April 26, 2013

Japan stirs Campbell's US 'pivot' soup

Oscar Wilde wrote, "When the gods wish to punish us, they answer our prayers."
Perhaps this is how Kurt Campbell feels today.

Campbell, after all, as
assistant secretary for East Asia in Hillary Clinton's State Department, was a
key architect and proponent of the "pivot to Asia", which was meant to elicit
satisfactory behavior from China - and, in the process, demonstrate US
leadership and relevance - by confronting the PRC with a phalanx of Pacific
democracies (plus Vietnam of course) determined to impose liberal security,
economic, and human rights norms on the rogue superpower.

The inevitable
result of US backing has been an increased willingness of the Philippines, Vietnam, and Japan to stand up to China, which
has contributed a virtuous cycle of Chinese hostility and a further defensive
cleaving of the smaller nations to the United States.

less-than-desirable by-product has been the tendency of the pivot's designated
junior partners to tug at the dragon's whiskers for national and domestic
political reasons, secure in the knowledge that the United States must back them
up, even if the confrontation runs contrary to long-term US interests and
objectives for the region.

In the case of Japan, adventurism has gotten
out of hand, and the US is responding with anxiety, a shift in policy, and a
sea-change in nomenclature.

History will judge if Prime Minister Shinzo
Abe is the architect of Japan's renaissance, or merely an opportunistic and
short-sighted nationalist. In any case, he has already demonstrated a
willingness to stir the Pacific pot in ways that excite the anxiety of the
United States.

The United States' discomfort at Japan's eagerness to
hype the Senkaku/Diaoyutai Island dispute as a useful point of friction with
China has become palpable.

Kurt Campbell, now ensconced in the private
sector on the board of the Center for a New American Security think tank, chose
to reveal to the Kyodo News Agency that the US government had advised Japan
against the nationalization of three of the Senkaku Islands, the provocation
that sparked this year's Sino-Japanese brouhaha:

The Japanese government consulted with the State Department prior to
the purchase, Campbell revealed, and was given "very strong advice not to go in
this direction."

The US government, in urging Japan not to follow
through with the purchase, stressed the action could "trigger a crisis" with
China, which claims the islands for itself.

"Even though we warned
Japan, Japan decided to go in a different direction, and they thought they had
gained the support of China, or some did, which we were certain that they had
not," Campbell said. [1]

Stroking the Senkaku fetish might be
excused as an unavoidable political imperative for Abe, given the rise in
anti-Chinese feeling in Japan. However, under Abe the Japanese government has
unilaterally undertaken a series of other moves to strengthen the hands of
Pacific nations seeking to counter China.

In recent months, the Japanese
government has agreed to provide 10 patrol boats to the Philippines; enticed
Taiwan to abandon its anti-Japanese stance on the Senkakus (which, as a matter
of proximity, really belong to Taiwan) by granting Taiwanese fishing vessels the
right to fish near the islands (though not within the 12 mile limit); offered
its economic good offices as an alternative to China as a destination for
Mongolian coal; and scheduled talks with Vietnam on cooperation in "maritime
security", also known as the provision of patrol boats along the Philippine

The spectacle of the Japanese government cutting all sorts of
anti-China deals in Asia on its own kick raises the specter of an independent
Japanese security policy and, with it, the kind of destabilization that the US
pivot to Asia was meant to pre-empt.

As Peter Ennis reported in Dispatch
Japan, the Obama administration was determined to reign in Prime Minister Abe's
anti-China shenanigans during his March visit to Washington:

In a brief Oval Office appearance with Abe, Obama spoke not one word
about the Senkakus, China, Okinawa, or even a "joint vision" of the sort
announced with Noda. Abe tried his best to criticize China, very indirectly, but
adhered to US desires to not rile-up Beijing. ...

Neither Obama nor
Secretary of State John Kerry took the seemingly easy step of reiterating the
January 18 statement by then-Secretary of State Clinton outlining American
opposition to any effort at unilateral change of Japan's administrative control
of the Senkakus. This was a far-cry from Abe's initial desire for a strong
statement from Obama specifically mentioning China. ...

Obama embraced
the US-Japan alliance, but did not embrace Abe. [2]

for the United States - and the pivot - it looks like the Japanese military cat
is permanently out of the bag, as a result of Japan's growing unwillingness to
accept the second-class military status imposed upon it by its defeat in World
War II.

The Abe government is determined to revise Japan's "pacifist"
constitution and dilute its restrictions on military operations outside Japan's
borders once the LDP gains expected dominance of the Diet's upper as well as
lower house - and the ability to unilaterally amend the constitution - following
elections in July.

