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Weekly Economic Briefing

Japan & Developed Asia

A victim of Kim’s chicanery?

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Rising defence spending in Japan and developed Asia reflects two key threats to the region. Firstly, the acceleration of North Korea’s nuclear weapons programme and increase in ballistic missile testing. Secondly, the strengthening of China’s military capabilities and its more forceful actions in the East and South China Sea. How is the nature of these threats changing, and what will be the impact on the region? Let us start with North Korea. The week ahead promises to be an intriguing one, with the commencement of joint command-post military exercises between South Korea and the US coinciding with a meeting between South Korea president Moon Jae-in and North Korean counterpart Kim Jong-un. The first inter-Korea talks since 2007 have already been heralded as a success following reports of North Korea’s willingness to suspend nuclear and missile tests, as well as to enter discussions with South Korea on a formal peace treaty. However, the fact that the inter-Korean summit may occur amid pre-announced military drills highlights the lingering ambiguity regarding de-escalation on the peninsula.

Frosty relations Keeping powder dry

So what to expect from the diplomatic interventions in the coming months? North Korea has pursued a strategy to ensure regime survival through a nuclear deterrent while seeking to decouple South Korea and other regional powers from the US. In our view, the question of regime survival is driving the shift in engagement from North Korea. Unfortunately, it is not clear whether this is from a position of weakness, driven by a ‘maximum pressure’ approach from China, or from one of strength, as Kim switches strategy having achieved his initial objective of establishing supremacy at home while boosting his negotiating hand overseas. The evidence, although patchy, is more supportive of the view that China has become more assertive in pressuring its neighbour in spite of its much-vaunted non-intervention policy. After targeting coal imports from North Korea last year, exports from China of refined petroleum and steel have declined substantially in 2018. There has been a similar diplomatic hardening with the average annual frequency of high-level exchanges declining under the current leadership (see Chart 8). China has also taken a more aggressive view of counter proliferation policing, with Beijing recently setting up monitoring stations close to the border. Unfortunately, this does not fully convince. Furthermore, a diplomatic solution may benefit the US and the South equally as much, with China to appear on the periphery during the historic US-North Korean summit in May/June. We will be looking for more clues this week.

For the region’s powers, a more assertive China in North Korea is not the only concern. Disputes over the fortification of island chains in the South China Sea and maritime territorial disputes have brought increased spending and the threat of military action closer to international borders. This has prompted Japan to recently set up the so-called Amphibious Rapid Deployment Brigade, a Japanese version of the Marine Corps, while South Korea is looking into the feasibility of domestic production of a nuclear-powered submarine. However, despite these dynamics, defence spending has remained rather modest as a share of GDP across most economies (see Chart 9). While regional politics are far from stable, talk about an arms race seems premature.

Govinda Finn, Japan and Developed Asia Economist