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Japan, China, South Korea island disputes threaten global economy (+ video)

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However, by the end of that decade, hopes for regional stability and cooperation were on the rise. Much of the progress came on the financial front. After the 1997 financial crisis rocked the entire region, a consensus emerged among the big three countries and a group of 10 smaller ones in Southeast Asia that East Asia needed a financial safety net.

In 2000, a system of emergency credit lines between central banks was born and has since developed into a regional foreign exchange pool with $240 billion in resources. Trade between nations in the region increased substantially.

More recently, in the immediate aftermath of the global financial crisis in 2008, China, Japan, and South Korea increased existing central bank credit lines with each other. Just last year, China and Japan agreed to begin conducting trade in their own local currencies in order to increase commerce between their two economies.

The island disputes are threatening to undermine all this. Three recent events highlight how the territorial spats are now spilling over into the economic sphere.

First, nationalist fervor in China has led to a de facto boycott of Japanese goods, causing September sales of Japanese cars in China to plummet. Japan’s major automakers say they will draw down production in China. Overall, Japanese exports to China fell 14 percent in September from a year ago, according to preliminary figures from Japan's finance ministry.

The second eyebrow raising incident occurred earlier this month when Japan and Korea allowed a $57 billion expansion of a currency swap agreement – essentially an emergency line of credit – between their central banks to lapse. Both countries deny that territorial dimensions led to the lapse, but the denials are unconvincing. Risks to global financial stability are increasing, which is precisely the climate where such agreements are valuable in the first place.

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