The row over Senkaku islands off Okinawa has again come to the fore in Sino-Japanese relations. The media is reporting as if this were a contest for the oil and gas, which allegedly lie in the surrounding seabed. But for Japan it is a question of guarding its own sovereignty (it even has not embarked upon exploitation of oil and gas). In a broader sense it is a question of maintaining the status quo in East Asia. Let me explain why---
(This is my personal view. You can refer to Japanese official version at:
http://www.mofa.go.jp/region/asia-paci/senkaku/senkaku.html )

Geography
Japanese territory extends far beyond Okinawa; its southernmost island is less than one hundred miles away from Taiwan.
(Please see a map at:
https://www.google.co.jp/search?q=%E5%B0%96%E9%96%A3%E5%88%97%E5%B3%B6%E3%80%81%E5%9C%B0%E5%9B%B3&hl=ja&rls=com.microsoft:ja:IE-SearchBox&rlz=1I7_____ja&prmd=imvns&tbm=isch&tbo=u&source=univ&sa=X&ei=PHcGUOBI8aOIB9DGkcEI&ved=0CFkQsAQ&biw=1024&bih=513)
Here you can see the Senkaku islands in almost equidistance between Japanese southern islands and Taiwan, but the distance to the Chinese mainland is far larger.

History
China claims early discoveries of these islands by its nationals, but its governments had not established effective control of the Senkaku islands (remember that Columbus discovered America, but neither Spain nor Genoa now claims the U.S.A.). In 1885, ten years before the Sino-Japanese War, one Japanese national applied to the Japanese government for a permission to build a fish-processing factory on the island. At that time the islands were not inhabited and were not administered by any government. But the Japanese government, apparently in fear of unnecessarily provoking the Qing Dynasty, procrastinated with giving the permission. The Japanese national went on for himself and built the factory without permission.

After the Sino-Japanese War broke out in 1894, the Japanese government formally merged the islands with Okinawa Prefecture (Okinawa in its turn had been annexed to Japan in 1874). The ownership of the Senkaku Islands did not become an issue in the negotiations for Peace Treaty in 1895.

After the Sino-Japanese War (and until 1971 as indicated below) neither Qing Dynasty nor ensuing Chinese governments claimed these islands, although the fish-processing factory operated until 1940 under Japanese jurisdiction (after that the islands became uninhabited).

In 1946, four months after the end of the Pacific War, the Allied Forces shifted the administration of the islands from the Japanese government to themselves. Even after the conclusion of San Francisco Peace Treaty in 1951 the Senkaku Islands remained under jurisdiction of the U.S.A. (it was based on the Article 3 of the Treaty). The U.S.A. used the islands as shooting range. Neither Kuomintang government nor the new PRC government ever disputed these arrangements. In the initial years of the PRC rule the islands were peacefully listed as Japanese territory in their atlas book (the same was the case in Taiwan).

China suddenly starts claiming the islands after discovery of oil

A change occurred when the United Nations Economic Commission for Asia and the Far East (ECAFE) conducted a seabed resources research of the area in 1968. It was pointed out that the continental shelves around the islands might have oil and gas reserves. On June 11th of 1971 Taiwan Foreign Affairs Department issued a statement declaring the ownership of the islands, and on December 30th of 1971 PRC Foreign Affairs Department issued a similar statement. Japanese Foreign Ministry immediately retorted these claims by publishing a statement to verify its ownership of the islands. Meanwhile, the jurisdiction of the Senkaku Islands had been returned to the Japanese government together with the Okinawa Islands on June 17th of 1971.

Japan and mainland China reopened diplomatic relations in 1972 and signed a Peace Treaty in 1978; the Senkaku Islands did not become a subject of the negotiations. Deng Xiaoping, answering to a related question in a press-conference in Japan (October 1978), said that this matter should be shelved ("for ten years to come, for example", he said) until future generations find some good solutions. However, as China's power grew, the Chinese government started to unilaterally and fictitiously list the islands as part of its territory in various concerned laws, and promulgated this to its people, while the Japanese government kept exerting effective control of the islands.

This has made the Chinese government a prisoner of its own argument; it would lose face in public, whenever the Japanese rule of the islands becomes visible for the Chinese people. Therefore, the Chinese government does not want that Japan strengthen its rule on the islands. As China does not want to decisively impair the relations with Japan (money and technology from Japan are still vital for China), it so far limits itself to a subtle game to grope for opportunities to expand its power on the islands with its vessels occasionally violating the territorial waters around the Senkaku Islands (the Japanese Maritime Safety Agency's vessels always make them leave).

Meanwhile, in 1997 the both countries signed a treaty on fishing. In accordance with the treaty Chinese fishermen are entitled to free fishing in the EEZ (Exclusive Economic Zone--200 nautical miles) except for the territorial waters. There is no agreement about oil and gas development in the region.

A war of nerves on the status quo

So, the basic picture of the issue is as follows: some gentleman A suddenly starts claiming that something B, belonging of a gentleman C, is actually his, writes down a memo that B belongs to him, and awaits a moment when balance of power with the gentleman C turns in his favour.

If this will be brought for a judgment by the ICJ (International Court of Justice), the odds would be for Japan. Two years ago, when I made a lecture at remote Tartu University in Estonia, one Chinese student approached me at the ensuing reception and asked me in a polite but blaming tone why Japan does not return the islands to China (when I explained to her that if China keeps going with its practice of delayed claim ["estoppel" in judicial jargon], it may eventually claim the whole earth, she withdrew).

A Russian diplomat may have a similar feeling toward the Japanese in the "Northern Territory" issue, but the four islands, which Japan claims, were recognized as Japanese territory in the first treaty between Japan and Russia in 1855, they were militarily occupied by the Soviet Union toward the end of the Pacific War (about 3000 Japanese inhabitants were forcibly deported to mainland Japan. There was no Russian inhabitant before that), and the Japanese government has been claiming these islands for more than sixty years after the occupation.
The Senkaku issue today is not so much an economic issue (oil, gas and fishing) as a political issue; Japan does not want to compromise its sovereignty and China does not want to lose its face. This precarious game could go on without armed conflicts, as long as they believe that the status quo is not impaired.

Self-restraint on both sides

This time the Chinese suspect that Japan attempt to change the status quo. Shintaro ISHIHARA, Governor of Metropolitan Tokyo and ambitious patriotic statesman (in two months he will be eighty years old), recently declared in New York that the Tokyo City Government was considering to purchase the ownership of the Senkaku Islands from one Japanese national who somehow came to own the islands. Prime Minister Noda intervened, offering a purchase by the national government; by so doing things would be under better control by the national government.

Such is the situation in Japan. Today's political situation in China may be more fluid, because posts are being redistributed on the threshold of the Communist Party Congress (General Secretary Hu Jintao will be replaced by Xi Jinpin). This generates a fierce battle among powerful groupings. And on top of that the fall of once mighty Chongqing secretary Bo Xilai seems to have left some people frustrated in the People's Liberation Army. There may well be an attempt to destabilize the situation around the islands, because it would put the Party leadership in an inconvenient position.

In such a milieu international support for maintenance of the status quo and a call for self-restraint are needed. If the islands be taken by forcible means, it may eventually spead to Taiwan and Okinawa. The Japan-U.S. alliance would be put to a severe test. However, openly pressurizing either of the parties would be counter-productive. A subtle handling is needed.