By Linda Sieg
TOKYO, July 10 (Reuters) - Japan's prime minister appears to be trying to dampen tensions with China with a proposal to buy islands at the centre of a row with Beijing, instead of letting the nationalist governor of Tokyo proceed with his own provocative plan to purchase them.
The proposal, however, could backfire, risking a replay of the bitter feud that rocked relations two years ago, diplomatic experts say, even as the Asia rivals mark the 40th anniversary of diplomatic relations amid ever-tightening economic ties.
Domestic dynamics in both China, where the world's second biggest economy faces a once-a-decade leadership change, and Japan, where unpopular Prime Minister Yoshihiko Noda's ruling party is splintering over a planned sales tax hike, could fan nationalism in both countries, making it harder to manage ties.
"Both sides have painted themselves into a corner despite common economic interests," said Lam Peng Er, a senior research fellow at the National University of Singapore's Asian Institute. "They are aware they are among each other's most important economic partners, but they have their own domestic political considerations that they can't ignore."
Noda, a conservative who has shifted Japan's diplomacy back toward a focus on U.S. security ties after his ruling Democratic Party's brief flirtation with a more Asia-centred stance, said on Saturday that the central government was considering buying the uninhabited isles.
Claimed by Japan, China and Taiwan, the islands - known as the Senkaku in Japan and the Diaoyu in China - are located near rich fishing grounds and potentially huge oil and gas reserves.
The Japanese leader's comments came months after outspoken Tokyo Governor Shintaro Ishihara first floated his own scheme for the Tokyo Metropolitan Government to purchase three of the islands, currently privately owned by Japanese nationals and leased to the central government, to "protect" them from Chinese maritime incursions.
VULNERABLE TO DOMESTIC PRESSURE
The 79-year-old Ishihara - long known as a China critic and now considering setting up a new political party ahead of an election that could come this year - has since collected 1.3 billion yen ($16.33 million) in donations for the purchase.
"Noda's intention is not to escalate the situation, but the opposite," said University of Tokyo professor Akio Takahara.
"He wants to stabilise the situation."
Some Japanese analysts, however, questioned the motives of Noda, whose support rates have slipped to below 30 percent since he took office last September. "Maybe he is attempting to score domestic points at the expense of antagonising China," said Sophia University professor Koichi Nakano.
Intentions aside, experts said the plan could end up precipitating rather than easing tensions.
"Of course, it depends on how China will react," said Shinichi Kitaoka of the Institute for International Policy Studies in Tokyo, who argued Noda did not intend to provoke Beijing. "I think the Chinese government does not want to politicise this ... but they are very vulnerable to the people's voices."
INTERTWINED ECONOMIES, EDGY TIES
Ties between the giant Asian neighbours, long plagued by Beijing's bitter memories of Japan's past militarism and by rivalry over resources and regional clout, plummeted in 2010 after Japan detained the skipper of a Chinese trawler whose boat collided with two Japanese patrol ships near the islands,
China, which has already denounced Ishihara's plan as illegal, swiftly condemned Noda's counter-proposal.
Chinese media has kept up the drum beat with a series of strongly-worded commentaries and editorials, reflecting the public pressure Beijing will be under to take stern action rather than just mouth angry words.
The official Xinhua news agency warned Japan on Monday against "playing with fire" while the widely read and influential tabloid the Global Times called for China to "discourage" economic relations to press home its point.
Anti-Japanese feeling in China is easy to inflame due to memories of Japan's occupation of parts of China in the 1930s and 1940s, while many Japanese are uneasy about China's growing economic, diplomatic and military clout.
Whether the islands dispute, which in 2010 prompted China to impose a de facto ban on exports of rare earth minerals vital for electronics and auto parts manufacturing, descends into a deep economic chill again is as yet tough to call.
Lam in Singapore said tight economic ties - trade between Asia's two biggest economies grew 14.3 percent in 2011 to a record $345 billion - would likely keep the feud from going beyond verbal jousting. "To take retaliatory measures against the other side is like cutting off your own nose, because the economies are so intertwined," he said.
But Huang Dahui, a Japan expert at Beijing's Renmin University, forecast trouble ahead.
"If Japan insists on going down this road and buying the islands for the country, then China will have to take serious measures," Huang said. "It will take the same kind of serious steps that China took last time."
Either way, few see the two countries breaking out champagne to celebrate this year's 40th anniversary of diplomatic ties.
"Despite the 40th anniversary, there is no harmonious mood at all," said a Japanese lawmaker close to Noda.
"Edgy relations will probably continue." ($1 = 79.6050 Japanese yen) (Additional reporting by Tetsushi Kajimoto, and Michael Martina and Ben Blanchard in BEIJING; Editing by Raju Gopalakrishnan)