Japan and China Clash Over Trade as Tokyo Faces Deepening Debt Crisis
Tensions between China and Japan have escalated in early 2026 over trade restrictions and political disputes. Beijing imposed new export controls on Japanese firms, while Tokyo responded with economic and diplomatic countermeasures. The standoff follows months of strained relations, with both sides exchanging sharp criticism.
At the same time, Japan's financial pressures are growing. The government's debt has hit record levels, and a planned tax cut threatens to widen the deficit further.
On January 6, 2026, China added 20 Japanese companies—including Mitsubishi Shipbuilding Co. and SUBARU Corporation—to its export control list. The move targeted firms suspected of misusing dual-use goods, citing unverifiable end users and purposes. Beijing framed the restrictions as necessary to protect its core interests and maintain regional stability.
Japan's government reacted swiftly. The Foreign Ministry lodged a formal protest, while Defence Minister Shinjiro Koizumi pushed for stronger countermeasures. Tokyo also accelerated plans to diversify rare earth supply chains, aiming to reduce reliance on Chinese imports.
The dispute deepened over political remarks. China demanded that Prime Minister Sanae Takaichi retract statements on Taiwan and uphold the one-China principle. Japanese officials dismissed the request, with right-wing factions growing more vocal after the recent House of Representatives election. Polls suggest many young voters distrust China, with some expressing views of civilisational superiority.
Economic strains add to Japan's challenges. The 10-year government bond yield climbed to a 27-year high in January, reflecting investor concerns. With debt now at 230% of GDP, Takaichi announced a two-year suspension of the consumption tax on food—a move expected to cost 5 trillion yen in lost revenue annually.
The export controls and political row mark the latest flashpoint in China-Japan relations. Tokyo's tax cuts and supply chain shifts signal a longer-term strategy to counter economic dependence on Beijing. Meanwhile, the bond market's reaction highlights investor unease over Japan's mounting debt and geopolitical risks.
