Japan said Wednesday it has begun processing applications that would allow domestic companies to test-drill in contested waters in the East China Sea where China plans to launch full-scale drilling for natural gas.

The move comes on the heels of heated anti-Japanese demonstrations in various cities across China and could exacerbate the already strained political relations with its largest trading partner, observers said.

Prime Minister Junichiro Koizumi dismissed such fears.

“This is just (regular) procedure,” Koizumi claimed to reporters later Wednesday. “We will proceed (with handling the applications) in an orderly manner.”

Oil companies first applied for rights to conduct exploratory drilling for oil and gas in the area in the 1960s to the then Ministry of International Trade and Industry.

The applications have been on hold for four decades, however, because the area lies just within Japan’s self-claimed exclusive economic zone, which China has not formally acknowledged. Beijing asserts that its EEZ extends farther than the median line set by Japan.

China is the world’s second-largest consumer of oil and Japan is the third-largest. And in an age of spiking energy prices, China’s test-drilling in adjacent waters has raised concerns among government and industry officials in Tokyo that Beijing is targeting Japan’s underwater resources.

On April 1, MITI’s successor, the Ministry of Economy, Trade and Industry, said it completed a geophysical survey that shows two of the natural gas fields China is currently tapping, roughly halfway between Okinawa Prefecture and China, may extend into Japan’s EEZ.

METI chief Shoichi Nakagawa said at the time that Japan would begin to process test-drilling requests if China did not comply with Tokyo’s requests for details on its gas projects and a halt in ongoing exploration in a week’s time.

In explaining the timing of Wednesday’s announcement, a senior Foreign Ministry official said the government thought it best to start granting drilling rights to Japanese developers before Foreign Minister Nobutaka Machimura’s Sunday visit to Beijing, where he is to meet with his Chinese counterpart, Li Zhaoxing.

“We thought it would give a bad impression if Japan granted the drilling rights after the two ministers discussed the (drilling) issue,” reckoned the official, who asked not to be named.

He also said that if Japan’s decision to start processing applications was delayed, it would give the wrong impression to the Chinese side that Tokyo was only bluffing and would not actually grant developers rights.

Chief Cabinet Secretary Hiroyuki Hosoda told reporters in the morning that the decision doesn’t mean there isn’t a chance of amicably resolving the matter.

“We would like working-level talks between the two countries on this and other issues pertaining to Sino-Japanese relations as a whole to continue,” he said.

METI officials are studying applications for exploratory drilling in a 3.6 million-hectare area within Japan’s claimed EEZ.

It will take two to three months for oil companies to get test-drilling rights, after which it will take at least a month before actual drilling can start. Drilling could cost at least 3 billion yen, according to officials.

In addition to providing monetary support, METI will work with the Foreign Ministry, the Defense Agency and the Japan Coast Guard to ensure the safety of the Japanese firms involved, the officials added.

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