China's Export Controls Show Effect, Nearly 40,000 Japanese Companies Face Supply Chain Changes

Interface News Reporter | Tian Heqi

After China’s Ministry of Commerce blacklisted 20 Japanese entities for export controls and added 20 others to the watchlist, Japan’s defense supply chain is facing growing challenges.

On March 12, data released by Tokyo Shoko Research (TSR) showed that the 20 entities on the control list are connected to approximately 9,538 domestic business partners, while the 20 entities on the watchlist are linked to about 39,000 domestic partners, raising concerns about the expanding impact.

TSR analyzed all business partners of the listed companies and institutions (excluding Kawasaki Heavy Industries Aerospace Systems, which operates as a corporation) from a database of about 4.4 million companies, including non-defense-related partners, and categorized them into primary (direct) and secondary (indirect) levels.

The results showed that 8,842 companies (92.7%) are unlisted, and 8,317 companies (87.2%) have a registered capital of over 10 million yen, indicating a relatively high proportion of such companies.

Image source: Tokyo Shoko Research

Unlike the export ban list focused mainly on companies in the defense and aerospace industries, core groups such as Subaru, InnoSense, and Mitsubishi Materials are included, broadening the scope of trade partners.

TSR stated that further measures by China cannot be ruled out. Currently, it is too early to predict the specific extent of impacts on supply chains and commercial channels, and further confirmation is needed.

On February 24, this year, China’s Ministry of Commerce announced that it would include 20 Japanese entities, such as Mitsubishi Shipbuilding, involved in enhancing Japan’s military capabilities, on the export control list. Meanwhile, 20 Japanese entities, including Subaru, that cannot verify the end users and end uses of dual-use items, were added to the watchlist.

Image source: Ministry of Commerce

Chen Yang, a young Japanese issues scholar and visiting researcher at Liaoning University’s Japan Studies Center, told Interface News that the impact of export controls has already expanded through supply chain transmission, gradually penetrating multiple levels of Japan’s industry, posing a dual challenge to Japan’s economy in terms of supply chain and consumer markets.

According to Global Times citing Japanese media reports, in January this year, the number of Chinese tourists visiting Japan dropped by 60% year-on-year, impacting Japanese department store sales.

Chen Yang told Interface News that the two lists released in February are further refinements and extensions of previous announcements, transforming macro regulations and principles into precise, actionable controls.

On January 6, this year, the Ministry of Commerce issued a notice titled “On Strengthening Export Controls of Dual-Use Items to Japan,” banning all dual-use items from being exported to Japanese military users, military purposes, and other end users that could enhance Japan’s military strength.

“Dual-use items” refer to goods, technologies, and services that have both civilian and military uses or can enhance military potential, especially those used in designing, developing, producing, or using weapons of mass destruction and their delivery systems, including related technical data.

According to the 2026 edition of the “Management Catalog of Export Licenses for Dual-Use Items and Technologies” jointly published by the Ministry of Commerce and the General Administration of Customs, dual-use items include specialized materials and related equipment, chemical products, and materials processing, among others. Notably, this includes critical strategic minerals such as rare earths, graphite, tungsten, gallium, germanium, and antimony.

Rare earths are known as “industrial vitamins,” comprising the lanthanide series elements, along with scandium and yttrium, totaling 17 elements. Heavy rare earths are essential raw materials in fields like electric vehicles, new energy, and national defense, with high economic value.

Chen Yang said that China’s recent measures are a continuation of retaliatory actions following Japanese Prime Minister Suga Yoshihide’s false statements on Taiwan in November last year, and also a firm response to Japan’s recent moves toward re-militarization and nuclear ambitions.

“Many of the 20 Japanese entities on the export control list are core participants in Japan’s defense industry, directly involved in the research, production, and maintenance of Japan Self-Defense Forces equipment.”

Chen Yang cited Mitsubishi Heavy Industries’ Mitsubishi Shipbuilding and Mitsubishi Heavy Industries Aerospace Engines, which have long led projects on warships, submarines, and fighter jet engines; IHI group companies, which play key roles in missile and rocket engines.

“These are not arbitrary names; they are based on in-depth intelligence analysis, precisely targeting the most strategic nodes in Japan’s military supply chain,” he said.

In contrast, the 20 entities on the watchlist are mainly civilian businesses, but due to difficulties in verifying end users and purposes, they are subject to stricter scrutiny.

Chen Yang believes that this tiered management effectively differentiates risk levels, directly affecting only 40 entities, a very small proportion of Japanese companies, ensuring normal trade with other Japanese firms.

