China has escalated trade tensions with Japan by threatening to restrict exports of rare-earth minerals and launching an anti-dumping investigation into key Japanese chemical imports. According to a report from China Daily, Beijing is warning Tokyo it might cut off rare-earth supplies, a move directly linked to comments Japanese Prime Minister Sanae Takaichi made last year regarding Taiwan. The minerals in question are the same seven that faced restrictions in April during a clash with the U.S.
This is a significant development for Japanese manufacturers, who have been working to reduce dependence on China since 2010, when China previously cut rare-earth exports during a territorial dispute. Japan's strategy has involved creating new supply chains, notably with government and bank support for Australia's Lynas Rare Earths Ltd. By 2024, a former Japanese minister stated the country had reduced its rare-earth dependence on China to 60%, down from a peak of 90%.
The threat coincides with a new Chinese government ban on over 800 dual-use items from going to Japan's military or any buyer supporting its defense system—a list that typically includes rare earths. China is now considering extending these limits to regular Japanese companies as well. Heavy rare earths like dysprosium and terbium remain a critical vulnerability for Japan; these are used in powerful magnets essential for missiles, smartphones, and electric vehicles. While Lynas began sending small amounts of these minerals to Japan late last year, the majority of Japan's supply still originates from China.
In a parallel move, China's Ministry of Commerce opened an anti-dumping probe into dichlorosilane imports from Japan. The investigation, triggered by an application from Tangshan Sanfu Electronic Materials Co., will review shipments from July 2024 through June 2025 and has a one-year deadline, extendable by six months. Dichlorosilane is a core material used to produce thin films for logic, memory, and analog chips, extending the trade dispute into the semiconductor sector.
Market reactions were immediate but mixed. Shares in Lynas jumped 16% in Sydney trading as Japan is forced to rely more heavily on alternative suppliers. Japan's Topix index fell around 1%, with the auto and car parts sector hit particularly hard—the Topix Transport Equipment Index dropped 2.5%. In contrast, Toyo Engineering Corp., which builds machinery to extract rare earths from the ocean floor, saw its shares surge 20%.
The trade measures are a direct response to Prime Minister Takaichi's Taiwan comments, which Beijing has demanded she retract. Takaichi, with strong domestic backing, has declined to do so. While Japan has protested the steps, it has avoided retaliation, citing risks to its domestic industry, especially for carmakers reliant on Chinese components for electric vehicle production.
Regional alliances are being tested. Japan has kept the United States informed as relations with China deteriorate. The timing of China's export controls appears designed to drive a wedge between Japan and South Korea, another U.S. ally, coming hours after South Korean leader Lee Jae Myung met with Xi Jinping. However, Japan retains its own leverage, controlling up to 90% of the global market for advanced photoresists—a key chipmaking material—where export limits could severely hinder China's semiconductor ambitions for years.
