For ramming the patrol boats and treading in "Japanese territory," the captain of the Chinese vessel was arrested by Japanese authorities and held captive for almost three weeks. Japan finally decided to let him go last Friday but China is still demanding an apology and compensation from Japan for its "illegal and invalid" detention. Not being one to budge, Japan's Foreign Ministry responded by saying China's demands are "groundless and utterly unacceptable to Japan."
"If you're not gonna say sorry then our friendship is over!" Just like that, China threw a tantrum and decided to cut off some of its exports to Japan. According to the New York Times, Chinese customs officials are now blocking shipments of rare metals and minerals that Japan uses for manufacturing hybrid cars, solar panels, electronic gadgets, and missiles - pretty much all the high-tech toys Japan is famous for.
Note that 93% of the world's supply of rare earth elements is found in China and that Japan has been the biggest buyer of these materials for several years. On top of that, most American manufacturing companies also rely on Japan to process these materials so you can imagine how much damage this export ban could cause in the global economy.
Amidst all this, Japan isn't entirely defenseless. They could report this alleged export ban to the World Trade Organization, accusing China of violating free trade rules. Besides, history shows that Japan isn't likely to sit idly when other countries impose trade restrictions on them. I seem to recall a particular American oil embargo way back in 1941 which was one of the main reasons why Japan bombed Pearl Harbor. Yikes! This ongoing tension would PROBABLY not be that bad since the Chinese Ministry of Commerce strongly denied that they restricted exports of these materials in the first place.
Still, the growing tension between the two Asian powerhouses just adds to the long list of headaches that both countries are currently experiencing. Ironically, both are in their own battles to control the value of their respective currencies.
China has been under pressure from the U.S. to let the yuan appreciate, arguing that the weak value of the yuan gives them an unfair competitive advantage. Meanwhile, the BOJ has recently intervened in the markets to try and counter the yen's persistent rise. Remember, by keeping their currencies weak and "cheap", China and Japan can help boost export demand.
With the outcome of the global recession still in the balance, chances are that we will see the two nations come to a compromise over a relatively small issue. After all, they would not want to waste all the progress that has been made towards better economic growth in Asia as a whole. I'm sure they understand that if either of them wants to have a shot of un-planting the U.S. as the world's biggest economy, they will have to play nice and find a way to work together.