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Takeaway: The dispute may come to a close if all goes according to plan, but there's plenty of work to be done on both sides.

The ongoing protests and disputes between China and Japan over a territorial dispute may be coming to a close if all goes according to plan. Japanese Prime Minister Yoshihiko Noda has called for discussions between the two countries in order to hammer out some sort of resolution. Noda noted that without talks, both economies would continue to suffer. Last week’s Chinese auto sales numbers highlighted the problems with China-Japan tensions with September sales figures declining for large Japanese automakers. 

That being said, the respective populations of each country won’t tolerate weakness from their governments and Senior Analyst Darius Dale emphasizes that both countries will display accelerated levels of protectionism going forward, sans military intervention:

“The dispute is playing out exactly as we had anticipated in our SEP 19 note tiled: “ARE CHINA AND JAPAN HEADING FOR WAR?”, specifically in that the spat has caused a severe amount of economic hardship – mostly shared by Japan, which we outlined as having more to lose on that front (the SEP China sales figures from the large Japanese auto manufacturers were all down roughly 35-45% YoY; Japan’s Cabinet Office downgraded its assessment of the economy for the third-consecutive months – the longest streak since 2009). Moreover, the uncertainty over the future leadership of both countries (upcoming Japanese elections; Chinese leadership transitions) is contributing to what we’d highlight as a delayed response to diplomacy (i.e. “vice-ministerial discussions at an unspecified date” are probably not going to cut it). We continue to envision accelerating protectionism (either de facto or de jure – same result) and further economic pain as leaders from both nations are in a bind both culturally and politically.”

–Darius Dale, OCT 12, 2012

There’s a long way to go before this situation comes to a close, but Japan and China are taking a step in the right direction – at least for the sake of both economies.