China Escalates Rare Earth War on Japan With New Export Controls

On 29 June 2026, China's Ministry of Commerce announced a fresh round of trade controls against Japanese industry, adding 40 entities to its dual-use restriction regime. Twenty organisations, including the National Institute for Defense Studies and several research centres for naval, ground and air systems, were placed on the export control list, which bars Chinese and foreign exporters from shipping them Chinese-made goods that have both civilian and military applications. Another 20 entities, among them ship engine maker Mitsui E&S and divisions of Fujitsu and Komatsu, were added to a watch list that forces exporters to obtain special licences, submit risk assessments and pledge that the items will not strengthen Japan's military. Beijing framed the move as a response to what it calls Japan's pursuit of a new form of militarism under Prime Minister Sanae Takaichi.

The latest measures mark the third major escalation in a campaign that began in January 2026, when Beijing banned dual-use exports to Japan covering rare earth elements, permanent magnets and other critical minerals tied to defence technology. In February, China placed subsidiaries of Mitsubishi Heavy Industries, IHI and Kawasaki Heavy Industries on the control list and added Subaru, TDK and FUJI Aerospace Technology to the watch list. The June round widens the net further, naming Mitsubishi Electric Defense and Space Technologies, Mitsubishi Precision, MHI Logitech and a Kawasaki Heavy manufacturing unit in Gifu. The dispute traces back to November 2025, when Takaichi suggested that Tokyo could intervene militarily if China attacked Taiwan, remarks that Beijing has repeatedly demanded she retract.

Behind the diplomatic language sits a far larger supply chain story. The Takaichi dispute has become the focal point of a critical minerals contest in which China is leaning on its near monopoly over rare earths. China accounts for roughly 60 percent of global rare earth mining but controls close to 90 percent of refining and separation, and more than 99 percent of the heavy rare earths such as dysprosium and terbium are processed inside the country. Japan imported about 76 percent of its rare earth materials from China in early 2026, a share that has been rising rather than falling despite years of diversification efforts.

The pressure is being applied with precision. China has continued to export finished rare earth magnets to Japanese customers at normal volumes while throttling the raw materials needed by Japan's own magnet producers, a deliberate asymmetry that deepens dependence on Chinese value-added products. The exposure runs through the heart of Japanese manufacturing. Carmakers need around 1.5 kilograms of rare earths for each electric vehicle, smartphones rely on more than a dozen separate rare earth elements, and Japan sources roughly 85 percent of its gallium, vital for defence electronics and 5G chips, from Chinese processors. Magnet specialists such as Proterial, Shin-Etsu Chemical and TDK remain heavily reliant on Chinese supplies of neodymium, dysprosium and terbium.

Market reaction on 29 June was mixed. Shares in watch-listed Howa Machinery fell about 4.6 percent and Mitsubishi Electric slipped around 1.4 percent, while Mitsubishi Heavy Industries gained close to 5 percent and Terra Drone rose, as investors bet that Japanese defence suppliers will win more orders rather than fewer. Tokyo rejected the measures, with Chief Cabinet Secretary Minoru Kihara calling them unacceptable and urging Beijing to revoke them. Beijing insisted the controls are lawful and would not affect normal trade for law-abiding firms.

Japanese industry has been preparing for this scenario. Manufacturers raised rare earth inventories to roughly 90 days of supply at the end of 2025, compared with a typical 30 days, and have accelerated work on recycling, urban mining and magnets that use little or no dysprosium and terbium. Proterial has been ramping up a production line for such magnets, while automakers are testing motors that avoid rare earth permanent magnets altogether. Diversification toward suppliers in Vietnam, France and Australia, including Lynas processing capacity in Malaysia, is progressing but remains small relative to demand, and materials processed outside China typically cost several times more. Japan's trade minister Ryosei Akazawa travelled to Beijing in late May 2026 to explore an off-ramp, with limited results.

The standoff is likely to intensify before it eases. Takaichi's government has made defence a priority since taking office in October 2025, lifting military spending toward 2 percent of GDP and promoting longer-range missiles and weapons exports. Japan will revise its core defence and security documents by December 2026, a step that could expand its budget further and harden Beijing's stance. For now, the June controls add another layer of friction to electronics, automotive and aerospace supply chains that already run through one of the world's most concentrated mineral chokepoints.