Actually, a lot of nibbling has already taken place.
Recently, the Japanese cabinet decided that Japanese ground forces could be
dispatched overseas "to assist in the evacuation of Japanese nationals" from
danger zones. Defense Minister Itsunori Onodera asserted Japan's legal right to
engage in preemptive strike to forestall an imminent attack, while stating that
Japan had not developed that capability "as yet".

During Prime Minister
Abe's visit to the United States, the Japanese team also touted the concept of
"collective self-defense", which states that the Japanese self-defense forces
could come to the defense of an ally, ie fight a war outside Japan's borders as
long as it was "defending an ally". To demonstrate the benefits of the
collective self-defense posture, the Japanese team also suggested that Japan's
missile defense network would be pleased to knock down a North Korean missile
headed for the United States.

The Obama administration, while
undoubtedly appreciative of the offer to shelter beneath Japan's missile defense
umbrella, was perhaps more worried about Japan knocking down something else and
starting World War III, and demurred.

In a relatively unnoticed but
equally significant development, the Obama administration also objected strongly
to Japan's plans to process its spent fuel rods domestically and enlarge its
sizable stockpile of bomb-worthy plutonium metal. [3] Another indication that
Japan has slipped the leash is in the area of "Abenomics".

It is safe to
say that no governments outside of Japan are enthusiastic about the keystone of
Prime Minister Abe's national economic rebirth strategy: a wild bet on
quantitative easing twice the size of the US effort, one that will inject US$1.4
trillion into the economy over two years and double Japan's money supply.

Officially, the objective of the policy is to boost inflation to 2%,
thereby baking inflationary expectations into the economy, and stampeding "Mrs
Watanabe", the prototypical Japanese saver, into buying a new car or
bedpan-emptying robot right away, instead of waiting for another 20 years of
continued deflation to bring the price within reach. Nobody knows if that will

Unofficially, the objective of the policy seems to be to drive
down the yen and boost Japanese exports, which is already working.

cite Oscar Wilde once again, export promotion is the quantitative easing
consequence that dares not speak its name. Nobody who engages in quantitative
easing - the United States, the European Union, or, now Japan - admits that the
objective is to weaken the currency and keep factories humming with exports.
Because once one country weakens its currency, everybody else will, and we're
down the slippery slope.

Given the fait accompli Abe delivered to
the financial markets, the Group of 20 decided to give Japan the benefit of the
doubt with this less than ringing endorsement of its motives at the April 19
meeting of finance ministers in Washington:

Japan's recent policy actions are intended to stop deflation and
support domestic demand.

Full stop.

The G-20 had a lot more
to say about quantitative easing, as long as it didn't have to talk directly
about Japan:

We will refrain from competitive devaluation and will not target our
exchange rates for competitive purposes, and we will resist all forms of
protectionism and keep our markets open. We reiterate that excess volatility of
financial flows and disorderly movements in exchange rates have adverse
implications for economic and financial stability. Monetary policy should be
directed toward domestic price stability and continuing to support economic
recovery according to the respective mandates of central banks. We will be
mindful of unintended negative side effects stemming from extended periods of
monetary easing.

Concerned readers will be shocked, shocked! to
learn that Japanese officials and sympathetic media outlets spun the G-20's
leeriness about quantitative easing and its one-sentence shirking of criticism
of Japanese policy into an endorsement of Abenomics. As in:

G-20 understood Japan's policies to revive economy - BOJ's Kuroda.

The Japan Times headlined with "G-20 finance chiefs back
aggressive easing regime" and continued with a strategic use of the passive

Those comments were viewed as giving a green light to Japan's
program, which has driven the value of the yen down by more than 20 percent
against the dollar since October. [5]

As reported by the Guardian,
concern over Japan's Abenomics plans was already widely acknowledged back in

Japan will escape censure from the G20 group of nations meeting in
Moscow this weekend despite widespread unease at Tokyo's aggressive intervention
into currency markets to drive down the value of the yen.

It is
understood that pressure from the International Monetary Fund (IMF) and several
prominent G20 members has kept any reference to Japan's attempts to depress the
yen out of a communique due to be released on Saturday.

A draft
communique seen by Reuters suggests that Tokyo would not be singled out for
criticism, as had been suggested.

