China-Japan rare earth spat curbs exports

[Ben Graham]

China’s threats this week to restrict rare earths exports to Japan could harm the Japanese economy and manufacturers, which heavily depend on China for supplies of the critical minerals.

China’s Ministry of Commerce announced Tuesday a ban on the export to Japan of dual-use items that have civilian and military applications, the state-run China Daily reported.

But Beijing is also considering curbs on export permits for some rare earth-related products, according to the Daily.

The move appears to be a reaction by Beijing against comments made in November by Japanese Prime Minister Sanae Takaichi, who suggested Japan could become involved in a military conflict over Taiwan, a sensitive issue for China which regards Taiwan as its own province.

Asian rare earth stocks surge on new China-Japan export curbs

Huge economic losses

While details on rare earth export restrictions weren’t yet known, analysts said the economic fallout for Japan could be severe.

The country’s automotive industry, which uses rare earths for magnets, drivetrains and batteries could be forced to cut production or halt manufacturing altogether if rare earths are cut off, Hidetoshi Tashiro, chief economist at Japan’s Infinity LLC said, according to China Daily. Tashiro is also CEO of Terra Nexus Project Management Services.

A ban could easily affect other manufacturers as well, including the wider electronics industry and especially semiconductor producers, he said.

If the rare earths restrictions last three months, Japan could incur losses of about 660 billion yen ($4.2 billion), pulling down nominal and real GDP by an annualized 0.11%, according to analysis from Japan’s Nomura Research Institute. After one year, those losses could reach 2.6 trillion yen, denting GDP by 0.43%.

Japan’s Nikkei stock index fell more than 1% on Thursday, after falling by the same amount on Wednesday and Tuesday.

Billions worth of imports

Japanese trade figures cited by China Daily show that in 2024, electrical machinery and telecommunications equipment imports from China totalled 7.7 trillion yen, personal computers and peripherals came to 2.4 trillion yen, precision optical instruments 400 billion yen, and rare earths 200 billion yen. Those imports totalled about 10.7 trillion yen, comprising around 42% of Japan’s total imports from China that year.

China’s export restrictions echo a similar move by Beijing in 2010, when it sharply cut rare earth shipments to Japan following a territorial dispute over the Senkaku Islands.

Supply chain independence

Though the ban only lasted about two months, it alerted Japan to its reliance on China for the critical minerals and spurred it to seek other suppliers.

In 2011, Japanese conglomerate Sojitz and government mineral agency Jogmec made a $250 million deal with Australia’s Lynas Rare Earths (ASX: LYC) for long-term supply of the elements. Lynas holds the Mount Weld mine in Western Australia and is the largest producer of rare earths outside of China. Lynas processes the elements at a facility in Malaysia.

Lynas becomes first producer of heavy rare earths outside China

The Lynas deal and other supply chain arrangements have helped Japan reduce its reliance on Chinese rare earths to 60-70% today from 90% in 2010, according to Jogmec data cited by The New York Times.

US rare earths deals

Japan’s initiatives to bolster its supply chain resilience came several before the United States accelerated similar efforts.

In August, the Department of Defense and MP Materials (NYSE: MP) – the only producer of rare earths in North America – signed a 10-year off-take agreement that sets a price floor of $110 per kg for neodymium-praseodymium materials.

That followed a $500 million deal in July between MP and Apple (Nasdaq: AAPL) for domestic supplies of rare earths for smartphones and electric vehicles.