Escalation of U.S.-China Military Exercises
The large-scale military exercises by both the US and China in the South China Sea are not merely shows of force, but a structural turning point fundamentally rewriting the security order of the Indo-Pacific. Sea lanes through which approximately 80% of Japan's energy supply passes are becoming the frontline of geopolitical risk, making a comprehensive policy overhaul in defense, economy, and diplomacy unavoidable.
── Understand in 3 points ─────────
- • From January to March 2026, the Chinese People's Liberation Army conducted "Joint Sword-2026A," its largest-ever joint exercise around the Spratly Islands in the South China Sea. Over 40 vessels, including the aircraft carrier "Fujian," participated.
- • The U.S. Navy conducted the "Freedom Edge 2026" exercise in the same waters. Japan, Australia, and the Philippines participated in the multilateral exercise, which included the USS Ronald Reagan Carrier Strike Group and nuclear submarines.
- • China's Ministry of Foreign Affairs condemned the U.S. military exercise as "provocative military action" and hinted at freezing some diplomatic channels.
── NOW PATTERN ─────────
The "spiral of conflict" between the US and China over the South China Sea is simultaneously triggering a realignment of alliance structures and the risk of "power overextension" for various nations, accelerating the destabilization of regional order.
── Probabilities and Responses ──────
• Base case 55% — Resumption of communication between US and Chinese leaders, stabilization of exercise frequency in the South China Sea, slight upward trend in Japan's defense budget, agreement on a joint statement at the ASEAN Foreign Ministers' Meeting
• Bull case 15% — Announcement of regular US-China military dialogues, slowdown in China's defense spending growth rate, decrease in incidents in the South China Sea, resumption of regular Japan-China foreign ministerial talks
• Bear case 30% — Physical clash incident between China and the Philippines, collision incident between vessels in the South China Sea, raising of US military DEFCON (defense readiness condition), sharp rise in crude oil prices (over $100/barrel), reports concerning Japan's designation of an "Important Influence Situation" (Jūyō Eikyō Jitai)
📡 THE SIGNAL — What Happened
Why it matters: The large-scale military exercises by both the US and China in the South China Sea are not merely shows of force, but a structural turning point fundamentally rewriting the security order of the Indo-Pacific. Sea lanes through which approximately 80% of Japan's energy supply passes are becoming the frontline of geopolitical risk, making a comprehensive policy overhaul in defense, economy, and diplomacy unavoidable.
- Military — From January to March 2026, the Chinese People's Liberation Army conducted "Joint Sword-2026A," its largest-ever joint exercise around the Spratly Islands in the South China Sea. Over 40 vessels, including the aircraft carrier "Fujian," participated.
- Military — The U.S. Navy conducted the "Freedom Edge 2026" exercise in the same waters. Japan, Australia, and the Philippines participated in the multilateral exercise, which included the USS Ronald Reagan Carrier Strike Group and nuclear submarines.
- Diplomacy — China's Ministry of Foreign Affairs condemned the U.S. military exercise as "provocative military action" and hinted at freezing some diplomatic channels.
- Energy — Approximately 88% of Japan's crude oil imports are transported from the Middle East via sea lanes including the South China Sea. About 30% of LNG imports also pass through these waters.
- Defense Policy — Based on the revised Defense Buildup Plan in December 2025, the Japanese government is accelerating the deployment of long-range missiles to the Nansei Islands.
- Economy — The annual trade value passing through the South China Sea is estimated at approximately $3.4 trillion, concentrating about one-third of global trade.
- Alliance — At the Japan-U.S. summit meeting in February 2026, an expansion of joint patrols in the South China Sea was agreed upon.
- International Law — The 2016 arbitral tribunal ruling rejected China's "nine-dash line" claim, but China continues to disregard the ruling.
- Technology — China has completed the deployment of HQ-9B long-range anti-aircraft missile systems and anti-ship ballistic missiles on its artificial islands in the Spratly Islands.
- Philippines — Sino-Philippine friction over the Second Thomas Shoal with the Philippine military intensified from the latter half of 2025, resulting in multiple clash incidents during resupply missions.
