The inevitable counter-reaction to China's aggressive behavior in Asia

The easiest call of the last half-century:  push Japan around enough and you'll get an end to its constitutionally-mandated pacifism.

Unlike Germany, which self-flagelated to the point of altering its social persona, Japan did no such thing.  It simply buried the past, which it can now dig up with enough incentives from Beijing, which seems to have counted on the notion that it could push Tokyo around indefinitely.

No, this doesn't change my attitude on the "pivot" or AirSea Battle.  In both cases, it proves how unnecessary they are as over-the-top reactions (yes, I understand the "show of force" part; I just worry that such things tend to be forgotten fairly quickly inside the Pentagon and thus today's feint equals tomorrow's "unshakeable national security interest").

The US enabled Asia's peaceful rise by playing Leviathan and thus obviating anyone's need to "arms race" with anyone else inside the region.  The result being, for the first time in history, India, China, Korea and Japan all "risen" without any wars.  

Beijing seems to have seen some historic advantage in this situation, which now disappears - inevitably.  Thus, now is NOT the time for the US to "pour it on" but to play the honest-broker all the more.

Now Japan and EU start talks on free trade deal

FT story.

Comes right on the heels of recent talks with US to consider starting similar negotiations.

This is the West not waiting on the WTO, which is good.

It's also the West recognizing collective strengths, which is also good.

That's the funny thing about trade pacts - they tend to come when times are bad. 

Because, when times are good, everyone's too picky and demanding.  But when times are bad, and everyone assumes trade protectionism will rule, wiser heads prevail.

This is old-school globalization (1945-1980), and it's good to see that it's still capable of moving the ball forward.

South Korea follows Japan's path to soft-power exports

WAPO story on how South Korean directors are experiencing a sort of explosion in Hollywood.  I've long been a big fan of SouKo's horror films, but now it appears that we're getting a broader flow - post-Gangnam Style:

South Korea’s film directors, like its pop stars, have been trying for years to break out of their country’s competitive but small market and into the West. Just as Korean music finally broke through last year with Psy’s “Gangnam Style,” this might be the year that Korean directors take over Hollywood.

Three of South Korea’s top directors are this year releasing, and in one case already have released, their first English-language films, often featuring top-name American actors (or Anglophones who pose as Americans), the New York Times noted in a story this weekend. The directors have long had “fan bases” in Hollywood eager to pull them into the U.S. market, the Times says, explaining that American producers appreciate that Korean directors’ “style and restraint go hand in hand with a taste for visceral, often bloody stories in popular categories like horror and crime.”

South Korea seems poised to follow the path of Japan.  It had its democratization moment back in the 1990s, and its big firms have gone from knock-offs to high-end offerings.  Now, it's time to start exporting the culture.

It's a journey worth watching.  China invariably follows this path, and the Chinese spend a lot of time watching South Korea and how it navigates from middle-income to higher realms.  South Korea is, last time I checked, just about the biggest regional investor in China and you see Koreans all over the place in major cities - especially in universities.  It seems like a positive "lead goose" effect, wherein the Chinese are more ready to follow the South Korean example than admit to doing the same with Japan.

Then again, it's natural to focus more on the country making the journey is closest historical proximity to your own.  Japan modeled itself significantly on the US, South Korea watched and copied Japan's example.  China will eventually copy South Korea in many ways, and Seoul is an excellent example of how you do it.

Charts of the day: Saudi Arabia's options

Nice full-page analysis at FT on how the Saudis have worked hard to give themselves a response option if Iran attempts to close Hormuz (far harder than imagined).

The relevant bit:

Earlier this year, Riyadh and Abu Dhabi opened new pipelines that will increase the ability of countries to bypass the strait. Fully operational, 6.5m barrels per day, or about 40 per cent of total flows, will now be able to take alternative routes. “The Middle East is much better prepared now than a year ago to cushion the impact of a disruption in the Strait of Hormuz,” says Edward Morse, head of commodities research at Citigroup and former US deputy assistant secretary of state for international energy policy.

