Tokyo is concerned at signs that Beijing may be laying the groundwork to restrict access to the metals vital to manufacturing.

TOKYO, Jan 7 (Reuters) - Japan called China's ban on dual-use exports for its military "absolutely unacceptable" on Wednesday, amid a looming threat of broader curbs on vital rare earths in an escalating dispute between Asia's top two economies.

China has banned exports of some rare earth elements and other items to Japan that could be used for military purposes, straining already tense relations between the two countries following the Japanese prime minister’s recent remarks on Taiwan.

China sought to reassure Japanese businesses that its latest export controls are narrowly targeted, saying that civilian use will remain unaffected by curbs intended to limit military applications.

China is opening an anti-dumping investigation into Japan over a chemical used in the manufacturing of semiconductors, it announced on Wednesday.

The move underscores China’s leverage over global rare earth supply chains, accelerating efforts by Japan, the U.S., and allies to diversify sourcing

Japan and China agreed in June 2008 to cooperate over oil and gas resources in the East China Sea, but negotiations came to a halt two years later due to rising tensions between the two countries.

The Nikkei 225 Index retreated by 1% today, Jan. 7, to ¥52,000, down from this week’s high of ¥52,590. It dropped as the ongoing geopolitical tensions between China and Japan escalated. The China-Japan crisis has escalated The Nikkei 225 Index dropped as investors reacted to the escalating geopolitical crisis between Japan and China.

As South Korean President Lee began a state visit to China on Saturday, major Japanese media outlets closely tracked Beijing's efforts to ties.