Risks in Japan’s Relations with China, South Korea, and Taiwan · PDF fileChina, South...

Risks in Japan’s Relations with China, South Korea, and Taiwan

eurasia groupDefi ning the Business of Politics.

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Prepared for PricewaterhouseCoopers Aarata

This confidential report is intended solely for the internal use of PricewaterhouseCoopers Aarata and is based on the opinions of Eurasia Group analysts and various in-country specialists. Eurasia Group is a private research and consulting firm that maintains no affiliations with governments or political parties.

© 2013 Eurasia Group, 149 Fifth Avenue, 15th Floor, New York, NY 10010

22 August 2013

Nick ConsonerySenior Analyst, Asia+1 [email protected]

John GreenDirector, Research+1 [email protected]

Scott SeamanSenior Analyst, Asia+1 [email protected]

Sean WestDirector, United States+1 [email protected]

Risks in Japan’s Relations with China, South Korea, and Taiwan

Contents

Key takeaways 1

Japan 1

Introduction 1

Domestic politics 2

Foreign policy 2

Economics and trade 3

The US rebalancing toward Asia 5

Japan and China 6

Introduction 6

Domestic politics 6

Foreign policy 6


Japan and South Korea 7

Introduction 7

Domestic politics 8

Foreign policy 8


Japan and Taiwan 9

Introduction 9

Domestic politics 9

Foreign policy 9


Risks in Japan’s Relations with China, South Korea, and TaiwanPrepared for PricewaterhouseCoopers Aarata | 22 August 2013 1


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Key takeaways

•TheJapanesegovernment’smoreassertiveeconomicandsecuritypoliciesarecreatingchallengesforthecountry’smaintenanceofpositiverelationswithChina,SouthKorea,andTaiwan.

•TheUSrebalancingtowardAsiawillstrengthenitsbilateralallianceandeconomictieswithJapan,butPrimeMinisterShinzoAbe’snationalistrhetoricandtougherstanceonsecurityissueswillcontinuetocomplicateUSrelationswithChinaandSouthKorea.

• TensionsbetweenJapanandChinawillpersist,butthetrajectoryforbilateralengagementisimprovingasbothcountriesareworkingtoputrelationsonamorestablefooting.

• GrowingeconomicinterdependenceandanalignmentofstrategicinterestssupporteffortsbyJapanandSouthKoreatoimproverelations,thoughPresidentParkGuen-hye’sfocusondeepeningtieswithChinamayslowandcomplicatethoseefforts.

• JapanandTaiwanhaveacomparativelygoodrelationshipthatwilllikelyremainso;TaiwanismoreconcernedabouteconomiccompetitionwithSouthKoreathanwithJapan.

JapanIntroductionThegovernmentledbyAbeandhisLiberalDemocraticPartyisimplementingambitiousplanstoreinvigorateJapan’seconomyandstrengthenitsdefenseandsecuritypositions.Whilemuchofthispolicyagendafocusesonpromotingdomesticchange,itisalsogeneratingawiderangeofpoliticalandeconomicexternalitiesthatcreatenewchallengesforrelationswithChina,SouthKorea,andTaiwan,aswellasmanyothercountriesinAsiaandaroundtheworld.

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Domestic politics WhileJapan’sshifttotherightisoverstated,thereisnoquestionthatAbeistakingatougherstanceonforeignpolicyissuesandotherchangesthatincreasetheriskofheightenedtensionswithJapan’sAsianneighbors.AlthoughAbemadeitclearaftertheupperhouseelectioninJulythatheintendstoremainfocusedoneconomicmatters,heandotherright-leaningpoliticianswillcontinuetopromotediscussionsoncontroversialissuessuchasconstitutionalrevisionandeducationalreform.EvenifAbe’sgovernmenttakesameasured,incrementalapproachtointroducingchangesintheseareas,thefactthatAbe’sgovernmentpursuesthemwillratchetuppoliticalpressureongovernmentsinChina,SouthKorea,andTaiwantohighlight—andvigorouslyprotest—aperceivedriseinmilitarismandhistoricalrevisionisminJapan.

