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China and Japan face off: Tiny islands, big dispute (+video)

The China and Japan face off over five islands has sunk relations to a 40-year low - the worst since diplomatic relations began. But the sabre rattling is just for show, say analysts.

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Notably, Berger says, "there is a growing feeling in Japan that if they do not stand up to the Chinese there will be no end to how far they will be pushed around."

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At the same time, points out Taylor Fravel, a professor of international relations at the Massachusetts Institute of Technology in Cambridge, both Japan and China are involved in other territorial tussles with other countries, and neither wants to look weak in the current crisis.

"Prevailing in this could send a signal to rivals in other disputes," Professor Fravel suggests.

Though neither side seems to want a military conflict, China is warning that it would make Japan pay economically in a protracted crisis over the islands.

China "has always been extremely cautious about playing the economic card," stated an editorial in the overseas edition of the People's Daily late last month. "But if Japan continues its provocations, China will take up the battle."

So far, Japanese businessmen are reporting nothing more serious than delays at customs and difficulties securing Chinese visas. But the potential for damage is huge; China is Japan's largest export market (Japan is China's third-largest market), and the two countries' bilateral trade was worth nearly $350 billion last year.

Economic motivator?

On the other hand, China is not immune to the economic fallout of a drawn-out dispute.

Japan is the largest foreign investor in China after Hong Kong, pumping more than $5 billion into the country in the first eight months of this year. If anti-Japanese feelings continue to rise, Japanese investors are likely to think twice about putting money into China.

"That must be a factor" in China's thinking, says Fravel. "In the current economic slowdown, the jobs that Japanese investment creates are even more important than before."

"The economic risks should be a clear reminder to leaders on both sides to behave responsibly" in this crisis, argues Zhu. "The potential economic damage should be an alarm bell."

Behind the details of the territorial dispute, though, lies a larger picture: a shifting balance of power in Asia that some analysts say is contributing to the tensions.

China's rise – it overtook Japan in 2010 to become the world's second-largest economy – has made Beijing "more assertive, and readier to take advantage of opportunities to advance its interests," says Ms. Niquet.

That, adds Glaser, is what is happening now. "As the balance of power changes" between the two Asian giants, "China sees this crisis as an opportunity to push" Japan into acknowledging that there is a dispute over ownership of the Senkaku/Diaoyu Islands as a first step toward negotiations.

The Global Times, a nationalist tabloid owned by the Chinese Communist Party, put it bluntly in a recent editorial.

"Japan has been China's closest rival for a century," it argued. "China has recently achieved some strategic advantages over Japan, and it can solve the Diaoyu island issue thoroughly only by extending those advantages."

With both sides holding fast to their territorial claims, "I do not see a solution," says Zhu. "But the pressing issue right now is not a solution but how to prevent an accidental collision at sea igniting a military conflict."

Tuesday Japan's coast guard reported that four Chinese ships entered the disputed waters and had not responded to Japan's instructions to leave. 

The danger, warns Berger, is that "if we do not have a resolution and a new equilibrium between China and Japan, we may have a series of such crises of this nature. There will be games of chicken over and over, and sooner or later there will be a disaster."

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