When Bygones Were Bygones

Today, China and Japan are at each other’s throats, but 30 years ago they were like old friends. What happened?

In an international version of the blame game, Beijing and Tokyo have frequently resorted to historical analogies in their argument about which side is responsible for the deterioration of bilateral relations. In a Jan. 22 speech, Japanese Prime Minister Shinzo Abe compared China and Japan today to Germany and Britain on the eve of World War I. Some Chinese newspapers reciprocated by likening Abe to Hitler and contrasting Germany's recognition of its historical wrongs with Japan's apparent lack of remorse for its wartime atrocities. And Xi Jinping's March 28 visit to Germany, part of his first European tour as China's president, was supposed to include a trip to the Memorial to the Murdered Jews of Europe -- a not-so-subtle slap to Tokyo and one that Berlin rightly nixed.

As both sides scour through the historical record to prove each other wrong, they are ignoring their own recent past: For years after normalization of Sino-Japanese relations in 1972, the two countries worked closely together. Japan played an essential role in China's modernization, supplying government assistance for the development of ports, railways, electric power, water supplies, and telecommunications. Japan's aid to China in the 1980s -- $649 million on average annually between 1982 and 1989 -- dwarfed that of the rest of the G-7 combined. And for its part, Beijing was less concerned with Japan's past wrongdoings than with forging closer economic and political ties.

One interesting feature of the Sino-Japanese relationship in the 1980s was the intensity and the intimacy of the political dialogue, reflected in the frequency of summits, which happened roughly annually from the late 1970s. (There hasn't been a Sino-Japanese summit since 2008). One such summit took place exactly 30 years ago, when Japanese Prime Minister Yasuhiro Nakasone visited Beijing for talks with Chinese policymakers, including paramount leader Deng Xiaoping. Records of this trip -- published for the first time in the Digital Archive of the Woodrow Wilson International Center for Scholars' Cold War International History Project -- make for striking reading, so different are they from the sea of bitterness that engulfs the Sino-Japanese relationship today.

After coming to power in the late 1970s, Deng promised the Japanese that he would "let bygones be bygones." His commitment to developing close relations with Tokyo ushered in the golden age of Sino-Japanese cooperation. When Deng and Nakasone met in March 1984, they stayed clear of memories of war. And they did not mention any of the poisons of Sino-Japanese relations -- Japanese textbooks that the Chinese believed whitewashed memories of the war, or ownership of the disputed Senkakus in the East China Sea, islands administered by Japan but claimed by China, which calls them the Diaoyu.

Instead, Deng and Nakasone turned their attention to the big picture. Japan and China, Deng said, needed to look "further, longer, and wider" in developing relations into the 21st century. This was "more important than all other issues." Nakasone told his Chinese counterparts that better relations between Japan and China would both "stabilize the Asia-Pacific region" and become "a powerful pillar for world peace." The two neighbors, Nakasone argued, "have many reasons to cooperate and no reasons to clash."

The summit provided an occasion for discussions on regional issues, none more important than stability on the Korean Peninsula. Then, as now, Pyongyang held its neighbors in suspense by engaging in provocations like assassinating three senior South Korean politicians and 18 others in Burma. The Chinese, while claiming limited influence with the North Korean regime, recognized their "obligation" to encourage a dialogue between Pyongyang and other players, including the Japanese.

This dialogue did not lead to any immediate results, but it helped improve the general climate in Northeast Asia, making possible such later developments as China's 1992 rapprochement with South Korea. And its existence was a sign of mutual trust between the two sides. "We believe it is better to engage in dialogue than not to engage in dialogue," then Chinese Foreign Minister Wu Xueqian told his Japanese counterpart, Shintaro Abe, who accompanied Nakasone to Beijing. Shintaro Abe, the father of current Prime Minister Shinzo Abe, also spoke about "good faith," keeping lines of communication open, and "negotiated solutions" to bilateral and regional problems. These were all obvious points, yet the diplomatic bluster evinced by today's Abe suggests that common sense is not necessarily a hereditary trait.

