Global investor: China's gain is Japan's loss

Japan's economy may still be four times bigger than China's, but some time ago it passed the baton marked "economic powerhouse" to its large northern neighbour. China's economy is ripping along at 8-10 per cent a year. Japan's is shrinking in nominal terms. China is attracting record foreign direct investment, Japan a relative trickle.

Worse, China's gain is Japan's loss. China is swamping Japan with cheap exports, fuelling its seemingly endless deflationary descent. Japanese manufacturers, unable to compete, are fleeing to China, causing the "hollowing out" of domestic industry and pushing unemployment towards post-war highs. Clearly, the future now leads to Beijing, Shanghai and the Pearl River Delta. Tokyo, Osaka and Kobe are of the past.

......Far from being a threat to Japan's economy and companies, China may be Japan's way out of a fix. The two countries, bitter rivals for years, could be highly complementary.

......Japan is not being swamped by Chinese exports, but is running a trade surplus with China - about $1.5bn in 2002.......

China has recently overtaken the US as the largest exporter to Japan. But at about 1 per cent of gross domestic product, many think it is far-fetched to blame cheap Chinese goods for Japanese deflation.......

Most imports from China are of labour-intensive goods, with 60 per cent concentrated in textiles, food and basic materials. Japanese exports to China are sophisticated, capital intensive goods. In other words, both countries are producing and exporting according to their comparative advantage......

......buy shares in Japanese companies with smart investments in China. Again, contrary to perception, Japanese companies have been relatively slow on to the Chinese mainland, leaving room for further moves.......

......many Japanese companies have been successful at raising profit margins by investing intelligently in China and other low-cost producers.

As tariff barriers come down, companies that export to China also stand to benefit. Japanese companies struggling as capital investment slides at home could be in for a big fillip.