China Japan Island Dispute:Anti-Japan protests spread amid reports that Chinese boats are heading for Senkaku islands.

Relations between Asia’s two biggest economies have faltered badly, hitting their lowest point in decades on Tuesday when China marked the highly charged anniversary of Japan’s 1931 occupation of its giant neighbour.

Tension had run high on land and at sea, with four days of major protests in cities across China and Japanese and Chinese boats stalking each other in waters around a group of East China Sea islands, known by Japan as the Senkaku and by China as the Diaoyu.

“Japan should rein in its behaviour and stop any words and acts that undermine China’s sovereignty and territorial integrity,” Xi said in a meeting with visiting U.S. Defense Secretary Leon Panetta, according to Xinhua news agency.

Xi, whose recent absence from public engagements sparked a series of rumours but was eventually pinned down to a back injury, is tipped to replace Hu Jintao as party chief this year.

Tokyo’s nationalist governor, Shintaro Ishihara, floated a plan for metropolitan authorities to buy the islets, prompting Japan’s government to buy them instead in a bid to defuse the crisis.

“If Japan yields to China on this problem … China’s hegemony in Asian waters would easily be established,” Ishihara told the Tokyo Metropolitan Assembly.

Japanese businesses shut hundreds of stores and factories across China, some sending workers back to Japan in fear the protests would get out of hand. Japan’s Beijing embassy had been under siege by protesters throwing water bottles, waving Chinese flags and chanting slogans evoking Japan’s occupation.

“It seems the protests in front of our embassy have subsided,” the embassy said in an email to Japanese citizens.

Outside the embassy, police moved on a lone protester who had been shouting “Defeat small Japan” early on Wednesday.

Reports of China maneuvering 11 warships into Japanese-controlled waters near the resource-rich, disputed Senkaku Islands sent the international media into a tizzy over the prospect of a war between the two fierce rivals that could potentially put the United States into the position of having to choose between an important ally and its biggest trading partner.

“That isn’t going to happen,” said the source, unauthorized to talk to the media about this matter and declining to be named. Japan has claims to the island going back to the Meiji era, which mainly took place in the last half of the 19th century, the expert added.

[adrotate banner=”46″]