East Asia is becoming, in the language of international relations theory, "bipolar." Until recently, Asia was arguably “multipolar” - there was no one state large enough to dominate and many roughly equal states competed for influence. China’s dramatic rise has unbalanced that rough equity. Until recently, China pursued a “peaceful rise” strategy, one of accommodation and mutual adjustment. This approach sought to forestall an anti-Chinese encircling coalition. Since 2009 however, China has increasingly resorted to bullying and threats. All this then sets up a bipolar contest between China and Japan, in the context of China’s rapid rise toward regional dominance and such goals would broadly fit with what we have seen in the behavior of previous hegemons and a potential Sinic Monroe Doctrine.
Many have sought to draw comparisons between Asia today and Europe in the run-up to WWI. Most notably, in a widely covered speech at the World Economic Forum in Davos last month, Japanese Prime Minister Shinzo Abe compared his country’s current bilateral relationship with China to that of England and Germany before WWI. Specifically, Abe used the example of London and Berlin before WWI to warn that China and Japan’s extensive economic ties do not necessarily preclude them from going to war. Now it appears that some in Asia believe the current regional environment is more similar to Europe just before WWII. However, there appears to be some disagreement over which country in Asia most resembles Nazi Germany.
A common interpretation of history, Jordan's Prince Zeid told the UN this week, helps smooth tensions between former enemies, "as we have seen repeatedly, fighting that ends without reconciliation – especially fighting inside States – is fighting that can, and often does, resume." To those following the tensions between Japan and China (as well as South Korea), the implications are obvious. While the fighting between these nations ended almost 70 years ago, the process of reconciliation remains incomplete. The “deeper reconciliation” Zeid described, one based on “a shared memory of a troubled past,” has not yet emerged. The current tensions in Northeast Asia have another analogue: the conflicted legacy of the U.S. Civil War.
China and Japan’s war of words reveals a larger struggle for regional influence akin to a mini Cold War. Last week's tempestuous pissing contest in Davos, which The FT's Gideon Rachman notes left people with the belief that "this is not a situation that is getting better; it is getting worse." Following Abe's analogies to WWI, China's Yi compared Abe's visit to the Yasukuni shrine to Merkel visiting the graves of Nazi war criminals and as the rhetoric grows the US has asked for reassurance from Abe that he will not do it again. So we have two countries, each building up their militaries while insisting they must do so to counter the threat of their regional rival. Added to this, a deep distrust of each other’s different political systems coupled with a history of animosity makes the two nations deeply suspicious of each other. Each country insists it loves peace, and uses scare tactics to try to paint its opponent as a hawkish boogeyman. Sound familiar to anyone else?
On a satellite interview from Pyongyang, North Korea, former NBA player Dennis Rodman 'lost it' this morning with the anchor from CNN's "New Day" show. Describing his (and his team's) visit to North Korea as a "great trip for the world," Rodman started to get frustrated when questioned about whether he will use the opportunity to speak about Kenneth Bae, an American citizen who has been held in North Korea. "Do you understand what he did?" Rodman exclaimed, "You tell me! You tell me! Why is he held captive?" Having described Kim Jong Un as a "friend for life," Rodman went on to tell the CNN anchor, "I don't give a rat's ass what you think." Ah, the new normal diplomacy. We wonder if Kim's uncle also described him as a 'friend for life.'? As WaPo reports, The White House is not happy.
Fed's action or inaction remains an under-appreciated risk to the global economy.
The following 8 key dynamics (from government over-reach and economic stagnation to civil discontent and beyond) will play out over the next two to three years...
Without question, 2013 was a jam-packed year for national security, defense and foreign policy watchers in the Asia-Pacific. Don’t expect the Asia-Pacific to be any less fraught next year.
It was the Year of the Zombies. Not in the sense of most of humanity dying from a horrible plague and then reanimating as mindless flesh-eating ghouls. No, it was much worse than that...
"...as an investor, nearly always if you buy panic and you know what you are doing, and then hold on for a number of years, you are going to make a lot of money.
You also have to be sure that your crisis or panic is not the end of the world, though..."
Overnight rhetoric in Asia became increasingly heated when China's Ministry of Foreign Affairs expressed "strong dissastisfaction" at the slanderous actions of Abe's Japanese government over the Air Defense Identification Zone (ADIZ) and the "theft and embezzlement" of the Diaoyu Islands. "Japan's attempt is doomed to failure," China warned ominously and as we highlight below, a reflection on the possible rational reasons for China and Japan to go to war over the Senkaku/Diaoyu islands highlights the seriousness of the ongoing brinksmanship in the East China Sea. If a war is fought over these long-contested islands, it will have an eminently rational explanation underlying all the historical mistrust and nationalism on the surface. War in the East China Sea is possible, despite the economic costs.
2013 was a year when Europe tried to reallign its primary source of natgas energy, from Gazpromia to Qatar, and failed. More importantly, it was a year in which Russia's Vladimir Putin undisputedly won every foreign relations conflict that involved Russian national interests, to the sheer humiliation of both John Kerry and Francois Hollande. However, it seems the former KGB spy had a Plan B in case things escalated out of control, one that fits with what we wrote a few days ago when we reported that "Russia casually announces it will use nukes if attacked." Namely, as Bloomberg reports citing Bild, Russia quietly stationed a double-digit number of SS-26 Stone, aka Iskander, tactical, nuclear-capable short-range missiles near the Polish border in a dramatic escalation to merely verbal threats issued as recently as a year ago.
Contrary to some expectations, the budget deal has done absolutely nothing to push global markets or US futures higher which was to be expected: markets are no longer driven by fundamentals but by such things as carry pairs which signal monetary policies. Sure enough, as a result of the strength in the Yen, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.
You know that game involving word association at the psychotherapists? The one where you have to say the first word that springs to mind.