By Satoshi Sugiyama and Kantaro Komiya
TOKYO, Jan 7 (Reuters) – Japan on Wednesday called China’s ban on dual-use exports for its military “absolutely unacceptable”, amid a looming threat of wider restrictions on vital rare earths in a growing dispute between Asia’s top two economies.
Dual-use items are goods, software, or technology that have both civilian and military applications, including certain minerals essential to the manufacture of drones and chips.
Japanese Prime Minister Sanae Takaichi sparked the row late last year by saying a Chinese attack on democratically-ruled Taiwan could be considered an existential threat to Japan. China considers Taiwan part of its territory, a claim the island rejects.
Beijing asked him to retract his remarks, which he did not do, prompting a series of countermeasures, the latest of which was Tuesday’s ban on exports to military users or for any purpose that contributes to Japan’s military strength.
“Such a measure, which only targets our country, differs significantly from international practice, is absolutely unacceptable and deeply regrettable,” said Japanese government spokesman Chief Cabinet Secretary Minoru Kihara.
At a daily news conference on Wednesday, he declined to comment on the possible impact on Japanese industry, saying it remained unclear which items would be targeted.
Japan’s Nikkei stock index fell about 1 percent on Wednesday, bucking the trend of record highs in U.S. and European benchmarks.
Stocks of major military contractors Kawasaki Heavy and Mitsubishi Heavy were among the biggest losers, down about 2 percent.
RARE EARTH BURNING NEXT?
Beijing is still considering restrictions on rare earth exports to Japan, China Daily, a newspaper owned by the ruling Chinese Communist Party, said on Tuesday, citing sources familiar with the matter.
Such a move could have major implications for manufacturing power, including the key auto sector.
Japan has tried to diversify its supply of rare earths since China last cut exports of the mineral in 2010, but it still relies on China for about 60 percent of imports.
For some heavy rare earths, such as those used for magnets in electric and hybrid vehicle engines, for example, Japan is almost entirely dependent on China, analysts say.
Japanese automaker Subaru said it was closely monitoring the situation, while peers Toyota and Nissan did not immediately comment.
A three-month cut in Chinese rare earth exports, similar to the one in the 2010 dispute, could cost Japanese businesses 660 billion yen ($4.2 billion) and shave 0.11 percent of annual gross domestic product, Nomura Research Institute economist Takahide Kiuchi said in a note on Wednesday.
A one-year ban would cut 0.43 percent of GDP, he added.
Tokyo is unlikely to sit idly by if Beijing’s bans begin to target Japanese businesses more broadly, said Cameron Johnson, senior partner at supply chain consultancy Tidalwave Solutions in Shanghai.
“If Japanese civilian or commercial entities are targeted, you could see the Japanese retaliate,” he said.
Such responses could target areas such as semiconductors or other high-end manufacturing materials that China needs for its own supply chain, he added.
Separately on Wednesday, China launched an anti-dumping investigation into Japanese imports of dichlorosilane, a key chemical for the semiconductor industry, the Commerce Ministry said on its website.
PREPARING FOR A LONG WINTER
Since Takaichi’s remarks about Taiwan in early November, Beijing has urged citizens not to visit Japan, halted imports of Japanese seafood and canceled meetings and cultural events.
US President Donald Trump, who brokered a fragile trade war truce with Chinese President Xi Jinping late last year and plans to travel to Beijing in April, asked Takaichi not to escalate the dispute further, sources told Reuters.
The row, however, does not appear to have affected Takaichi’s strong popularity at home, opinion polls show.
Analysts compare the rift to the one sparked by Tokyo’s 2012 decision to nationalize the disputed islands, which sparked mass protests against Japan in China and halted meetings between the two countries’ leaders for two and a half years.
“I think this will take quite a while,” Keita Ishii, chairman of Itochu Corp, one of Japan’s largest trading houses, said in a televised interview on Tuesday.
Asked about the export restrictions on Japan at a regular press briefing on Wednesday, China’s Foreign Ministry spokesman reiterated Beijing’s anger at Taiwan’s Takaichi’s comments.
“We urge the Japanese side to face the root cause of the problem, reflect on its mistakes and withdraw the erroneous remarks,” Mao Ning said.
Later in the day, Japan’s Kyodo news agency reported that last week the Japanese government protested to China over signs of new offshore gas exploration activities in the East China Sea. Activities were spotted on the Chinese side of the median line between the two countries, Kyodo said.
Tokyo has lodged similar protests with Beijing, citing a 2008 agreement on cooperation in the development of natural resources in the East China Sea.
Japan’s foreign ministry was not immediately available to comment on the Kyodo report.
(1 USD=156.6800 yen)
(Reporting by Satoshi Sugiyama, Kantaro Komiya, Tim Kelly, Rocky Swift, Daniel Leussink and Maki Shiraki, Kiyoshi Takenaka in Tokyo; Liz Lee, Ethan Wang, Xihao Jiang, Shi Bu and Lewis Jackson in Beijing; Writing by John Geddie; Editing by Michael Perry and Clarence Fernandez)
