China tightens export controls on Japan defense-linked groups

China widened export restrictions on Japanese defense-linked organizations on Monday, adding new pressure to a supply chain fight that can hit companies investors actually own. The move matters because export controls can slow or block access to materials and components used in advanced manufacturing, especially items tied to defense technology.

China’s Ministry of Commerce said it added 20 Japanese entities to its export control list, including the National Institute for Defense Studies and research centers focused on ground, naval and air systems. Units connected to Mitsubishi Electric and Mitsubishi Heavy Industries were also named by the ministry.

An export control list restricts who can receive certain goods from a country. In this case, China said domestic exporters, as well as overseas organizations and individuals, are barred from transferring Chinese-origin dual-use goods to the listed entities. Dual-use goods are products or materials that can serve civilian purposes but also have military applications. The ministry said existing activities involving those entities must stop immediately.

Beijing also placed another 20 entities on a watch list that faces tougher licensing checks. The ministry identified names including Mitsui E&S, Terra Drone Corporation, nuclear fuel processors and several OKI Electric Industry units. Both sets of measures took effect immediately, according to the ministry.

For the watch-listed entities, China said it would apply stricter reviews of the final user and the final purpose of exported goods. The ministry said it would not approve exports tied to Japanese military users, military uses or any end-use that could improve Japan’s defense capabilities.

A wider campaign against Japan

The latest measures extend a campaign China began in January, when Beijing banned dual-use exports to Japan that included rare earth elements, permanent magnets and other critical minerals used in defense technologies. Rare earths are a group of minerals used in high-performance magnets and other advanced components.

In February, China added 20 entities to its export control list, including subsidiaries of Mitsubishi Heavy Industries, IHI Corp. and Kawasaki Heavy Industries. It also put another 20 firms on the watch list at that time, including Subaru, TDK and FUJI Aerospace Technology.

The dispute intensified after Japanese Prime Minister Sanae Takaichi said in November that a hypothetical Chinese attack on Taiwan could prompt a Japanese military response. Beijing criticized those remarks, and China’s Commerce Ministry said Monday that Japan had shown no regret since the February listings and had accelerated what Beijing describes as a shift toward new-style militarism.

The ministry urged Japan to change course while saying the measures would not affect normal economic and trade activity between the two countries. It also said Japanese companies that comply with the law have no reason to be concerned.

Why markets are watching rare earths

Share moves were mixed after the announcement. Mitsubishi Electric fell about 1.4%, while Howa Machinery, which was placed on the surveillance list, dropped around 4.6%. Mitsubishi Heavy Industries rose 4.9%, and Terra Drone gained 1.7%.

Gracelin Baskaran, director of the critical minerals security program at the Center for Strategic and International Studies, said in a January report that China has used its strength in critical mineral supply chains to pressure political behavior it opposes without using military force. She said countries that have supported Taiwan are especially exposed.

Japan has tried to reduce its reliance on China for rare earths by investing in domestic refining and processing since 2010. Still, its supply chains remain closely tied to China and Vietnam, from mining through permanent magnet production.

Koki Akimoto, an economist at Daiwa Institute of Research, estimated in December that a one-year halt in Chinese rare earth imports, combined with continued limits on component supplies, would cut Japan’s real gross domestic product by about 1.3%, or roughly 7 trillion yen, equal to $43.3 billion. Gross domestic product measures the value of goods and services produced in an economy.

This story draws on original reporting from CNBC Economy.