Despite growing economic inter-dependence, ties have been chilled by Japanese Prime Minister Junichiro Koizumi's visits to a Tokyo shrine which honours war criminals along with other war dead.
Territorial disputes and a Chinese nuclear submarine's intrusion into Japanese waters in November are other irritants.
Signs are growing that Japanese authorities, who once shied away from offending China, in part because of the legacy of a bitter wartime past, are now more inclined to stand up to their giant Asian neighbour.
Rights given up
"It has been decided that from today the Japan Coast Guard will assume the maintenance and management of the lighthouse," Chief Cabinet Secretary Hiroyuki Hosoda said in Tokyo on Wednesday, adding the group which built it had given up their rights to it.
"Internationally and historically, there is no doubt that the islands belong to Japan. I feel there is no problem at all."
China's official Xinhua news agency quoted Foreign Ministry spokesman Kong Quan as saying that Japan's unilateral actions were "illegal and invalid" and that the main Diaoyu island and neighbouring islets had long been China's territory. Japan claims them as the Senkakus.
"Internationally and historically, there is no doubt that the islands belong to Japan. I feel there is no problem at all"
Japan's Chief Cabinet Secretary
Koizumi said Japan had done nothing wrong. "The state took over the lighthouse because private citizens disposed of it. The state did what it should." he said.
Asked about the possibility of China reacting angrily, Koizumi responded simply: "Why?"
Last March Japan and China clashed over the island, part of a cluster which lies between the southern Japanese island of Okinawa and Taiwan, when Japanese police arrested and deported seven Chinese activists who had landed on one of the islands. Japan claimed them after defeating imperial China in 1895.
Last March the two clashed over
an island near Okinawa
The Senkaku, or Diaoyu, islands provide access to rich fishing grounds and possible oil deposits in the area.
The lighthouse on the disputed isle has been a trigger for feuds many times in the past.
Nationalist passions in Hong Kong and Taiwan were aroused when a Japanese group built the lighthouse in July 1996. The lighthouse drew a flotilla of vessels in the months that followed, carrying protesters from Taiwan and Hong Kong, several of whom landed on the Japanese-administered islands.
A Hong Kong activist drowned in September 1996 when he jumped into stormy waters near the islands to press China's claim.