Photo: The Canadian Press. All rights reserved.

In this Sept. 16, 2012 photo, a cyclist looks back at badly-damaged Japanese supermarket Aeon following an anti-Japan demonstrators' attack in Qingdao in Sandong Province, China. aren't even an economic backwater.(AP Photo/Kyodo News) 

The craggy island specks in the East China Sea aren't even an economic backwater. They have no factories, no highways, no shops, no people, only goats. But the high-pitched row between Beijing and Tokyo over their ownership is exacting a growing toll on Japan, threatening to send its recovery from last year's disasters into reverse.

Sales of Japanese cars in China are in a free-fall. At the China Open last weekend, a representative of Sony Corp., which is a sponsor of the tennis tournament, was loudly booed at the title presentation for the women's final. Chinese tourists are cancelling trips to Japan in droves. And some analysts say Japan's economy will shrink in the last three months of the year.

The business and economic shockwaves come after Japan last month nationalized the tiny islands, called Senkaku in Japan and Diaoyu in China, which were already under Tokyo's control but are also claimed by Beijing. The move set off violent protests in China, and a widespread call to boycott Japanese goods. Toyota Motor Corp. and Honda Motor Co. dealerships were burned down in one city.

Seeing footage of Toyota cars getting smashed by angry rioters, Toyota President Akio Toyoda had looked almost tearful, confiding in reporters: "I couldn't bear to watch. It hurt as though I was getting beaten."

A report by J.P. Morgan, released Tuesday, projected Japanese auto exports to China will crash 70 per cent during the October-December period. The export of auto parts will slip by 40 per cent, about the same drop estimated for exports of other consumer products, such as electronics, it said.

The aftermath of the latest phase of the sizzling territorial spat with China will cause Japan's economy, the world's third biggest, to shrink 0.8 per cent in the fourth quarter, according to J.P. Morgan. It had previously forecast no growth in the quarter.

J.P. Morgan chief economist Masaaki Kanno fears the fallout could get worse in the months ahead, as the September sales numbers for Japanese automakers only account for damage that started the middle of the month.