The dispute over a small group of uninhabited islets in the East China Sea escalated over the weekend as protesters attacked Japanese car dealerships, shops and factories in China. Beijing, which has already sent ships to the area of the islands, has begun to discuss economic retaliation for what it sees as an incursion by the Japanese on Chinese territory. On Monday many Japanese factories were closed and Japanese expatriate workers were urged to stay home.
Reuters reported Monday that the islets, called the Senkaku by Japan and Diaoyu by China, have become the site of a territorial dispute that threatens economic ties between the two countries since the Japanese government decided to purchase some of them from a private Japanese owner.
The plan was supposed to be less incendiary than one seen as angering Beijing even further: that of the nationalist governor of Tokyo to buy and build facilities on the islands. However, Beijing was enraged over the idea and the situation has worsened since the Japanese government announced its plans.
Ownership of the islets has been in dispute since 1885, with the disagreement escalating in the 1970s after a study showed that oil reserves might be found under the sea nearby. The islands were thought to have been ceded to Japan by the Qing Dynasty in 1895 by the Treaty of Shimonoseki as part of the islands surrounding Formosa, and were inhabited by Japanese fishermen prior to the end of World War II.
At some point they passed into private Japanese hands and, according to am Indian Express report, are currently owned by the Kurihara family, which purchased them many years ago from descendants of the original Japanese owners. The group of islets is in a rich fishing area and reportedly also may have considerable mineral reserves.
Last week the Chinese sent surveillance ships to the islands, and the state-owned People's Daily said on its microblog that a flotilla of around 1,000 Chinese fishing boats was sailing for the area on Monday with plans to reach its destination later in the day.
Trade between the two nations came in at a hefty $345 billion in 2011, but now that is threatened as Chinese citizens attacked Japanese establishments, both diplomatic and commercial, on the mainland. Even more protests are planned for Tuesday.
While Chinese Foreign Ministry spokesman Hong Lei said the government would protect Japanese firms and citizens and also said that protesters must obey the law, his other words were more incendiary. In the report he was quoted saying, "The gravely destructive consequences of Japan's illegal purchase of the Diaoyu Islands are steadily emerging, and the responsibility for this should be borne by Japan.”
However, the Chinese government has stepped up its rhetoric with a threat to exert economic pressure over the matter. According to the overseas edition of the People's Daily, the main newspaper of the Chinese Communist Party, Beijing plans to retaliate where it will hurt Japan’s economy most: its pocketbook.
In a front-page editorial, the newspaper asked, "How could it be that Japan wants another lost decade, and could even be prepared to go back by two decades?" It added that China "has always been extremely cautious about playing the economic card. But in struggles concerning territorial sovereignty, if Japan continues its provocations, then China will take up the battle."
The dispute is already taking a financial toll on Japanese companies with factories or presences in China; everything from shuttered factories to canceled flights to the shares of retail stores are translating into losses. "All Japan-related shares are under selling pressure," Andrew To, a research director from Emperor Capital, said in the report.
The U.S. could get involved, too, based on treaty commitments. U.S. Defense Secretary Leon Panetta, who is visiting Japan, met with both Japanese Prime Minister Yoshihiko Noda and Japanese Foreign Minister Koichiro Gemba on Monday, and said that the U.S. would honor its security treaty obligations to Japan but would not take sides.
He also urged both sides to find a peaceful resolution, and was quoted saying, "It is in everybody's interest ... for Japan and China to maintain good relations and to find a way to avoid further escalation."
After talks with Panetta, Gemba said in the report, "I did not bring up the topic today, but it is mutually understood between Japan and the United States that [the islands] are covered by the treaty."