China is warning Japan it might cut off rare-earth supplies again, according to a report from China Daily on Tuesday.

The reason for China’s decision of course remains comments the Japanese Prime Minister made last year about Xi Jinping Taiwan.

The minerals China is referring to are the same seven that got hit with restrictions in April when China was clashing with the U.S.

This is a big deal for Japanese manufacturers, as they’ve been trying to rely less on China since 2010, when China cut rare-earth exports during a fight over islands.

Japan pushed to create new supply chains when the government and local banks backed Australia’s Lynas Rare Earths Ltd. to help make that happen. In 2024, a former Japanese minister said Japan had cut its rare-earth dependence on China down to 60%, from as high as 90%.

China blocks military-linked exports while Japan leans more on Lynas

China Daily published its story right after the government announced it’s banning over 800 dual-use items from going to Japan’s military or any buyer that might support its defense system. That list normally includes rare earths. Now China is thinking about limiting those exports to regular Japanese companies too.

Heavy rare earths are still the weak spot. These include dysprosium and terbium, which are used in strong magnets found in missiles, phones, and electric cars. Lynas only started sending small amounts of those minerals to Japan late last year. Most of Japan’s supply still comes from China.

Shares in Lynas jumped 16% in Sydney on Wednesday. Japan has no choice but to bet even harder on them now. That’s been Tokyo’s go-to since 2010, when it first scrambled to break China’s chokehold.

Rare-earth magnets are everywhere; inside cars, electronics, weapons. But Japan’s in a better spot than before. It has its own magnet makers. Companies have stockpiled materials. And there’s been a shift toward needing less heavy rare earths overall.

Markets react to threat as some stocks fall and others shoot up

Japan’s Topix index dropped by around 1% after the news. That’s not massive, and over half the stocks on the list actually went up. This follows a strong start to the year, as the Topix and Nikkei 225 both rallied two days straight, hitting records.

But the auto and car parts sector took a hit. The Topix Transport Equipment Index dropped 2.5%. These companies know they’re exposed. Rare earths are key for electric vehicles, and China still owns that supply chain.

One company made gains. Toyo Engineering Corp., which builds machines to pull rare earths from the ocean floor, shot up 20%. Investors think Japan will need new sources fast.

Big-name broker CEOs still think Japanese stocks will go up this year. In 2025, Topix was up over 20%. Even Goldman Sachs dropped their rating but said they still see room to make money.

China is bringing back the same pressure tactic. Japan says it’s ready.

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