As tensions flared over Japan's detention of a Chinese ship captain, and the China's detention of Japanese soon after, Japanese companies reported that rare earth shipments from China were being delayed or blocked. The central Chinese government has denied the reports, but it's pretty clear by now that some sort of retaliatory action happened even if it wasn't a policy decision given substantial concern from Japan. Local Chinese players on the ground might have decided to take it upon themselves to punish Japan with delayed rare earth exports, even if the central government didn't want them to do it.
It's huge a wake up call for Japan and other nations around the world, including the U.S., because many parts of the modern technology economy are dependent on rare earths.
The problem is that while rare earths production can be developed in many other parts of the world, (The U.S. actually has an abundant amount of rare earths, it's just not mined currently) in the short-term almost nothing can be done to remove China's choke hold over this niche of the technology supply chain. It takes time to get new mines up and running.
Thus in the case of Japan, this harsh reality means they simply have to capitulate and keep China happy, because the economic costs of losing rare earths is far too great, as highlighted by a Japanese government minister on Tuesday:
“The de facto ban on rare earths export that China has imposed could have a very big impact on Japan’s economy,” the economic and fiscal policy minister, Banri Kaieda, told a news conference Tuesday. “We need to restore Japan-China ties, especially economic exchanges, as soon as possible.”The same would be the case for America, should China ever choose to flex its trade war muscles. We understand that U.S. officials are A) trying to thread the needle between a true trade war and simply winning some concessions and B) creating a foreign political enemy to focus attention on ahead of the U.S. elections, but Japan's experience shows how they are playing with fire -- The U.S. economy doesn't need any additional shocks right now.