Restricting rare earths supplies has long been raised as one potential avenue for Beijing to pile pressure on Tokyo, especially after China used its dominance of the industry last year to stare down US tariffs.

Supply chain disruptions like this, as seen in the US-China tensions of 2021-22, remind manufacturers of the need to diversify away from China, said Kohei Onishi, senior investment strategist at Mitsubishi UFJ Morgan Stanley. Rare-earth-related company Toyo Engineering Corp. rose as much as 20% Tuesday, while Toyota Motor Corp. fell as much as 3%, the most since early November.

Japan relied on China for around 70% of its rare earth imports as of 2024, according to the Japan Organization for Metals and Energy Security. That was more than a decade after China had wielded the materials as a weapon against Tokyo during a 2010 territorial dispute. At that time, the Chinese move wreaked havoc across Japan’s manufacturing industry.

Nomura’s Kiuchi wrote that if the new controls were to apply to rare earths, Japan would take a significant hit. If rare-earth export restrictions were to last three months, the resulting economic loss would amount to about ¥660 billion, cutting Japan’s economic output by 0.11%, he estimated.

The latest move may extend well beyond rare earth supplies. China’s dual-use export control list features more than 800 items, ranging from chemicals, electronics and sensors to equipment and technologies used in shipping and aerospace.

The trade action comes amid a diplomatic standoff following remarks made by Japanese Prime Minister Sanae Takaichi in early November that suggested Tokyo could deploy its military if China uses force to try and seize Taiwan. Beijing responded angrily and demanded Takaichi withdraw her remarks. She has refused, saying Japan’s position over Taiwan remains unchanged.

The ambiguity of China’s action may be intentional. “By triggering concern in Japan about the ongoing availability of critical Chinese industrial inputs, the announcement puts immediate pressure on Takaichi to offer concessions,” Teneo analysts James Brady and Gabriel Wildau wrote in a research note.

Since the dispute began, China has restricted tourism to Japan, made protests at the United Nations and stepped up military maneuvers, among other measures.

In announcing the export controls, a Chinese Ministry of Commerce spokesman explicitly linked them to the dispute over Takaichi’s comments.

“Japan’s leader recently made erroneous remarks on Taiwan, hinting at the possibility of military intervention in the Taiwan Strait,” the ministry spokesperson said in a statement on Tuesday. Those comments were of “malicious nature with profoundly detrimental consequences,” according to the spokesperson.

China’s military newspaper reiterated that the move demonstrates China’s commitment to regional security.

“This move not only safeguards national security and interests but also helps curb the trend of military buildup in the Asia-Pacific region, injecting certainty into the promotion of regional peace and stability,” the People’s Liberation Army Daily wrote in a commentary Tuesday.

So far, the US has given limited public support to its ally over the standoff with China. In a call on Wednesday, Kanai spoke with Assistant Secretary of State for East Asian and Pacific Affairs Michael DeSombre, according to Japan’s Foreign Ministry. The two officials “exchanged views on the current regional situation and reconfirmed close coordination between Japan and the US,” according to the statement.

–With assistance from Colum Murphy, Alice French, Brett Miller, Momoka Yokoyama and Dan Murtaugh.

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