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China last year surpassed the US to become Japan’s biggest trading partner for the first time since records began, underlining the importance of the Chinese economy to Japan’s faltering recovery.


Total trade with China, including Hong Kong, reached Y22,200bn ($214bn), against Y20,479bn for the US, according to preliminary figures from the finance ministry released on Wednesday.

Imports and exports were fairly evenly matched, producing a trade surplus in Japan’s favour of Y1,455bn, compared with a much heftier surplus of Y6,962bn with the US.

Mikihiro Matsuoka, economist at Deutsche Bank, said the US continued to play a bigger role than raw figures suggested. He estimated that a quarter to a third of Japan’s exports to China ended up in the US.

After initial hesitation, Japanese companies have stepped up their direct investment in China in the past few years. A significant proportion of Japanese exports to China, including components, are fabricated into finished products before being shipped to third countries.

As a result, China now accounts for 20.1 per cent of total Japanese trade, up from 19.2 per cent in 2003. The US last year accounted for 18.6 per cent of trade against 20.5 per cent in 2003.

Japan’s global trade surplus grew 17.9 per cent in 2004 to Y12,011bn, its third year of increase. The rise reflected a strong export performance, on which Japan’s recovery has been built, coupled with modest domestic demand for imported products.

In the three months to December, however, the trade surplus fell 9 per cent against the same period in the previous year. That suggests net exports may have been a drag on economic growth during that period, partly because of the effect of rising oil prices.

The finance ministry on Wednesday released a report on regional economies showing that growth in some areas of Japan has slowed along with exports.

Mr Matsuoka said exports to China had begun to slow in spite of the economy’s continued fast growth - 9.5 per cent year on year in the fourth quarter. Recent export growth to China of 20 per cent year on year had halved to about 9 per cent, he said. That reflected a slowdown in Chinese demand for industrial equipment, such as turbines and construction-related machines, as well as for Japanese cars, he said.

Overall, Mr Matsuoka said, net exports had not contributed to the growth of Japan’s gross domestic product in the three months to December, after being the driver for several quarters in a row.

The government is hoping that exports will once again become an engine of growth, assuming that global demand picks up and the effects of high oil and commodity prices begin to recede. The Bank of Japan has said capital spending and household expenditure are solid, implying the economy is not wholly dependent on the performance of exports.

In 2004, Japan’s overall trade surplus with Asia surged 32.9 per cent to Y7,430bn, while that with Europe also rose, by 14.5 per cent to Y3,270bn.