An unnamed delegate was quoted as
saying: "There wasn't anybody putting Japan on the spot. That's quite frankly a
bit of a surprise." [6]

For its part, in order to avoid explicit
criticism in the Washington meeting, the Bank of Japan declared it would print
money by purchasing Japanese government bonds, not directly purchasing foreign
securities and thereby explicitly strengthening foreign currencies. [7]

Nevertheless, in the real world, a lot of that money is going to end up
in foreign markets (and strengthening foreign currencies) anyway, simply getting
laundered through private securities firms instead of flooding out direct from
the BOJ. Bill Gross, the bond guru of Pimco - and Japanese QE skeptic-told the
Wall Street Journal:

"This BOJ printing seeps out daily into global markets as Japanese
institutions which have sold their Japanese government bonds to the BOJ look for
higher yielding replacements," said Mr Gross in an email interview Tuesday
afternoon with The Wall Street Journal. "Ten-year Treasurys to us look very
low-yielding, but to them they yield 125 basis points more." [8]

is not out of line to speculate that Japan's announcement of its decision to
join negotiations on the Obama administration's cherished Trans Pacific
Partnership trade pact was also timed to ensure US forbearance on Japan's
massive program of quantitative easing.

Japan may be enjoying some
success in its public relations campaign to paper over widespread unease about
its quantitative easing program, but massaging the national and financial press
is not going to alleviate private US concerns about the immediate and less than
beneficial impact of Prime Minister Abe's diplomatic and economic initiatives on
another important pivot partner, South Korea.

In the framework of the
pivot, Japan's disregard for the sensibilities and interests of the Republic of
Korea, a frontline state in any effort to restrain North Korea and counter
China, is well-nigh inexplicable. 


Why split the anti-China alliance by fussing over the Dokdo Islands, provoking
South Korea with unnecessary, symbolic affronts like Abe's offering to the
Yasakuni shrine, the visit of almost 200 lawmakers to the shrine, or making
statements like this?:

On Tuesday during an Upper House session, Abe was asked to comment
on the 1995 statement by then-Prime Minister Tomiichi Murayama, who
straightforwardly apologized for Japan's "colonial rule and aggression," which
"caused tremendous damage and suffering to the people of many countries."

Abe didn't elaborate, but he did claim that the definition of
"aggression" in general has yet to 

"firmly determined" by academic experts or the international community.

What is described as aggression "can be viewed differently" depending on
which side you're on, Abe said. Major South Korean newspapers slammed Abe on
their front pages Wednesday. [9]

If Prime Minister Abe is unable to
characterize the invasion of Korea and China as "aggression", Japan's neighbors
are free to worry about how elastic his definition of "self-defense", collective
or otherwise might be, once the constitution is revised.

In some
circles, Japan's quantitative easing is seen as little more than a zero-sum game
to juice the economy by benefiting Japanese exporters at the expense of their
direct rivals in South Korea, pivot be damned:

[T]he Hyundai Research Institute predicted that if the yen reaches
100 or 110 to the dollar, South Korean exports will fall by 3.4% in the first
case and 11.4% in the second.

The problem is the large degree of overlap
with Japan in terms of major exports, which account for 60% of South Korea's
GDP. An analysis by the Korea International Trade Association showed an overlap
of about 50% between South Korea's top 100 export items and Japan's.

Indeed, Ministry of Trade, Industry and Energy (MTIE) figures on the
first quarter growth rate for export items where South Korea competes with Japan
showed an 11.3% drop from the previous quarter for steel and a 3.5% drop for
automobiles. With respective ratings of 0.63 and 0.58, they were the second and
third most competitive industries behind shipbuilding (0.75).

South Korea experiences a double whammy at the hands of
Japanese quantitative easing thanks to the ROK's status as a growing, emerging
economy and, therefore, a hot money magnet, as William Pesek wrote for
Bloomberg, while chronicling the ROK's $16 billion stimulus counter to the 20%
drop in the value of the yen:

Instead of spurring demand, ultra-low rates are creating a flood of
hot money. All that cash has to go somewhere, and it's ending up in Chinese junk
bonds, Philippine stocks, Australian real estate and the Korean won.

More bold steps may be coming. Korea is considering ways to insulate
itself from capital-flow volatility, possibly by imposing taxes on financial
transactions. Fifteen years ago, Malaysia became a pariah state when it limited
the flow of money. Today, it is common-sense economics to protect your country
from being overwhelmed by central-bank largesse.

Developing Asia once
spread financial contagion from New York to London and Tokyo. Now, as the
world's richest economies return the favor, Asian policymakers are grappling for
ways to cope ? [11]

Ironically, one of the best ways for the US to
restrain an increasingly independently minded Japan is by cozying up to China
and redefining the pivot away from its China-containment (and provocation and
destabilization-enabling) roots.

