On September 18, some 4,000 protesters gathered outside the Japanese embassy in Beijing, hurling rocks and bottles and burning the Japanese flag. The day was the 81st anniversary of the Japanese invasion of China that kicked off World War II in Asia, but the demonstrators were really responding to a more recent Japanese encroachment -- its purchase earlier this month of a chain of uninhabited islands also claimed by China.
In the weeks since, Chinese demonstrators in Qingdao set fire to a Panasonic Corp. factory and looted a Toyota dealership. Vandalism of Japanese cars, restaurants and shops has been seen in most big cities in China. Anticipating that the riots would reach a fever pitch September 18, most Japanese businesses in China were closed that day, and many Japanese expatriates have headed home, at least until things cool off.
"About 60 percent of my clients have come back, tentatively, to Japan," says Toshiyuki Arai, a Tokyo partner for Paul Hastings who mainly represents Japanese and U.S. companies investing in China.
The relationship between China and Japan has always been complicated by their wartime past. The recent flare-up is over a chain of islands that Japan currently administers but that China also claims -- the Chinese call them the Diaoyu and the Japanese call them the Senkakus. Earlier this month, at the urging of right-wing groups, the Japanese government paid $26 million to buy the islands from private Japanese owners. That was the spark that set off nationalist protests across China.
The protests subsided late last week, but the war of words rages on. In a commentary published Monday, China's official Xinhua news agency called Japan's $26 million purchase of the islands a "farce" and warned that there might be economic consequences for Japan. Likewise, Prime Minister Yoshihiko Noda of Japan told The Wall Street Journal Sunday that the Chinese protests could frighten foreign investors.
For lawyers focusing on cross-border deals between the world's second- and third-largest economies, none of these thoughts are comforting.
"They're mightily concerned," says Arai of his clients. "They have lots and lots of yen and dollars on the ground."
Though lawyers active in Japan practice say they're not aware of any deals being canceled so far, they say it is possible that some Japanese companies may be rethinking their commitments to the China market. Many of their employees on the ground have left China temporarily out for fear for their safety, though no one was hurt during the protests.
One Japanese lawyer who stayed behind says that though the streets have calmed, the dread of being targeted is still palpable. "It's becoming better, but I still have some feeling of being scared," he says.
It's not the first time anti-Japanese riots have swelled in recent years. Seven years ago, anger over Japanese textbooks that minimized the country's responsibility for the war led to large demonstrations in China and similar acts of vandalism. But there is widespread agreement that last week's demonstrations were worse.