Pang Zhongpeng, an expert on Japanese issues at the Chinese Academy of Social Sciences’ Japan Research Institute, told Interface News that China’s law-based listing is only targeting a few Japanese entities, and the measures only concern dual-use items, not affecting normal China-Japan trade. Law-abiding Japanese entities need not worry, reflecting China’s restraint and differentiated approach.

What actual impacts might this precise control have on Japan?

Pang Zhongpeng believes that from the perspective of international political economy and supply chains, this move will impose substantial restrictions on Japan’s military industry.

It will directly impact Japanese defense enterprises, which rely heavily on China for critical materials like rare earths, special alloys, and precision electronic components. The 20 core companies on the list involved in shipbuilding, aircraft engines, and space systems may face delays or disruptions in developing and producing ships, fighter jets, and missiles.

Second, it could affect Japan’s economy. Some Japanese companies that depend on Chinese supply chains might shift some production capacity to the U.S. or Europe, but in the short term, it’s difficult to completely eliminate reliance on Chinese key materials.

Although Japan’s overall dependence on Chinese rare earth imports has decreased from about 90% to 60%, reliance on key categories remains high. A Nomura Research Institute assessment shows that Japan’s use of heavy rare earths like dysprosium and terbium for electric vehicle motors is nearly 100% dependent on China. Supply restrictions could severely impact related industries.

Image source: Nikkei Chinese Web

According to the “Monthly Monitoring Report on China’s Rare Earth and Related Products Trade (January-December 2025)” by the Digital Economy Laboratory of the University of International Business and Economics, in 2025, Japan was China’s second-largest export market for rare earths and related products, with exports reaching $48.79 million (about 3.351 billion RMB), accounting for 13.9% of China’s total rare earth exports, down 3.9% year-on-year.

Chen Yang noted that, according to economic principles, Japan’s dependence on China for rare earths, processing, and high-end materials cannot be replaced in the short term. The more Japan pushes for military expansion and aligns with external camps to decouple from China, the more it will expose its own industrial vulnerabilities.

Eiji Hoshino, chief economist at the First Life Insurance Economic Research Institute, pointed out that Japanese companies outside the defense industry will also face rising costs and squeezed profits.

An industry insider specializing in rare earths told Interface News that since China’s export controls on dual-use items began in early January, related measures have already affected Japanese companies, but the full extent of the impact requires further data.

The insider said that Japan is also seeking third-party suppliers or trying to bypass controls through transactions in other countries to obtain rare earths, but this would entail higher procurement costs.

According to this source, some Japanese companies still have inventories from earlier stockpiles, so the immediate supply pressure is not yet apparent.

“Japan is currently exploring multiple channels for alternative rare earth sources, including developing overseas mines and expanding overseas supply chains,” the analyst added. For example, Japan is accelerating rare earth mining projects in Namibia and investing in Lynas in Australia, which has long-term supply agreements with Japan.

Since March, Japan has taken several actions in the rare earth sector.

According to Nikkei Chinese Web, the Japanese government announced plans to develop rare earth resources in Namibia’s southwestern region. They are recruiting companies for mining development and considering building impurity removal refining plants locally.

On March 9, Japan announced it would provide technical support for rare earth extraction in Malaysia, aiming to help Malaysia, rich in rare earth reserves, establish production capacity and diversify supply channels.

Additionally, Japan’s Proterial (formerly Hitachi Metals) is considering manufacturing magnets for electric vehicle motors without heavy rare earths in North America and elsewhere.

Recently, Lynas revised its supply agreement with Japanese-Australian rare earth companies, extending the contract to 2038. The agreement guarantees Lynas an annual production of 5,000 tons of praseodymium-neodymium and commits to purchasing half of the year’s dysprosium and terbium output, totaling over 7,200 tons of rare earths annually.

Following China’s official release of the specific list of Japanese companies under export controls, most affected Japanese firms have adopted a cautious stance.

NHK reported on February 24 that Japanese companies targeted by China’s export restrictions on civilian and military items are racing to verify facts and gather information.

Image source: Ministry of Commerce

Mitsubishi Heavy Industries stated that some of its aircraft engines and ship components are involved. The company said it is currently investigating the facts.

During its February 4 financial results briefing, Mitsubishi Heavy Industries noted that the impact of China’s strengthened export controls, including on rare earths, is currently limited, but if restrictions continue, effects could become significant.

IHI Corporation, one of Japan’s top three heavy industries, also said it is verifying facts and will monitor the situation closely. Japan Marine United Corporation said it cannot comment until details are clarified. Subaru is studying related information and will keep a close watch on developments.

Interface News has reached out to Mitsubishi Heavy Industries, Kawasaki Heavy Industries, IHI Corporation, and others regarding these issues; as of press time, no responses have been received.