Drezner over at Foreign Policy seems surprised that China would be so belligerent towards Japan over custody of the Chinese fishing trawler captain. Drezner points out that China's apparent rare-earth embargo against Japan makes little sense internationally. A belligerent China is pushing the Pacific Rim towards Washington; according to Drezner, China doesn't seem to realize this. I think they must.
I believe that Chinese policymakers are more aware of the consequences of their actions than Drezner gives them credit for. The Economist suggests that with its harsh stance on this issue, China means to warn other states in the region not to cross the Chinese in territorial disputes.
Additionally, it would not do to forget the powerful role anti-Japanese sentiment has played in post-Cold War China. Jiang Zemin stoked anti-Japanese sentiment to bolster the legitimacy of his government. As a result, a large majority of Chinese are now virulently anti-Japan, without encouragement from the state. The 2005 anti-Japan protests in China were a huge problem for the Chinese government.
The anti-Japan demonstrations connected with the fishing trawler incident have been much smaller, in part because of government efforts to curtail protests. China's strong stance on the issue has also likely been a mitigating factor. China is an authoritarian state, and I don't mean to suggest that Chinese leadership would pursue or abandon certain policies based on public opinion to the degree that a western democracy would. But we can't forget that even in China the voice of the people counts for something.
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