President Barack Obama’s trip to Asia this week has focused mostly on Japan’s territorial disputes with China. On this issue, Obama seems to be repeating the same mistakes he made in Ukraine.
By creating false expectations of U.S. support for the Japanese position, the president is encouraging Japan to escalate its belligerent rhetoric. That, in turn, makes Chinese military action to seize the disputed islands more likely. Everyone knows that there is no chance of the United States going to war with China to defend Japan’s claim to four uninhabited lumps of rock.
Luckily, a military confrontation in the East China Sea remains highly unlikely because the Beijing government’s top priority is economic and financial reform. Unfortunately, this seems less true of Japan.
Prime Minister Shinzo Abe’s attention seems to have shifted from economics to diplomacy and military matters — and financial markets have started to notice this disturbing change of focus. The clearest evidence can be seen in the relative performance of the Japanese stock market.
Equities around the world have enjoyed a strong rebound in the past few weeks. While the U.S. and several European stock markets were again challenging record highs this week, the Tokyo market has been by far the world’s worst-performing stock market, down 10 percent so far this year.