The recent and unfortunate territorial dispute between Japan and China over the islands called, respectively, Senkaku by Japan and Diaoyu by China, are not really about the land itself, but likely more about the rights to the potentially significant oil and natural gas reserves in the area (see CNN's disputed islands sidebar).
The most recent set of problems over these islands erupted in April of this year and have been escalating since then. The most recent dispute is in response to Japan's decision and efforts to nationalize the privately owned islands by purchasing them from a Japanese family. Last week there was an additional escalation of public tension and unrest in China where protests against the Japanese nationalization efforts of the islands have begun to turn more violent (see CNN's discussion of the history of the situation).
Escalating protests and boycotts
During last week's protests, which are increasingly heated and tense, a number of Japanese owned factories and facilities in China have been attacked, burned, blocked by angry protesters, and similar events. The result has been a temporary shut-down of three (3) Panasonic facilities as well as Japanese automaker facilities around China. Fire was reported at a Panasonic part's plant and a Toyota dealership in the Chinese city of Qingdao (see this report from Bloomberg Buisnessweek). As the rhetoric in China continues to intensify alongside of the violence, there is growing concern of the economic impact from Chinese demonstrators demanding boycotts of Japanese businesses and products. There have been protests in over 20 cities, including internationally, by Chinese demonstrators (see this discussion from Bloomberg Businessweek).
Economic and supply chain concerns
There is presently concern as to the impact of not only the current, temporary shut down of Japanese manufacturing facilities in China, but should the tensions increase and/or spread, the possibility of additional shut downs could lead to supply chain disruptions for a number of industries, the semiconductor and electronics industry included.
Additionally, the economic fall-out of these demonstrations and boycotts is also likely to negatively affect Japan just as auto sales in China, a major auto purchasing nation, is heating up; Japanese auto sales were down last month while other foreign auto makers experienced 10% increases, according to this report by Bloomberg Buisinessweek.