07/17/2013 10:59 am ET

Asia Is the World's Economic Engine But Looming Security Matters Threaten Continued Smooth Running

Asian economies are the highest current and projected growth areas in the world. China is the word's largest market, second largest economy after the U.S., and America's number one provider of debt. Japan stands as the world's third largest economy, the purveyor of the Asian economic miracle, and America's most important Asian ally.

Simmering security issues pose a threat to the region's continued growth and its fueling the world economic system. To date they have been underplayed by analysts and overwhelmed by world events. Turning a blind eye to current tensions in the Pacific-Rim could yield volatility in the world economy and its capital markets.

A key factor in Asia's stability precipice is Japan's facing major threats to its security, primarily from China and North Korea. Japan must address these concerns without a standing army that its constitution's Article 9 prohibits, relying on the US as its sole protector in the case of conflict.

2012 was a game changer in terms of Japan's view of its security, i.e., whether it can protect itself were it to face a formidable power -- let alone a major power like China.

Tensions between Japan and China escalated to their highest level in 60 years in early 2012, when China began to publicly renew its claim for a group of small uninhabited islands in the Pacific Rim. Chinese activists landed on the island and planted Chinese flags. Within the same week Japanese activists descended upon the island replacing Chinese flags with Japanese ones. In September, Japan officially purchased the island from members of a private Japanese family that acquired them in 1972. This set off mass anti-Japanese protests, many violent, in more than 80 cities in mainland China and Hong Kong. Japanese-owned property was attacked. Toyota, Honda, and Nissan shut down production plants; Panasonic and Cannon ceased operations in multiple cities around China; and arson damaged Japanese sites. Japanese expatriates were afraid to leave their homes. In December 2012, China sent its air-force fighter jets into Japan's airspace for the first time since the 1950's.

China wants the territory's-oil reserves and valued fishery deposits. Japan remains stalwart. A country allowing territory to be commandeered by another country is a no-no--Defense 101. Think Falkland Islands, Grenada, and thousands of other examples throughout history.

China lies 300 miles off Japan's coast with the world's fourth largest stockpile of nuclear weapons. It has the world's largest army, and is reportedly seeking regional outposts where it can establish bases.

The U.S. Department of Defense (DOD), as well as the Stockholm International Peace Research Institute, cite China as the second largest spender its military after the United States. In its 2013 annual report, the DOD made it clear that China's goal is focused on potential conflict in Asia. It states: "The People's Republic of China (PRC) continues to pursue a long-term, comprehensive military modernization program designed to improve the capacity of its armed forces to fight and win short-duration, high-intensity regional military conflict." The report was understandably alarming for Japan.

Even the United States, for its own security, is watching the rapid expansion of China's army, navy, and air force, including China's focus on cyber-warfare and space activities in recent years,. These are dangerous developments, in part because the data and the extent of capabilities is still being quantified.

What else does Japan see when it looks around its neighborhood: a hostile, secretive North Korea, with its nuclear-weapons capability? In 2012 Kim Jong-un became leader at the age of 28. Now 29 he's a bellicose leader who threatens to attack the US and its interests (bases in Japan). A leader essentially a few "gap years" removed from being a college senior and possessing nuclear weapons is, by definition, a scary situation.

However, Japan's citizens until recent events, have not been in favor of the country rearming. And there is no evidence that the public will support drastic changes. Having been on the receiving end of the only two nuclear bombs ever dropped on a populous, the subsequent human and environmental consequences have never left the psyche of the Japanese people.

Threats to Japan may indeed be a catalyst for change in its policies on defense. Predictable reactions by China, N. Korea and even S. Korea could destabilize markets and the peaceful balance that has been the foundation of Asia's economic growth. It would have reverberating affects around the globe. One option that could lead to a solution is for the US to initiate a series of talks on security matters with Japan, China and ASEAN nations, before the matter becomes a stifling gauntlet to world economic growth. Keeping heads in the sand to these looming security issues would be a mistake by the US and countries in the Asia-pacific.

In the coming months Japan's will consider steps to deal with its security dilemma. Japan must be judicious in its choices. However, its decisions should be viewed in the context of what it faces in proximity to its borders, and the fundamental obligation it has to protect its 167 million citizens.