So Kurt Campbell emphasized the
distance between Washington and Tokyo on the Senkakus, and - notably for someone
who built a diplomatic strategy on confronting China - made the case in an op-ed
for the Financial Times for increased cooperation between the US and China:

[T]he world's most important bilateral relationship is the one
between the US and China. For that relationship to succeed, it must be embedded
in a larger framework of US diplomacy in Asia, stretching from Japan to India,
but certainly the US-China piece will be central for the 21st century. With new
leadership in Beijing under President Xi Jinping settling in and President
Barack Obama starting his second term, this is a defining period for the future
of US-China relations. Both countries have challenging domestic agendas, but
Washington and Beijing fully recognise the importance of their international
interactions. [12]

The US media also made some ridiculous but
significant efforts within the context of the North Korean crisis to shoehorn
China into the unlikely role of America's pivot "ally". [13]

As part of
the China reset, the Obama administration dispatched the chairman of the Joint
Chiefs of Staff, General Michael Dempsey, to Beijing, where he labored to
redefine the pivot as "not all about China" and, indeed, not even a pivot at

Economic, security, and demographic trends all lead to the
Asia-Pacific region, he said.

"Furthermore, I tell them this wasn't
about them, meaning China. Of course they're a factor, but this wasn't a
strategy that was aimed at them in any way," Dempsey said.

The chairman
added that military considerations are only part of the broader US regional
strategy. "I pointed out to them that among the first visitors who came here
after our ? rebalancing initiative was announced was Jack Lew, the secretary of
the treasury," he said. [14]

For connoisseurs of government
newspeak, it should be pointed out that apparently the "pivot", with its
thrusty, aggressive connotations is "out" and the more gentle, conciliatory
"rebalancing" is "in" as the description of what the US is trying to do to or
with China in Asia.

Speaking of the finance side of "rebalancing", the
Department of Treasury also quietly emphasized the implicit gap between
Washington and Tokyo on quantitative easing while giving China some modest
praise, as the German news outlet MNI reported:

If there was anything mildly unexpected in Lew's post-G20 comments,
it was the highlighted praise aimed at China, increasing the emphasis on the
positive beyond that of Lew's two most recent predecessors. ?

silence about Japan in his statement to his counterparts from around the world
seemed to soften somewhat the emphasis placed only hours earlier by a senior
Treasury official. The official had reiterated in response to a question from
MNI that the US. will be watching closely to see if the expansion of
quantitative easing in Japan actually does more to boost demand and inflation
than it does to depreciate the yen. [15]

In another indication of
US establishment umbrage, New York Times also weighed in with an editorial
critical of Japan's Yasakuni Shrine antics titled "Japan's Unnecessary
In a significant bit of reframing that probably irked the
Japanese government, the New York Times pointed out that the recent heightening
of tensions around the Senkakus was a bilateral effort (China was responding to
a flotilla of Japanese nationalists), not merely an exercise in Chinese
"assertiveness", as the Western media usually presents the issue:

On Monday, South Korea canceled a visit to Japan by its foreign
minister and China publicly chastised Japan. On Tuesday, tensions were further
fueled when Chinese and Japanese boats converged on disputed islands in the East
China Sea.

Japan and China both need to work on a peaceful solution to
their territorial issues. But it seems especially foolhardy for Japan to inflame
hostilities with China and South Korea when all countries need to be working
cooperatively to resolve the problems with North Korea and its nuclear program.

So, from the US perspective, maybe China is not the only big,
bad guy in Asia anymore.

Add Japan, with its unilateral, damn the
consequences (to others) security and fiscal aggressiveness to the list.

When one considers that the Japanese quantitative easing program could
blow up the Asian and world economy in a replay of 1997 - or worse - there's
even a case to be made that the genuine near-term threat to the world's
well-being from Japan is perhaps greater than that from China.

As one
finance guru told CNBC:

There are additional risks, the most glaring being that a big round
of quantitative easing in Japan may be no better at stoking growth and the good
kind of inflation there than it has been in the US. Despite the Fed's all-out
efforts, unemployment remains elevated and inflation subdued, though stocks have
soared. ...

"Monetary policy is being used as the policy tool to create
demand. The question is, is this going to end in tears?" Prudential's Krosby
said. "Is this going to end in worse calamity for the markets than what we had
in 2008 and 2009?" [17]

Creating and then managing intractable
problems through reshuffled nomenclature may be the ticket to full employment
for practitioners of international relations, but for promoters of the US
national interest, the realization that we are now wrestling with a second
assertive, unpopular, and profoundly destabilizing power in the West Pacific is
cause for concern, not celebration.