Diplomatic spat between Tokyo and Beijing threatens Japan’s already fragile

Japan’s fragile economy, already hurt by U.S. tariffs and declining investments in property, faces another hit due to the diplomatic spat between Tokyo and Beijing.

Miffed over Japanese Prime Minister Sanae Takaichi’s comments related to Taiwan, China on Friday advised its citizens against travelling to the country. Japanese tourism-exposed stocks fell in the aftermath of that warning, while experts caution the impact could be more severe over a longer duration.

Mainland Chinese tourists have been the largest group of foreign visitors to Japan so far in 2025 at about 5.7 million, or nearly 23% of all visitors, according to Japan’s National Tourism Organisation.

Takahide Kiuchi, executive economist at Nomura Research Institute, said tensions between the two Asian powers could result in a 1.79 trillion yen drop in Japan’s GDP over the course of one year — a 0.29% decline in the country’s GDP.

Mainland Chinese tourists to Japan dropped nearly 8% in 2013 compared to 2012 when there was a dispute over islands off western Japan in September 2012, known as the Senkaku in Tokyo and Diaoyu in Beijing. Kiuchi sees a similar risk in how the current situation is unfolding.

Travel spending is a huge growth driver for the world’s fourth largest economy, with inbound tourism contributing 0.4 percentage point to Japan’s 0.1% annual GDP growth last year, according to the Mastercard Economics Institute.

Stefan Angrick, head of Japan at Moody’s Analytics, echoed Kiuchi, saying that “a sharp drop in Chinese travel to Japan would sting.” Angrick said that if Chinese arrivals were to halve — as they have during previous diplomatic spats — Japan’s GDP growth could shrink by 0.2 percentage point.

“[This is] Hardly catastrophic, but an unwelcome drag for an economy already struggling to find traction,” Angrick said.

Japan’s third quarter GDP contracted 0.4% sequentially, marking its first contraction in six quarters. On an annualized basis, the economy shrunk 1.8%.

China’s consul general in Osaka Xue Jian retaliated on X, reportedly saying “the dirty neck that sticks itself in must be cut off,” in a post that was later deleted.

Tokyo summoned China’s ambassador to protest the “extremely inappropriate” remark, followed by Beijing summoning Japan’s envoy, issuing travel warnings, and deploying ships and drones near the Senkaku islands, prompting Japan to scramble fighter jets.

Chinese state-run editorials also took aim at Japan, with state broadcaster CCTV saying last week that Takaichi’s remarks were of an “extremely egregious nature and impact” and was a “gross interference in China’s internal affairs.”

Beijing considers Taiwan to be…