As the dispute over the Diaoyu Islands continues, economic tensions between China and Japan are still under stress. Due to anti-Japanese protests, Japanese automakers have been told to lie low. Amid these warnings, the Financial Times reports Mazda has been the first Japanese automaker to report a sharp decline in sales:

Japanese carmakers appear to be suffering significant sales declines in China over a flare-up over disputed islands in the East China Sea, after Mazda reported that sales in the country fell 35 per cent year on year in September.

Thousands of Chinese and Japanese tourists have cancelled trips to each other’s countries. Chinese customs officials are also reported to be holding up imports of Japanese electronics components, chemicals and other goods at Chinese ports.

Mazda is Japan’s fifth-largest carmaker and has a relatively small presence in China. But analysts say its problems are shared by other Japanese groups

Japanese carmakers were already on the defensive in China, a market whose blistering growth in recent years has made it a strategic priority for rival European, US and Korean brands. Supply disruptions caused by the 2011 earthquake compounded already existing issues of declining competitiveness, say auto analysts in China.

While Japanese automakers suffer, Korean automakers are thriving in China. This comes as China’s interest in the Korean wave grows:

South Korea’s automakers reported record sales in China last month while Japanese manufacturers posted declines after anti-Japan protests over disputed islands escalated in the world’s largest vehicle market.

Hyundai Motor Co., South Korea’s biggest automaker, and its affiliate Kia Motors Corp. (000270), sold a combined 127,827 vehicles, compared with the previous record of 116,763 units in September last year, Hyundai said in an e-mailed statement yesterday. The Seoul-based companies expect to exceed their 2012 sales target of 1.25 million units, it said.

“Anti-Japan sentiments in China began to affect car sales from September, and Korean carmakers were one of the beneficiaries with other global companies,” said Eric Choi, a Seoul-based auto analyst at Shinhan Investment Corp.

September sales in China of Hyundai Motor and Kia Motors were driven by the Langdong and K2 models respectively, according to the statement. The Langdong had sales of 15,243 units, compared with more than 10,000 in its debut in August while Kia sold a record 15,656 units of K2.

Although the territorial dispute has affected economic ties between China and Japan, Japan is planning to change their PR campaign in the dispute, from the Wall Street Journal:

Instead of taking the view that there’s no need to proactively promote its cause, Japan plans to step up a PR campaign outlining its claim to the disputed Senkaku Islands. The isles are administered by Japan but claimed by China, where they are known as the Diaoyu.

“We had refrained from actively asserting our position on the basis that a territorial dispute doesn’t exist,” Japan Foreign Minister Koichiro Gemba told reporters in New York last week, according to Japanese media.

“China is already suspicious of Japan’s intentions with the island purchase,” said Kiyoshi Takai, Tokyo’s J.F. Oberlin University professor of media and an expert on China.

“If Japan’s goal is to further escalate hostilities, the campaign is a fine idea,” Mr. Takai cautioned. “Right now is not the time to send the wrong message.”