Wednesday, July 21, 2021

Capital Markets: "Did Japan Deliver a Fait Accompli to the US?"

From Marc to Market:

Overview: The biggest rally in US equities in four months has helped stabilize global shares today. In the Asia Pacific region, Japan, China, and Australian markets advanced. Led by information technology and consumer discretionary sectors, Europe's Dow Jones Stoxx 600 is up around 1.35% near the middle of the session. US equity futures are firm, though the NASDAQ is lagging. The US 10-year yield that briefly dipped below 1.13% yesterday is firm today, around 1.25%, while European bond yields are 1-2 bp firmer. After a poor retail sales report, Australia's benchmark yield slipped a couple of basis points, which was sufficient to mark a new three-month low (~1.15%). Most of the major currencies are trading slightly heavier against the US dollar. The Scandis and New Zealand dollar are the most resilient today. Emerging market currencies are mostly weaker, leaving the Chinese yuan's 0.2% gain being the best. The JP Morgan Emerging Market Currency Index has been alternating between up and down sessions since the start of last week. Yesterday's small advance is being followed by a minor loss today. Gold is heavy, approaching $1800 after being turned back from $1825 yesterday. An unexpected drawdown in US oil inventories, according to API, would be the first since May if confirmed by the EIA later today, maybe helping oil prices recover from Monday's sharp drop. Initial resistance for the September WTI contract is seen near $68.80 and then $70.

Asia Pacific
There appears to be an escalation of posturing and positioning over Taiwan.
This week, Taiwan's first European office under its name opened in Lithuania. Other diplomatic posts are under the name Taipei. Recently, a civilian equivalent of the US's C-130 transport plane landed in Taiwan. Beijing claims the US military uses civilian aircraft for subterfuge. Military aircraft were used to deliver the vaccines the US donated to Taiwan. Japan has also escalated its position. On July 5, Deputy Prime Minister Aso explicitly went further than Washington and pledged Japan would come to the aid of Taiwan if it were invaded by China. A week later, Japan's annual security review was published, noting for the first time that stability around Taiwan was a significant part of its security.

This puts the US, which has a defense pact with Japan but not Taiwan, in a precarious position. Does Japan's pledge commit the US? And if the US has been dealt a fait accompli, does this change Beijing's calculations? As we have noted, the US "strategic ambiguity" towards Taiwan is meant to deter a unilateral declaration of independence by Taipei than an attempt to keep Beijing off balance. China has been aerially harassing Taiwan, sometimes sending dozens of fighters and bombers into Taiwan's airspace frequently. Beijing recently signaled by having extensive amphibious landing exercises and war games on nearby islands. Separately, but not unrelated, the UK announced that it will base two naval ships in Asia to help provide a bulwark against Chinese territorial claims in the South China Sea....


Good grief, that sounds a lot like the run-up to World War I and as to the position of Japan and the U.S. brings to mind the line:

"Diplomacy is the art of saying 'Nice doggie' until you can find a rock."
—Will Rogers

If interested see also 2013's: March of Folly: China Calls U.S. Position on Japan-China Dispute "Betrayal".