- Domestic Politics — In Japan, discussions on raising defense spending to over 2% of GDP are gaining full traction among both ruling and opposition parties. It is emerging as a key issue for the summer 2026 House of Councillors election.
- Insurance/Shipping — War risk insurance premiums for South China Sea routes are expected to rise by approximately 40% compared to 2025, passing on to shipping costs.
To understand the intensification of US-China confrontation in the South China Sea, it is necessary to unravel the historical layers of geopolitical significance this region holds.
The South China Sea has historically been a vital maritime trade route connecting East Asia and the Indian Ocean world. However, this region became a geopolitical focal point in the modern sense due to China's rapid naval buildup after the Cold War and the accompanying expansion of its territorial claims. China's assertion of historical rights over a vast area known as the "nine-dash line" dates back to the Republic of China era in 1947, but it gained military substance only after the 2010s.
From 2013 to 2015, China extensively reclaimed land on seven reefs in the Spratly Islands, creating artificial islands totaling approximately 1,300 hectares. On these artificial islands, 3,000-meter-class runways, radar facilities, and missile launch pads were successively constructed, effectively militarizing them. The United States under the Obama administration countered this with "Freedom of Navigation Operations" but could not prevent the physical reclamation. This "accumulation of faits accomplis" is at the root of the current confrontational structure.
The first Trump administration (2017-2021) initiated a trade war with China, transforming US-China relations into competitive confrontation. The Biden administration (2021-2025) developed this by strengthening alliance networks, promoting AUKUS (Australia-UK-US security pact), operationalizing QUAD, and deepening Japan-US-Philippines trilateral cooperation. The second Trump administration, which began in 2025, is showing a stance of intensifying more direct pressure on China, including militarily.
For Japan, the South China Sea issue is critically important because it concerns the very foundation of its energy security. Japan relies on imports for approximately 90% of its primary energy, with about 88% of its crude oil transported from the Middle East via the South China Sea and the Strait of Malacca. This "sea lane" is the lifeline of the Japanese economy, and its destabilization would signify the greatest energy risk since the oil shocks. During the First Oil Crisis in 1973, crude oil prices quadrupled in three months, and Japan's GDP growth rate plummeted into negative territory. The military tension in the South China Sea reawakens this historical trauma in the present day.
Structurally, three factors are converging in the current escalation of conflict. First is the dramatic improvement in China's "anti-access/area denial (A2/AD)" capabilities. With the operational deployment of anti-ship ballistic missiles like the DF-21D and DF-26, China is succeeding in making it costly for U.S. carrier strike groups to approach the South China Sea. Second is the linkage with the Taiwan issue. Military control of the South China Sea has the strategic significance of blocking U.S. military reinforcement routes from the south in the event of a Taiwan contingency. Third are domestic political factors. Facing an economic slowdown, the Xi Jinping administration is compelled to maintain domestic nationalism through a tough stance externally.
Japan's security policy is also at a historical turning point. With the revision of the three security documents at the end of 2022, the acquisition of "counterstrike capabilities" was decided, and defense spending has been significantly increased since 2023. However, the rapid militarization of the South China Sea demands an acceleration and further expansion of this plan. The fact that Japan, which once limited the role of the Self-Defense Forces within the framework of "exclusive defense" (Senshu Bōei), is now moving towards assuming security responsibilities across the entire Indo-Pacific, represents the most fundamental transformation in post-war Japanese security policy.
Accelerating this transformation is the deepening of security cooperation with ASEAN nations, particularly the Philippines. Since 2024, the RAA (Reciprocal Access Agreement) has come into effect between Japan and the Philippines, normalizing joint exercises between the Self-Defense Forces and the Philippine military. Strengthening cooperation with the Philippines, which most directly confronts China in the South China Sea, indicates that Japan is shifting its role from a "rear-support provider" to a "frontline partner."
The delta: The simultaneous large-scale US-China exercises in early 2026 elevated military tensions in the South China Sea from "low-intensity friction" to a stage of "strategic confrontation." This has forced Japan to confront sea lane defense not as an abstract policy issue, but as a concrete military and economic risk, accelerating a fundamental shift in its post-war security policy.
