Diplomatic spat between Tokyo and Beijing threatens Japan’s already fragile economy

Japan’s fragile economy, already hurt by US tariffs and declining real estate investment, is facing a new blow due to a diplomatic row between Tokyo and Beijing.

Disturbed by Japanese Prime Minister Sanae Takaichi’s comments about Taiwan, China advised its citizens not to travel to the country on Friday. While stocks affected by tourism in Japan fell following this warning, experts warn that the impact could be more severe over a longer period of time.

Mainland Chinese tourists are the largest group of foreign visitors to Japan so far in 2025; approximately 5.7 million people, or almost 23% of all visitors. Japan National Tourism Organization.

Takahide Kiuchi, executive economist at Nomura Research Institute, said tensions between the two Asian powers could lead to a 1.79 trillion yen drop in Japan’s GDP within a year, or 0.29% of the country’s GDP.

The number of Chinese tourists coming to Japan from the mainland fell about 8% in 2013 compared to 2012, when a dispute broke out in September 2012 over islands off the coast of western Japan known as Senkaku in Tokyo and Diaoyu in Beijing. Kiuchi sees a similar risk in the tenor of the current situation.

According to the Mastercard Economics Institute, travel spending is a major growth driver for the world’s fourth-largest economy; Inbound tourism contributed 0.4 percentage points to Japan’s annual GDP growth of 0.1% last year.

Stefan Angrick, head of Japan at Moody’s Analytics, echoed Kiuchi, saying “a sharp decline in Chinese travel to Japan would create pain.” Japan’s GDP growth could contract by 0.2 percent if Chinese arrivals were halved, as has been the case in previous diplomatic discussions, Angrick said.

“[This is] It’s hardly a disaster, but it’s an unwelcome setback for an economy that’s already struggling to find momentum,” Angrick said.

Japan’s third-quarter GDP contracted 0.4% in a row, its first contraction in six quarters. On an annual basis, the economy shrank by 1.8 percent.

China’s Consul General in Osaka, Xue Jian, retaliated against X, reportedly In his post, which was later deleted, it was said: “The dirty neck that put itself in needs to be cut off.”

Tokyo summoned China’s ambassador to protest the “highly inappropriate” statement; Beijing then summoned Japan’s envoy, issued travel warnings and deployed ships and drones near the Senkaku islands, prompting Japan to mobilize warplanes.

Chinese state-run editorials also targeted Japan. State broadcaster CCTV He said last week that Takaichi’s remarks were “extremely grave and impactful” and amounted to “major interference in China’s internal affairs”.

Beijing sees Taiwan as part of its territory and does not rule out using force against the island. Taiwan denies this claim and says only its people can decide its future.

Experts also told CNBC that tensions could last for several months.

That will continue until Takaichi backs down from his position of possible Japanese military intervention in Taiwan, said David Roche, veteran investor and president of Quantum Strategy.

“This is a major red line for China,” he said, adding: “This is viewed by Beijing as a significant intervention and a clear indication that Japan will be part of efforts to contain and deter China.”

Roche said that even the United States maintains an attitude of “strategic uncertainty” when it comes to Taiwan’s defense.

USA’ Taiwan Relations Act of 1979 He states that he would consider “any effort to determine Taiwan’s future other than by peaceful means” as a matter of serious concern for the United States, but does not commit the United States to Taiwan’s defense, creating this “strategic uncertainty.”

Tobias Harris, founder and principal of political risk consultancy Japan Foresight, told CNBC that this dispute may last longer than expected because neither side will be able to easily back down from their positions.

Taiwan’s importance to Beijing means it cannot easily accept Takaichi’s apparent policy change, and although the Japanese leader insisted his statement did not mean a change in stance, Harris said she could not easily back down and risked appearing weak if she bowed to Chinese pressure.

“Since his approval ratings remain strong, he can afford to resist and may see the benefit of resisting in the near term,” he said. Takaichi’s approval ratings we are currently at 69% It is among the highest in Japanese history as of November 16, according to the Asahi Shimbun newspaper.

This diplomatic tension could be the beginning of a “THAAD-like period” in the countries’ bilateral relations, causing “a long-term cooling in political and economic relations and a decrease in people-to-people contacts.”

“THAAD-like episode” refers to China reportedly organizing a boycott South Korean products, ban on group tours South Korea imposed a “soft ban” on K-pop content in 2016 after the US deployed the Terminal High Altitude Area Defense anti-ballistic missile system, also known as THAAD, on its territory.