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Chinese protesters with the words "Boycott Japanese goods" on their shirts march towards the Japanese Embassy in Beijing, China, Sunday, Sept. 16, 2012.

Ng Han Guan/The Associated Press

Some 1,000 Chinese fishing boats – draped in national flags – are reportedly en route to the waters around a disputed set of islands, posing a fresh challenge to the Japanese government's de facto sovereignty over the area and potentially bringing the Asian neighbours closer to conflict.

According to state-run media in China, the fishing boats are expected to reach the rich fishing grounds around the islands – known as Senkaku in Japan and Diaoyu in China – by early Tuesday. The official People's Daily reported on its website that the country's coast guard equivalent, Chinese Marine Surveillance, would also conduct "patrol and law enforcement" activities in the disputed waters.

While the government has said it wants to avoid a military confrontation with China, a Japanese newspaper on Monday quoted an aide to Prime Minister Yoshihiko Noda warning that the showdown over the islands could enter "a new stage" if the fishing boats did approach the islands.

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"We will not be able to sit by idly if fishing vessels reach the Senkaku Islands in large numbers," the unnamed aide was quoted as saying by Asahi Shimbun. He said the Japanese Coast Guard would be forced to make arrests if the fishing boats entered the waters Japan claims as its own, and that the navy would be on standby in case anything got out of control.

- Staff

Anger in the steets

China moved to tamp down rising anti-Japanese sentiment after a weekend of sometimes violent demonstrations, threatening Monday to arrest lawbreakers and scrubbing websites of protest-related images and posts.

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More demonstrations were expected Tuesday, the anniversary of a 1931 incident that Japan used as a pretext to invade Manchuria before the Second World War.

Protests flared in cities across China over the weekend, with occasional outbreaks of violence, including the torching and looting of Japanese-invested factories and shops.

China's authoritarian government rarely allows protests and the wave of anti-Japanese demonstrations clearly received a degree of official approval.

In the western city of Xi'an, police issued an order banning large-scale protests in commercial areas, districts with large populations, and anywhere near government offices.

In the southern city of Guangzhou, police said they arrested seven people for attacking cars and three for vandalizing shops. "The Guangzhou police would like to remind the public to be rational while being patriotic. Demonstrations must proceed according to law," police said in a statement.

Police in the eastern port of Qingdao, where protesters torched a Panasonic factory and Toyota dealership, also reported arrests.

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– Associated Press

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The economic factor

Commerce between the two countries amounted to more than $340-billion last year, with many flagship Japanese brands doing much of their production in China.

Neither side can afford for that to disappear – the Japanese economy grew just 1.4 per cent in the second quarter of 2012, while China posted 7.6-per-cent growth, its slowest pace in three years.


The effect on the yen

The yen weakened to a four-month low against the euro as investors speculated the Bank of Japan will expand monetary easing at its meeting this week.The Japanese currency fell to its lowest level in a week versus the dollar.

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The 17-member currency fluctuated after reaching a fourth-month high versus the greenback.

Demand for the yen was also dampened as China and Japan's worst diplomatic crisis since 2005 is putting at risk a trade relationship that's tripled in the past decade to more than $340-billion.

"If the tensions between China and Japan get worse, that reduces trade prospects for Japan, which should soften the yen a little more," said Paul Christopher, the St. Louis-based chief international strategist at Wells Fargo Advisors.

Japan's central bank may follow the Federal Reserve and the ECB in expanding its balance sheet.

Where Xi stands

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Chinese Vice-President Xi Jinping is widely seen as more pro-American than current leaders. Recent protests here against Japan over the disputed islands have been interpreted by some Beijing-based observers as a challenge to Mr. Xi and an effort to allow current Communist Party leader Hu Jintao to stay in control of the military longer.

Mr. Hu's predecessor, Jiang Zemin, stayed on as chairman of the Central Military Commission for an extra two years when he stepped down as head of the party and government a decade ago. One reason given was China's unsettled external circumstances, which some hardliners may be using now in a bid to prevent Mr. Xi from taking fuller control of the military.

"This could force Xi to take a strong line with Panetta," said a Chinese academic who asked not to be identified because of the issue's sensitivity. "He will have to say very forcefully that what the U.S. is doing is wrong."

Where Panetta stands

U.S. Defence Secretary Leon Panetta arrived in Beijing from Tokyo to meet this week with China's leadership, including Xi Jinping, expected to become the nation's next president.

Although he has been in Asia for only two days, Mr. Panetta has said that the United States was not taking sides in any of the region's territorial disagreements. Washington, he said, is advocating a diplomatic process to resolve the tensions peacefully.

Although the United States has said it is neutral in the dispute over the islands, its actions regarding Japanese radar programs show it is taking sides, argued Tao Wenzhao, deputy director of U.S. studies at the Chinese Academy of Social Sciences.

"This move shows that the U.S. has picked a side between China and Japan in the Diaoyu dispute," Mr. Tao said. "It is highly inappropriate and counter-constructive for the U.S. to make such a move at this highly sensitive time."

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