Editor’s Note: The following report is excerpted from Joseph Farah’s G2 Bulletin, the premium online newsletter published by the founder of WND. Subscriptions are $99 a year or, for monthly trials, just $9.95 per month for credit card users, and provide instant access for the complete reports.

WASHINGTON – The dispute between China and Japan over the Senkaku/Diaoyu islands is expected to have worldwide repercussions in an already fragile economy – and it eventually could draw in the United States as the dispute affects global economic conditions, regional analysts said in a report in Joseph Farah’s G2 Bulletin.

The dispute began with the Japanese government’s recent purchase of the privately held Senkaku Islands, as the Japanese call them, or Diaoyui Islands, as the Chinese refer to them. The islands are close to the Chinese mainland coast just north of Taiwan which China also claims. The closest Japanese possession to the Senkaku/Diaoyui islands is Okinawa.

Nevertheless, the area surrounding the islands is a rich fishing area and potentially has major energy resources.

In response, protests against Japanese companies in China sprang up, prompting a number of them to close their doors temporarily until the increasingly violent demonstrations subsided.

Now, the Chinese government is encouraging the boycott of Japanese products and is sending patrols and monitoring vessels to the islands.

Analysts say that the Chinese-Japanese dispute could involve the U.S., since Beijing sees Washington siding with Tokyo.

Historically, Japan has claimed the islands since 1895. They came under U.S. control following World War II but then returned to the Japanese government in 1972. The islands have been in private hands since then until the Japanese government purchased them a few weeks ago. And that’s when tensions heightened.

Nevertheless, the Chinese have made a big deal out of claiming the islands for themselves and any attempt now to walk back their claims would be interpreted as a sign of weakness by the Chinese population, who still don’t have a great deal of love for the Japanese since the invasion of Manchuria in 1931.

The Chinese foreign ministry issued a statement last week that warned that the “gravely destructive consequences of Japan’s illegal purchase of the Diaoyu Islands are steadily emerging, and the responsibility for this should be borne by Japan.”

In addition to Japanese companies having had to keep their workers at home in China, the Chinese government has called for a boycott of Japanese goods and is sending more fishing vessels to the islands.

The dust-up between China and Japan over the islands arose just as U.S. Defense Secretary Leon Panetta visited Japan and announced placing a second anti-ballistic missile radar system in Japan. While the U.S. says it is to defend against North Korea, the Chinese believe it is aimed more at them.

The dispute is affecting Chinese-Japanese trade, which amounted to some $345 billion last year, making China Japan’s second largest trading partner.

The dispute with Japan over the Senkaku/Diaoyu islands also comes at a time when China is asserting greater pressure on its neighbors such as Vietnam and the Philippines over claims to maritime areas in the East and South China Sea which have great potential energy resources.

As China continues its dispute with Japan, it will find it increasingly difficult to back down out of concern that it would be interpreted as a sign of weakness, especially in the eyes of the Chinese population. It also could encourage China’s neighbors to harden their positions even more over claims in the East and South China Seas.

If the Chinese people see the government as backing down and interpret it as a sign of weakness, it could prompt Chinese protests for other unrelated reasons — something which Beijing won’t tolerate.

There is a low expectation that the dispute will lead to a military conflict but, if prolonged, will involve the U.S,. which will have to take sides, probably backing Japan’s claims which will only complicate U.S.-China relations even more.

Keep in touch with the most important breaking news stories about critical developments around the globe with Joseph Farah’s G2 Bulletin, the premium, online intelligence news source edited and published by the founder of WND.

For the complete report and full immediate access to Joseph Farah’s G2 Bulletin, subscribe now.

Note: Read our discussion guidelines before commenting.