China-Japan rare earth spat curbs exports

Core Viewpoint - China's potential restrictions on rare earth exports to Japan could significantly impact the Japanese economy and its manufacturers, who rely heavily on these critical minerals for production [1][3]. Economic Impact - Analysts predict severe economic fallout for Japan if rare earth exports are restricted, particularly affecting the automotive industry, which utilizes rare earths for various components [3]. - If restrictions last for three months, Japan could face losses of approximately 660 billion yen ($4.2 billion), leading to a decline in nominal and real GDP by an annualized 0.11%. Over a year, losses could escalate to 2.6 trillion yen, reducing GDP by 0.43% [4]. Stock Market Reaction - Following the news of potential export restrictions, Japan's Nikkei stock index experienced a decline of more than 1% over three consecutive days [5]. Trade Dependency - In 2024, Japan's imports from China included 7.7 trillion yen in electrical machinery and telecommunications equipment, 2.4 trillion yen in personal computers and peripherals, 400 billion yen in precision optical instruments, and 200 billion yen in rare earths, totaling about 10.7 trillion yen, which represents around 42% of Japan's total imports from China that year [6]. Historical Context - China's current export restrictions are reminiscent of a similar action in 2010, when it reduced rare earth shipments to Japan following a territorial dispute, which highlighted Japan's reliance on China for these minerals [7][8]. Supply Chain Developments - The 2010 restrictions prompted Japan to seek alternative suppliers, leading to a significant reduction in reliance on Chinese rare earths from 90% in 2010 to 60-70% today, aided by deals such as the $250 million agreement with Australia's Lynas Rare Earths [9][10]. US Initiatives - Japan's efforts to enhance supply chain resilience predate similar initiatives in the United States, which have included agreements with domestic producers like MP Materials for rare earth supplies [11][12].