Why Japan Is Rushing to Aid Europe: It's All About China

Investors are inundated with talk about the tightly knit nature of the current global economy. But a series of moves on Tuesday – when U.S. stocks got a boost on prospects that Asian savings could be used to prop up the debt of European states -- shows how real those proclamations are.

In the last few months, Portugal had become the latest overly indebted European nation to alarm credit markets. But after Japanese Finance Minister Yoshihiko Noda on Tuesday pledged to buy more than 20% of upcoming joint European bond issues to help struggling European Union members, world markets took a more optimistic tone. "It's appropriate for Japan to make a contribution as a leading nation to increase trust in the deal," Noda said.

But investors should note that Japan's moves are more about its own interests than merely a spirit of international cooperation. Even as global fortunes continue to be more closely intertwined, a hard look at national interest can help investors anticipate the pace of things to come.

Hearts and Minds

Tokyo's moves should be viewed in the context of the Chinese charm offensive last year and the rivalry that's heating up between China and Japan. Beijing already has cast itself as a White Knight in Europe by using its massive reserves to support indebted states, politically sensitive industries and the euro currency.

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Part of China's motivation has been clear enough. The EU, after all, is China's single-largest export destination, giving the country an obvious interest in the region's stability.

But its move could yield other potential benefits. "China is also in the market to build some goodwill that potentially opens up new investment opportunities," analysts at The Eurasia Group wrote in a research note Tuesday. "Chinese investments on the European continent are perceived in Beijing as effective ways of circumventing protectionist barriers placed against Chinese exports," while also perceived as creating job opportunities at home.

Japan, therefore, is scrambling to compete with China's rapidly rising influence. After a high-profile territorial dispute in the fall, regional tensions flared further amid growing hostility from North Korea -- which counts China as its primary patron -- toward South Korea. Despite a bitter past, South Korea and Japan are now quickly forging closer ties.

How Europe Benefits From Asian Rivalry

That tension is now crossing over into dealings with the debt-ridden EU, which provides an ideal forum for some checkbook diplomacy. Massive Asian central bank reserves could influence agendas ranging from opening up new markets to previously contentious issues like arms sales to Beijing.

With $2.85 trillion in reserves, China obviously has plenty of room to maneuver. But Japan's $1.1 trillion aren't anything to scoff at either. Other major Asian central banks -- like those of South Korea and Taiwan, which have reserves of about $380 billion and $290 billion, respectively -- may also find themselves inclined to help out Europe, if only to try to limit China's influence.

Whatever the motivation, these flush central banks could end up providing the needed capital that skittish private-fund managers are reluctant to dole out. That means political dynamics in Asia could ultimately result in more stability for the eurozone.

So, while considerations of national self-interests are as alive as ever, they can still coincide with greater global cooperation, too.