China Detains 2 Japanese Nationals in Rare Earth Smuggling Case, Exposing Growing Geopolitical Risks for Japanese Businesses

China’s detention of two Japanese nationals over alleged attempts to export restricted rare earth-related materials has added a new flashpoint to an already deteriorating relationship between Asia’s two largest economies, underscoring how critical mineral supply chains have become increasingly intertwined with national security, industrial policy and geopolitical competition.

Japan’s Chief Cabinet Secretary Minoru Kihara said in a press conference on June 24^th that Chinese authorities had detained two Japanese citizens in the northeastern Chinese city of Dalian in May, though officials declined to disclose their identities or employers, citing privacy considerations. According to Japanese media reports, the individuals were suspected of attempting to smuggle rare earth-related products out of China without authorization.

One of the detainees was reported to be a male employee of a major Japanese electronics manufacturer operating in China. Tokyo said it was gathering information through diplomatic channels and had requested appropriate treatment of its nationals under Chinese law.

While details surrounding the case remain limited, the incident comes at a particularly sensitive time in Sino-Japanese relations, being shaped by Beijing’s efforts to leverage China’s dominance over critical minerals amid intensifying strategic competition with major economies.

China introduced export controls in April 2025 on seven categories of medium and heavy rare earth elements and related products, including dysprosium, terbium, samarium, gadolinium, lutetium, scandium and yttrium. The restrictions require exporters to obtain government licences before shipments can leave the country, with Beijing framing the measures as safeguards to protect national security.

The measures have nevertheless reinforced Beijing’s influence over global supply chains that underpin advanced manufacturing industries.

Rare earth elements are indispensable components used in permanent magnets, electric vehicle motors, fighter aircraft, missile guidance systems, wind turbines, robotics, semiconductors and advanced electronics. Heavy rare earths, in particular, are difficult to substitute because of their unique heat-resistant and magnetic properties.

China’s dominance across the supply chain remains overwhelming. It controls roughly 70% of global rare earth mining output, around 90% of global separation and refining capacity, and approximately 90-95% of global permanent magnet production.

Overall, China possesses an estimated 44 million metric tons of rare earth reserves and produced about 270,000 metric tons of rare earth oxides in 2025.

That dominance has become an increasing source of concern for Japan, as over the past year, China has imposed targeted restrictions on Japanese access to certain rare earth supplies.

In fact, the latest incident of Japanese nationals detained in China for allegedly smuggling restricted rare-earth minerals evokes memories of the 2010 East China Sea dispute, when China unofficially suspended rare-earth exports to Japan following the detention of a Chinese fishing boat captain near the disputed Senkaku Islands, known in China as the Diaoyu Islands.

That episode served as a wake-up call for Tokyo, following which it spent more than a decade attempting to reduce Japan’s reliance on Chinese supplies,

So, Japan launched a long-term diversification strategy focused on investing overseas, building strategic reserves and developing recycling technologies.

One of Tokyo’s most successful initiatives involved supporting Australian producer Lynas Rare Earths, which has since become the largest producer of separated rare earths outside China. Japanese government-backed institutions, including the Japan Organization for Metals and Energy Security (JOGMEC), provided financing support to secure long-term supply agreements.

However, progress has been uneven, and the country still remains heavily dependent on China for numerous processed minerals and advanced materials essential to its industrial base.

For instance, Japanese automakers, electronics manufacturers and defence contractors still rely heavily on dysprosium and terbium from China, which are used to improve the performance and heat resistance of high-strength magnets deployed in electric vehicles and precision equipment.

Recent Chinese restrictions have already disrupted Japanese imports. Per the reports, imports of key heavy rare earths from China have fallen close to zero for consecutive months, forcing companies to draw down inventories and search for alternative suppliers.

Moreover, many alternative suppliers still rely on Chinese processing infrastructure because separating and refining rare earth elements is technologically complex, expensive and environmentally challenging. Consequently, even when raw materials are mined elsewhere, they often still travel to China for processing before reaching end users.

So, China’s detention of the two Japanese nationals will only strengthen Tokyo’s resolve to build more resilient and independent supply chains.

Japanese firms have already announced initiatives aimed at reducing vulnerabilities. For instance, Shin-Etsu Chemical recently announced plans to build a new rare earth refining facility ​in Fukui prefecture in western Japan.

The Japanese government has also intensified diplomatic coordination with allies. For instance, at recent G7 meetings, Japanese Prime Minister Sanae Takaichi urged member states to collectively work to strengthen the resilience of critical mineral supply chains amid supply chain coercion by China against Japan, which she argued could adversely affect the supply chains of G7 members and other like-minded nations.

From Taiwan to rare earths: China and Japan’s widening strategic rivalry

The ongoing rare earth dispute is unfolding against a backdrop of broader geopolitical tensions between China and Japan over Taiwan, as well as issues of maritime security and economic interests in the East China Sea.

Tensions intensified over Taiwan between Beijing and Tokyo following remarks by Japanese Prime Minister Sanae Takaichi in November 2025, wherein she stated that a Chinese attack on Taiwan could constitute a “survival-threatening situation” for Japan under the country’s security legislation.

According to Japanese experts, the Japanese Prime Minister’s remarks could be interpreted to mean that if the U.S. forces operating during a Taiwan contingency came under attack, Japan could be compelled to cooperate under the framework of collective self-defence.

China considers Taiwan its integral part under its ‘One-China’ Principle that declares “both sides of the Taiwan Strait belong to one China” and “the Taiwan issue is China’s internal affairs”. So, Ms. Takaichi basically crossed Beijing’s red lines, triggering a sharp diplomatic fallout which then spilled over into trade and supply chains.

Moreover, Japan is also concerned about China’s efforts to consolidate its presence across the so-called First Island Chain, a strategic arc stretching from Japan through Taiwan to the Philippines, which Beijing increasingly views as a critical theatre for projecting power and challenging U.S.-allied security arrangements in the western Pacific that seek to contain China’s rise as a major global power.

For instance, in June, the China Coast Guard conducted coordinated patrols in waters east of Taiwan, linking them to the maritime delimitation talks announced by Japan and the Philippines in late May, aimed at delimiting the economic zone and continental shelf between them, which also include waters in Taiwan’s eastern exclusive economic zone (EEZ).

Another recent source of friction has been China’s expanding oil and gas infrastructure in the East China Sea near disputed waters also claimed by Japan. The Japanese government has been repeatedly protesting China’s construction and operation of energy extraction facilities near the so-called median line that Japan considers its maritime boundary, saying China was attempting to create faits accomplis in waters whose boundaries remain unresolved.

So, for China, its dominance over strategic resources appears to be emerging as a source of diplomatic leverage that can be deployed to advance its national interests, alongside other lines of effort such as expanding its naval and law-enforcement presence and economic activities in the strategic waters of the Western Pacific Ocean.

This must raise concern among Japanese businesses operating in, or dependent on, China, particularly companies involved in advanced manufacturing, chemicals, materials science and high-technology sectors, and the latest incident of two Japanese nationals detained in China over alleged attempts to export restricted rare earth-related materials is an illustration of that.

Tanmay Kadam is a geopolitical observer based in India. He has experience working as a Defence and International Affairs journalist for EurAsian Times. He can be contacted at tanmaykadam700@gmail.com.