The war of wordsbetween China and Japan over a chain of uninhabited islands has the potential to escalate in disturbing ways, and destabilize a region that is central to the world’s economic performance.

Some major Japanese brandname firms announced factory shutdowns in China on Monday and urged expatriates to stay indoors ahead of what could be more angry protests over a territorial dispute between Asia’s two biggest economies.

China’s worst outbreak of anti-Japan sentiment in decades led to weekend demonstrations and violent attacks on well-known Japanese businesses such as car makers Toyota and Honda, forcing frightened Japanese into hiding and prompting Chinese state media to warn that trade relations could now be in jeopardy.

Another outbreak of anti-Japan sentiment is expected across China on Tuesday, the anniversary of Japan’s 1931 occupation of parts of mainland China.

China and Japan do a massive amount of trade ($345 billion last year), with many component parts of that trade coming in from around the world. The provenance of the Diaoyu Islands (in the Chinese language; Japanese call them Senkaku) could disrupt all of that. In the past week, Japan purchased some of the islands, part of a World War II-era dispute (and actually before that, in the 19th century Sino-Japanese War) over who owns what territories, from private owners.

The protests in China yesterday were increasingly disturbing. Joe Weisenthal showed some examples of the slogans on his site, including this one calling for the “extermination” of the Japanese. China is currently sending 1,000 fishing boats into the area around the islands in the South China Sea. This could lead to a response, if Japanese Coast Guard authorities try to repel the fishing boats.

How could a small chain of uninhabited islands provoke this much anger and hatred? GlobalSecurity.org runs it down. A series of vague statements and blunders arising out of the post-WWII administration of territory can be blamed. However, this surely stands as a proxy for a global economic slowdown that has hit China particularly hard. It’s better to focus on the treachery of an enemy like Japan than the slowing of the economy and decrease of living standards.

If China tries to reassert control over the islands, the US may be bound by a Mutual Cooperation and Security Treaty with Japan to involve itself (and failing to do so cedes to the Chinese argument that the Diaoyu are their territory). The larger story, however, is that the global slowdown is provoking civil unrest. You can already see stateside effects of the global slowdown in the manufacturing data. QE3 might have its best effect for the US in lowering the value of the dollar and promoting exports, but you have to have sales for that. And this slowdown, which will only be prolonged by a China-Japan dispute, militates against that.

Photo by Remko Tanis under Creative Commons License