🔍 BETWEEN THE LINES — What the News Isn't Saying
What official statements don't reveal is the reality that both the US and China are politically exploiting the South China Sea tensions as a "manageable crisis" domestically. China needs the US as an external enemy to divert public attention from its economic slowdown, and the Trump administration is also using the South China Sea as a stage to project a "strong America" ahead of the midterm elections. Even when the Japanese government advocates for increased defense spending, the tensions in the South China Sea serve as the most compelling "external pressure." In other words, the core of the problem is the absence of major actors with a genuine incentive to resolve this tension.
NOW PATTERN
Spiral of Conflict × Alliance Strain × Power Overextension
The "spiral of conflict" between the US and China over the South China Sea is simultaneously triggering a realignment of alliance structures and the risk of "power overextension" for various nations, accelerating the destabilization of regional order.
Intersection of Dynamics
The three structural patterns of "spiral of conflict," "alliance strain," and "power overextension" are intricately intertwined in the single geographical space of the South China Sea, mutually reinforcing each other.
First, the "spiral of conflict" acts as a catalyst for the "alliance strain" to become apparent. As military tensions between the US and China escalate, allies are forced to choose "which side to take," and internal conflicts of interest surface. The division among ASEAN nations is a prime example, and the differing approaches to China between Japan and the US also become clearer with rising tensions. Conversely, cracks within alliances provide China with room to "divide and conquer," further accelerating the spiral of conflict. China's differentiated approach, offering economic incentives to neutral ASEAN states while intensifying pressure on the Philippines, precisely leverages this dynamic.
Next, "power overextension" adds temporal pressure to the "spiral of conflict." When nations are concerned about the sustainability of military spending, an incentive arises to "create favorable faits accomplis now," accelerating short-term escalation. The rapid pace of China's artificial island construction can be interpreted as a sign of its eagerness to establish strategic superiority "while" its economic growth rate is high. Similarly, the US's ability to concentrate military resources in the Indo-Pacific depends on the situation in other theaters, necessitating a show of presence before this "window of opportunity" closes.
Furthermore, "alliance strain" exacerbates "power overextension." The more uneven the burden-sharing within an alliance, the more financial and military burden concentrates on the leading nation (the US), increasing the risk of overextension. The Trump administration's demand for increased defense spending from allies is in this context, but if it takes a coercive form, it risks undermining alliance trust and, paradoxically, expanding the inefficiency of burden-sharing.
Japan is situated at the intersection of these three patterns. The triple challenge of protecting sea lanes at the forefront of the spiral of conflict, responding to pressure for an expanded role within the alliance and increased defense spending, while simultaneously avoiding financial overextension, is the most difficult equation facing Japan's post-war security policy.
📚 PATTERN HISTORY
1962: Cuban Missile Crisis
The two superpowers, the US and the Soviet Union, directly confronted each other militarily in the Caribbean, reaching the brink of nuclear war. Misperception of each other's "red lines" led to a spiral of escalation.
Structural similarities with the present: In military confrontations between great powers, the risk of accidental escalation is extremely high. The establishment of crisis management mechanisms (such as hotlines) is indispensable, but such mechanisms are insufficient between the current US and China.
1982: Falklands War
Argentina occupied the British-held Falkland Islands, and the UK recaptured them by military force. A sovereignty dispute over remote islands and maritime territory escalated into a large-scale military conflict.
Structural similarities with the present: Maritime territorial disputes become extremely difficult to resolve diplomatically once the countries involved perceive them as "core interests." China's current positioning of the South China Sea as a "core interest" indicates that the room for negotiated solutions is narrow.
1996: Taiwan Strait Crisis
China conducted missile exercises to pressure Taiwan's presidential election, and the US dispatched two aircraft carriers to confront them. The exchange of military signaling created a ladder of escalation.
Structural similarities with the present: Military signaling through exercises can sometimes succeed in deterrence, but if both sides misinterpret intentions, a crisis can rapidly escalate. The simultaneous exercises in the South China Sea in 2026 are more complex than in 1996, involving numerous actors, making control more difficult.