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Foreign policyBothagreateremphasisonadvancingpolicyareasofinteresttoright-of-centerpoliticalgroupsandAbe’splanstoenhanceJapan’sdefenseandsecuritycapabilitieswilllikelycomplicateeffortstomanageterritorialdisputeswithChinaandTaiwanovertheSenkaku/DaioyuislandsandwithSouthKoreaoverTakeshima/DokdoIsland.ButotherpressingsecuritydilemmassuchasthechronicthreatofNorthKoreanbelligerence,aswellasJapan’schangingdomesticpoliticalandeconomicdynamics,willpromptgovernmentsinJapanandelsewheretoconsiderrefocusingtheirattentionandresources.Itisunclearwhetherasignificantrecalibrationofforeignpolicyprioritieswillresult.Yetconditionsinandaroundthesecountrieswillremaininflux,creatingpotentialflashandinflectionpoints.

Abe’seffortstostrengthenthesecurityalliancewiththeUSaremotivatedinlargepartbyadesiretocounterbalancethegrowinginfluenceofChinaandhelpJapanrespondtootherthreatsintheregion.HisdiplomaticoverturestoSouthand



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SoutheastAsiaaswellascountriessuchasMongoliaandRussiareflectsimilarmotivations,thoughAbeandtheJapanesebusinesscommunityarealsokeenlyinterestedincreatingnewcommercialopportunitiesintheregionoutsideoftheChinamarket.Itisunclear,however,towhatextentandhowquicklyJapanesebusinessescandiversifytheiroperationsandinvestmentsawayfromChinatootherpartsofAsia,andwhatgeopoliticalchangeswouldresultfromsuchashift.

Economics and tradeAbeispromotingacombinationofmonetaryeasing,fiscalstimulus,andstructuralandregula-toryreformthatmakeupthecoreofhiseconomicpolicyagendaasameanstodefeatdeflation,enhancethecompetitivenessofJapaneseindustries,andgeneratesustainable,long-termgrowth.Whileitisstillunclearwhetherso-calledAbenomicswilldeliverasadvertised,someofitseffectsarealreadyinfluencingJapan’srelationswithcountriesinAsiaandelsewhereandwillkeepdoingsoformanyyears.

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Inthenearterm,loosermonetarypolicyandaweakeryenwillcontinuetofuelconcernsinChina,SouthKorea,andTaiwanabouttherisksposedbycheaperJapaneseexports,especiallyinsectorssuchasconsumerelectronicsandautomobiles,wherethesecountries’firmsoftencompetehead-to-headwithJapaneserivals.Whileafull-blowncurrencywarisunlikely,afurtherdropinthevalueoftheyenwouldincreasepressureonJapan’scompetitorstointroducecountermeasurestoshielddomesticcompanies.Inaddition,Japan’sparticipationinnegotiationsfortheTrans-PacificPartnership(TPP)tradeagreementhasgeneratedmomentumbehindtheeffortsofJapan,China,andSouthKoreatohammeroutatrilateraltradedeal.Thatsaid,theebbandflowoftensionsbetweenthesecountriesandJapaninotherareaswillaffectthepaceandoutlookforsuccessofthislatterendeavor.



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Value of Japan’s imports and exports 2012

Source: JETRO

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ImportsExports 37%

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Inthelongerterm,Abenomics—whetheritsucceedsorfails—willhavealargeimpactonJapan’spoliticalandeconomicrelationswithAsiaandtherestoftheworld.Ifstrongergrowthremainsontrack,Japan’sdemandforimportswillclimb,providingbenefitsformanyexportersinothercountries.However,asustainedresurgenceinJapan’seconomicstrengthcouldthreatentheinterestsofeconomicallyandpoliticallyinfluentialgroupsincountriesthroughoutAsia,therebyrampinguppressureforprotectionismthatdistortstradeandinvestmentflows.ButifAbenomicsproducesonlyashort-livedboost,alatereconomicdownturnwouldundercutdemandinJapanandacceleratemovementofJapaneseFDIandportfolioinvestmentstomarketselsewhere,manyoftheminAsia.TheinevitablepushandpullofAbe’seconomicinitiativescreatesahostofnewforcesthatwillshape—forbetterorworse—Japan’srelationswithChina,SouthKorea,Taiwan,andcountriesthroughouttheworld.



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The US rebalancing toward Asia The administration of President Barack Obama sees the Asia-Pacific region as one full of economic opportunity and geopolitical risk. As its clout has expanded, China has charted a more aggressive course in managing its ter-ritorial disputes with Japan and several Southeast Asian countries. At the same time, the rapid growth of econo-mies in China, South Korea, and Southeast Asia has made the Asia-Pacific region the driver of global growth. This intersection of risk and opportunity has motivated one of the Obama administration’s most important foreign policy initiatives—originally called the strategic pivot to Asia, but rebranded in recent months as a rebalancing toward Asia.

