Japanese stocks drop amid China's export curbs on dual-use goods

Thursday 08 January 2026 - 07:50

By: Dakir Madiha

Japanese stocks drop amid China's export curbs on dual-use goods

Japanese stock markets tumbled Wednesday as investors grappled with the economic fallout from China's fresh export restrictions on dual-use goods, raising alarms over potential disruptions to vital supply chains in the automotive and electronics sectors.

The Nikkei 225 index fell 1.06 percent to 51,961.98, pulling back sharply from the record highs it touched just a day earlier. The broader Topix index shed 0.77 percent, closing at 3,511.34. This downturn reversed the strong 4 percent gains posted by Japanese markets in the first two trading sessions of 2026.

China's Ministry of Commerce revealed Tuesday that it would ban exports of all dual-use items—products with both civilian and military applications—to Japan if intended for military purposes or to bolster Tokyo's defense capabilities. The move responds to comments from Japanese Prime Minister Sanae Takaichi, who indicated Tokyo might exercise its right to collective self-defense should China move against Taiwan.

Automakers bore the brunt of the sell-off. Shares in Toyota Motor and Honda Motor each dropped more than 2 percent, while Mazda Motor plunged as much as 3 percent. Defense equipment makers Mitsubishi Heavy Industries and Kawasaki Heavy Industries also declined.

Although Tuesday's announcement did not specifically cite rare earths, the state-affiliated China Daily reported Beijing's plans to tighten export licensing for medium and heavy rare earth elements, including dysprosium, a key component in electric vehicle motors. "Fears are mounting that these curbs could create bottlenecks for critical materials, driving up costs," noted Hiroshi Namioka, chief strategist at T&D Asset Management.

China holds about 60 percent of global rare earth mining capacity and over 90 percent of refining and separation capabilities. Takahide Kiuchi, executive economist at Nomura Research Institute, warned that a three-month export halt on rare earths could trigger production losses of roughly 660 billion yen (about $4.2 billion), trimming Japan's annual GDP by 0.11 percent.

The supply chain threat propelled shares in alternative rare earth producers. Tokyo-listed Toyo Engineering surged 20 percent to its daily trading limit, fueled by investor enthusiasm for its undersea rare earth extraction technology. Australia's Lynas Rare Earths jumped as much as 16 percent—its biggest gain since July—while Australian Strategic Materials rose nearly 10 percent.

This marks the second time China has wielded rare earth exports as leverage against Japan, following a 2010 shipment cutback amid a dispute over the Senkaku Islands, known as Diaoyu in China. That incident spurred Japan to diversify its sources, including government-backed support for Lynas.

Cabinet Secretary General Minoru Kihara branded the latest Chinese restrictions "absolutely unacceptable and deeply regrettable," saying they deviate from international norms. Japan's Foreign Ministry lodged a formal protest, though Tokyo has yet to announce any countermeasures.