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For Japan, China was the largest export market in 2009 (its share 18.9%, Source: Ministry of Finance Japan). China is a manufacturing base for Japan. For cost reduction, many Japanese companies set up their own factories in China. Since these factories cannot purchase all the parts locally, especially high-tech ones, Japan provides raw materials ,parts and manufacturing equipment to China and then these factories assemble and export them as finished goods to United States, Japan and so on.

In fact, the statics below shows that intermediate goods (raw materials) account for 72% of the current export to China. 22% of the remaining 28% are capital goods like manufacturing equipment. 【Breakdown of export amount from Japan to China in 2009, US$Billion】
Breaakdown Amount share
Intermediate goods (raw materials) 88.1 72%
Finished goods Capital goods 27.7 22% Consumer goods 6.47 6%
Sum 122.2 100% Source: Ministry of Finance Japan

I think there are two factors which affect the relation of trade between Japan and China: One is increase in China’s labor cost and the other is the appreciation of Renminbi against US dollar and Japanese Yen.

1. Cost competiveness
Japan has prioritized on China when it does production transfer to overseas countries, because China has cultural proximity, language similarity (both countries use Chinese characters) and closeness of geographical distance with Japan. Above all, the most important advantage China has is its low cost. However, in the past three years, China’s minimum wage increased and this trend will continue. It is said that China is losing its competitive advantage. 2. The appreciation of Renminbi against US dollar and Japanese Yen United states and other countries claim the Chinese government to revalue Renminbi. The appreciation of Renminbi against US dollars and

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