2001: Hainan Island Incident (EP-3 Collision Incident)
A US reconnaissance plane and a Chinese fighter jet collided in the airspace over the South China Sea, resulting in the death of the Chinese pilot. An accidental incident escalated into a diplomatic crisis.
Structural similarities with the present: The risk of accidental incidents during routine surveillance and reconnaissance activities escalating into a diplomatic crisis always exists. As of 2026, the density of US and Chinese naval vessels and aircraft activities in the South China Sea has dramatically increased compared to 2001, significantly raising the risk of collision.
2012-2014: Intensification of Japan-China Conflict over the Senkaku Islands
Triggered by the Japanese government's nationalization of the Senkaku Islands, China began constant dispatch of China Coast Guard vessels. Large-scale anti-Japanese demonstrations occurred in China, impacting Japanese companies.
Structural similarities with the present: Disputes over maritime territory can spill over into economic relations, causing direct damage to corporate activities. The intensification of tensions in the South China Sea could bring similar risks to Japanese companies operating in China and to supply chains dependent on China.
Patterns Revealed by History
The pattern consistently shown by historical precedents is that military confrontations between great powers over maritime territory always contain the risk of "unintended escalation." In all cases—the Cuban Missile Crisis, the Falklands War, the Taiwan Strait Crisis, and the Hainan Island Incident—neither side desired full-scale conflict in the initial stages. However, a combination of military signaling exchanges, domestic political pressures, and accidental incidents at the operational level led to escalation beyond the leaders' intentions.
Particularly noteworthy are the lessons from the 2001 Hainan Island Incident and the 2012 Senkaku dispute. The former demonstrated that accidental military incidents can directly lead to diplomatic crises, while the latter showed that maritime territorial issues can profoundly affect economic relations. The situation in the South China Sea in 2026 is a "compound risk" environment where these elements exist simultaneously. Given that the frequency and intensity of military contacts are at an all-time high, that domestic politics in both the US and China are pushing for hardline external policies, and that multiple allies, including Japan, are directly involved, there is no guarantee that the "managed competition" equilibrium shown by historical precedents will persist. It must not be forgotten that crises in past cases did not escalate to full-scale conflict often due to leaders' personal judgments (e.g., Khrushchev's compromise, Deng Xiaoping's "shelving" policy), rather than the functioning of structural safety mechanisms.
🔮 NEXT SCENARIOS
Large-scale exercises by both the US and China will subside in the first half of 2026, and superficial tensions will remain within the scope of "managed competition." Multiple accidental close-encounter incidents will occur, but both leaderships will manage escalation through direct dialogue channels. By mid-2026, a summit meeting between Xi Jinping and Trump (in-person or online) will materialize, leading to a minimum agreement on military "rules of the road." However, structural confrontation will not be resolved, and the militarization of China's artificial islands will continue. Japan will accelerate its defense buildup plan, partially completing the deployment of long-range missiles to the Nansei Islands within fiscal year 2026. Defense spending will remain around 1.6% of GDP, but an increase to 2% will be postponed as an issue for fiscal year 2027 and beyond. From the perspective of energy security, Japan will accelerate the diversification of LNG procurement sources (expanding shares from the US, Canada, and Australia) and strengthen its stockpiling system. Shipping insurance premiums will fluctuate with a 30-50% increase compared to 2025, and logistics costs will have some impact on consumer prices. Within ASEAN, negotiations for a Code of Conduct (COC) in the South China Sea will formally continue but will not reach a substantive agreement. Sino-Philippine friction will persist sporadically, but the Marcos administration will seek to balance strengthened security cooperation with the US and Japan with economic dialogue with China.
