As Chinese ambassador to Japan Wang Yi succinctly puts it, Sino-Japanese relations are at 'a critical crossroads'. But many analysts, Japanese and Chinese, are more direct, describing the strained ties between the neighbours as the worst in recent years, although economic relations remain as close as ever. Is the political relationship likely to worsen before it gets better? Is it likely to affect the hundreds of billions of US dollars worth of economic exchanges taking place between the two countries every year, as some have suggested? During the next six to 12 months, the leaders' wisdom and leadership skills will be put to the test as they attempt to steer bilateral ties back on track. On the surface, bilateral relations are heading into more turbulence in the short term, nudged by a series of rivalries and disputes including Japanese Prime Minister Junichiro Koizumi's annual visits to the Yasukuni Shrine, which honours Japan's war dead as well as convicted war criminals. Other problems include the intrusion of a Chinese nuclear submarine into Japan's territorial waters in November, and Tokyo's release last month of a new National Defence Programme outline which, for the first time, lists China as a potential threat. As nationalist sentiment builds in both countries, recent opinion polls showed Japanese and Chinese increasingly dislike one another. Many criticised their own governments for being weak in their policies towards each other. To make matters worse, Tokyo allowed former Taiwanese president Lee Teng-hui to visit Japan from December 27 to January 2, despite strong protests from Beijing. Many Chinese and Japanese analysts have speculated that Beijing will not forgive Tokyo for allowing Mr Lee's visit. Last week, Beijing asked a group of Japanese lawmakers to postpone a visit to the mainland, a move immediately seen as an indication of Beijing's anger. Some have also speculated that President Hu Jintao will adopt an even more hardline approach to Japan this year, when Beijing unveils a series of nationwide activities to mark the 60th anniversary of Japan's defeat in the second world war. But beneath the pessimism there are also signs of optimism. Mr Hu and Premier Wen Jiabao have met Mr Koizumi separately several times during the past few months. Such frequent high-level contacts will help enhance communications and reduce misunderstanding, while also showing that leaders in Beijing and Tokyo are still willing to improve ties. In an apparent attempt to avoid provoking Beijing further, Mr Koizumi announced last week that he would not visit the shrine during this year's New Year holidays, but he pointedly refused to rule out paying his respects later in the year. Both countries have bigger strategic reasons to ensure a more stable and smooth relationship, which is vitally important to Asia. Beijing has made it clear that it could play a more active role in helping Japan normalise relations with North Korea and solve the emotionally charged issue of the kidnapping of Japanese nationals by North Korea. Improving ties with Tokyo is in line with China's shifting diplomatic priorities. Beijing is now focused on building an international united front to fight Taiwanese independence. After gaining the support and understanding of the United States, Europe and Southeast Asian countries, it now intends to work on Japan, a traditional supporter of Taiwan. That also partly explains why Beijing reacted in the way it did to the visit by Mr Lee, who it sees as the godfather of Taiwan's independence movement. Among all the problems clouding bilateral ties, the most problematic are the so-called 'history issue' - including Japan's refusal to apologise for wartime atrocities - and, more importantly, Mr Koizumi's annual shrine visits. To tackle this problem, leaders in both countries should show greater wisdom and more delicate leadership skills. Beijing should realise the problem has permeated bilateral ties during the past two decades and will not be completely resolved in the next few years, while Tokyo should demonstrate some flexibility regarding Mr Koizumi's annual visits if it does not want to see relations deteriorate further. Obviously, Mr Koizumi would face fierce criticism at home if he publicly promised not to visit the shrine again. But Tokyo could consider moving the coffins of the 14 class-A war criminals enshrined at Yasukuni to a different shrine.