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Protesters holding Japanese flags punch their fists during an anti-China rally in Tokyo Sept. 22.


Business is still slow at the Beijing Fortune building, home to several major Japanese companies operating in China.

The offices of concerns like Hitachi Ltd., All Nippon Airways Co. Ltd. and Japan Airlines Corp., which were closed during the height of street protests in Beijing, are open again. But the slow foot traffic is a reminder of how a handful of uninhabited islands in the East China Sea are drawing the world's second- and third-largest economies into a standoff threatening major disruptions to two-way trade worth more than $340-billion (U.S.) last year.

"Japan is China's second-largest trading partner, China is Japan's largest trading partner, and Japan has a lot of investment in China," said Yao Yang, a professor at the China Centre for Economic Research at Beijing University. "In that case both countries are going to be hurt. The thing that has been most affected is Japan's investment in China."

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The islets, known in China as Diaoyu and in Japan as Senkaku, are claimed by China based on Ming dynasty-era maps but have been under Japanese control since 1895, with the exception of occupation by the United States after the Second World War. Three of the islands were sold from private Japanese hands to the Japanese government this month.

The angry street protests, which peaked last week with vandals targeting businesses including Toyota Motor Corp., Panasonic Corp. and Nissan Motor Co. Ltd. manufacturing plants, have calmed. Chinese authorities, who rarely tolerate protest, appear to have clamped down after their initial quiet encouragement.

But the patriotic anger has found another outlet, in boycotts of Japanese products and services.

There are more than 22,000 Japanese enterprises, large and small, operating in China. Populist anger reaches from the popular Japanese clothing retailer Uniqlo, whose Beijing flagship's trademark logo is still covered in red film, to public hospitals.

Japanese news agency Kyodo reported returns of pharmaceuticals from Chinese hospitals to their Japanese distributors, citing unnamed business sources. Some Japanese companies have sent families of employees home, while other Japanese business travellers have found their visas inexplicably delayed. Japanese goods at ports in Shanghai and Shenzhen have been facing delays over strengthened customs inspections.

Tens of thousands of passengers have cancelled travel plans between the two countries. Toyota and Nissan are slowing or temporarily halting production, and Chinese authorities are stepping up inspections of Japanese imports.

Staff at a deserted Japan Airlines Corp. office said 50 to 100 passengers per flight had been cancelling, leading to the suspension of flights on three routes until Oct. 27. At rival ANA, smaller aircraft have been put on major routes to three Japanese airports from Beijing after an estimated 40,000 seat cancellations, two-thirds of them Chinese travellers who had planned to visit Japan. Many of those would have been during the annual October National Day holiday, known as Golden Week for its annual boost to retail sales and tourism numbers.

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"We closed last week for four days but really it was like six days, the last two days we were open but there were no customers at all, not one," said restaurant manager Li Weiwei, 38, as her staff cleared the lunch remnants of just two tables, both foreigners.

Her restaurant, Matsuoka Yakiniku, is one of a cluster of Japanese eateries a few hundred metres from the Japanese embassy, many of which are adorned with large Chinese flags and red banners declaring the "Diaoyu islands belong to China!" to protect themselves from vandals and draw in hungry patriots.

"As the restaurant manager I am a bit worried about the business but as a Chinese I understand what people are doing, I understand people are pretty anti-Japan," she said.

"They refuse to buy Japanese products, they refuse to eat in Japanese restaurants. I understand. I hope we can tough it out and when China-Japan relations improve we will see things improve here too."

In question is whether China, with its economic growth already threatening to slow below the official target of 7.5 per cent this year, can afford action that discourages a major investor. The Chinese government was this month in desperate need of a distraction, amid a major corruption and murder trial linked to senior politician Bo Xilai, a slowing economy and an approaching changeover in power that only happens once every five years. Anti-Japan protests have in the past served as an outlet for a frustrated population.

But a protracted dispute could take a toll on China's manufacturing industries, already suffering from slowing exports, beyond the direct impact of Japanese investment. Most of the world's iPhones, for instance, are assembled in China but have many value-added parts brought from Japan.

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"I don't think the current dispute will last too long, in my opinion," said Tao Tao, a professor of international economics and trade at Beijing University. "After all, economic benefit is more important for both countries."

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