The key number is the Saudi one.  The kingdom has managed to siphon off half their exports to other vectors.

Then look at who's at risk.  US imports only 42% of its oil, and only 16% of that comes through straits, so only about 7% of US imported oil comes through straits, or roughly 3% of total US oil usage comes through straits. Of total US energy usage, that's just under 1.5%.

So no, the US won't be crippled when Hormuz gets shut down - as unlikely as that feat would be for Iran.

The rest of Asia's hopes for China next stimulus package

Turns out China's one-party state is pretty predictable in its spoils system:  new leaders get in, investment boom follows, and you can bet the best connected princelings clean up.

So while the US resorts to QE3, the world waits and hopes for China's pattern to continue.  The biggest hopes for this path are located in Asia, where China's economic slowdown is causing the same for South Korea and Japan.

The Asian Union integration process has already begun.  Memberships were offered and accepted in the form of FDI flows and absorption into China's vast processing trade networks.  

Asia sinks or swims together, which makes for a new burden for China regarding leadership transparency (where in the world was/is Xi?), because Beijing's decisions matter far beyond China's borders.

Signs of the coming agricultural interdependency

FT story on Marubeni, the Japanese trading house, buying US grain trader Gavilon - a major corn trader.

Why buy it?  China's recent forays into the US corn market suggest the rise of a similar long-term relationship as did early Chinese forays on soybeans years ago.  China now regularly imports massive amounts of US soybeans. A similar long-term transactional relationship now seems in the works regarding corn.  Marubeni already has an agreement with Sinograin, a state-owned Chinese company that manages the country's strategic food reserves.

Military strategists of varying levels of economic awareness imagine the US, Japan and China fighting naval battles over the South China Sea.  Meanwhile, truly deep economic/resources dependencies - such as these in food - are cropping up all over the place. 

Guess which relationships prevail?

And no, comparing this to globalization-cum-1914 is too ludicrous a notion to process.  It isn't comparing apples to oranges; it's comparing apples to mammals.

BTW, growing up on the edge of the US corn belt (SW Wisconsin), this issue is near and dear to my heart.

Sounds like China moving on DPRK diplomatic front

 Reuters reporting on Yahoo News, with my HT to World Politics Review's media roundup email.

To me, this is a very good sign:

North Korea has held secret talks with Japan in what is believed to be their first contact since the death of long-time leader Kim Jong-il, Japanese media said, as Pyongyang's closest allyChina and South Korea vowed to work closely on denuclearizing the North.

Amid a series of diplomatic contacts over North Korea in China, South Korean President Lee Myung-bak met Premier Wen Jiabao in Beijing to discuss ways to preserve stability on the peninsula as the unpredictable North undergoes a delicate transition of power.

Hiroshi Nakai, a former Japanese state minister in charge of the abduction issue, met the North's delegation on Monday for talks on the abduction of Japanese nationals in the 1970s and 80s, Japan's Kyodo news agency quoted sources as saying.

The two sides are also believed to have discussed terms for restarting intergovernmental negotiations, the Mainichi Daily News reported.

Nakai's office confirmed his trip to China. A government official declined to comment on the trip.

Two logical explanations:

1. China didn't want to push anything until Kim Jong Il passed; and
2. Beijing now wants to capture successor Kim Jong Eun on the diplomatic front before any internal purging process pushes Pyongyang toward displays of aggression toward the West.

How does Beijing do this?  It makes a big show of supporting KJE to put him in a good place, and says these efforts are part and parcel of achieving the same internationally.

If this is not China as a "responsible stakeholder," then I don't know what is.

So, again, a very good sign.

Would be nice if Obama Administration made it own overtures amidst this diplomatic flurry. Could prove decisive and keep us suitably in the mix.  Alas, I think the White House is already too invested in its "strategic pivot" to contain Chinese power in East Asia, which, to me, is a perfect 20th century answer to a 21st century phenomenon.

But I can always hope for common sense to re-emerge post-election . . ..

