20°C / 22°C
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  • 17°C
  • 8°C

China-Japan relations and global trade

Perhaps it is the extreme difference in temperature between Asia and the cold mountains of Switzerland at this time of year that led to some unusually forthright comments from Shinzo Abe, Japan's Prime Minister in Davos last week.

Although Japan is similarly swathed in winter, the temperature seems to be very much approaching boiling point in relations between China and Japan following their increasingly bitter dispute over some uninhabited rocks in the Pacific.

Asked about the possibility of some sort of conflict between China and Japan the PM gave a less than reassuring response. It feels as if both countries are sleep-walking towards some sort of confrontation, which could potentially have devastating implications for trade not only between the world's second and third largest economies, but globally. We need a more assertive US to calm the situation down.

What should we make of this?

While the world seems more interconnected than ever, an interesting divergence has opened up between falling defence spending in the US and Europe and ever-rising spending in Asia and elsewhere.

We are used to reading how American and European companies are hoping that exports will fill the void left in their order books from falling spending in their home markets, but what about Asian defence companies?

It has to be said there are few listed companies where defence is meaningful. Defence revenues are generally a small portion of a diverse pie, or where it is more significant you tend to find it concentrated in the hands of unlisted state owned enterprises.

Japan is the exception here. As perhaps the only major developed economy that is upping defence spending, Japanese companies with defence exposure have been very strong recently.

That might well be good for them, but for the rest of us we hope things calm down sooner rather than later.

Jonathan Schiessl is head of equities (international) and Asian equities specialist at Ashburton Investments.

Click here for a special feature on this year's World Economic Forum in Davos.