Implications for Investment/Action: Resumption of communication between US and Chinese leaders, stabilization of exercise frequency in the South China Sea, slight upward trend in Japan's defense budget, agreement on a joint statement at the ASEAN Foreign Ministers' Meeting
By mid-2026, more extensive military confidence-building measures than expected will be agreed upon between the US and China. Specifically, these will include a code of conduct for warships and military aircraft in the South China Sea (an enhanced version of CUES), continuous operation of hotlines during crises, and a system for prior notification of exercises in certain areas. The backdrop to this agreement is domestic factors in China, where the worsening economic situation (deepening real estate crisis, export slowdown) necessitates the Xi Jinping administration to stabilize the external environment. In this scenario, military tensions in the South China Sea will gradually decrease, and shipping insurance premiums will also stabilize. Japan will continue its defense buildup, but the pace will be somewhat moderated, creating room to focus on improving diplomatic and economic relations with China. A Japan-China summit meeting could materialize as early as autumn 2026, potentially resuming constructive dialogue on maritime security, including in the East China Sea. However, even in the optimistic scenario, it is unlikely that China will dismantle its military facilities on artificial islands, and the seeds of structural conflict will remain. The agreement is a "framework for management," not a "solution to the problem." Nevertheless, a reduction in the risk of accidental clashes would be a significant positive for regional stability and Japan's economy.
Implications for Investment/Action: Announcement of regular US-China military dialogues, slowdown in China's defense spending growth rate, decrease in incidents in the South China Sea, resumption of regular Japan-China foreign ministerial talks
Towards the latter half of 2026, an accidental military clash will occur in the South China Sea. The most probable scenario is an escalation of physical obstruction by the China Coast Guard against a Philippine resupply convoy, leading to a firing incident between the Philippine military and the China Coast Guard/Navy. In this scenario, if casualties occur, the Philippines would consider invoking the US-Philippines Mutual Defense Treaty, forcing the US to strengthen military support. Japan will not participate in direct military conflict but will be asked for rear support for US forces (support for sorties from US bases in Japan, logistical cooperation), leading to a political debate over the designation of a "Situation Threatening Japan's Survival" (Sonritsu Kiki Jitai). The most severe ripple effect of this scenario is economic. If the safety of navigation in the South China Sea is fundamentally called into question, shipping insurance premiums will skyrocket, and some shipping companies may temporarily suspend operations on South China Sea routes. This would directly impact Japan's energy supply, bringing severe inflationary pressure to the Japanese economy through sharp rises in crude oil and LNG prices. International financial markets would also be greatly shaken, with the Nikkei 225 stock average potentially plummeting by 10-20%, and the yen possibly surging as a safe-haven asset. Pressure to reorganize China-dependent supply chains would rapidly increase, accelerating the withdrawal of Japanese companies from China and diversification of investments. In this scenario, raising Japan's defense spending to over 2% of GDP would become politically unavoidable, and discussions on constitutional revision would also intensify.
Implications for Investment/Action: Physical clash incident between China and the Philippines, collision incident between vessels in the South China Sea, raising of US military DEFCON (defense readiness condition), sharp rise in crude oil prices (over $100/barrel), reports concerning Japan's designation of an "Important Influence Situation" (Jūyō Eikyō Jitai)
Key Triggers to Watch
- Sino-Philippine military clash incident during a resupply mission to Second Thomas Shoal in the South China Sea: April-August 2026 (period when resupply activities are active during the dry season)
- Defense policy becoming a key issue and election results in the summer 2026 House of Councillors election: July 2026
- US-China summit meeting held (or breakdown): Autumn 2026 (utilizing the opportunity of the G20 Summit or UN General Assembly)
- First full-scale carrier-based aircraft operation test by China's aircraft carrier "Fujian" electromagnetic catapult: June-December 2026
- Announcement of Japan's next Mid-Term Defense Program interim review: Late 2026 - Early 2027
🔄 TRACKING LOOP
Next Trigger: Philippine military resupply mission to Second Thomas Shoal (April-May 2026) — Whether the next contact incident between China and the Philippines occurs during the active resupply period of the dry season will be the most critical event determining the level of tension for the year.
Continuation of this pattern: Tracking: Evolution of US-China Military Standoff in the South China Sea — The next milestone is whether a US-China summit meeting materializes in autumn 2026, utilizing the G20/UN General Assembly.
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