China and Japan have lodged protests with each other over the holding of naval exercises in the East China Sea as their dispute over tiny islands show no sign of a resolution.
The heightening tensions have negatively affected economic relations between the region's two most important countries, which are also the world's second and third largest economies.
The dispute, which became a crisis when Japan purchased three of the islands from a private businessman in September, 2012, resulted in a 3.3 per cent drop in overall trade for the year, to $333.6-billion, according to Japanese figures.
The decline has continued this year.
In fact, six-monthly figures show that the drop in trade was such that by the first half of 2013, China was no longer Japan's biggest export market but had dropped behind the United States for the first time in five years.
The China Daily has warned that Japan is likely to be replaced by South Korea as China's second largest trading partner, after the United States, if present trends continue.
Meanwhile, Japanese investment in China fell in the same period by 31.2 per cent, to $4.9-billion, according to Jetro, the Japan External Trade Organization.
Southeast Asia is benefiting handsomely from the diversification of Japanese investment from China. Asean received $10.3-billion in Japanese investment in the first six months of this year, a 55.4 per cent increase and more than double the investment in China.
Tourism between the two countries has also been affected. The number of Japanese tourists in China fell by 25 per cent in the first half of 2013, to 1.4 million. The number of Chinese who visited Japan dropped to 530,000, a drop of 27 per cent.
Some 14,000 Japanese companies have investments in China, totaling $70-billion in 2012. A fair number of them are so scared of the environment in which operate – featuring violent protests, burning of cars and trashing of Japanese-owned establishments – that they have decided to leave the country.
Chinese law, however, stipulates that closing down a company requires the approval of local authorities, who are concerned about the loss of tax revenue and jobs. In the end, the Japanese investor may have little choice but to abandon his investment in favor of his Chinese joint venture partner.
A Japanese businessman, Masaru Hirose, at a press conference in Taiwan, spoke about the troubles of his father's company in Qingdao when it ran afoul of a Chinese partner. He said that "more than 100 Japanese corporations are currently prohibited from leaving China."
"Japan has not completely turned its back on China but wants to reduce its dependence on China and diversify its economic interaction with the Asean regional grouping, which is inherent with good trade and business potentials," Yumiko Kawasaki, an economist who does research on Asian economies, told Bernama, the Malaysian national news agency.
India, too, is expected to benefit from Japan's shift from China, where the atmosphere has been hostile for much of the last three years and worsened in September, 2012.
A major problem is a severe lack of mutual trust. In fact, surveys show that more than 90 per cent of the public in China view Japan in negative terms and these sentiments are reciprocated by more than 90 per cent of the Japanese public.
This is in stark contrast with the situation in the early 1980s when, in the wake of the signing of a peace and friendship treaty, the majority of people in each country felt a sense of affinity for people in the other country.
This means that the current situation isn't irreparable. When the territorial dispute was put on the shelf, the two peoples didn't view each other as enemies. But the two governments need to take steps to defuse the issue so that their peoples' views will change over time.
First, there needs to be recognition that the two countries need one another. The first thing to do is tone down the rhetoric.
On a substantive level, Japan should acknowledge that there was a tacit understanding to shelve the issue back in the 1970s rather than say China did so unilaterally.
China, on its part, should recognize that the Japanese government's purchase of three islands from their private owner was done to prevent their falling into the hands of Shintaro Ishihara, head of the Tokyo Metropolitan Government, who wanted to develop the islands and, frankly, provoke China. Furthermore, the purchase had no impact on sovereignty.
The two countries have to find a way to put the issue back on the shelf.
Frank.ching@gmail.com. Twitter: @FrankChing1