The fallout from the Diaoyu Islands will have global economic consequences, experts said, as the International Monetary Fund downgraded its world outlook.
Concerns grew after four State-owned banks, including the Industrial and Commercial Bank of China, the world's largest lender by market value, confirmed that it will not attend the IMF-World Bank annual meeting that opened on Tuesday in Tokyo.
Central bank governor Zhou Xiaochuan and deputy governor Yi Gang are still on the scheduled event list on the IMF's website but the itinerary of Finance Minister Xie Xuren has not yet been decided, a ministry spokesman said.
The news was the latest indicator of strained ties between the world's second and third-largest economies as a result of the Japanese government's decision in September to "purchase" the Diaoyu Islands, which belong to China.
"Tensions between the two countries, with annual trade worth $350 billion, will definitely put pressure on the world economy," said Jiang Yuechun, director of the Department for World Economy and Development at the China Institute of International Studies.
The affected areas will spread gradually from trade, to financial cooperation before becoming global, he said.
"This will be a smaller version of the collapse of Lehman Brothers which will cause a ripple effect and harm the global economy," said Yao Haitian, a researcher from the Institute of Japanese Studies at the Chinese Academy of Social Sciences.
Hiromasa Yonekura, chairman of the Japan Business Federation, on Tuesday told Shinzo Abe, leader of Japan's opposition Liberal Democratic Party, about his concerns over the issue.
The deterioration of Japan's ties with China is "exerting influences on the economic circle", Japanese newspaper Sankei Shimbun's website quoted Yonekura as saying.
The IMF lowered the growth forecast on Tuesday for both China and Japan by 0.2 percentage points from its projections in July. The forecast for China stands at 7.8 percent, and Japan's stands at 2.2 percent.