Time's Battleland: Why Japan won't go all Caldicott over Fukushima

No, that ain't the Kool-Aid.My favorite - and most frustrated - anti-nuke activist Helen Caldicott believes Fukushima drives Japan out of the industry and - by extension - kills the industry worldwide.

Read the entire post at Time's Battleland blog.

Wikistrat's "The World According to Tom Barnett" 2011 brief, Part 6 (Flow of Security)

In this section I cover the symmetricization of the Long War, nuclear proliferation (and the lack thereof), how America shaped this world with its grand strategy, and who the key superpowers will be in the post-2030 landscape.

How to sell to old people

Economist article on how Japan is learning to do this, and we watch Japan because it's farthest along in this demographic aging process:

Ueshima never explicitly describes itself as a coffee shop for the elderly. But it targets them relentlessly—and stealthily. Stealthily, because the last thing septuagenarians want to hear is that their favourite coffee shop is a nursing home in disguise.

Japan is greying fast: already a fifth of its people are over 65. And the “silver generation” has gold to spare. The incomes of middle-class working folk have declined in the past decade, but seniors are sitting on a vast pile of savings. Almost a third of the nation’s household wealth, some ¥450 trillion ($5.8 trillion), is in the hands of those aged 70 and older (see chart). In the West, the elderly pinch pennies, but Japan’s seniors pay extra . . . 

Many firms tailor their services to silver shoppers without letting on, explains a marketing specialist .  . . But inside there are chairs for weary shoppers. Signs are in large fonts. Many salespeople are in their 50s and 60s, since elderly customers trust such people more than whippersnappers. The food hall promotes good old-fashioned Japanese noodles more than newfangled foreign muck.

The shelves are lower, so older people can reach them. (Because of wartime food shortages, the elderly are much shorter than their juniors in Japan.) Loyalty cards at Keio award points not according to what you buy, but according to how often you visit. “Seniors have a lot of time on their hands,” the marketer explains.

Marketing to the elderly is tricky. The direct approach—say, calling your product “the soap for the over-70s”—does not work. And traditional advertising fails. “You can’t use TV adverts: they forget them,” groans the 30-something executive. “We show it again and again and again—and they still can’t recall it,” he sighs. Word-of-mouth is the only way.

Fascinating stuff.  It'll be interesting to see how this translates to the US environment.

WPR's The New Rules: U.S. Global Role Depends on Hard Fiscal Choices

Much of the global perception of America's long-term decline as the world's sole surviving superpower is in fact driven by our fiscal decline. That's why I was disturbed to hear Democrats so quickly dismiss GOP Sen. Paul Ryan's bold, if flawed, federal budget proposal on the grounds that it would "end Medicare as we know it."  Frankly, arresting our decline means ending a lot of things "as we know them." That's simply what being on an unsustainable path forces you to do.

Read the entire column at World Politics Review.

Will we see National Food Companies?

FT story.

Marubeni is a Japanese trading company. Historically focused on importing energy and raw materials to resource-poor Japan (the map to the right show's the company's global network of independent power producers), Marubeni is also the world's sixth biggest grain trader by volume.  

Marubeni's chief exec just announced that he wants the company to break into the top tier, known as the "ABCD group" (for ADM, Bunge, Cargill, Dreyfus and "lowly" Glencore--which apparently doesn't rank a letter).  Marubeni's grain traffic has doubled in the last five years, so it's no idle boast.

My thought, which I've been toying around with in the Wikistrat global model, is that global ag markets already resemble energy markets in their tightness of supply and volatility of price, so, when you consider that France-sized chunk of arable land that's been taken off the market over the past few years through purchases and leasing, can't we start talking about the rise of National Food Companies, or companies that have, as their guiding logic, the securing of food networks abroad for a primary national customer back home?  

Economist chart found here.

I mean, when China or Saudi Arabia sign these contracts, I gotta bet we're talking investing entities with some serious ties to the government - advertized or not.

Actually, Marubeni's ambition reflects a region-wide focus, since China is already its bigger market.  What's especially interesting about its ambition is how Marubeni uses its grain trade to get into ancillary markets like milling and animal feed processing.  

