Economic stakes high in China-Japan islands dispute

BEIJING — The worst of the anti-Japanese protests that have swept China in recent days may be over. The financial fallout for the world’s second- and third-biggest economies may be just beginning.

Japanese-owned factories, restaurants, mini-marts and clothing retailers across China closed en masse Tuesday as protests continued in nearly 100 cities, sparked by a dispute over control of uninhabited islands near Taiwan.

Automakers Nissan, Honda, Toyota and Mazda suspended operations at some plants, as did Sony. Hundreds of 7-Eleven shops run by a Japanese company were shuttered, as were dozens of outlets of the popular Gap-like Japanese clothing chain Uniqlo. Eateries serving Japanese food — even those with Chinese owners and staff — closed as well, shaken by weekend demonstrations that saw protesters overturning Japanese cars, looting businesses and setting factories on fire.

Though domestic political pressure made it difficult for either side to compromise, neither appeared to be in the mood for an escalation either. China sent hundreds of police to the Japanese Embassy on Tuesday to monitor the crowd that gathered there, and many people received text messages from the police asking them to protest peacefully.

But with the world economy struggling, damage has already been done. One analyst predicted a “short, sharp downturn” in business dealings between two major global players.

The business closures and calls to boycott Japanese goods helped drive down the stock prices of many Japanese companies, including Nissan, which fell 5%; Honda, which dropped 2.5%; and Uniqlo parent Fast Retailing, which plummeted 7%. The shares of some Chinese companies with close ties to Japanese firms also fell.

“This is the worst we have seen,” said Tetsuo Kotani, a research fellow at the Japan Institute of International Affairs in Tokyo. “This could be a turning point for Japanese companies, making them reconsider the risks in China and leading them to diversify toward Southeast Asia, South America and Africa.”

Anti-Japanese sentiment has long existed in China, and authorities often have encouraged it. The recent demonstrations were the largest and most violent since 2005, when Chinese took to the streets over grievances that included a textbook they said downplayed accounts of Japanese brutality in China and elsewhere in Asia during World War II.

The latest protests appeared to peak Tuesday on a date tied to that same period: the 81st anniversary of an event that launched Japan’s deadly occupation of large parts of China.

The dispute is over uninhabited islands known by Japan as the Senkaku and China as the Diaoyu. Japanese officials, pushed to action by Tokyo’s nationalistic governor, Shintaro Ishihara, announced last week that the government would buy three of the islands from the Japanese family that has controlled them for decades. China argues that they were an integral part of its territory for centuries, and were illegally occupied by Japan.

Prospects for a quick diplomatic solution seemed dim Tuesday as both sides dispatched vessels to areas near the islands. Chinese Defense Minister Liang Guanglie said his country hoped to resolve the dispute peacefully, but said it reserved the right to take further action if Japan did not correct its “mistakes.”

Liang’s remarks came at a news conference in Beijing with U.S. Defense Secretary Leon E. Panetta, whose trip to Asia has been overshadowed by the dispute. Although the United States and Japan have a mutual defense treaty, which requires Washington to aid Japan if it is attacked, Panetta has called for restraint and for a diplomatic settlement.

The stakes for Japan and China are high. Trade between them was worth nearly $350 billion last year. China is Japan’s largest export market, and China received about $12 billion in foreign direct investment from Japan in 2011, according to Japanese government figures. More than 3 million Japanese visit China annually.

Chinese firms seized on the nationalist spirit to promote their brands. The search engine Baidu added a cartoon of the disputed islands (topped with a Chinese flag, of course) to its home page. A grocery store in the southern province of Guangdong set up a large display of toothpaste — brand name “China” — in the shape of a cannon, adorned with a red banner declaring, “The Diaoyu Islands Are China’s!” Meanwhile, several prominent Chinese newspapers with ties to the government carried opinion pieces suggesting the country should slap sanctions on Japan, starting a trade war.

Some of the several thousand marchers who showed up Tuesday at the Japanese Embassy in Beijing carried portraits of Mao Tse-tung and red banners. They promoted Chinese food, cars, appliances — and moisturizing cream.

“When you moisturize your face, Dabao is good enough,” said a handmade poster carried by one man, touting a low-cost Chinese lotion. “You don’t need to use Japanese cosmetics!”

Caroline Rose, a professor of Sino-Japanese relations at the University of Leeds in Britain, said many observers had initially hoped that a symbolic dispatch of ships to the islets would quickly return the situation to the status quo. That’s less likely now, Rose said.

“I don’t know that there’s a quick, easy face-saving measure to be found … but eventually they will probably have to agree to disagree,” she said. A “short, sharp downturn” is likely in the near term, but the long term is murkier, she added, noting that Japanese businesses rebounded within a year after the 2005 protests.

For now, the travel and tourism sectors are feeling some of the strongest effects. All Nippon Airways said 18,000 tickets on flights between the two countries had been canceled in recent days, Japan’s Nikkei economic newspaper reported. China withdrew its contingent from this week’s Japan Open badminton tournament in Tokyo, Agence France-Presse reported.

James Reilly, author of “Strong Society, Smart State: The Rise of Public Opinion in China’s Japan Policy,” said the dispute, along with another islands fight between Japan and South Korea, had soured “a lot of encouraging signs that had been developing among China, Japan and South Korea on a range of broad economic issues in the past year,” such as expanding currency swaps.

Shi Yinhong, a professor of international relations at Renmin University in Beijing, said he doubted that Chinese officials would escalate the tension. But the widespread destruction of property and the calls for boycotts are already taking a toll, he said.

“The Japanese enterprises here now feel very insecure,” said Shi, adding that he was “extremely surprised” by the extensive damage protesters caused over the weekend. “The Japanese businesses in China have already been profoundly damaged. Few consumers will want to buy the merchandise; people are already making private decisions to stop buying Japanese goods.”

Shi said the violent outbursts may backfire on China.

“Before the massive demonstrations and illegal actions, the [islands] case was in China’s favor,” he said. “But now, in the eyes of foreign audiences, who is right and who is wrong has become very ambiguous.”

julie.makinen@latimes.com

Times staff writer David S. Cloud and researchers Tommy Yang and Nicole Liu contributed to this report.