This initiative has both security and economic elements. The TPP, a trade deal that would include at least 12 countries and 40% of global GDP, sits at the nexus of both elements. In addition to lowering tariffs, the TPP will tackle issues such as regulatory coherence and rules to reduce the market distortions often created by state-owned enterprises. But the TPP’s benefits go beyond the economic realm. It will also give the US a platform to strengthen security relationships with old allies such as Japan and South Korea and build relationships with new friends such as Vietnam. Concurrent with closer alliances, the US will gradually move military hardware to the region from other areas, such as Europe, where security concerns have declined. However, the rebalancing may ultimately be less significant than planned, as growing budgetary constraints force the US military to reduce the size of its naval and ground forces and reallocate these now scarcer resources globally.

The US rebalancing toward Asia is a positive development for Japan. It will promote stability in the region and provide Japan with new opportunities in the US market. In particular, the rebalancing should reassure Japanese officials that the US would defend Japan if it were to come under attack by another country, including China. The US has made it clear that while it does not maintain a position on the sovereignty issue, it considers Japan’s administrative control of the Senkaku/Diaoyu islands to be covered by the US-Japan security treaty. Nevertheless, it still expects Japan to do whatever it can to settle this dispute as peacefully as possible.

A central security component of rebalancing is strengthening the US-Japan-South Korea trilateral relation-ship. The US has made it clear that it regards the Japan-South Korea relationship as Japan’s most important in the region. After taking office after last December’s lower house election, Abe softened his rhetoric on issues such as the territorial dispute with South Korea over Takeshima/Dokdo Island and revision of the Kohno Statement on Korean comfort women. But if Abe sharpens his focus on issues that inflame negative emotions in neighboring countries, the US will have a more difficult time balancing the interests of Japan and South Korea as key allies and managing its already challenging relations with China.

Any impact that the US rebalancing has on Japan-Taiwan relations will be more modest and center on trade. Taiwan has expressed interest in eventually joining the TPP, a move that the US supports in principle. Yet given Chinese sensitivity and the need for market reforms in Taiwan, its membership is unlikely to occur for several years. Should Taiwan eventually join, it would further expand Japanese market access in the region.

The rebalancing is good news for Japanese security and trade ties. But it will also push Japan to play a larger role in regional leadership.



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Japan and ChinaIntroductionChina’srelationshipwithJapanhasbeenparticularlytroubledsinceSeptember2012,whenBeijingreactedstronglytoTokyo’spurchaseofthreeisletsintheSenkaku/DiaoyuchainfromprivateJapaneseowners.Beijing’ssubsequentdecisiontostokenationalistsentimentwithinChinaandtoimplementamaritimestrategydesignedtochallengeJapan’sadministrativecontroloftheislandselevatedgeopoliticalandbusinessriskinJapan-ChinarelationsandacrossAsia.Nevertheless,theriseintensionsbetweenJapanandChinaappearstohavepeakedinrecentmonths,withimportantchangesinbothsides’behaviorindicat-ingthatafurtherdownturninrelationshasbecomelesslikely.

Domestic politicsChina’sleadershipremainsunderconsiderabledomesticpressuretodefendagrowingarrayofinterests.Beijingwillstillneedtoberesponsivetoanationalisticpopulationandtothestrategicgoalsofthemilitary.ThenationalismwillremainprimarilydirectedatJapanbecauseofperceivedhistoricaltransgressionsandtheCommunistParty’slegitimacy,whichdependsinlargepartonitsabilitytoportrayitselfastheprimarydefenderofChina’ssovereigntyandnationalinterests.ThegovernmentwillbeunwillingtochangeitspositiononterritorialdisputesandwilllikelycontinuetotestJapan’scontroloftheSenkaku/Diaoyuislands.Thatsaid,thenewleadershipisseekingtobelessconstrainedbynationalisticfervorandsensesspacetopursueamorepositivetenorinrelationswithJapan.

Foreign policyThedeploymentofadditionalChineseandJapanesemilitaryassetstotheEastChinaSeahasincreasedthedangerofamiscalculationoraccidentatseasparkingacrisis,andJapanesecompaniesremainconcernedthatanewbilateralflare-upcouldpromptChineseboycottsofJapaneseproductsorattacksonJapaneseassetsinChinasimilartothosethatoccurredlastfall.However,thenewgovernmentledbyPresidentXiJinpingismovingawayfromthestridentlynationalistandmoreassertiveforeignpolicyapproachintheAsia-Pacificregiontowardasoftertack.ExamplesofthisshiftincludenewandexpandedmilitaryengagementswiththeUSandmountingpressureonNorthKoreatorestrainitsprovocativebehavior.

