The spat, which centres on a string of uninhabited islands in the East China Sea but feeds on historical animosities, is being watched closely by other Asian nations who have their own territorial disputes with China.

The latest flare-up after years of relative calm was sparked by an incident this month near a disputed island chain, called Senkaku in Japan and Diaoyu in China, located near oil and gas fields.

Japan, which suspects a Chinese fishing boat captain deliberately rammed its patrol boats, seized his vessel, arrested the skipper and has held him since, citing its domestic law, although it has released his crew and boat.

China has reacted with fury, labelling the September 8 arrest illegal and launching a string of diplomatic protests, cancelling official visits and summoning Japan's ambassador five times, once late at night.

"I personally feel Japan's government is riding a tiger," said professor Yin Xiaoliang of the Institute of Japan Studies at China's Nankai University in Tianjin, pointing out that the case is tricky for Japan.

"If they don't handle this under Japanese domestic law, that's tantamount to admitting the Diaoyu Islands are Chinese territory. If they handle it according to domestic law, the Chinese side will not cease its pressure."

"Further, Japan's economy depends more on China's. They have no choice but to maintain good relations with China."

China has allowed angry editorials in the state-controlled press, as well as protests on the streets -- although the rallies, the latest on Saturday, were relatively small and short and stayed non-violent.

As often in the past, the protesters invoked the memory of imperial Japan rampaging across Asia, including China, before and during World War II.

Post-war Japan has embraced pacifism and issued repeated official apologies, but many Asians still question the depth of its contrition.

On Saturday, the anniversary of Japan's 1932 invasion of Manchuria, more than 100 protesters rallied near the Japanese embassy in Beijing, and demonstrations were also held in Shanghai and Hong Kong.

A year ago, when Japan's centre-left Democratic Party of Japan (DPJ) came to power, its first premier Yukio Hatoyama said he wanted closer ties with East Asia, especially China.

Hatoyama called the East China Sea a "Sea of Fraternity" and promoted the idea of an EU-style Asian Community, while unsettling Washington with a plan, since abandoned, to move a US airbase off Japan's Okinawa island.

But conservative politicians and the defence bureaucracy have long pointed with alarm at China's defence spending and growing military muscle.

In its annual defence white paper on September 10, Japan criticised China's lack of transparency in military spending and its recent naval activities as "a matter of concern for the region and the international community".

A Pentagon report last month said China was ramping up investment in nuclear weapons, long-range missiles, submarines and aircraft carriers, building up a force that could strike as far as the US territory of Guam.

Last Wednesday former US deputy secretary of state Richard Armitage said on a Tokyo visit that in the ongoing row China was "testing" Japan.

He told Japanese media that China's strong reaction toward Japan served as a "warning to Vietnam, Malaysia, the Philippines and Taiwan about their disputed territory" in nearby waters including the South China Sea.

Armitage proposed that Tokyo and Washington hold joint military drills in undisputed areas further west in the Pacific to send a signal to China.

China is now Japan's biggest trade partner, and a major manufacturing base and consumer market. Japan, scrambling to revive its economy, has recently eased visa restrictions to allow more Chinese tourists.

A bilateral plan to jointly explore a gas field in another disputed part of the East China Sea also appears under threat since China resumed unilateral, unspecified construction there in recent days.

Japan's cabinet met on Saturday, according to the Kyodo news agency, and said it was considering "countermeasures" including a plan for Japan to conduct its own test drilling in the sea near the Chinese offshore facility.

Despite the current troubles, many observers say tensions will ebb again because both sides see their relationship as too important to fail.

Yu Tiejun, a professor of Sino-Japanese relations at Beijing University, said: "I don't think this situation is going to escalate because it has already reached a point that neither side expected."

earlier related report
Anti-Japan protesters rally in China over boat row
Beijing (AFP) Sept 18, 2010 - Waving banners and chanting anti-Japanese slogans, protesters staged rallies in China Saturday to voice anger over the arrest of a Chinese trawler captain which has sparked a major diplomatic row.

"Down with little Japan", "free our captain" and "remember September 18", demonstrators shouted in Beijing as sirens rang out to commemorate Saturday's highly sensitive anniversary of Japan's invasion of Manchuria in 1931.

Beijing is furious about the seizure of a Chinese fishing boat near a disputed island chain in the East China Sea and the subsequent arrest of the captain.

Tokyo says he intentionally rammed two Japanese coastguard vessels during a high-seas chase on September 7.

The incident has sparked the worst tensions between the Asian neighbours in years, with Beijing summoning Tokyo's ambassador five times in a week and scrapping scheduled talks over joint energy exploration in the East China Sea.

The uninhabited islands -- called Senkaku in Japan and Diaoyu in China, and also claimed by Taiwan -- lie in an area with rich fishing grounds that is also believed to contain oil and gas deposits.

Tokyo had warned its citizens in China to remain vigilant to ensure their safety in the event of any backlash over the dispute.

More than 100 demonstrators rallied near Japan's embassy in Beijing and a group also stopped outside the Chinese foreign ministry, where they chanted "down with the traitors to the motherland" and urged China to "retake the Diaoyu islands".

In Shanghai, around 20 demonstrators gathered near the Japanese consulate and several were arrested, an AFP journalist witnessed. Other protesters tried unsuccessfully to block the police car taking them away.

Sirens wailed in several cities to mark the anniversary of Japan's occupation of a swathe of northern China which began with an assault on the city of Shenyang 79 years ago.

The atrocities committed by Japanese forces have cast a long shadow over relations between the two economic powerhouses, with frequent calls on Tokyo to apologise.

About 70 protesters marched through central Hong Kong towards the Japanese consulate, chanting for the return of the ship's captain and the disputed island chain.

"The Diaoyu islands are Chinese territory but they're under the control of the Japanese government," Derek Lien, 24, told AFP. "We want the ship's captain returned and an apology."

Albert Ho, chairman of Hong Kong's Democratic Party, called on Tokyo to "tender an unqualified written apology" over the maritime incident and "immediately return the Diaoyu islands to our country".

"We want to let the Japanese understand the feelings of our nation," Ho told reporters.

Protesters held Chinese flags and waved banners with slogans such as "Chinese people can't be put down by the Japanese government", while Ho called for "reasonable compensation for war crimes" committed during the Manchurian invasion.

"Money is not the problem -- the Japanese government needs to apologise for history," Will Tan, 31, told AFP.

"They made mistakes and did bad things to Chinese people."

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