Hot Economics, Cold Politics? Reexamining Economic Linkages and Political Tensions in Sino-Japanese Relations
39 Pages Posted: 19 Jul 2010 Last revised: 7 Sep 2010
Date Written: September 1, 2010
Scholars often claim that East Asia is characterized by “hot economics and cold politics.” While economic linkages between East Asian countries proliferate rapidly, mutual distrust and unresolved historical tensions seem to present a continual obstacle to the development of closer interregional political ties. This dynamic is particularly evident in the bilateral relationship between Japan and China. Though it has much to gain from trading with Japan, China continues to experience strong domestic anti-Japanese sentiment and periodic protests over issues such as history textbooks, territorial disputes, controversial Japanese statements about the Nanjing Massacre, and visits by politicians to the infamous Yasukuni Shrine. Despite the frequency with which the “hot economics, cold politics” thesis is invoked, however, there have been few attempts to test its accuracy or to specify the conditions under which it holds true. To what extent do firms react to these political debacles, and to what extent are the latter simply demonstrations of nationalist rhetoric?
We attempt to tackle these questions by using a combination of event analysis and nonparametric matching techniques to examine the effects of three negative shocks in Sino-Japanese relations — the August 2003 poisoning of Chinese citizens by mustard gas left behind by the Japanese during World War II; the intrusion of a Chinese submarine into Japanese waters in September 2004; and the April 2005 anti-Japanese protests in China — on specific types of companies listed on the Tokyo Stock Exchange. We also include two types of placebo tests to ensure that our research design is not indiscriminately affected by any type of political shock. Our findings indicate that when shocks are unexpected and have potentially large-scale consequences, companies dependent on the Asian sales marked are more negatively effected than otherwise similar companies. This suggests that a firm’s value is partially tied to Sino-Japanese bilateral relations and that political tensions are indeed important for the future of economic linkages in Asia. Our findings help to clarify the relationship between economic integration and political tensions between these two key countries, making a contribution to the growing literature on Asian regionalism. Moreover, these findings have significant implications for the broader literature on conflict and economic interdependence. As globalization pushes countries all over the world to become more economically interconnected to partners with whom they have longstanding political disagreements, it is increasingly important for analysts to develop a nuanced understanding of the complex nexus between economics and politics.
Keywords: economics, security, stock markets, Japan, China, Sino-Japanese relations, political shocks, event analysis, matching
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