GEOPOLITICAL TENSIONS: Simmering tensions turn up the heat on Asia’s economies

Geopolitical risks in northeast Asia are escalating to the point where economic growth is being hit

  • By Anthony Rowley
  • 03 May 2014
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For the past two or three years, ADB annual meetings have taken place against a background of increasing geopolitical tensions in northeast Asia.

These have continued to increase in the run-up to this year’s meeting, with fresh incidents occurring between China and Japan and stresses between Japan and South Korea. Meanwhile, the continuing threat that North Korea poses to the stability of the region and the decades-long, but still simmering, dispute between Japan and Russia over a string of islets to the north of Japan seized by the former Soviet Union from Japan in the closing days of World War II, have served to worsen the anxiety.

At the heart of the Sino-Japanese standoff is the dispute over who owns the Senkaku Islands (Diaoyu in Chinese), a rocky outcrop in the East China Sea, while another territorial dispute — over the Takeshima islets in the East China Sea — festers between Japan and South Korea.

There is a good deal more than territorial issues, however, behind the antagonisms and occasional outbreaks of aggression that have boiled away for decades among these key Asian powers even as wars in Indochina became a thing of the past and a spirit of peaceful co-operation spread across the region.


Today tensions have reached a point where, in the past year alone, Japan and China have scrambled their fighter jets hundreds of times to ward off what each claims are marauding incursions by the other side into their maritime waters or airspace, and where incidents have taken place at sea.

To the outside world, used to viewing Asia as a continent where economic miracles happen and where economic growth rates have become the envy of the rest of the world, such incidents may seem like a distant threat, and indeed there is something of a phony war atmosphere about the situation.

Threats in Ukraine and the Crimea appear much more real and immediate to those in Europe or North America than those in the lesser known expanses of the East China and South China seas. But experts who know the Asia region well are far from sanguine.

The situation between Japan and China is seen as most critical. “Neither side is looking for a confrontation but the dangers of miscalculation and accident are very great and that could lead to a shooting war,” Gerald Curtis, professor of political science at New York’s Columbia University tells Emerging Markets.

Curtis is not alone in fearing that repeated encounters between Japanese and Chinese ships and aircraft around the Senkakus could spiral into conflict. The situation has “elements of the chaotic about it”, adds Kent Calder, director of the Reischauer Centre for East Asian Studies in Washington DC.

A senior US naval officer recently added his voice to those urging moderation, saying that in many cases “young mariners” or pilots in Japanese and Chinese vessels and aircraft patrolling disputed territories might have to make difficult decisions that could lead to inadvertent clashes.

Tensions escalated again in mid-April when China seized a Japanese container ship in China’s Zhejiang province on the order of the Shanghai Maritime Court. The vessel, belonging to Mitsui OSK Lines was seized on China’s claims that Japan still owes money on ship leasing claims going back to pre-war days.

The bizarre incident marks the latest in a series which has involved the arrest of a Chinese fishing trawler in Japanese waters a couple of year ago, Japan’s move in 2012 to nationalise ownership of the Senkaku Islands, subsequent anti-Japanese riots in China and a continued souring of bilateral relations.


Meanwhile, relations between Japan and South Korea have touched lows over the Takeshima islets (known in Korean as Dokdo) which both sides claim, and over the “comfort women” issue — a euphemism for the Korean women said to have been forced to provide sexual services to Japanese military before and after World War II.

For a while, such incidents did not appear to be harming economic relationships in the region and even last year trade between Japan and China continued to expand. But recently there have been clear signs that geopolitical tensions in northeast Asia are indeed beginning to have an economic impact.

Japan’s business investment in China has fallen sharply in the wake of disputes between the two countries over territorial and other issues while Asean (the Association of Southeast Asian Nations) countries have emerged as a major alternative pole for Japanese investment, according to the Japan External Trade Organisation (Jetro).

Jetro data shows the impact of the sharp deterioration in Japan-China relations in the past two years on Japanese patterns of investment in Asia has been profound. “Japanese companies have realised the risks they face,” says Jetro chairman and CEO Hiroyuki Ishige.

Japanese foreign direct investment (FDI) into Asean member countries almost doubled last year from 2012 to reach a record ¥2.33tr while by contrast, the amount of Japanese investment going to China dropped 18% to ¥887bn.


In another sign of mounting concern over regional tensions, the ADB issued a call toward the end of April for strengthened regional co-operation in Asia to counter what it called growing “geopolitical risks”.

“Asia needs stronger co-operation now more than ever,” Iwan Azis, head of ADB’s Office of Regional Economic Integration, told Emerging Markets after the launch of the Manila-based development bank’s latest report monitoring the progress of regional co-operation in Asia. “Regional trade and financial integration have ratcheted up over the past decade and closer co-operation is needed to counter geopolitical risks while surveillance and financial safety nets can address contagion.”

US president Barrack Obama visited Tokyo and Seoul in late April before going to Malaysia and the Philippines but while he urged moderation on the part of Japan and South Korea in their relations with China, the fact that he also emphasised the strength of US military alliances with both nations is likely to concern the Chinese govenment, analysts say.

  • By Anthony Rowley
  • 03 May 2014

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Rank Lead Manager Amount $m No of issues Share %
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1 Citi 206,449.53 755 8.84%
2 JPMorgan 192,919.68 823 8.26%
3 Bank of America Merrill Lynch 175,174.46 602 7.50%
4 Barclays 144,195.77 526 6.17%
5 Goldman Sachs 139,497.22 445 5.97%

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1 Deutsche Bank 23,530.61 67 7.96%
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5 BNP Paribas 14,834.05 81 5.02%

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Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 10,673.78 46 8.06%
2 Citi 9,632.20 60 7.28%
3 Goldman Sachs 9,310.79 46 7.03%
4 UBS 9,230.61 36 6.97%
5 Morgan Stanley 8,508.94 46 6.43%