China bans dual-use goods exports for Japan military, govt calls it 'unacceptable' as rare earths lay in crosshairs

Japan's ⁠top government spokesperson said on Wednesday that China's ban on exports of dual-use items to the country was "absolutely unacceptable and deeply regrettable", as a diplomatic dispute between Asia's top two economies ramped up.

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.

Japanese Prime Minister Sanae Takaichi touched off the dispute with Beijing late last year by ‌saying a Chinese attack on democratically-governed Taiwan could be deemed an existential threat to Japan. China regards Taiwan as part of its territory, a claim the island rejects.


Beijing has demanded she retract the remarks, which she has not done, prompting a series of countermeasures, the latest of which was Tuesday's ban on exports of dual-use items for military use.

"A measure such as this, targeting only our country, differs significantly from international practice, is absolutely unacceptable and deeply regrettable," Japan's Chief Cabinet Secretary Minoru Kihara told a daily press ‌conference on Wednesday.

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

The reaction from markets to the news was relatively ‌muted though Japanese shares were lower on Wednesday, bucking a global trend that carried U.S. and European benchmarks to record highs.

Japan's broad Topix gauge of equities slid 0.55%, with a subindex of mining shares leading declines, down 3.2%.

RARE EARTH RESTRICTIONS NEXT?

China Daily, a newspaper owned by the ruling Chinese Communist Party, reported on 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, including ‍its key automotives sector, analysts say.

While Japan has sought 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.

A three-month curb on ⁠Chinese exports of rare earths, like that seen during the 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 on Wednesday.

A year-long ban would knock 0.43% off GDP, he added.

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.

($1 = 156.6800 yen)