China Blacklists Japanese Defense Institutes, Tightens Export Controls

China on Monday blacklisted four Japanese government defense research institutes and imposed tighter export restrictions on dozens of other Japanese entities, escalating a months-long campaign to restrict Tokyo's access to dual-use goods, including rare earth minerals.

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

Domestic exporters, as well as overseas organizations or individuals, are prohibited from transferring Chinese-origin dual-use items to the named entities, according to the statement, adding that any ongoing activities must stop immediately.

Separately, China added another 20 entities, including Mitsui E&S Co., drone maker Terra Drone Corporation, nuclear fuel processors, and multiple units of OKI Electric Industry, to a watch list requiring enhanced licensing scrutiny. Both actions take effect immediately.

The ministry said it would apply stricter end-user and end-use reviews to watch-listed entities, and that exports involving Japanese military users, military applications or any end-use that could strengthen Japan's defense capabilities would not be approved.

Pressure campaign

The measures mark the latest escalation in a campaign launched in January, when Beijing banned dual-use exports to Japan, including rare earth elements, permanent magnets and other critical minerals required for 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 another 20 firms, including Subaru Corp., TDK Corp. and FUJI Aerospace Technology to the watch list.

China has ratcheted up pressure on Tokyo after comments by Japanese Prime Minister Sanae Takaichi in November that a hypothetical Chinese attack on Taiwan could trigger a military response from Tokyo, which drew criticism from Beijing.

In a statement Monday, a spokesperson for the commerce ministry said Japan had shown no remorse since the February listings and had instead "accelerated" its push toward what Beijing characterizes as "new-style militarism" — including deploying offensive weapons and launching missiles overseas.

Beijing urged Japan to "turn back from the wrong path," while insisting the measures would not affect normal bilateral economic and trade activities and that "law-abiding Japanese firms have no reasons to worry."

China's leverage

Market reactions were mixed following the statement. Mitsubishi Electric and Howa Machinery, one of the 20 companies on the surveillance list, declined around 1.4% and 4.6%, respectively, while Mitsubishi Heavy Industries and Terra Drone Corp gained 4.9% and 1.7%.

China has sought to leverage its dominance over critical mineral supply chains as a tool of deterrence — pressing political behavior it opposes without resorting to military force, Gracelin Baskaran, director of the critical minerals security program at the Center for Strategic & International Studies, said in a report in January. Countries that have expressed support for Taiwan remain particularly exposed, she added.

Japan has invested in domestic refining and processing to reduce its dependence on China for rare earths since 2010, but it remains deeply entangled in supply chains that rely on China and Vietnam, from mining to permanent magnet manufacturing.

Koki Akimoto, an economist at Daiwa Institute of Research, estimated in December that a one-year cutoff of Chinese rare earth imports and sustained component supply constraints would reduce Japan's real GDP by about 1.3%, or roughly 7 trillion yen ($43.3 billion).