Nor is the talent for subtle analysis passed from generation to generation. Earlier Chinese leaders objected to Nakasone's repeated visits to the Yasukuni Shrine, which honors millions of Japanese war dead, including 14 Class A war criminals, but they did not conclude from these visits that Nakasone was a fascist and certainly did not bar him from coming to China, as Beijing did to Abe after his December 2013 appearance at the shrine. Then Premier Zhao Ziyang was careful to distinguish between such "militarist actions" and the general direction of Japan's foreign policy, a distinction lost on the current generation of Chinese policymakers. 

But the Sino-Japanese quarrel has always been as much about domestic politics as about international grievances. In the 1980s, the Chinese Communist Party's domestic legitimacy was in even greater question than it is today: Runaway inflation, worsening corruption, and skyrocketing crime put the Chinese reformers under a lot of pressure. Yet Deng did not intentionally spoil relations with neighbors to distract from domestic difficulties. Likewise, Nakasone, who presided over a relatively weak faction within the ruling Liberal Democratic Party, had to play a constant balancing game between party stalwarts to keep his premiership afloat. Yet he also conducted a skillful foreign policy, befriending U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher and pushing for breakthroughs with South Korea, China, and -- inconceivably at the time -- the Soviet Union.

It is the people who were different, though, not the times. Deng and Nakasone had witnessed firsthand how moral posturing, warmongering, and ultimatums can lead nations to ruin. This shared knowledge allowed the two leaders to distinguish statesmanship from politics and see the big picture, an ability that Abe and Xi have conspicuously failed to demonstrate.

In late February, the National People's Congress, China's rubber-stamp parliament, proclaimed the establishment of a national day of remembrance for the Nanjing Massacre, which saw Japanese troops slaughter hundreds of thousands of Chinese in late 1937 and early 1938. While remembrance is generally a good thing, this move is more about politics, and amid renewed Sino-Japanese tensions it will only lead to further acrimony. Both sides have abused the memory of the war for political ends and are purposefully forgetting that China and Japan have not always been enemies.

But in 1984, when China and Japan were much closer to each other than today, they looked to the future, not to the past. Rescuing this forgotten age from the clutches of historical amnesia is a step toward ensuring that China's and Japan's reciprocal demonization does not become a self-fulfilling prophesy.

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The 2 Percent Doctrine

Is the European Central Bank ready to start tackling the continent’s inflation problem?

Is the European Central Bank finally going to act? Despite 12 straight months of inflation readings below the supposed target for the Eurozone, the folks in Frankfurt haven't changed interest rates since November or brought in any new measures to juice the world's second-biggest economy. But this week, a member of the European Central Bank's (ECB) governing council hinted that it might finally emulate the Federal Reserve's tireless and unconventional fight against deflation. Here are some possible reasons why the ECB has been sitting on its hands -- and may continue to do so at next week's policy meeting.

1. Doing nothing has been fine.

Earlier this month, the media trumpeted a middling forecast for Eurozone growth as enough reason for Mario Draghi, the ECB president, to leave interest rates alone. This may come as little comfort to millions of jobless Europeans; indeed, the Eurozone's unemployment rate in January was the same as a year before. But the ECB's mandate is to maintain price stability over the medium term, not to ensure full employment.

Moreover, neither price stability nor the medium term has an explicit definition for the ECB. Its target for inflation is "below, but close to" 2 percent, and it doesn't give any specifics about time frame. (Economists often think about the medium term as anywhere from three to five years, which doesn't help too much.) So it's anyone's guess how quickly Draghi feels the inflation rate should return to its target, or where that target really is. For him, everything may well be going to plan.