Just got me thinking . . . 

Chart of the day: From population "pyramid" to "kite"

Economist special report on Japan, mostly about aging.

Japan is merely the first to shuffle into this undiscovered country. In 2050 it's median age will be 56.  It's 45 now.  So a jump of almost a dozen years in 4 decades.  Fast, right?  I mean, that's a year increase every three and a half years.

But consider this:  China sits now at 35 and will be at 47-48 come 2050, or a jump of 12-13 years over the same time period. That's a 35% increase in the median age, compared to just under 25% for Japan. And remember the size differential:  China is ten times the size of Japan.

America now?  Thirty-six.  Which means China will pass the U.S. in yet another category soon.  America in 2050?  Just a grey hair under 40.  A modest rise of 3.9 years, meaning we're aging at one-third the pace of either country, or a total increase of only 11%.

Think about a country being like a man.  I don't know what 56 is like, but I know 48 ain't the same as 39-40. China best enjoy its "century" while it can.

You want to keep it young in Asia, try India and SEA Asia:  24 now and 32 then.  Bit of a change there at 33%.  But it suggests that outside of China, Japan and Korea, the rest of Asia won't hit middle age until near the end of the century.

Learning from the yen

FT column by Gillian Tett says to read journalist-cum-banker Taggart Murphy's history of the yen to understand the way ahead on the renminbi, also considered to be held to artificially low value by its government.

But what caused the trade imbalance, argues Murphy was: 1) the US Fed deficit structurally built into the body politic by Reagan, and 2) the Japanese "development state" system of national leverage, centralized credit allocation and credit risk socialization (the govs stood behind banks).

That's all ancient history now, and Japan's gov today intervenes to weaken the strong yen.  

Tett says just read the book and swap out Japan for China and it all makes sense all over again.

This has been my argument in the brief for a couple of years now--a grand strategic choice by America that enabled export-driven growth in Asia while allowing us to: 1) be a military superpower and 2) ask for no sacrifice from society because money remained so cheap.

How did Japan escape the grind?  Not well.  (And the same can be said for us today.)  Japan worked to spur domestic demand while keeping exports strong, and that paved the way "for a crazy bubble, followed by a bust, and more currency instability in subsequent years."

Murphy's point:  "Changing the units of account had not the slightest chance of dealing with these fundamentals.  But they made for a more unstable world."

In other words, be careful what you wish for.

This is a consensus argument I find:  it's not the pegging that hurts us but the sterilization of the foreign currency won in the process (i.e., China's continued insistence of controlling its allocation in a macro sense).

What went wrong with Japan is that it outgrew the need for central control of capital allocation via a state-dominated banking system.  It outgrew that system like a child outgrows shoes, says Tett.  But it waited too long to reform the system--the same danger that awaits China, one imagines.

And yet, China claims to be growing up its system as fast as possible.  Tett says the pace remains too slow.

Macro lesson of Murphy's book:  the twin dangers of rapid revaluation and too slow reforms.  In between lies the sweet spot of making capital allocation more marketized and efficient, letting in a reasonable amount of inflation but not too much.

Old story I would add:  centralized and authoritarian works for extensive growth under conditions of scarce capital, as centralized allocation allows the state to direct growth.  But once the economy matures or "complexifies" sufficiently, the system outgrows the crudity of that initial system and needs the wisdom of crowds larger than can be assembled in one room in Beijing.

Iran's oil exports not choked, but redirected eastward

Our sanctions are described as "choking" Iran's exports.  But what I see is an export level dropping in concert with production, where the sanctions may be having significant impact, but probably not as much as claimed. 

Clearly, what the sanctions etc. has done is redirect Iranian oil exports from Europe & Japan to "rising" Asia. Eventually, the investment profile will change to reflect that, meaning the energy investments Iran attracts will likewise be shifted from West to East.  It just takes longer.  

Naturally, the Obama administration wants to shut down that possibility as well, but I suspect it'll be far less successful simply because rising Asia needs oil and gas from EVERYBODY, and can't afford our WMD qualms.

