Japan’s fragile economy, already weighed down by U.S. tariffs and declining property investments, faces additional challenges following a diplomatic dispute with China.
The tension arose after Japanese Prime Minister Sanae Takaichi made comments regarding Taiwan, prompting China to advise its citizens against traveling to Japan. Following the advisory, tourism-exposed Japanese stocks fell, and experts warn the economic impact could worsen if the dispute persists.
Impact on Tourism and GDP
Mainland Chinese tourists have been Japan’s largest group of foreign visitors in 2025, with about 5.7 million arrivals, accounting for nearly 23% of all international visitors, according to Japan’s National Tourism Organisation.
Takahide Kiuchi, executive economist at Nomura Research Institute, estimates the tensions could cost Japan 1.79 trillion yen in GDP over a year—a 0.29% decline. Historical precedent supports this concern: during a 2012 dispute over the Senkaku/Diaoyu islands, Chinese tourist arrivals dropped nearly 8% year-on-year.
Travel spending is a major growth driver for Japan, contributing 0.4 percentage points to last year’s modest 0.1% GDP growth, according to the Mastercard Economics Institute. Stefan Angrick, head of Japan at Moody’s Analytics, noted that a sharp decline in Chinese travel could reduce GDP growth by 0.2 percentage points, describing it as “an unwelcome drag for an economy already struggling to find traction.”
Japan’s economy already contracted 0.4% sequentially in Q3, marking its first contraction in six quarters, with an annualized shrinkage of 1.8%.
Rising Diplomatic Tensions
The diplomatic dispute escalated on Nov. 8, when Takaichi warned that a Chinese attempt to seize Taiwan by force would threaten Japan’s survival, suggesting Japan might need to defend its ally if U.S. warships intervened. In response, China’s consul general in Osaka made a harsh remark on social media, later deleted. Tokyo protested, Beijing issued travel warnings, and deployed ships and drones near the Senkaku islands, prompting Japan to scramble fighter jets.
State-run Chinese media also criticized Japan, with CCTV labeling Takaichi’s remarks as “extremely egregious” and an interference in China’s internal affairs. Beijing considers Taiwan part of its territory, while Taiwan maintains that its people alone determine its future.
Experts predict the tensions could last several months. Investor David Roche, president of Quantum Strategy, suggested the dispute will persist until Takaichi softens her stance on potential Japanese military intervention regarding Taiwan.
The situation highlights the delicate balance in U.S.-Taiwan-Japan-China relations, with the U.S. maintaining strategic ambiguity under the 1979 Taiwan Relations Act, emphasizing concern over non-peaceful attempts to determine Taiwan’s future without committing directly to its defense.