China expands export restrictions on Japan, targeting drone, nuclear, and defense institutes

China blacklisted four Japanese government defense research institutes and tightened export restrictions on dozens of other Japanese organizations, escalating a months-long campaign aimed at limiting Tokyo’s access to dual-use goods such as rare earth minerals.

The Ministry of Commerce added 20 entities, including the National Institute for Defense Studies and research centers for land, naval and air systems, to its export control list. Several units of Mitsubishi Electric and Mitsubishi Heavy Industries were also included.

The statement said domestic exporters, as well as foreign organizations or individuals, are banned from transferring Chinese-origin dual-use items to these entities, and any ongoing activities must stop immediately.

Separately, China placed another 20 entities, including Mitsui E&S Co., drone manufacturer Terra Drone Corp., nuclear fuel processors and several units of OKI Electric Industry, on a watch list that requires stricter licensing checks. Both measures take effect immediately.

The ministry said it will apply stricter end-user and end-use reviews for watch-listed entities, and exports involving Japanese military users or uses that could strengthen Japan’s defense capabilities will not be approved.

These steps are the latest escalation in a campaign that began in January, when Beijing banned dual-use exports to Japan, including rare earth elements, permanent magnets and other key materials used in defense technologies.

In February, China added 20 entities, including subsidiaries of Mitsubishi Heavy Industries, IHI Corp. and Kawasaki Heavy Industries, to its export control list, and placed another 20 companies, including Subaru Corp., TDK Corp. and FUJI Aerospace Technology, on the watch list.

China has increased pressure on Tokyo after comments by Japanese Prime Minister Sanae Takaichi in November suggesting that a possible Chinese attack on Taiwan could trigger a military response from Japan, which angered Beijing.

A Commerce Ministry spokesperson said Japan had shown no remorse since the February listings and had instead accelerated what Beijing calls “new-style militarism,” including deploying offensive weapons and launching missiles abroad.

Beijing urged Japan to “turn back from the wrong path,” while saying the measures would not affect normal trade and that “law-abiding Japanese firms have no reason to worry.”

Market reactions were mixed following the announcement. Mitsubishi Electric and Howa Machinery, which is on the surveillance list, fell about 1.4% and 4.6%, respectively, while Mitsubishi Heavy Industries and Terra Drone Corp. rose 4.9% and 1.7%.

China is using its dominance in critical mineral supply chains as a way to influence political behavior without military action, according to Gracelin Baskaran of the Center for Strategic and International Studies. She said countries that support Taiwan are especially exposed.

Japan has been working to reduce reliance on China for rare earths since 2010 by investing in domestic refining and processing, but it still depends heavily on China and Vietnam across its supply chains.

Economist Koki Akimoto of the Daiwa Institute of Research estimated that a one-year cutoff of Chinese rare earth imports and ongoing supply disruptions could reduce Japan’s real GDP by about 1.3%, or around 7 trillion yen ($43.3 billion).