Dual-use items—goods, software, or technologies that have both civilian and military applications—include certain rare earth elements critical for producing drones and semiconductors. The latest export restrictions follow remarks by Japanese Prime Minister Sanae Takaichi late last year, suggesting that a Chinese attack on democratically-governed Taiwan could constitute an existential threat to Japan. Beijing, which considers Taiwan part of its territory, demanded that Takaichi retract her comments, which she has not done.
Japan’s Chief Cabinet Secretary, Minoru Kihara, described China’s action as “targeting only our country,” noting that it deviates from international norms. Speaking at a daily press conference, he said the government had yet to determine exactly which items would be affected and declined to speculate on potential industrial impacts.
The announcement immediately rattled markets. Japan’s Nikkei share index fell about 1% on Wednesday, bucking a global trend that saw U.S. and European benchmarks reach record highs. Stocks of major defense contractors Kawasaki Heavy Industries and Mitsubishi Heavy Industries were among the biggest losers, declining roughly 3%.
Potential Impact on Rare Earth Supplies
China Daily, a state-owned newspaper, reported that Beijing is considering tightening license reviews for rare earth exports to Japan. Analysts warn such measures could have broad consequences for Japan’s manufacturing sector, particularly its automotive industry.
Although Japan has been working to diversify its rare earth supply since China restricted exports in 2010, around 60% of its imports still come from China. Nomura Research Institute economist Takahide Kiuchi estimated that a three-month curb on Chinese rare earth exports could cost Japanese companies ¥660 billion ($4.21 billion) and reduce annual GDP by 0.11%. A year-long ban could cut GDP by 0.43%.
So far, China Customs data does not indicate a decline in rare earth exports to Japan. In November 2025, the latest month with available data, shipments rose 35% to 305 metric tons, the highest monthly total for the year.
Escalating Diplomatic Tensions
Since Takaichi’s comments in early November, Beijing has taken a series of retaliatory measures, including advising Chinese citizens against traveling to Japan, halting imports of Japanese seafood, and canceling cultural and business events.
The dispute has attracted international attention. U.S. President Donald Trump, who negotiated a fragile trade truce with Chinese President Xi Jinping late last year and is scheduled to visit Beijing in April, reportedly urged Takaichi not to escalate tensions further. Despite the fallout, Takaichi’s domestic popularity remains robust, according to opinion polls.
Analysts have compared the current dispute to the 2012 rift triggered by Tokyo’s nationalization of disputed islands, which sparked mass anti-Japan protests in China and led to a two-and-a-half-year freeze in high-level diplomatic engagement.
“I think this will drag on for quite a while. President Xi seems a bit angry,” said Keita Ishii, president of Itochu Corp, one of Japan’s largest trading houses, in a television interview on Tuesday.