Japan vs. China: Clash of the Asian Titans

What in the world is going on between Japan and China these days?! Are these Asian superpowers about to engage in a full-on war? Let me give you a quick recap of what’s going on so far, what we can expect, and how we could profit from all this drama.

It’s no secret that Japan and China have been “frenemies” for the longest time. The tension started heating up recently when China had a territorial dispute with Japan when it comes to ownership of a few islands in the East China Sea. This area, which is known to Japan as the Senkakus and to China as the Diaouyu Islands, is surrounded by waters rich in oil reserves and rare minerals.

These islands have been controlled by Japan for years but it appears that China wants a piece of it, as Chinese ships and drones have been lingering nearby. Because of that, the Japanese government issued a warning that it could strike down those unmanned drones if they come too close.

In response, Chinese defense ministry spokesperson Geng Yansheng said that Japan should not underestimate the Chinese army’s determination and ability to defend their territory. “If Japan does what it says and resorts to enforcement measures like shooting down aircraft, that is a serious provocation to us, it is an act of war,” he added. “We will surely undertake decisive action to strike back.”

History buffs say that this revived rivalry between the two nations comes at a crucial point when China is struggling to return to its glory years of double-digit economic growth and Japan is fighting to emerge from decades of deflation. Also worth noting is that China’s recent territorial claims against other Asian nations haven’t resulted in an all-out war so far and that Japan has always attempted to pursue the more peaceful alternative in resolving conflict.

However, an actual war between Japan and China is still a possibility, as neither is showing signs of yielding or coming up with a compromise. If this happens, it could spark a prolonged risk-off period, which might hurt higher-yielding assets as well as currencies from Asian nations and emerging markets.

Commodity currencies, particularly the Australian dollar and the New Zealand dollar, are already starting to weaken because of the ongoing uncertainty. After all, should China engage in a war with Japan, much of its capital would be allocated to defense, leaving less resources to shore up production and trade activity.

While the lower-yielding yen tends to strengthen during periods of risk aversion, it appears that traders are not too eager to park their money in the Japanese currency either. Better keep close tabs on any updates on this issue since it could mean more safe-haven flows to the dollar!

  • Jack

    Information such as this piece posted on babypips provide good knowledge to people, HOWEVER, there’s still uncertainty on the fact that whom Senkakus or diaoyu island belongs to. They are still arguing about that. Big forums such as babypips when posting, should not be bias or assume facts that’s not certain. This is definitely unacceptable.


  • Bruce

    Who are you kidding, Jack? Everyone in the world knows that China is having a hard time sustaining growth so it’s out to grab other territories from other countries who are just minding their own business. It’s so obvious. Ask Vietnam, Malaysia, the Philippines, Brunei… and now Japan.

  • Aaron

    Who are you kidding Bruce? Why don’t you ask South Korea or Russian about their territory disputes with Japan? You obviously need a lesson in history. And you need to learn how to be objective.

  • Han

    Please get the fact right before making comments. The islands have never been owned by Japan. Japan started the dispute by nationlizing the islands. Japan wants to start war and not China. The main culprit is US who let Japan to control the islands knowing that China owns the islands.

  • forexpips

    How about you guys take this “history lesson” somewhere else? You’re missing the point of the article, which is that the tension is keeping risk off and comdolls/yen weak. It’s a territorial dispute which means we’re not in a position to say who’s right or wrong. Now you all can debate about it or just try to make profits off this, which is what this FOREX TRADING site is all about anyway.

  • Jack

    I don’t wanna start a war here. I simply just want to point out that Babypips should not be bias when posting info such as this and be subjective to these sensitive issues and get the fact right. It is influencing people with wrong idea. Even big newspaper agency post wrong facts, they will apologies publicly. I’m not saying babypips should do that but they should correct it as least.

    Hope to get a reply from Babypips on their thoughts.


    P.S. Is there any report article button? i dont see it lol

  • Bruce

    If you know how to use Google, you’d see that actual news sources have the same information. I don’t see any inaccuracy on this entry. It’s bound to have biases, you need to make opinions when you’re a trader.

  • Hm, i dont think its important who started what for a lowly trader like myself since i cant help anything about it. The risk turning away from yen is useful but that’s it from an fx p.o.v.
    I also dont think there will be an actual war over it anytime soon since they both know this would cost a LOT of resources that would need to be diverted, let alone the bad publicity and the international conflict or the fact that the americans would have to make a choice towards their allies against china in this case, something they definitely not want to do openly and military im sure of that so barring the un i think the us alone would lobby to prevent escalation of the conflict into a full scale war. No one would benefit from it and in the meantime no one would get any of the resources there either, maybe some of it would become unusable or unreachable for some time after even.
    The only thing that could probably start a war is some freak accident blowing something up thats manned or some stray bullet or someone on patrol panicking and shooting someone. Other than that world powers have to save face in matters like these they cant just give in. Also keep in mind both countries have a somewhat conservative majority in government in place which makes diplomacy probably even harder because of the underlying nationalism that comes with that. China and Japan have a history and its probably very hard for top politicians on either side to make the first step into i dunno maybe a joint venture protected from other nations. I dont know what this trans pacific pact is all about yet either im sure anyone involved in that wouldnt want any kind of open war either so in short as i said, i dont think there’ll be rockets flying around any time soon