Diplomatic tensions between the Asian neighbors flared this month over who owns a spray of tiny uninhabited islets in the East China Sea. Japan Coast Guard cutters collided with a Chinese fishing boat in the disputed waters and arrested the ship's captain. China was furious.
Normally a territorial spat between global trading powers wouldn't devolve into a ruthless strike at one of the neighbor's key economic interests -- in this case, Japan's auto industry.
But apparently that's not how China Inc. plays the game.
Among Beijing's protests -- which included the “postponement” of the Chinese debut concert by Japan's most famous boy band -- was the halt of shipments to Japan of rare-earth metal.
These minerals, which include such elements as neodymium and dysprosium, are critical to the electric motors, glass coatings and electronics used in today's automobiles, especially hybrids.
The problem: China controls more than 90 percent of the world market for rare earths. So when they turn off the tap, companies like Toyota Motor Corp. and Honda Motor Co. really feel it.
Sure enough, Japan soon released the skipper. And despite Beijing's denial that it ever halted exports in the first place, traders were telling journalists shipments then magically resumed.
The lesson for Japan was clear. Depending on China carries plenty of hidden costs.
Toyota saw the writing on the wall. This summer, it reportedly set up a task force to explore alternative sourcing of rare earth minerals to break the chain to China.
But this incident is a sober warning for all of how an increasingly assertive China plays hardball.