On the anniversary of the 1931 Japanese invasion of China, tensions between the world's second and third largest economies are escalating. The Associated Press reports that late Sunday, China broke off high-level government contacts with Japan "over the extended detention of a fishing boat captain arrested near disputed islands. The rare move pushed already tense relations to a new low, and showed China's willingness to play hardball with its Asian rival on issues of territorial integrity." The latest straw on the camel's back was the detention of a Chinese fishing boat and its captain, after it hit two Japanese Coast Guard boats in the East China Sea, a territory claimed by both countries, as previously reported by Zero Hedge.Furthermore, " the captain's detention for further questioning — pending a decision about whether to press charges — has inflamed ever-present anti-Japanese sentiment in China." China reaction has been swift and merciless, proving just great the ego of the now second largest economy, and largest holder of US debt, has become: "Beijing has suspended ministerial and provincial-level contacts, halted talks on aviation issues and postponed a meeting to discuss coal." Also, attached pictures of Japanese flag burning can not instill much confidence in Sino-Japanese relations stabilizing any time soon.

More from AP:

"If Japan acts willfully, making mistake after mistake, China will take strong countermeasures, and all the consequences will be borne by the Japanese side," Chinese Foreign Ministry spokesman Ma Zhaoxu said in a statement.



Takeshi Matsunaga, a spokesman for Japan's Foreign Ministry, said the reported measures were unilateral.



"We ask China to respond calmly so as not to escalate the problem further," he said.



The move raises questions about cooperation between China and Japan at international forums such as this week's summit in New York on United Nations goals to fight poverty, which Chinese Premier Wen Jiabao and Japanese Prime Minister Naoto Kan are attending.



It also throws into doubt whether China's President Hu Jintao will attend the annual summit of Asia-Pacific Economic Cooperation forum leaders to be held in Yokohama, Japan, in November. Leaders of the two countries were also due to attend a G-20 summit in Seoul the same month.



This is the lowest bilateral relations have fallen to since they were strained under former Prime Minister Junichiro Koizumi, whose repeated visits to a war shrine in Japan during his 2001-2006 term angered China.



The two countries halted ministerial-level defense talks for three years from 2003. But even in those tense times, Japan's foreign minister visited China in 2004 and met Wen.



China's decision to cut high-level contacts appears to reflect a worry about losing face in front of the Chinese public which might trigger a nationalistic backlash against the government if it appears weak or unable to protect the country's sovereignty.



Already, the number of Chinese tourists visiting Japan has plunged because of the dispute, CCTV said. On Friday, a Beijing-based food company announced it would cancel a planned group tour to Japan for 10,000 people to reward employees, their families and business partners.



Beijing made the announcements shortly after a Japanese court approved a 10-day extension of captain Zhan Qixiong's detention.



"His detention was extended for further questioning. He will be held until Sept. 29," an official at the Naha Public Prosecutor's Office in Okinawa, southern Japan, said on condition of anonymity because he was not authorized to speak to the media.



Under Japanese law, prosecutors can hold a suspect for up to 20 days while deciding whether to file formal criminal charges. The first 10-day detention period ended Sunday.

And one can be absolutely certain, that a direct result of this action will be the massive gobbling up of even more JGBs in an attempt by the PBoC to once again streghten the yen, as Central Bank warfare escalates, forcing the Bank of Japan to intervene yet again in the FX market, further angering Europe, whose currency has surged by over 10% in the past week, and making life for investors on either side of the Atlantic and Pacific ever more unpredictable, in a landscape in which the biggest marginal buyers (and sellers) of securities are increasingly the central banks themselves. The only winner out of this: the US Treasury department which buys even more time to proceed with a failed Keynesian policy of pereptually debt-funded, deficit creation.