I don't see Japan giving up it's land, yet I don't see China going to war. I think we'll see this protests coming to an end, possibly a violent one. The only reason FOX and CNN aren't cover this is due to it being overshadowed by the goings-on in the Middle East.
1.) Of course the Chinese government is behind this. Do you really think protests this large would be allowed to occur and would get any press if the government didn't want them to?
2.) The situation is all kinds of fucked up. It's just a comedy of ridiculous errors by a bunch of retarded assholes. I could have sworn I posted something about this situation a month or two ago, but the search function is being its usual little whore.
The entire situation exists because the Chinese government didn't handle the post-WWII division of every little island systematically. If China had voiced interest in those islands (really, barely-above-sea-level rocks) at that time, they would have been China's without any question. Any time between the end of WWII and the mid-1960s, either mainland China or Taiwan could have asked for and gotten those little islands for the asking. They didn't. At some point, their complete incompetence counts against them.
The big kick-start to this recently was an out-of-power Taiwanese politician went to those uninhabited islands and planted the Chinese (mainland!) flag. He claimed he forgot the Taiwanese flag. This has caused all kinds of issues in Taiwan, because the Taiwanese want the islands for "China" (the concept, not China the communist mainland). To make the people at home happy, he should have hosted both the Chinese and the Taiwanese flags. But that wouldn't have been as good politically for China (mainland), so he pussied out his own country for his kind-of-homeland country.
Meanwhile, Japan is just sitting there repeating that the Chinese (both China and Taiwan) didn't give a fuck about the islands for decades and finders keepers.