TherearealsostrongindicationsthatChinaandJapanareworkingtocircumventtheirdiplomaticimpasseovertheSenkaku/Diaoyuislandsinthehopesofstabilizingbilateralrelationswithoutcompletelyresolvingthisdispute.AbesentViceForeignMinisterAkitakaSaikitoBeijinginlateJulytotalkwithhiscounterpartthere,andtheChinesegovernment’sdecisiontoarrangeameet-ingforSaikiatahigherlevelwithForeignMinisterWangYidemonstratedtheimportanceitattachedtohisvisit.Abe’sdecisiontosendarepresentativetotheYasukuniShrineon15Augustinsteadofvisitinghimselfindicatedasimilarwill-ingnessfromJapantotakepoliticalrisksathomeinordertokeepthedooropentoimprovingthebilateraldialogue.ThoughChinaandSouthKoreaprotested



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whenotherJapanesepoliticiansvisitedtheshrineandcriticizedthespeechtocommemoratetheendofWorldWarIIthatAbemadeataseparatevenue,theirreactionasawholewasrelativelymild.YetdespitetheseeffortstogentlypushtheJapan-Chinarelationshipinamorepositivedirection,thereremainsariskofanintentionalorinadvertentprovocationrekindlingtensions.

Overall,China’slessconfrontationalapproachtorelationswithJapanandothercountriesinAsiaisdrivenbyagreaterrecognitionamongChinesepolicymakersthatmoreassertivepositionsregardingdiplomaticandterritorialdisputessince2010havecreatedabacklashintheregionthatdamagesChina’smedium-terminterests,especiallybycreatingnewopportunitiesfortheUStosolidifyitspresencethere.Moreover,China’snewleadersappeartobelievethatheightenedregionaltensionsriskunderminingeffortstoachievenationalsecurityanddevelopmentgoalsaswellasmakeprogressinthegovernment’sdomesticpolicyagenda,whichistheirprimaryfocus.Japanisacaseinpoint,aslossesinChinarelatedtothedisputeovertheSenkaku/DiaoyuislandshavediminishedJapanesecorporateenthusiasmfornewinvestmentsinChina;thoseinvestmentshavebeenanimportantdriverofjobcreationinChinafordecades.

Economics and tradeEconomicswillcontinuetopromotestabilityinJapan-Chinarelationsbylimitingthegovern-ment’stoleranceofthechronictensionsthatsignificantlyhinderbilateraltradeandinvestmentflows.Thisdynamic,atthesametime,reducesthewillingnessonbothsidestopursueretributivetrademeasures,thoughthesizeofitsmarketmakesChinamorewillingthanJapantoemploytraderestrictionsasleverageintheirdisputes.Moreover,marketconcernsthatAbenomicswillaggravatebilateraltensionsarelikelyoverstated.WhileChinesepolicymakersworrythatJapan’smonetaryeasingwillenhanceinflationarypressuresandcapitalinflowsintoChina,inflationindi-catorsinChinaaretrendingdownwardatthemoment.Also,givenChina’sactiveinterventionsinforeignexchangemarketstooffsetappreciationpressureontherenminbi,itisinaweakpositiontocriticizeJapanasapotentialcurrencymanipulator.Lastly,Japan’sstrongdemandforChineseexportssuggeststhatitisinChina’sinterestforAbenomicstosucceedinproducingamorerobustandrapideconomicrecoveryinJapan.

Thatsaid,JapaneseandotherforeignfirmswillremainexposedtoaheightenedlevelofpoliticalrisksurroundingChina-Japanrelations.Thoughlookinglesslikelynow,anewspikeintensionsaroundterritorialdisputescouldnonethelessreigniteboycottsofJapaneseproductsinChina,andtheChinesegovernmentorevencorporateactorsmighttakestepstohampertraderelationsbetweenthetwocoun-tries.Anuptickinfrictioncouldlikewisethreatentospilloverintothecorporateregulatoryrealm—inparticularbyleadingtoslowdownsinChina’santimonopolyreviewprocess.ThecommerceministryreportedlyfrozeapprovalsforanyinternationalM&AdealsinvolvingJapanesefirmsforanumberofmonthsduringtheperiodofamplifiedbilateraltensionslastyear.ThatfreezefueledcorporateandinvestoruneasethatChinamightusethisregulatoryprocessforpoliticalpurposes.

