The flare-up between China and Japan over the Diaoyu Islands will have a limited effect on the GDP of the two economies while benefiting some neighboring ones, said a Moody's report released on Friday.

Lower production caused by the dispute in China would hurt its GDP, while lower stock prices might hurt Japanese households, said Alaistair Chan, an economist at Moody's Analytics, writer of the report.

As a result, lower component imports could hurt producers in Thailand, he wrote.

"Although the effects are more widespread, they are also more diffuse and hence likely to amount to less than 0.1 percent of GDP for either country."

South Korea is benefiting from the conflict between China and Japan through higher exports and tourist bookings, and Japanese companies may accelerate plans to diversify to Indonesia or India, the report stated.

Ties between the world's second- and third-largest economies have become strained after the Japanese government announced in September the "purchase" of the uninhabited Diaoyu Islands.

The International Monetary Fund cut the growth forecast on Tuesday for China by 0.2 percentage points to 7.8 percent from the projections in July, and lowered that of Japan also by 0.2 points to 2.2 percent.

The forecast for global economic growth this year was lowered to 3.3 percent from 3.5 percent.

Standard & Poor's credit analyst Naoko Nemoto wrote earlier in a research note: "If the political confrontation drags on and further worsens ties between both countries, it may hurt Japan's macro economy and affect the credit quality of rated Japanese companies on a large scale."

Zhang Monan, a researcher at the State Information Center, said: "The chain reaction of the territorial dispute will not only dampen trade between China and Japan and affect growth of the two economies, but also affect the supply chain in Asia and crush the global economy."

The dispute over the islands will have a number of mostly negative economic effects over the medium term, the Moody's report said.

"Any conflict between the world's second- and third-largest economies would be expected to have regional and global implications, which in this case could be positive for certain neighboring countries," it said.

Chan said some potential consequences sound farfetched, such as a threat by a Chinese Ministry of Commerce official to dump China's holdings of Japanese government bonds.

"Even if China did sell its Japanese bonds, Japan would be unlikely to suffer as it can finance its debts domestically and may benefit from a cheaper yen. And China would need to invest more in US and European bonds, from which it has been trying to diversify," he said.

Japan treasury bonds held by China reached a historic high of 18 trillion yen ($231 billion) at the end of last year, up 71 percent from 2010.

Japan said in December it would become the first developed economy to hold yuan-denominated bonds as reserve assets.

wangxiaotian@chinadaily.com.cn