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China’s anti-Japan protests could bring heavy cost

A man looks at large Chinese national flags covering the entrance to a Japanese restaurant in Suzhou, Jiangsu province, Sept. 17, 2012. Major Japanese brand name firms announced factory shutdowns in China on Monday and urged expatriates to stay indoors ahead of what could be more angry protests over a territorial dispute between Asia’s two biggest economies.

ALY SONG/REUTERS

Recent anti-Japan protests in China, triggered by a dispute over who owns some contested islands, looked a lot like scenes from 2005. Then, anger was directed at Japan's bid for a seat on the UN Security Council, and the contents of a Japanese history textbook. As now, it looked seven years ago as if protests were being tolerated by the Chinese government. What's different this time is economic uncertainty. The cost of letting things get out of hand is also considerably higher.

If history repeats, there's little to fear. In 2005, after four weekends of escalating protests, the government stepped in, arresting ringleaders. Japan's prime minister apologized for wartime offences, and an awkward peace resumed. Foreign direct investment from Japan to China hit a record of $6.5-billion (U.S.).

China's leaders may be counting on a rerun. Anger around the Diaoyu islands diverted attention from the two-week disappearance, and reappearance, of Vice-President Xi Jinping. As a leadership change approaches, a bit of nationalism keeps the masses, and the still-influential armed forces, occupied.

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But the balancing act is tricky. In Beijing, protesters were mostly young twentysomethings. Some carried posters of Chairman Mao – hardly reassuring for the current leadership, which has largely put Mao into storage. The fiercest incidents occurred in export-rich areas like Guangzhou and Shenzhen, where employment is under threat from a slowing economy. In April, 2005, quarterly GDP growth was 10 per cent. Now it is 7.6 per cent.

On the economic front, Japan also has more to lose now than in 2005. Measured at current U.S. dollar values, Japan's exports to China have doubled since 2005, while Japan's nominal GDP, measured in the same manner, has grown by just 44 per cent.

Japan is also much more subject to the whims of Chinese consumers. Japanese carmakers sold three million cars in China in 2011, triple the volume in 2005, according to LMC Automotive. Retailer Uniqlo, Japan's biggest clothing retailer, had 133 stores in China at the end of February, more than a tenth of the total, versus almost none in 2005.

So far, fallout from the protests is limited. Markets seem relaxed. But both trade and politics make the stakes higher this time. If both sides don't call a truce, however insincere, the cost of escalating conflict could be unacceptably high.

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