Just as geopolitical risk showed signs of abating after Sunday’s nuclear weapons deal with Iran, tensions between China and Japan over disputed islands have re-surfaced.
And at a time when risk appetite in global markets is running strong, strategists say renewed strain between two of the top three world economies is something that should not be taken lightly by financial markets.
“At the moment if you look at the world, one of the striking features is that there aren’t many tail risks out there, especially if the U.S. and Iran are now talking,” said Bank of Singapore Chief Economist Richard Jerram, referring to a deal between Iran and six world powers to curb Iran’s nuclear program. “But with the China and Japan dispute, both sides are stubborn and this is one of the bigger geopolitical risks the world still faces.”
Beijing at the weekend declared an “Air Defense Identification Zone” that covers most of the East China Sea and a group of uninhabited islands that have been the subject of heightened tensions between China and Japan in recent years.
The move has been criticized by Tokyo and Washington. The U.S. has warned that Beijing’s military claim to airspace raises the risk of “misunderstanding and miscalculations,” according to media reports.