China's Rare-Earth Leverage Over Japan and Supply Chain Vulnerabilities: Geopolitical Risks and Investment Opportunities

China's dominance in the rare earth elements (REEs) market remains a cornerstone of its geopolitical influence, with the country controlling 69.2% of global REE mine production in 2024 and 58,142 metric tons of rare earth magnet exports valued at nearly $2.9 billion. This dominance is reinforced by state-directed production quotas and export restrictions, which have increasingly targeted strategic partners like Japan. The recent reimposition of export controls on critical rare earths-such as holmium, erbium, and dysprosium- following Japanese Prime Minister Sanae Takaichi's remarks on Taiwan underscores how China weaponizes its supply chain leverage to advance diplomatic objectives. For investors, this dynamic highlights both systemic risks and emerging opportunities in the critical minerals sector.

Geopolitical Risks: China's Strategic Leverage Over Japan

Japan's reliance on China for rare earths has historically made it a prime target for supply chain coercion. In 2025, China tightened export restrictions on dual-use items and medium/heavy rare earths, prompting Japan's foreign ministry to condemn the measures as "absolutely unacceptable". The economic stakes are high: a three-month restriction could cost Japan ¥660 billion annually, while a one-year ban could slash GDP by 0.43%. These risks mirror the 2010 crisis, when China similarly restricted rare earth exports to Japan during a territorial dispute.

China's 2025 export controls extend beyond raw materials to include equipment for rare earth processing, compounding vulnerabilities in sectors like electric vehicles, semiconductors, and defense. For Japan, this represents a direct threat to its technological edge, as heavy rare earths like dysprosium and terbium are indispensable for high-performance magnets in EVs and aerospace systems.

Japan's Diversification Strategies: A Blueprint for Resilience

Faced with repeated supply shocks, Japan has pioneered a multi-pronged strategy to reduce dependency on China. A landmark achievement is the Sojitz-Lynas partnership, which began importing dysprosium and terbium from Australia's Lynas in October 2025. This collaboration, rooted in a 2023 exclusive agreement, now provides the only operational heavy rare earth supply chain outside Chinese control.

Japan's approach also includes strategic stockpiles, investments in recycling infrastructure, and research into material substitution, according to energy policy analysis. The Japan Organisation for Metals and Energy Security (JOGMEC) has played a pivotal role in aligning private and public interests, while joint ventures with European nations and companies like REAlloys further diversify supply chains, as research indicates. These efforts position Japan as a model for nations seeking to mitigate rare earth vulnerabilities.

Global Investment Opportunities in Critical Minerals

The geopolitical tensions between China and Japan have accelerated global interest in securing critical minerals. For investors, the focus is shifting to midstream separation capacity and heavy rare earths, where China's dominance remains most pronounced. Australia's Lynas, for instance, has become a strategic asset, with its partnership with Japan offering a blueprint for non-Chinese processing hubs.

In the U.S., companies like MP Materials and Energy Fuels have seen stock price gains following China's 2025 export restrictions, reflecting growing demand for domestic alternatives. However, scaling production remains challenging given China's vast refining infrastructure. This gap creates opportunities for international collaboration, as seen in the U.S.-Japan critical minerals partnership, which emphasizes shared processing capabilities and technology transfer.

Emerging markets in Brazil, Canada, and Africa also present untapped potential, particularly in upstream mining and recycling. As the clean energy transition drives demand for rare earths, investments in these regions could yield long-term returns while reducing geopolitical exposure.

Conclusion: Navigating Risk and Opportunity

China's rare earth leverage over Japan illustrates the fragility of global supply chains in an era of strategic competition. For investors, the key lies in balancing short-term risks with long-term opportunities. Japan's diversification strategies-centered on partnerships, stockpiles, and recycling-offer a roadmap for building resilience. Meanwhile, investments in non-Chinese processing hubs, heavy rare earths, and international collaboration present compelling avenues for growth.

As the IEA warns, supply concentration risks are becoming a reality, making supply chain security a non-negotiable priority. For those willing to navigate the geopolitical landscape, the rare earth sector holds both challenges and rewards.