And frankly, why should they when we shield our best-boy in the region on the same subject?

Scary, I know, but eventually Iran's nukes gets Israel the strategic security it needs.  Frightening journey, yes, but I've yet to see an alternative pathway of any serious plausibility.

Japan: apparently no de-globalization as it ages?

Special FT insert on Japan's business climate.

Two things I took note of:  Gov seeks to lure foreign investors (not a usual headline re: Japan) because it realizes "that the country has come to rely on the outside world to support growth"; and banks looking to expand externally to counter stagnate growth at home.

Point being: Japan's demographic decline isn't making its business climate less open but just the reverse.  The biz community and government see an even more compelling logic for deeper connection with the global economy.

Japan starts pushing China on trade and currency

FT story on how Japan getting testy in China's direction over rise of yen and growing Chinese purchases of Japanese debt--sound familiar?

Japan's finance minister, speaking in the parliament, complains that it's a one-way street:  Japan cannot buy Chinese currency or debt.  Meanwhile, China's yen purchases this year are 6x larger than the previous five years put together.

All this while the latest maritime spat plays itself out.

Japan's Democratic Party won power for several reasons, to include their promise to work for a "relationship of trust" with China.

No one, for now, predicting a decline in relationships similar to 2005, because the economic bonds have grown spectacularly since then.  But something to watch:  in May China promised to restart talks on bilat exploitation of gas in East China Sea.  Does that go away now?

South Koreans are now bitching about the same things.

So we see continue to see natural regional resistance to China's rise, which is less a choice on China's part and more of a negotiation on everybody's part. Beijing seems to be losing track of the latter reality.

But that will change.

Japanese employers have a counteroffer to Beijing

WSJ story in which Japan is basically saying to China, if you want us to stay, you have to make your legal system more transparent and your business rules more robust.  

Lately, as a result of worker unrest against Japanese factories in China, Beijing has been lecturing the Japanese on the need to pay its workers better wages.  So apparently the Japanese have decided to return the lecturing favor.

In effect, this is Japan joining the growing chorus of Western businesses complaining about China's increasingly hostile investment and business environment--a big sign, in my mind.

Cybersecurity as a way to revitalize the US-Japan alliance

FT op-ed by John Alkire, managing director of Morgan Stanley Japan.

Basic argument:  we share a common enemy in China's persistent and pervasive cyber snooping and industrial theft.  Recently, US and Japanese officials agreed to stop cyber-snooping on each other and cooperate on cyber-security--basically the cyber equivalent of a traditional military alliance.  Alkire even goes so far as to say we should stand up a joint cyber-security facility on Okinawa to finesse the continuing tension over the US marine base there.

So yeah, little to no chance of us every landing Marines in China, but cyber-security "forces"?  There you have my attention.

Why "the coming war with Japan" isn't coming

Referencing George Friedman's 1991 book, and the notion he still peddles in The Next 100 Years about the U.S. and Japan squaring off in a "war of the worlds" space battle that involves secret moon bases right out of James Bond.

This is James Fallows in front-of-mag bit in The Atlantic.

He returns to an old neighborhood of his and "finds an inward-looking country that has lost its ambition."

I have heard this refrain from a number of Japanologists.  The kids there are zoning out the world.

Is it a wealthy place?  Definitely.  But a self-satisfied one too, facing an extreme demographic decline (getting smaller and older at a stunning pace).

An interesting example of the turn inward:

The Japanese youths, scientists, and businesspeople of the 1980s, like their Chinese and Korean counterparts today, were bursting to use their country's success as a platform to engage the rest of the world, by traveling, investing, studying.  As The Washington Post recently pointed out, only half as many Japanese students are now enrolled at U.S. colleges as 10 years ago--the opposite of the trend in almost every other nation.  The tight job market has discouraged students from doing anything as "risky" as spending time outside the Japanese school system.  The elbows-out cockiness of the Japan I remember caused its frictions.  But I miss its eagerness for a new version of itself.

What happens when your population shrinks by half over a half century?

You don't become more ambitious, or war-like.