China banned exports of dual-use items to Japan that can be used for military purposes, according to a commerce ministry statement Tuesday, Beijing's latest move in reaction to remarks Japanese Prime Minister Sanae Takaichi made last year about Taiwan.

The Ministry of Commerce said exports of such items to military users or for any purposes that contribute to Japan's military strength are banned, effective immediately. Organizations or individuals from any country or region that violate the ban will be held legally liable, the statement said.

"Japan's leader recently made erroneous remarks on Taiwan, hinting at the possibility of military intervention in the Taiwan Strait," a ministry spokesperson said. Those comments violated the One-China principle and were of "malicious nature with profoundly detrimental consequences," according to the spokesperson.

Dual-use items are goods, software or technologies that have both civilian and military applications, including certain rare earth elements that are essential for making drones and chips. 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.

Origins of the diplomatic dispute

Ties between Beijing and Tokyo have deteriorated since Takaichi said on November 7 that a Chinese attack on the democratically governed island of Taiwan could be deemed an existential threat to Japan, in a remark that Beijing said was "provocative." China regards Taiwan as part of its territory, a claim that Taipei rejects.

The Chinese foreign ministry questioned Japan's motives around Taiwan, saying its "provocations" could be a pretext for building up its military forces and overseas missions.

Neither side has backed down since Takaichi's comments. Amid several heated exchanges among their diplomatic corps, China has cautioned its citizens against trips to Japan, and numerous events promoting cultural and business exchange have also been canceled.

In late December, the Japanese cabinet approved a record spending package for the fiscal year starting in April, including a 3.8% increase in the annual military budget to 9 trillion yen ($58 billion).

In a commentary in December, China's state-run Xinhua news agency said it had been "alarming" in recent years that Japan had "drastically" readjusted its security policy, increased its defense spending year after year, relaxed restrictions on arms exports, sought to develop offensive weapons and planned to abandon its three non-nuclear principles.

Japan lodges formal protest

Japan lodged a strong protest with China following the announcement.

Masaaki Kanai, the Japanese Foreign Ministry's head of Asia Oceanian affairs, "strongly protested" to Chinese deputy consul Shi Yong, according to a statement from the Japanese ministry. Kanai said a measure exclusively targeting Japan that deviates from international practice is unacceptable and demanded it be retracted.

Japan's Chief Cabinet Secretary Minoru Kihara told a daily press conference Wednesday that the measures were "absolutely unacceptable and deeply regrettable."

"A measure such as this, targeting only our country, differs significantly from international practice," Kihara said.

He declined to comment on the possible impact on Japanese industry, saying it remained unclear exactly what items would be targeted.

An official at the Japan External Trade Organization told Reuters that "China has not provided a list of restricted items so at this stage it is impossible to say what impact the export curbs will have."

A Japanese government source who spoke on condition of anonymity called the move "symbolic," adding that "until now, China has avoided doing things that would seriously hurt Japan's business community. By taking this step and causing trouble for Japanese industry, they may be aiming to fuel domestic criticism of Takaichi."

Rare earth concerns loom

Some analysts and Japanese firms have feared that China would retaliate by restricting exports of rare earths, essential for Japan's automotive sector, since the diplomatic dispute broke out in November.

China Daily, a newspaper owned by the ruling Chinese Communist Party, reported Tuesday that Beijing was considering tightening the license review of rare earth exports to Japan more broadly, citing sources with knowledge of the matter.

Such a move could have sweeping implications for the manufacturing powerhouse.

Despite Japan's efforts to diversify its supply of rare earths since China last throttled exports of the minerals in 2010, around 60% of its imports still come from China, according to macroeconomic research firm Capital Economics.

A three-month curb on Chinese exports of rare earths, like that seen during 2010, could cost Japanese businesses 660 billion yen ($4.21 billion) and shave 0.11% of annual gross domestic product, Nomura Research Institute economist Takahide Kiuchi said in a note Wednesday. A year-long ban would knock 0.43% off GDP, he added.

Around 1,100 items are on China's export control list for dual-use goods and technologies, covering at least seven categories of medium and heavy rare earths such as samarium, gadolinium, terbium, dysprosium and lutetium.

So far, China customs data has shown no sign of a decline in rare earth exports to Japan, though the data is released with some delay. In November, the latest month for which there was data, exports grew 35% to 305 metric tons, the highest tally last year.

One Japanese private sector source in Beijing told Reuters on condition of anonymity that it still took a "considerable amount of time" to obtain rare earth export license approvals as of late November, and that many other Japanese firms were in similar positions. But it was unclear whether that was a direct consequence of the diplomatic dispute, they cautioned.

Regional implications

The announcement from Beijing came after major Japanese business groups said they would be postponing their annual trip to China, originally scheduled for later this month. Since 1975, such visits have taken place every year, with rare exceptions during the Covid-19 pandemic and a 2012 dispute over the Diaoyu Islands, which Japan calls the Senkaku Islands.

China's measures also came during South Korean President Lee Jae Myung's visit to Beijing, where Chinese leader Xi Jinping urged him to stand on the right side of history. Both U.S. allies, Japan and South Korea, have previously aligned with Washington in providing a counterbalance to Chinese economic and military might in the region.

In his meeting with Lee on Monday, Xi mentioned China's and South Korea's historical rivalry against Japan, calling on the two countries to "join hands to defend the fruits of victory in World War II and safeguard peace and stability in northeast Asia."

Mao Ning, a spokeswoman for China's foreign ministry, said at a press conference Tuesday that along with "peace-loving countries and peoples around the world," Beijing will "never allow Japan's right-wing forces to turn back the wheel of history" or "allow militarism to make a comeback."

Finance ministers from the Group of Seven nations will meet in Washington on January 12 to discuss rare earths supplies, three sources familiar with the matter told Reuters Tuesday.

Liu Jiangyong, a Japan specialist and professor of international affairs at Tsinghua University in Beijing, said Takaichi's remarks on Taiwan, along with Tokyo's more hawkish stance in recent years, have dealt the "most serious" blow to ties since relations were normalized in 1972.

"This shock will not only deepen political and structural problems between the two sides but inevitably spill over into other areas," Liu said to the South China Morning Post. "Overall, the outlook for China-Japan relations in 2026 is bleak."