Stratfor has an analysis of the China-Japan island conflict and its history.
For decades, Tokyo and Beijing generally abided by a tacit agreement to keep the islands dispute quiet. Japan agreed not to carry out any new construction or let anyone land on the islands; China agreed to delay assertion of any claim to the islands and not let the dispute interfere with trade and political relations. Although flare-ups occurred, usually triggered by some altercation between the Japanese coast guard and Chinese fishing vessels or by nationalist Japanese or Chinese activists trying to land on the islands, the lingering territorial dispute played only a minor role in bilateral relations.
However, Ishihara's plans for the Tokyo municipal government to take over the islands and eventually build security outposts there forced the Japanese government's hand. Facing domestic political pressure to secure Japan's claim to the islands, the government determined that the "nationalization" of the islands was the least contentious option. By keeping control over construction and landings, the central government would be able to keep up its side of the tacit agreement with China on managing the islands.
China saw Japan's proposed nationalization as an opportunity to exploit. Even as Japan was debating what action to take, China began stirring up anti-Japanese sentiment and Beijing tacitly backed the move by a group of Hong Kong activists in August to sail to and land on the disputed islands. At the same time, Beijing prevented a Chinese-based fishing vessel from attempting the same thing, using Hong Kong's semi-autonomous status as a way to distance itself from the action and retain greater flexibility in dealing with Japan.
As expected, the Japanese coast guard arrested the Hong Kong activists and impounded their ship, but Tokyo also swiftly released them to avoid escalating tensions. Less than a month later, after Japan's final decision to purchase the islands from their private Japanese owner, anti-Japanese protests swept China, in many places devolving into riots and vandalism targeting Japanese products and companies. Although many of these protests were stage-managed by the government, the Chinese began to clamp down when some demonstrations got out of control. While still exploiting the anti-Japanese rhetoric, Chinese state-run media outlets have highlighted local governments' efforts to identify and punish protesters who turned violent and warn that nationalist pride is no excuse for destructive behavior.
Presently, both China and Japan are working to keep the dispute within manageable parameters after a month of heightened tensions.* * *
China is struggling with the new role of the military in its foreign relations, while Japan is seeing a slow re-emergence of the military as a tool of its foreign relations. China's two-decade-plus surge in economic growth is reaching its logical limit, yet given the sheer size of China's population and its lack of progress switching to a more consumption-based economy, Beijing still has a long way to go before it achieves any sort of equitable distribution of resources and benefits. This leaves China's leaders facing rising social tensions with fewer new resources at their disposal. Japan, after two decades of society effectively agreeing to preserve social stability at the cost of economic restructuring and upheaval, is now reaching the limits of its patience with a bureaucratic system that is best known for its inertia.
Both countries are seeing a rise in the acceptability of nationalism, both are envisioning an increasingly active role for their militaries, and both occupy the same strategic space. With Washington increasing its focus on the Asia-Pacific region, Beijing is worried that a resurgent Japan could assist the United States on constraining China in an echo of the Cold War containment strategy.
We are now seeing the early stage of another shift in Asian power. It is perhaps no coincidence that the 1972 re-establishment of diplomatic relations between China and Japan followed U.S. President Richard Nixon's historic visit to China. The Senkaku/Diaoyu islands were not even an issue at the time, since they were still under U.S. administration. Japan's defense was largely subsumed by the United States, and Japan had long ago traded away its military rights for easy access to U.S. markets and U.S. protection. The shift in U.S.-China relations opened the way for the rapid development of China-Japan relations.
The United States' underlying interest is maintaining a perpetual balance between Asia's two key powers so neither is able to challenging Washington's own primacy in the Pacific. During World War II, this led the United States to lend support to China in its struggle against imperial Japan. The United States' current role backing a Japanese military resurgence against China's growing power falls along the same line. As China lurches into a new economic cycle, one that will very likely force deep shifts in the country's internal political economy, it is not hard to imagine China and Japan's underlying geopolitical balance shifting again. And when that happens, so too could the role of the United States.