The Takaichi Fallout: Japan stocks slide as China tightens rare earth exports

Japanese shares fell sharply on Wednesday as investors weighed the "Takaichi-cost" of worsening China-Japan ties after Beijing tightened controls on rare earth exports. The Nikkei average slid 1.06 percent to close at 51,961.98, down 556.1 points from the previous session.

China's Ministry of Commerce on Tuesday announced the strengthening of export controls on dual-use items to Japan. As per the announcement, the export of all dual-use items to military users in Japan or for purposes that enhance Japan's military capabilities is prohibited. The move comes as bilateral tensions escalate following erroneous remarks by Japanese Prime Minister Sanae Takaichi on matters related to China's internal affairs.

China accounts for roughly 60 percent of global rare earth mining and dominates the downstream supply chain, controlling more than 90 percent of the world's refining and separation capacity in 2024, according to data from the International Energy Agency. This includes heavy rare earths such as dysprosium, a material critical for the motors used in electric vehicles.

Selling pressure was most pronounced in auto stocks in Tokyo trading on Wednesday. Toyota Motor and Mazda each fell as much as 3 percent, while Honda, Nissan and Suzuki also weakened. Shares of defence-related firms, including Mitsubishi Heavy Industries and Kawasaki Heavy Industries, also declined.

According to the Nikkei, Takahide Kiuchi, executive economist at Nomura Research Institute, estimated that if rare earth export restrictions were to last for three months, the resulting reduction in production could amount to losses of around 660 billion yen ($4.2 billion), underscoring the broader market impact of The Takaichi Fallout.

(Cover via VCG)