Lessons from Japan’s efforts to wean itself off Chinese rare earths

WHEN JAPAN and China feuded over a set of disputed islands in 2010, China deployed a novel weapon. It imposed an unofficial ban on exports of rare earths, minerals used in everything from cars to missiles. Such economic coercion has since become commonplace. China used tough new controls on rare earths to force America to back down in its trade war this year.

In recent weeks it is once more Japan whose relations with China have been on the rocks. Last month Takaichi Sanae, Japan’s prime minister, said that an invasion of Taiwan could cross the threshold that requires a military response by Japan. That triggered an uproar from China, which cut some direct flights to Japan, warned its citizens against travelling there, and sent coastguard ships to the same set of islands over which the two powers squabbled 15 years ago, which Japan calls the Senkaku and China the Diaoyu.

Japanese officials are bracing for more economic warfare. This time they are better prepared. The lessons Japan has learned may be helpful for other countries struggling to cope with China’s rare-earths bullying. They also show how hard this will be.

At the time of the Senkaku crisis Japan depended on China for around 90% of its rare earths. When China cut off exports Japanese production lines nearly ground to a halt. Japan swiftly released a Chinese fishing captain who had rammed a Japanese coastguard ship near the islands. Only then did the minerals start moving again. The first lesson, then, is a painful one that America has already learned: in the short term, China holds the cards.

Immediately after its stand-off with China, Japan’s government passed a ¥100bn ($1.2bn) supplemental budget for rare-earth supply chains. It also developed a national strategy for breaking China’s chokehold on the materials. This involved finding alternative sources of rare earths, reducing their overall use, and stockpiling them for the next crisis. A decade later, Japan had managed to bring the share of rare earths it sourced from China down by one-third. But that meant it still depended on its coercive neighbour for some 60%.

The second lesson is that getting even that far is extremely difficult. It is not the quantity that is the problem. It is that industries need a wide variety of rare earths. Two Japanese firms got together to buy a big stake in Lynas, an Australian rare-earth mining firm, which delivered lots of “light”, or easier to extract, minerals. But only this October did the first “heavy” rare earths from its mines reach Japan. Not only are rare earths hard to mine, but refining them is also an expensive, lengthy and environmentally harmful process that few countries want to host. Raw material from Lynas’s Australian mines is mostly processed in Malaysia.

After all that, rare earths imported from Malaysia to Japan between 2020 and 2024 still cost 50% more on average than Chinese analogues, according to Mizuho, a Japanese bank. Firms producing things like missiles and fighter jets may be willing to pay the premium to reduce risk. Those in competitive consumer markets probably will not. Meanwhile, demand for rare earths is outpacing Japan’s new supply. Its dependence on China has ticked back up and now stands at around 70%, according to the Institute of Energy Economics, a Japanese think-tank. The third, somewhat demoralising, lesson is that it is hard to replicate China’s command of the entire production process, let alone its scale, which together give it considerable pricing power.

China has yet to deploy rare earths in its current dispute with Japan. Xi Jinping, China’s leader, may be loth to unholster that particular weapon lest he upset the fragile truce he has reached in the trade war with America. Or China may simply be saving rare earths for later in the diplomatic confrontation. Japanese officials think that reducing tensions to pre-spat levels will be a matter of months or years, not days or weeks.

If critical minerals do come into play, Japan’s efforts to secure alternative supplies and build stockpiles will have bought some time. That will help stave off the severe shortages that caused Japanese industry to panic in 2010. Back then “It was like falling off a cliff,” says Suzuki Kazuto of the Institute of Geoeconomics, a think-tank in Tokyo. “This time it would be like being hit by a car—both are serious, but at least we’ll be able to survive.” The final lesson, then, is that China’s economic weapon can be indeed blunted. But the blow will still be heavy. ■