Abe, China and fences

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Media captionJapan and China both claim a group of islands in the East China Sea

Japanese Prime Minister Shinzo Abe said don't waste Asia's prosperity on military expenditure and that Asia and the world need a mechanism for crisis management in his keynote speech at the World Economic Forum in Davos.

Yet, since he came to power a year ago, tensions have increased with China, namely over ownership of the Senkaku (to the Japanese) and Diaoyu (to the Chinese) and his visit to a controversial war shrine.

So much so that Carlos Ghosn, the CEO of one of Japan's largest companies, Renault-Nissan, told me that the business community is pressuring the Abe government to resolve the issue with China.

And leading economist Nouriel Roubini identifies it to me as one of the risks of 2014 - a potential military clash.


For Japan, a country with weak demand due to a shrinking population, risking one of its main external markets is perhaps foolhardy. When I asked Ghosn about how much demand can grow in an ageing society, he pointed to the importance of export markets.

Thus, the desire of business to see tensions eased.

That should be the desire of the Abe government too.

After all, for Abenomics to work, it requires firms to raise wages, key to defeating deflation that has just begun to ease after 20 years.

The government can pressure firms, which it is doing. But, ultimately, firms would only permanently raise wages if demand grew.

For a shrinking population with weak internal demand, external demand is important. Indeed, exports to China were a driver of Japan's recovery via exports in the past decade.


As Abe said in his speech, Asia has become the growth engine of the world.

He says it's due to a renewed Japan and its neighbours, including China. He is encouraging the creation of a free trade area known as the Trans-Pacific Partnership (TPP) - but bear in mind that it excludes China.

These somewhat contradictory tendencies seems to pervade Abe's speech and the stance between the second and third largest economies in the world. But, as Ghosn told me, it is more to Japan's benefit that this fence between neighbours is mended.