Tiny Pacific Islets Sinking Giant Japanese Businesses in China

TAIPEI ( TheStreet) -- You'd need a microscope to find these islands on most maps of Asia. No one lives there, unless you count short-tailed albatrosses.

But boatload after boatload of activists cuts through choppy currents to reach them, turned away each time by Japan's wily coast guard. Most of the activists come from China, where the government claims the rocky protrusions as their own and wants Japan out.

The unassuming islets, part of a huge constellation of others just like them, suddenly threaten to sink Japanese companies with business in China. Competing claims over what Japan calls the Senkakus and China the Diaoyudao have hatched waves of occasionally violent street protests across China plus boycotts against made-in-Japan products sold in the offended country. Taiwan makes yet another claim on the islands.

Japanese people fearing for their safety have cancelled trips to China, while normally eager Chinese consumers avoid cars, electronics and shops that are emblematic of the world's No. 3 economy. (China ranks No. 2, so take that.)

Like foreign firms from Europe or the U.S., the big names from Japan have expanded into China to take advantage of its fabled potential market and low-cost manufacturing bases. China is now Japan's largest trade partner.

The number of Japanese subsidiaries has grown eight times since the 1990s, and they sold 11.4 trillion yen ($147 billion) worth of goods to China in the 2011 fiscal year. Another 13.4 trillion yen worth of stuff is shipped to China from Japan, London-based Capital Economics says in a Sept. 24 report on fallout from the turf strife.

Compounding the dispute, China and Japan may never settle a series of problems that extend back to World War II. After Japan surrendered and left occupied China in 1945, it never adequately apologized and instead glorifies wartime acts, Beijing argues. It's astonished that Tokyo would now insist on controlling the disputed islets, plus claiming an undersea oilfield north of it.

Japanese leaders accuse the Chinese government of bringing up these issues late in the game (Beijing said little until about 20 years ago) to stoke public nationalism while overlooking the renunciation of its World War II past with a 1947 peacetime constitution.

Yet when anti-Japan demonstrations erupted across China in 2005 over an accumulation of post-war political disputes, former Chinese commerce minister Bo Xilai warned the boycott would jeopardize China's economic development as joint ventures are rampant and Japanese firms employ some 1.5 million locals.

Chinese authorities squelched the protests that year in part to avoid damaging economic ties. But Bo Xilai has been ex-communicated. Is anyone listening now?

The Japan External Trade Organization office in Beijing is still tallying up business losses from this month's demonstrations and boycotts. It's busy phoning up some of the 4,619 Japanese subsidiaries in mainland China and estimating a toll from cancelled travel plans.

JETRO doesn't expect to report dramatic losses yet but warns of a lag effect that's obvious in six to 12 months even if anti-Japan activity dies down before then. "Direct losses are hard to estimate but may not be too huge for now, yet from today forward we might see something different," JETRO specialist She Xing told me this week. In 2005, he adds, "the government handled protests in a rational manner."

At least 19 massive Japanese firms are listed in New York, putting their shares at risk if their properties, workforces or sales take a sustained hit.

Violent mid-September protests in various Chinese cities prompted temporary closure of many Japanese businesses in China, Capital Economics says. It names Panasonic ( PC) and global camera maker Canon ( CAJ) plus three signature automakers, Toyota Motor ( TM), Honda ( HMC) and Nissan ( NSANY).

These firms are on the move in China. Toyota hopes to double sagging China sales by 2015 with sales of hybrids and cheaper cars, a Japanese business paper, Nikkei said earlier this month. Chinese local governments are keen on putting drivers into hybrids as pollution stifles the air.

Panasonic is aiming for sales growth in China from 8.5 billion yen in fiscal 2011 to 25 billion yen in fiscal 2015 with what it describes as a full-scale entry into the "Chinese housing equipment and construction market" this year.

Shares for these automakers and electronics firms have fallen 3% to more than 9% since Sept. 14, the day before mass demonstrations swept China.

The Japanese retailer Uniqlo also closed shops in China over the island sovereignty dispute, but share prices of its owner Fast Retailing ( FRCOF) have held steady this month following a strong net-profit report for nine months ending in May.

On the travel side, Japan Airlines ( JAL), Asia's second largest airline by valuation, has also cut China flights as it logged 12,000 cancellations through November. After an IPO earlier this month, the airline's share prices rose just 1% on the first date of trading under the weight of protests in China. JAL delisted after it went bankrupt in 2010 but later restructured to turn profitable.

Wait on the shares of these firms to see how low the row with China pushes them. As the dispute resolves, they will represent a buying opportunity.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.