China has a rich supply of rare earths and its production accounts for 90% of the world's total production. Japan has relied heavily on rare earths from China, and in 2010 80% of rare earths used in Japan came from China, according to Digitimes Research.
Since 2010, when Japan and China began to have disputes over Diaoyu/Senkaku island, China has been using rare earth production and pricing as one of its bargaining chips for diplomatic and military purposes. This has prompted Japan to find ways to reduce its reliance on China's rare earths by searching for supplies in other countries, conducting R&D to find substitutes, and recycling usable rare earths.
Japan's reliance on imported rare earths from China fell to 50% in 2012. Although China's rare earth exports continue to be around 30,000 tons, the reduced reliance from Japan has cause the price of rare earths to fall more than 50% from May-July 2012. Hence China has yet to use rare earth restrictions as a tool during the most recent island dispute.
Although shortages of light rare earths have been eased, most heavy rare earth reserves continue to be controlled by China. Therefore, heavy rare earths are likely to play a key role in the future if the dispute between Japan and China escalates.