Japan and South KoreaIntroductionSouthKoreaandJapanhavesufferedperiodicboutsofbilateraltensions,andthispatternislikelytopersist.Butwiththetwocountries’economiesbecomingmoreinterdependentandtheirstrategicinterestsincreasinglyconverging—particularlywithrespecttoNorthKorea–relatedrisks—South



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KoreahasasolidinterestinimprovingcooperationwithJapanandavoidingactionsthatriskseriouslydamagingbilateralrelationsortradeandinvestmentflows.

Domestic politicsNationalismdirectedagainstJapanisanessentialpartoftheKoreanidentity.IssuessuchasSouthKorea’sclaimoverthedisputedislandofTakeshima/Dokdo,Japanesehistorytextbooks,andespeciallythedemandsforanapologyandcompensationforformerKoreancomfortwomenremainhot-buttonnationalissues.AsthedaughterofformerpresidentParkChung-hee,Parkisunderheavypressuretoavoidappear-ingtobeoverlyfavorabletowardJapan.HerfatherwasanofficerinJapan’sarmy,wasfluentinJapanese,andsignedatreatytonormalizerelationswithJapanin1965.WhilenormalizationhelpedleadtoSouthKorea’srapideconomicdevelop-ment,mostSouthKoreansstillfeelitfailedtoproperlyaddresssufferingimposedbyJapan’soccupation.Evennow,PresidentPark’sdomesticpoliticalfoesbrandherfatheras“pro-Japan,”apowerfulstigmaforSouthKoreanpoliticians.

Asaresult,ParkmustwalkafinelinebetweenappearingtooclosetoJapanwhilestillmaintainingeffectivecooperation.ShehasahistoryasanadvocateforcomfortwomenseekingrestitutionfromJapan.YetsheislikelytoexerciserestraintandrefrainfromdeliberatelystokingnationalismforpoliticalpurposesasherpredecessorLeeMyung-bakdidwithhisvisittoTakeshima/Dokdoin2012.OnlyiftheactionsorrhetoricofJapanesepoliticiansoffendtheSouthKoreanpublicwillParkrespondbymakingstatementscriticalofJapanasshedidon15AugustwhensherepeatedhercriticismofJapanesepoliticiansforvisitingYasukuniShrine.Buthercriticismwassofterthaninpreviousstatements,perhapsbecauseAbedidnotgohimself.FrictionscouldworsenifJapanesepoliticalleaderstakeactionsthatgobeyondtheusualvisitstothisshrine—suchasrevisingorwithdrawingthe1993KohnoStatement.Suchamovewouldprovokedemon-strationsandboycottsinSouthKoreaofJapanesegoodsandfirms.

Foreign policyParkwilltrytostrikeadelicatebalancebetweenimprovingbilateralrelationswithJapanandcultivatingcloserrelationswithChina.WhileParkseekstoimproverela-tionswithJapan,shewillnotdosoattheriskofalienatingChina,whichhasbecomeSouthKorea’stoptradingpartner.Parkhassaidamaingoalofheradministrationistonegotiateafree-tradeagreementwithChina.SymbolicofherintentiontochartanewcourseforSouthKorea’sforeignpolicy,ParkmetwithChina’sambassadortoSouthKoreabeforemeetingwiththeJapaneseambassador,andmetwithXiwhenshehasyettomeetwithAbe—areversalofthediplomaticpeckingorderinthepast.ParkspeaksfluentChineseandwasthepreviousgovernment’sspecialenvoytoBeijing,whichequipshertoworkwellwiththenewChineseleadership.

Economics and tradeEconomicrelationsbetweenJapanandSouthKoreaarelikelytobeastabilizingforceinthebilateralrelationshipdespiteoccasionalflare-upsoverhistoricaland



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territorialdisputes.WhileChinaisSouthKorea’smostimportanteconomicpartner,JapaneseandSouthKoreanfirmsalsohavecloserelationships.SouthKoreacontinuestorelyonFDIfromJapan,andJapan’snichetechnologiesareneededtocompletemanySouthKoreanconsumerproductsforexport.Japan’sFDIinSouthKoreamorethandoubledfrom2001to2012toreach$4.54billion,comparedtothe$4.01billionthatSouthKoreareceivedfromChina,Taiwan,HongKong,Singapore,andMalaysiacombined.