2. It's the Germans, stupid.

In January, Germany's Sabine Lautenschläger replaced compatriot Jörg Asmussen on the ECB's executive board after he decided to get back into politics in Berlin. Though Asmussen routinely insisted the ECB's inflation target was a symmetrical one -- that is, inflation below target was just as bad as inflation above -- he reportedly argued against a suggestion by Draghi to push interest rates to zero. Lautenschläger may be even more hawkish, judging by a nomination hearing where she sounded skeptical of long periods of low interest rates and asset purchases by central banks.

By contrast, Asmussen had strongly backed Draghi's controversial strategy of buying government bonds to improve liquidity, so his recent stiffening on monetary policy was somewhat unexpected. It may have had something to do with the difference between inflation back home in Germany and in the Eurozone as a whole. Though German price increases lagged behind for much of the past four years, since May they have been higher than inflation in the monetary union:

Source: Eurostat data via the Federal Reserve Bank of St. Louis.

In fact, the data since May show inflation of 0.8 percent in Germany and deflation of 0.5 percent in the Eurozone, despite the German contribution. Asmussen's welcome in Berlin might not have been quite so warm if he had stoked fears of higher inflation just months before. But it is more than a little interesting that it was his countryman Jens Weidmann, the president of the Bundesbank, that dropped the hints about more radical moves by the ECB this week, especially given how the two men had tussled over such policies just this past summer. 

3. Hey, the ECB is pretty good at its job.

If the ECB's job is to head off bouts of high inflation and deflation before they happen, it may be doing extraordinarily well by at least one measure: expectations. If the central bank truly can control the inflation rate in the Eurozone, then it has managed to outfox its constituents with remarkable regularity.

Economists have long supposed that people avoid making the same mistakes repeatedly when trying to forecast the future. In other words, their expectations for things like inflation should be decent predictors of the future, and never be systematically too high or too low. And yet that is exactly what seems to be happening in the Eurozone of late. 

Each month, the European Commission surveys people in the Eurozone about inflation in the coming year. They can respond that inflation will be higher, lower, or the same. The commission discards the "same" votes and takes the difference between "higher" and "lower" as an indicator of where prices are going. But what actually happens to prices?

For the past five years, the difference between inflation in the year after the survey (as measured by the European Commission's harmonized index) and inflation in the year before has been almost the opposite of what people expected. Forecasts for faster increases in prices were followed by slower ones, and vice versa:

Source: Eurostat data via the Federal Reserve Bank of St. Louis and European Commission data via OECD.

So are people in the Eurozone just lousy at predicting inflation? Or is the ECB like an expert chef, turning down the heat precisely when inflation is expected to rise and fanning the flames when it looks like falling? If it's the latter, then the people in these surveys must consistently be surprised by the ECB's actions and influence. 

4. Who cares? The ECB can't affect anything, anyway.

Perhaps the ECB doesn't exert quite so much control over inflation. It may indeed be harsh to blame a few technocrats in Frankfurt for the lack of movement in prices across the continent; slack demand for goods and services in the Eurozone probably has a lot to do with poor national policies, widespread long-term unemployment, and an overall lack of confidence in the durability of the economic recovery. Expanding credit further can't solve all of these problems, as at least one pundit has remarked, and may even create other ones. The question is whether, on balance, it can help. 

The ECB may have a symmetrical inflation target, but the costs of erring on either side are not necessarily equal. William Dudley, the president of the Federal Reserve Bank of New York, has frequently pointed out that the economic costs of deflation are likely to be much greater and harder to contain than the costs of a credit glut. Moreover, when the real return to investing falls -- as it did in the United States after the Great Recession, and likely did in the Eurozone as well -- then monetary policy that seems loose may in fact be far too tight.

Dudley came to his conclusions after studying Japan's deflation and asking why historically low interest rates in the United States had been puzzlingly ineffective at reviving demand. He came away a strong advocate of the Fed's program of enormous interventions in the nation's credit markets, which Japan has since adopted as well. His counterparts in Frankfurt still have time to learn the same lessons.