The significance of the agreement went well beyond a 'win-win' energy deal, and represented the most concrete breakthrough to have emerged from the two Asian neighbours' attempts at repairing ties strained by wartime history and modern rivalry.

'This is a good example of how it is possible to reach agreement despite the difficult problems we face,' Japanese Foreign Minister Masahiko Koumura said yesterday.

Chinese Foreign Ministry spokesman Jiang Yu said likewise in a statement, noting that the agreement was 'beneficial to the healthy and steady development of Sino-Japanese ties'.

Under the pact, Japanese firms are to invest in the Shi- rakaba gas field, which the Chinese call Chunxiao, the development of which has already been started by two Chinese oil companies.

Profits for the Japanese side will be in proportion to the amount of investment made, but details have yet to be announced. Both countries have also agreed to conduct joint exploration on a 50-50 basis in an area south of the Asunaro gas field, which the Chinese call Longjing.

Current estimates for the amount of natural gas in the East China Sea vary widely, though the prospect of undiscovered deposits makes the region a strategically important one for energy-hungry China and Japan, both highly dependent on imported energy.

Negotiations for yesterday's deal had been anything but easy due to the locations of the gas fields, which sparked tense arguments over extraction rights and questions about how the maritime boundary delineating the two countries' exclusive economic zones (EEZ) should be drawn.

Japan maintains that the boundary should be the median line between both countries, whereas China insists that its EEZ should extend right to the edge of its continental shelf, which is far south of the median line.

Tokyo is also upset with Chinese attempts to develop the Chunxiao gas field, which is near the median line, before the EEZ issue is resolved, saying that this would siphon gas from the Japanese side.

The agreement indicated that Beijing and Tokyo had decided to shelve these tricky matters for now. But they continued to maintain a cautious if vague stance over the sensitive issue of territory for fear of a domestic backlash.

Ms Jiang stressed that the agreement did not 'harm the respective legal stances of both sides'.

Hours before her announcement, a small crowd held a rare protest outside the Japanese Embassy in Beijing to oppose the imminent deal.

'The Chinese people will not let Japan steal any fortunes from our East China Sea,' the group of about 20 young and middle-aged men said in a statement.

Analysts in Beijing said such outbursts were not surprising, and suggested that the authorities should be able to contain them.

'Both countries cannot end up doing nothing just because there are criticisms of some decisions,' said Professor Bu Ping, a Chinese historian who has been leading a joint study of Sino-Japanese history.

Bickering over wartime history, the Yasukuni shrine and the East China Sea gas fields plunged Sino-Japanese ties to their lowest point in 2005 before ties improved.

Professor Shi Yinhong of the People's University likened the gas deal to the clearing of a major hurdle for bilateral ties. He said: 'If there had been no progress or if the dispute had worsened, then it would negatively impact the improving relations.'

chinhon@sph.com.sg

wengkin@sph.com.sg

NEWS ANALYSIS, ASIA