China's 12th five-year plan, for 2011-2015, aims to transform the economy from export-led growth to consumer-led growth. The problem is that China's exports have been hard hit by the slowdown in the global economy. As a result, China's leaders are in a panic as they realize that they have much less time for making the transition from export-led growth to consumer-led growth than they expected. Their immediate response has been to raise minimum wages, which is worsening the weakness in exports by raising labor costs.

Tokyo's recent decision to buy contested islets in the East China Sea infuriated Beijing, prompting widespread demonstrations in China and a boycott of car and other brands made in, or by, Japan. Nationalists in both countries are inflaming the tensions between the two nations. Over the past 12 months through August, China exported $153.1 billion of goods to Japan and imported $186.7 billion.

Those trade flows are already getting hit by the dispute as Japanese auto sales are plummeting in China. Last month, a Chinese driver of a Japanese car was left partially paralyzed after being beaten by an anti-Japanese mob. People have been debating over social media the risks of purchasing a car from Japan. Toyota said it sold 44,100 vehicles in China in September, down 49% year-over-year. Nissan said its sales in China fell to 76,066 vehicles last month, down 35%. Honda reported a 41% drop to 33,931 vehicles.

Source: http://blog.yardeni.com/2012/10/china-vs-japan.html">Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.