TOKYO – Should the escalating spat between Japan and China over disputed islands evolve into a full-blown diplomatic battle, the economic fallout could include derailing delicate talks over developing potentially lucrative undersea gas fields between the two Asian giants.
Already, Beijing has suspended ministerial-level contacts with Tokyo, and postponed a second round of talks on the natural gas deposits. China also said Tuesday that Premier Wen Jiabao won't be meeting with Japanese Prime Minister Naoto Kan at a U.N. conference in New York this week.
"The atmosphere is obviously not suitable for such a meeting," Foreign Ministry spokeswoman Jiang Yu told reporters.
In the first comments from a top Chinese leader, Wen was stronger Tuesday night, laying the blame entirely at Japan's door.
Tokyo "bears full responsibility for the situation, and it will bear all consequences," he said to overseas Chinese in New York, according to the state-run Xinhua News Agency.
Anti-Japanese protests have flared in numerous locations around China, and the dispute has spilled into cultural ties, too. Beijing abruptly canceling invitations to 1,000 Japanese youth to the Shanghai expo and the Japanese pop group SMAP has called off a concert in Shanghai.
The chill was set off by Japan's arrest of a Chinese fishing boat captain two weeks ago for colliding with Japanese coast guard vessels near islands in the East China Sea claimed by both nations. Relations are at their worst since the 2001-2006 term of former Prime Minister Junichiro Koizumi, whose repeated visits to a war shrine in Japan enraged China.
China and Japan compete as the world's No. 2 and No. 3 economies, but they have become intertwined and both have an interest in not letting any dispute undermine vital trade and business ties.
So far, tensions haven't risen as high as they were in 2005, when Japanese shops and restaurants were attacked. But there have been calls for boycotts of Japanese products — many of which are actually made in China.
The dispute this time is focused on territorial claims, as an increasingly confident China — its economy booming and military expanding — asserts its presence in the region. Beijing has demanded that Tokyo release the captain, threatening countermeasures if Japan continues "making mistake after mistake."
Japan, meanwhile, made a conciliatory gesture Wednesday.
"If possible, it would be good to quickly hold high-level talks, including broad, strategic discussions," Japanese Chief Cabinet Secretary Yoshito Sengoku told reporters, saying that the countries should continue to strengthen their ties despite the spat.
The U.S. also has urged the two sides to work out the matter through appropriate diplomatic means.
But neither country wants to appear soft, which is going to make it tough to resolve without one side or the other losing face.
"China is worried that if it looks weak on a territorial matter, it could face a barrage of criticism, which could turn into a wider protest against the government," said Shinji Kojima, professor emeritus of Chinese history at Tokyo University.
In the background of the dispute is an ongoing question of access to natural gas fields in the East China Sea some 310 kilometers (190 miles) northeast of the islands, known as Senkaku by Japan and Diaoyu or Diaoyutai in Chinese.
Access to gas fields so close to their shores would be a boon for energy-hungry China as well as resource-poor Japan. A thorny issue for some time, the two sides agreed in 2008 to jointly develop the deposits.
Under that deal, Japanese will be allowed to invest and share in the profits of existing Chinese operations in the Chunxiao fields, which Japan calls Shirakaba, that run closer to China, while Japanese and Chinese will jointly develop other fields farther out.
The agreement marked a real breakthrough in Japan-China relations, which had struggled to improve for years. While it could have easily bogged down in territorial disputes, the decision to shelve such claims in favor of progress is something almost unprecedented for the sides, particularly China which traditionally takes a hardline on all issues relating to sovereignty.
"The gas fields question has always been part and parcel of the Sino-Japanse relationship," said Sheila Smith, a senior fellow at the Council on Foreign Relations in Washington. But if this territorial dispute "goes on the rocks, it could derail their ability to negotiate a common approach on the gas field reserves," she said.
Since the collision, Japan has spotted Chinese ships bringing equipment to one of the gas fields, raising concerns that Beijing may start drilling unilaterally. Responding to Tokyo's inquiry about the move, China said it had brought in equipment for "repairs" of a platform out at sea.
Jiang, the Foreign Ministry spokeswoman, said Tuesday that China possesses sovereign rights over the Chunxiao fields and that its activities there were "lawful and reasonable." But she did not directly link the issue to the islands dispute.
The spat faces a test on Sept. 29, the deadline by which Japanese prosecutors must decide whether to charge the Chinese fishing trawler captain. The 14 crew members and boat were returned last week.
Some analysts speculate that Beijing may be testing the resolve of the relatively new Democratic Party-led Japanese government, perceived by some to be less hardline than the previous conservatives who ruled Japan for most of the post-World War II era.
Despite the tough talk, both side are likely to be cautious about further escalating tension, said Liang Yunxiang of Peking University's School of International Studies.
"Before they take any further steps, both governments must ask themselves, do we have any measures to deal with the possible consequences?" Liang said.