As a Japanese national in the U.S., I have an opportunity to observe the situation from the outside. I saw people worry not only about the economic consequences, but also the potential of nationalist sentiment peaking in Japan.
Due to the bitter memory of WWII, strong nationalism has been somewhat taboo in Japan. The Japanese have a strong ethnic identity, but at times it has caused a friction in neighboring countries. Ultra nationalists think the pacifist article 9 of the Japanese constitution, which restricts the use of military force in other countries makes Japan weak. They also feel that the Japanese are repeatedly forced to apologize to the neighboring Asian countries, which Japan invaded during the war.
On the other hand, some people want to protect article 9 of the Japanese constitution and insist on permanently denouncing the use of any kind of military force, cutting the not-so-small defense budget, and allocating it to education and other social programs.
For 65 years, Japan hasn't exercised any military muscle at all, even though the country is well armed. It was a big controversy when the Self Defense Forces were deployed for an U.N. peace keeping mission in a non-combattant role. The Japanese people are wondering, "Can we do it, if it's really necessary?"
There are many comments on the Japanese social networking sites, most wanting to assert Japan's legitimacy of the ownership of the Senkaku islands. Right wing nationalists who hate the Chinese and the Koreans are writing nasty and malicious comments. A few radical people took the matter into their own hands in Japan and carrying out minor acts of malicious public nuisance.
The Japanese news media is not reporting the internal turmoils of the Chinese government which must have strongly influenced the problems of the disputed islands. It's not hard to monitor the Chinese news from China, because even I can do it from my tiny apartment in New York City. I thought it's a shame that The New York Times, The Washington Post, and the other news media outside of Japan had better analysis of the issue than the Japanese media.
The news from Japan details the demonstrations such as factory damages, the number of people marching, and so on. One of my online friends who lives in Shanghai particularly lamented about a news report of 1,000 fishing boats sailing out to the disputed islands for demonstration. Several Japanese news outlets said that the Japanese coast guard was waiting around the area to receive them. But it was a false alarm. If the Japanese government and news media had properly monitored several Chinese language news stations, they would have known that those fishing boats had safely returned to the shore already after their daily fishing excursions.
Did the Japanese media intentionally report false information to make the story more exciting, or are both the Japanese government and media incompetent? Asian countries should have sufficient diplomatic skills to resolve this problem peacefully. Also the Japanese government and media should provide better information to the Japanese people, so that citizens can understand this whole complex issue.