ($182.6 billion) in 2011. Officials spent a one-day record 8.07 trillion yen Oct. 31 to bring the currency down from a postwar high of 75.35 yen.
The currency traded at 78.08 dollar at 5:10 p.m. in Tokyo, from 78.18 late yesterday in New York.
Noda has been unable to reverse more than a decade of deflation and his biggest legislative achievement was a sales tax increase that risks damping consumption.
He is Japan’s sixth prime minister since 2006, and the third for the Democratic Party of Japan since it defeated the Liberal Democratic Party in 2009 after the LDP’s half-century domination of government. Japan has failed since then to foster a durable two-party system and political squabbling following the March 2011 earthquake and Fukushima nuclear disaster that killed more than 18,000 people has left both major parties with less than 50 percent combined support.
Asked about the rapid leadership turnover, Noda cited the lack of a fixed term for prime minister and a split parliament that impedes progress.
“For the international community, if we have a different prime minister attending every summit there is no sense of stability,” he said. “We have to do something about that.”
Noda’s approval rating was 34 percent in a Yomiuri newspaper poll published Oct. 3, compared with 65 percent when he took office 13 months ago. Support for his DPJ was at 18 percent, while that of the LDP was 28 percent. Almost 45 percent had no party preference.
Noda spoke on the eve of a gathering of the Group of Seven in Tokyo, where finance chiefs and central bank governors will assess the recovery from the 2009 global recession. People’s Bank of China Governor Zhou Xiaochuan isn’t attending the meetings and pulled out of a keynote speech to the Institute of International Finance in Tokyo as well.
The gathering follows efforts by Europe to address its debt crisis with the establishment of the 500-billion euro ($644 billion) European Stability Mechanism. Japan has supported Europe through the purchase of rescue-fund bonds and increased contributions to the IMF.
“Japan is the largest creditor country in the world, so we have made contributions to the stability of international markets and we want this IMF meeting to confirm that we will continue to contribute,” Noda said.
The prime minister also urged the Bank of Japan to take “decisive” action at the right time to end deflation that’s eroded wages and growth.
To contact the reporters on this story: Matt Winkler in Tokyo at firstname.lastname@example.org; Isabel Reynolds in Tokyo at email@example.com; Takashi Hirokawa in Tokyo at firstname.lastname@example.org
To contact the editor responsible for this story: Peter Hirschberg at email@example.com