Tensions escalate between China and Japan as rare earth export curbs enter force

Japanese officials are pretty upset about it

Rowan Dunne

Published

21 hours ago

China just announced a ban on exports of dual-use items to Japan that could support military purposes. These items include goods with both civilian and military applications, such as certain rare earth elements critical for electric vehicles, defence technology and electronics.

The restrictions took effect immediately on Jan. 6 and target military end-users or any uses enhancing Japan’s military capabilities, though no specific list was released.

Markets responded promptly, with certain Australian and Japanese rare earth stocks surging on Jan. 7. As reported by Bloomberg, investors shifted toward non-Chinese suppliers amid fears of supply disruptions.

Australia’s Lynas Rare Earths Ltd (OTCMKTS: LYSCF) (FRA: LYI) climbed 16 per cent, its strongest gain since July. Additionally, Australian Strategic Materials Ltd (OTCMKTS: ASMMF) (FRA: 80P) rose nearly 10 per cent.

In Japan, deep sea rare earth specialist Toyo Engineering Corp (TYO: 6330) jumped 20 percent while cerium producer Daiichi Kigenso Kagaku Kogyo Co Ltd (TYO: 4082) soared as much as 27 per cent.

Analysts noted that tighter Chinese controls would benefit upstream producers outside China, reminiscent of the 2010 dispute between the two nations that drove prices higher.

China dominates the global rare earth market, supplying about 60 to 63 per cent of Japan’s imports.

The Chinese Ministry of Commerce announced today that it will strengthen export controls on dual-use items to Japan.

In accordance with relevant laws and regulations, including the "Export Control Law of the People's Republic of China," and to safeguard national security and… pic.twitter.com/mHGhACDoH5

— Loong of the east (@loong_of) January 6, 2026

Japan didn’t take the news well

National officials strongly condemned the move. On Wednesday, Chief Cabinet Secretary Minoru Kihara described the ban as “absolutely unacceptable” and “deeply regrettable,” arguing it deviates from international trade norms and unfairly targets Japan. Japan’s government pledged to diversify supplies and evaluate impacts

Despite the gains observed by select Japanese firms, fears of higher supply chain costs weighed on investor sentiment, dragging down Japanese auto, machinery, and defence stocks on Wednesday.

Furthermore, the Nikkei 225, Japan’s premier stock market index, dropped 1.06 per cent to close at 51,961.98 after shedding over 500 points.

Automakers, heavily reliant on rare earths for EV motors, led the declines. Toyota Motor Corp (OTCMKTS: TOYOF) (NYSE: TM) and Mazda Motor Corp (OTCMKTS: MZDAY) fell up to 3 per cent, with Honda Motor Co Ltd (OTCMKTS: HNDAF), Nissan Motor Co Ltd (OTCMKTS: NSANY) and Suzuki Motor Corp (OTCMKTS: SZKMF) following suit. Defense firms like Mitsubishi Heavy Industries Ltd (OTCMKTS: MHVYF) and Kawasaki Heavy Industries Ltd (OTCMKTS: KWHIY) also dropped around 2 per cent.

Research firm predicts Japanese economic losses

According to Nomura Research Institute, a three-month rare earth restriction could cause 660 billion yen (US$4.2 billion) in production losses and reduce Japan’s GDP by 0.11 per cent.

The measures stem directly from remarks by Japanese Prime Minister Sanae Takaichi regarding Taiwan. On Nov. 7 last year, during a House of Representatives session, she stated that a Chinese military action against Taiwan, such as a blockade involving force, could constitute a “situation threatening Japan’s survival.”

This would invoke Japan’s right to collective self-defence under 2015 security legislation, the Japanese leader highlighted, potentially allowing military involvement alongside allies like the U.S.

Takaichi, known for her hawkish foreign policy views and pro-Taiwan stance, has faced backlash from Beijing, which views the comments as interference in its internal affairs and a violation of post-WWII commitments. China has demanded retractions and escalated with prior steps like travel warnings and seafood bans.

This latest export curb serves as pointed retaliation, highlighting Taiwan’s role as a flashpoint and raising risks of further economic division and shifts in regional alliances.

Nomura Research Institute estimates that if China's restrictions on (heavy) rare earth exports to Japan were to last for a year, losses could reach about 2.6 trillion yen (>$16B), leading to a 0.43 percent decline in both nominal and real GDP.

It's surely cheaper (and safer!)… pic.twitter.com/dvnYYCj4vt

— Piotr Turek (@rekurencja) January 6, 2026