By Robert Flint

NEW YORK (Dow Jones)--Unlike currency markets, the government of China has a long memory. It doesn't forget issues which have influenced its
relations with Japan not only for decades, but for centuries.

Diplomatic ties between Asia's two biggest economies have plunged to their lowest point since the early 1970's. The situation has become so
serious that it's spilled over into financial markets, dragging down the Nikkei 225, the benchmark Japanese equity index, as well as the yen.

The potential losses go far deeper than damage to Japanese property on the Chinese mainland. Should the frosty stretch in Sino-Japanese
relations turn into an Ice Age, billions of dollars are at stake in trade and investments.

When it comes to issues affecting national sovereignty or identity, China is prepared to let the economic chips fall where they may.

"The Chinese government can't yield to any demands that would hurt Chinese pride," said George Wei, a China expert and associate professor
at Susquehanna University in Selinsgrove, Pa.

The immediate catalyst for the current wave of tension is a history textbook which is used by only 18 of 11,102 junior high schools in
Japan, according to the Associated Press. As opposed to Mao Zedong's collection of thoughts on revolution, Japan's little-read book has
largely been ignored by the domestic public, but attracted enormous attention abroad.

The textbook has been "singled out by Japan's neighbors as evidence the country is trying to whitewash its militarist past," wrote the AP.

The row has led to harsh words from both sides and violent demonstrations in China that included the stoning of the Japanese
embassy in Beijing. Protests over Japan's campaign to assume a permanent seat on an expanded United Nations' Security Council have also figured
in. Japan's relations with Taiwan, which the Chinese government considers a renegade province, as well as sovereignty over several tiny
islands, contribute to the general level of tension.

"There's a historical and psychological dynamic at work for the leadership of Asia," said John Malott, managing director at Manatt Jones
Global Strategies and former U.S. ambassador to Malaysia. For the first time since its emergence during the 19th century, Japan is "having to
deal with a strong China," said Malott.

Substantial Economic Issues Involved

It's not purely a political or symbolic dispute, said Wei of Susquehanna University. Substantial economic issues are also involved, especially
access to energy resources, he stated.

Many Japanese corporations look to China, already the world's second-largest buyer of Japanese goods, as the cornerstone in their
export strategies, said Malott. Considering the importance China has for these corporations, it's not surprising the Nikkei or the yen would
decline because of escalating tensions between the two countries, he said.

What may be most disconcerting is that the difficulties don't seem easily resolved. Neither side has much room for compromise, considering
the political and cultural realities in both countries, said Wei.

Some China watchers suggest the mainland government could be attempting to garner international support, or at least understanding, for an
eventual veto of Japanese membership on the Security Council. So far, many Asian nations have added to the chorus of criticism over the
textbooks.

Other believe the Chinese leadership welcomes an outpouring of nationalistic spirit at a time when the divide between prosperous
coastal regions and struggling inland regions is more evident that ever before.

Given the uncertainties that will only mount the longer the dispute between Japan and China remains heated, the revaluation of the yuan
looks to be less and less of an acute issue for the Chinese government.

Despite the insistence of top officials from the U.S. and other countries that the time is now right for China to move to a more
flexible currency system, it's doubtful their mainland counterparts share that assessment.

A revaluation of the yuan has only been a hot topic for a few short years. China's issues with Japan have been around for far, far longer.
And in the eyes of most of China's citizens, they are also a lot more important.

(Robert Flint, an assistant news editor, has covered currency markets for Dow Jones Newswires for the past seven years and was previously
Beijing bureau chief and chief correspondent in Scandinavia.)