ConcernsthatAbenomicswillexacerbatebilateraltensionsarelikelyoverblown.AlthoughtheParkadministrationwouldpreferthatthewonnotappreciateagainsttheyen,SouthKoreahaslimitedoptionsindealingwiththisissue.AG20jointstatementearlierthisyearappearstocondonetheyen’sdepreciation,makingitunlikelythatSouthKoreawouldreceivemuchinternationalsupportforanefforttofightit.Moreover,thereareeconomicbenefitsassociatedwithastrongerwonthatareconsistentwithPark’sso-calledeconomicdemocratizationagenda,includinglessexpensiveimports,moreconsumerpurchasingpower,andtheencouragementofmoredomestic-orientedproduction.Parkhasstressedherdesiretohelpsmallandmedium-sizedbusinessesthatarelessvulnerabletoastrongwonthanaretheexport-orientedchaebols (largeconglomerates).Fortheforeseeablefuture,thegovernmentislikelytoadoptawait-and-seeattitudeconcerningthewon’sappreciation.

Japan and TaiwanIntroduction DiplomaticrelationsbetweenTaiwanandJapanhavebeenlargelypositiveinrecentyearsandarelikelytoremainso,thoughsporadictensionssurroundingtheirterrito-rialdisputeovertheSenkaku/Diaoyuislands(calledDiaoyutaiinTaiwan)mayflareupfromtimetotime.JapanandTaiwanwillnonethelessretaingenerallycloseeconomic,political,andevenculturallinks,andtradeandinvestmentflowsareexpectedtoincreaseasbothgovernmentspushformorebilateralliberalization.

Domestic politicsPoliticsinTaiwanareconducivetomaintainingapositiverelationshipwithJapan.WhileJapan’scolonialistpasthauntsitsrelationswithotherregionalpowerssuchasChinaandSouthKorea,theTaiwanesehavealessnegativeviewofJapan’sgovernanceoftheirisland(1895–1945).AndwhilenationalismisgrowingamongTaiwaneseyouth,thatsentimentisdirectedmuchmoretowardmainlandChinathanJapan.

Foreign policyTaiwanesePresidentMaYing-jeouhasprioritizedimprovingrelationswithmainlandChinaashissignaturepolicy.ButhealsohasworkedtoexpandTaiwan’sdiplomaticandtraderelationswithothercountries,Japaninparticular.In2011,TaiwanandJapansignedabilateralinvestmentagreementandsignaledaninterestineventuallyenteringintotradeliberalizationtalks.Whilethewindowforsuchtalkshasnotyetopened,theoveralltrajectoryofTaiwan-Japanrelationswillremainpositive.



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Themajor,ifoutlying,riskoftensionintherelationshipisgeneratedbytheunsettledissueofsovereigntyovertheSenkaku/Diaoyu/Diaoyutaiislands.YetwhereasthisdisputecarriesasignificantriskforJapan-Chinarelations,therisktoJapan-Taiwanrelationsissmaller.Thisdifferencewasapparentearlierthisyear,whenChina-Japantensionssurroundingtheissuespiked,butJapansuccessfullycalmedtensionswithTaiwanbyconcludinganagreementwithitconcerningfishingrightsindisputedwaters.

Economics and trade Tobesure,therecentdepreciationoftheyencomplicatesTaiwan’seconomicenvironment.Theisland’sexportsareunderperformingthisyear,andthatweaknessisraisingconcernsthatitseconomywillcontinuetolanguishthisyear,afterexpandingbyjust1.26%in2012.

However,Taiwan’sfearregardingJapaneseeconomicpolicieshasmoretodowithSouthKoreathanwithJapan.Inparticular,TaiwanisworriedthatyendepreciationismotivatingtheSouthKoreangovernmenttotakesteps—suchasinterestratecutsandcurrencyintervention—todepreciatethewoninordertokeeppacewiththeyen.WhileSouthKoreamightlooktoJapan,TaiwanlookstoSouthKoreaasitsbiggestdirectcompetitoringlobalexportmarketsandisworriedthatSouthKorea’seffortstocounteraweakeryenwilldirectlyharmTaiwan’seconomy.WhilethisdynamicisunlikelytocausefrictioninJapan-Taiwanrelations,TaiwanislikelytointerveneincurrencymarketsmoreaggressivelytomaintaincompetitivenessrelativetoSouthKorea.

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