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What is happening?
The conflict between Beijing and Tokyo has taken on a new dimension, as earlier this month China imposed a ban on export of dual-use goods to Japan. The trade restriction targets a range of strategical items, including rare earth elements used in the production of high-tech electronics, electric vehicle (EV) motors, and also defence systems.
The restrictions are already creating instability in Japan’s domestic market, placing several key industries under direct pressure and highlighting the need for supply-chain diversification as a pillar of national industrial security.
What is the broader picture?
On January 6, China’s Ministry of Commerce announced its intention to strengthen the export controls of dual-use items designed for Japan. These are defined as goods, software or technologies that can be used for both civilian and military purposes. The move is part of a series of multi-layered pressure tactics from Beijing, triggered by remarks from Japan’s Prime Minister Sanae Takaichi regarding a possible military assistance to Taiwan.
Although Beijing has not released a comprehensive list of targeted goods, based on China’s Catalogue of Goods Subject to Import License Administration (2025), the controls may cover certain rare earths, chemicals, or power and electrical equipment.
The strategy of the Chinese authorities lies in imposing a significant administrational burden on Japanese companies importing rare earths. Firms would be required to provide detailed end-use information, including shipment routes, the nature of the final products manufactured in Japan, and whether they might become a subject of trade with third countries, such as the United States.
This measure is expected to negatively affect key Japanese high-tech industries, particularly EVs and semiconductors, due to delays in shipments of critical minerals. By January 15, market reactions were already visible: Stocks of some biggest firms had fallen – Tokyo’s Nikkei 225 fell 0.9%, with technology-related stocks underperforming, while chipmaker Tokyo Electron, Japan’s third most valuable company in terms of market cap, saw its shares decline 3.3%.
Another area of concern is energy stability. Japan generates roughly 10% of its electricity form solar power, based on its renewable energy strategy, with its 7th Strategic Energy Plan finalized in early 2025 with a goal of 40-50% renewables by 2040. However, it remains almost entirely dependent on imports of Chinese solar panels and its key components. In the light of latest escalation, this dependence shows as a critical strategic vulnerability.
While Japan has managed to significantly reduce its reliance on Chinese rare earths from around 90% in 2010 to roughly 60% today, further diversification is increasingly difficult and costly. China retains a near-monopoly in the global processing of several key minerals, including dysprosium and terbium. Developing alternative supply chains would require large investments and could raise costs for homeland manufacturers.
Why does it matter?
China has revealed its hand but is still winning the game. This round demonstrates how dependencies created in peacetime quickly become vulnerabilities during political crises. Beijing’s actions underscore how trade is being instrumentalized as a tool of geopolitical leverage, forcing Tokyo to reconsider its supply-chain resilience and strategic autonomy.
Beyond Japan, the move also sends a broader signal to the rest of the liberal bloc about the potential misuse of trade restrictions in cases of geopolitical confrontation. For the European Union, heavily dependent on Chinese imports for rare earths and other critical materials (up to 95% in 2024), this situation highlights the urgent need for proactive diversification strategies to reduce dangers of an uphill battle.