Authored by Robert Dujarric, via The Diplomat [7],
What options does China have? The Naval Diplomat's James Holmes has one idea here [8].
Tensions between Japan and China over the Senkaku (Diaoyu) islands are continuing, as indicated by continued obstacles to Japanese businesses in China, a drastic decline in tourism, and Chinese patrols near the islands. This is both a Sino-Japanese issue and a part of a broader confrontation between China on one side and the United States and its allies on the other.
Given Japan’s reliance on the U.S. security umbrella, Tokyo’s moves are to some extent constrained by American actions. Nevertheless, Japan’s size and resources mean Tokyo retains considerable autonomy in handling its relationship with Beijing.
At this point, Tokyo has three options:
DO NOTHING. Regardless of the legitimacy of conflicting claims over the islands, the responsibility for the escalation lies mostly with China. The nationalization of three islets, previously owned by a Japanese citizen, did not alter the status quo. Moreover, given (former) Governor Ishihara’s antics about Tokyo purchasing then, it was imperative that the central government preempt him. On the other hand, the party-sponsored – or at least tolerated – violence against Japanese property and individuals in China was on a different scale. Additionally, Chinese moves against Japanese businesses in China amount to economic sanctions.
Nevertheless, doing nothing is an option for Japan. Chinese actions so far are not a grave threat. Japan has an overriding interest in not making the situation worse, and in making sure that if it does it will be crystal clear that Beijing is at fault. A Japanese reaction could backfire, whereas waiting to see how things evolve over the next months, or even years, avoids this risk.
Additionally, the Noda cabinet may soon be history, possibly replaced by an administration led by a failed ex-premier (Shinzo Abe) who deemed it a good idea to pray at Yasukuni Shrine earlier this month. Taking a proactive course on China policy requires stable and high-quality leadership, something which is lacking in Tokyo.
SEEK A COMPROMISE: Giving up control of the islands is not in the cards. However, Japan could seek to accept some Chinese demands. This could include looking at various forms of joint development, revising fishing zones, etc.
The advantage of such a strategy is that it would test the proposition that the Communist Party is not interested in drastically altering the status quo but had to react when the “nationalization” of the three islands made it lose face. If this hypothesis is true, a limited amount of concessions could settle the issue. Given the importance for all concerned to defuse the situation, the cost-benefit ratio of such a strategy would be positive.
If it turned out that no amount of Japanese concessions bought peace, then we would all know that Chinese Communist Party's intent. However, given the domestic politics in Tokyo, implementation of such a policy would be tricky in the absence of a charismatic prime minister trusted by a large majority of the electorate.
GO ON THE OFFENSIVE: In both 2010 and 2012, Beijing crossed the line of accepted norms. It unleashed economic warfare against Japan (in 2010 with the rare earths and delays in customs, in 2012 through physical attacks on Japanese assets in China, state-sponsored cancellations of travel, slowdowns in import processing, etc.). So there is an argument for demonstrating that there is a price to pay.
A strategic offensive would have two prongs. The diplomatic part would be Japanese support for a territorial status quo to end once and for all territorial disputes. Japan would acknowledge the full sovereignty of South Korea over Takeshima (Dokto) and of Russia over the Northern Territories (the southern Kuriles). China would then be seen as the only troublemaker, since it would be the only remaining regional actor with territorial claims (Taiwan would too, but its role in the Senkaku crisis is obviously less critical) and improve relations with Seoul (and perhaps Moscow).
The economic offensive could have several pillars. Japanese customs would slow down the processing of Chinese imports, focusing on those which can easily be sourced from other locations. Chinese airlines and tour operators that bring tourists from Japan to China could see their operations subjected to unfortunately lengthy tax audits, inspections, and other bureaucratic hurdles.
In some cases, Japan is the only source of high-tech components for China-based exporters. In selected cases, these exports could be slowed down, focusing on those that are vital for Chinese state-owned corporations and businesses owned by senior party officials and their families.
Such an ambitious strategy could signal Beijing that there are costs to aggressive behavior. In particular, it would have the advantage of preventing future miscalculations on China’s part by deterring the Communist Party from further escalation with Japan. If one believes that China is on a road that will lead to war with the U.S. and its allies, making a stand now could ensure peace in the future by forcing Beijing to see how costly its objectives are and demonstrating Japanese resolve backed by the U.S.
All of these three options have advantages and disadvantages. The first one differs from the other two in terms of the requirements for implementation. It does not require particularly talented leadership, whereas the others demand first-rate actors in Japan's cabinet. The last one, and to some extent the "compromise” would also entail very close cooperation with the United States, but the “do nothing” option could be accomplished through normal working level channels with Washington.