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Japan and China Agree to Hold Talks on Rift After Noda Call

October 12, 2012

Japan and China Agree to Hold Talks on Dispute After Noda Call

A man strolls with dogs on a baby cart as paramilitary police officers arrange the steel fence in front of the Japanese Consulate General in Shanghai, China. (AP Photo/Eugene Hoshiko)

Japan and China agreed to talks aimed at reducing tensions over a territorial dispute a day after Japanese Prime Minister Yoshihiko Noda warned that Asia’s two biggest economies would suffer without negotiations.

Officials from both countries agreed to hold vice- ministerial level discussions at an unspecified date, Japan’s Foreign Ministry said last night. The dispute “will have a number of mostly negative economic effects over the medium term,” Moody’s Analytics said in a report today.

“It is important for Japan and China to take a broad view and start by communicating with the aim of improving relations, including at the planned vice-ministerial meeting, where I expect a frank exchange of views,” Japanese Chief Cabinet Secretary Osamu Fujimura told reporters today in Tokyo.

Japan’s purchase last month of uninhabited East China Sea islands called Senkaku in Japanese and Diaoyu in Chinese sparked violent demonstrations in China and hurt Japanese exporters such as Nissan Motor Co. (7201) Prolonging the worst bilateral crisis since at least 2005 endangers trade ties that have tripled to more than $340 billion in the last decade.

“These are the second and third-largest economies in the world and our interdependence is deepening,” Noda said in an Oct. 10 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.”

Stocks Impact

Japanese stocks today swung between gains and losses, after the Nikkei 225 Stock Average (NKY) recorded the biggest three-day slump since June on concern over the dispute. The Nikkei 225 was down 0.1 percent at 1:42 p.m. in Tokyo after falling as much as 0.2 percent. The gauge has dropped 3.7 percent this week, headed for a four-week decline.

China reduced its presence at the International Monetary Fund’s annual meeting this week in Tokyo. While People’s Bank of China Governor Zhou Xiaochuan canceled his appearance, his deputy Yi Gang will give a lecture on Oct. 14 in his place, IMF spokesman William Murray said today in an e-mailed statement.

The conflict caused Nissan and Toyota Motor Corp. (7203) to suffer their worst month of Chinese sales since at least 2008 in September. The IMF warned an escalation of the conflict could hurt a global economy struggling to overcome the impact of the European debt crisis.

“We need talks through various channels to make sure there is no effect on the broader relationship,” Noda said in his interview. “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.”

Energy Resources

The islands are surrounded by rich fishing grounds and adjacent to natural gas resources. The East China Sea may hold as much as 160 billion barrels of oil, the U.S. Energy Information Administration said in a report citing Chinese studies.

Also 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.

“Reports indicate that most Japanese investment already committed to China will go ahead, but future investment may be hurt by the conflict,” Sydney-based Moody’s analyst Alaistair Chan wrote in today’s report. “Japanese companies may accelerate plans to diversity to Indonesia or India.”

China, which has sent more patrol boats into waters claimed by Japan since the purchase, maintains that it has owned the 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.

Asked about Noda’s comments, a Chinese official yesterday 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.

To contact the reporters on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net; Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net


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