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How debts and double-dealing sparked Japan-China islets row

By Antoni Slodkowski

OMIYA, Japan (Reuters) - The road to China's breakdown in relations with Japan began here - a sleepy Tokyo suburb that is home to the reclusive real-estate investor at the centre of the explosive property deal that enraged Beijing.

Surrounded by concrete walls, security cameras and warnings of guard dogs, Kunioki Kurihara has shunned the spotlight in his compound since closing a deal to sell three uninhabited islands in the East China Sea to Japan's government in September.

The islands, known as the Senkaku in Japan, are also claimed by China, where they are known as the Diaoyu and deemed part of its national territory for centuries.

Their $25.5 million sale sent tension soaring between Tokyo and Beijing. Seen in Beijing as a nationalisation of private property, it sparked violent protests and a boycott of Japanese goods. Chinese ships were dispatched to patrol disputed waters.

Participants close to the deal describe how a property magnate with heavy debts clinched a deal he had sought with the government for at least six years by playing it off against a fiery nationalist - Tokyo's then-governor, Shintaro Ishihara.

Ishihara has since resigned to return to national politics at age 80. It was his initial offer to buy the islands that led to a quick government purchase - at a markup of at least half a million dollars.

Kurihara, 70, declined a request for an interview.

His younger brother Hiroyuki, who describes himself as family spokesman, has used his sudden fame to promote a book, "Senkaku Islands for Sale" -- and a longshot plan to turn the islands into a centre for medical tourism.

"It's odd that they owned the islands for so long," said Jeffrey Kingston, director of Asia Studies at Temple University in Japan. "It's only now that the ante is up."

FROM FISH PROCESSING TO FLASHPOINT

Mostly rocky outcroppings which serve as a home to migratory birds and a herd of wild goats, the islands are closest to Taiwan, about 210 km (125 miles) northeast of Taipei and 1,800 km from Tokyo.

The largest, Uotsurijima in Japanese, rises up like a forest-canopied mountain from the sea, with no port for landing. A little larger than New York's Central Park, the island's highest point tops the Eiffel Tower.

The Kuriharas obtained the islands for an undisclosed amount in the 1970s from Zenji Koga, a journalist from Okinawa, an island to the northeast. Before World War Two, his father had run a fish processing plant on Uotsurijima.

Japan annexed the islands in 1895 and Koga rented them, then bought them in 1932, when they fell under the jurisdiction of colonial Taiwan, also annexed by Japan.

Taiwan also claims the islands.

The Kuriharas obtained the islands after the United States returned Okinawa to Japan in 1972 and interest grew in potential oil and gas deposits.

But the family's focus was on commercial and residential property in Omiya, a legacy of wealth built up in the rice trade. Records show Kunioki pledged at least 75 real estate parcels in Omiya and Tokyo against his bank borrowing.

One building next to his house served until recently as headquarters of a Buddhist-affiliated group, Kenshokai, which preaches that Japan faces an apocalyptic reckoning and invasion by China. The group, a former Kurihara tenant, has described the isles as a potential flashpoint in that conflict.

In the summer of 2011, Kurihara approached Akiko Santo, a lawmaker from the opposition Liberal Democratic Party, saying he wanted to try to sell the islands to Tokyo governor Ishihara.

Ishihara became internationally known in 1989 for his best-seller "The Japan that Can Say No," an argument to reduce Japan's reliance on the protection of the United States.

"THE STRONGEST PROMISE YOU CAN MAKE"

Kurihara described himself as an admirer of the governor and said he wanted to sell him the islands, Santo said. The two met at the Omiya compound in September 2011 and later in Tokyo's fashionable Ginza district, where they reached a verbal deal.

"They shook hands and gave their word to each other as men, which in Japan is the strongest promise you can make," she said.

In April, Ishihara announced a plan to buy the islands, raising $17 million from private donors. His deputy, Vice-Governor Naoki Inose, also an author, estimated Kurihara's net debt at about 1.5 billion yen, almost $19 million.

"I'm not stupid. I checked his mortgages," Inose told Reuters.

Records show Kurihara had a credit line of almost $50 million, or 4 billion yen by 2012. The funding was provided by Bank of Tokyo-Mitsubishi UFJ, Japan's largest lender, and the Saitama Shinkin Bank, a local bank.

The final offer from Ishihara's team was just over 2 billion yen, nearly $25 million, two people close to the talks said.

But Kurihara had also been talking to the government.

Prime Minister Yoshihiko Noda saw a national bid as a way to head off a more damaging confrontation with China.

"He first approached us about the islands in 2006," said Akihisa Kameda, the official responsible for negotiating the deal.

Kameda said Kurihara had earlier rejected proposed swaps for forests or fields elsewhere in Japan. With the Tokyo governor offering cash, the government was forced into the bidding.

By late June, Kurihara had grown worried that the sale could be tied up in Tokyo's local parliament or derailed by assessors, Santo said. He broke off talks with Ishihara's team with a curt message: "I decided to sell the islands to Japan."

Government negotiators offered Kurihara the higher price, people involved told Reuters, and fast-tracked a deal that would have taken up to a year with a private-sector buyer.

Kameda offered few details on the price, saying that it reflected a calculation of what it would cost to "replace" the islands, without further explanation. Officials declined requests by Reuters to see documents related to the valuation and sale.

On September 11, Japan announced it had nationalised three of the Senkaku islands, generating outrage in China, where a Communist Party Congress opened last week to put in place new leaders who will face the challenge of re-engaging with Japan.

"Japan should have pressed more for China to accept that the Senkaku are Japanese islands," Kurihara's brother, Hiroyuki, told Reuters.

Kazuko Kurihara, a younger sister, still holds the second-largest island, Kubajima, and in May renewed a 20-year lease to the Defence Ministry. Kubajima has been made available to the United States as a bombing range, last used in 1978.

Ishihara has told aides he wants to fund building projects on the islands. That would strain ties with China further.

Santo said she understood Kurihara's pursuit of the highest offer. "For him, business considerations were the most important. After all, he is a real-estate broker," she said.

($ = 80.1400 Japanese yen)

(Additional reporting by Junko Fukita and Kimiteru Tsuruta, Writing by Kevin Krolicki, Editing by Ron Popeski)

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