That's pretty bad, yeah. It's actually racist on multiple levels, on top of being a terrible pun in the first place.
- Either of the first two lines on their own are racist. Just pulling your eyes in a slant and going "Chinese" or "Japanese" is mocking them and using their race and appearance as a punchline in a "haha, look at the funny looking foreigner!" way. In fact, the sign language word for "Chinese" was pointing to the corner of your eye, and there are efforts to change or avoid this sign because it's racist.
- "Chi-knees" or "Japan-knees" are dumb puns and also mocking their race again.
- Chanting the phrase to anyone is just loudly othering them and mocking people of this race for existing. You're highlighting that they're different, you're putting people on the spot for it, and you're showing that you think it's fun to make a chant about it.