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Noda Says Failure to Buy Islands Could Have Meant China Conflict

Aug. 22 (Bloomberg) -- Former Japanese Prime Minister Yoshihiko Noda had no choice but to buy a group of islands at the heart of a dispute with China to avoid worse bilateral tensions or even conflict, he told a group of reporters today.

Noda had the government buy three of the East China Sea isles known as Senkaku in Japanese and Diaoyu in Chinese in September 2012 from a private owner. The move came after then-Tokyo Governor Shintaro Ishihara announced a separate plan to purchase them and led to frozen relations with China. Asia’s two largest economies haven’t held a summit since then and coast guard ships from both countries regularly tail one another through nearby waters.

“If I hadn’t nationalized them, the Tokyo Metropolitan Government would have bought them,” Noda said at his offices in Tokyo. “Governor Ishihara would have bought them and he would have made drastic changes on the islands, such as building a shelter for boats,” he added. That would have led to worse tensions between Japan and China, or even conflict, Noda said.

Ishihara didn’t care whether his actions sparked conflict and believed that Japan “would not lose in a battle of conventional weapons,” Noda said. “I thought if people like that took the lead, the result would be terrible,” he said.

Tax Worry

The predecessor of Shinzo Abe, Noda expended political capital while in office to pass legislation raising the sales tax to help rein in the world’s highest debt burden as the population ages and social security costs balloon.

He is now worried that the current government’s “Abenomics” policies won’t expand the economy sufficiently to allow the second phase of the tax increase to 10 percent in October next year from the current 8 percent, he said. Failure to raise the tax as planned would send a message both domestically and internationally that Japan won’t maintain fiscal discipline, which would be extremely risky, he said.

Abe’s government has said it will examine economic data for the July-September period before deciding by the end of the year whether to go ahead with the tax increase. Gross domestic product for the three months through June fell an annualized 6.8 percent as consumption slumped after a rush before the April 1 increase in the sales tax to 8 percent from 5 percent.

“Abenomics needs to improve the economy, especially between July and September and enable a proper political decision,” he said. “What I’m worried about is that I can’t really see the effect of Abenomics,” he added.

Noda said he had had doubts from the beginning about the effect of monetary easing, which Abe has deployed as the first of his “three arrows” of economic policy.

Initial stock market gains from the start of Abenomics have worn off, Noda said. The second arrow, flexible fiscal policy, amounts to “repeating the mistakes of the past,” he said.

Noda has little confidence in Abe’s third arrow, which focuses on growth policy. “I don’t know what the third arrow is aiming for, but I think it will miss its target. I think it’s weak,” he said.

To contact the reporter on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net

To contact the editors responsible for this story: Andrew Davis at abdavis@bloomberg.net Malcolm Scott

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