China's Economic Surge Could Boost Japan

China's rapid economic growth and increasing domestic demand are stimulating imports from Japan, a factor that may play an important role in Japan's economic recovery, according to research from the Chinese Academy of Social Sciences (CASS).

The research suggests that overseas demand will be one of the strongest drivers of Japan's economic recovery. China is the country's biggest trading partner and the largest export destination for its goods.

At present, China runs a trade deficit with Japan, but that may change during the coming months, because the island nation is likely to need more Chinese goods to aid post-disaster reconstruction, analysts said.

CASS predicted that in the wake of the 9.0-magnitude earthquake, which unleashed a 7-meter-high tsunami on March 11 and prompted a nuclear crisis, Japan's economy is likely to grow at a rate of between 1 and 2 percent this year, a sharp decrease from its GDP growth of 3.9 percent in 2010, a 20-year high.

"Following the disaster, trade relations between Japan and China will be further strengthened," Zhou Shijian, a senior trade expert from Tsinghua University in Beijing, told China Daily. "There will be more opportunities for trade between the two countries," he said.

Talks on establishing a free- trade zone between China, Japan and South Korea may start next year, said Chinese Premier Wen Jiabao during his two-day working trip to Japan and South Korea on May 21 and 22.

Japan's recent disaster has had a limited influence on its trade with China, according to the CASS research.

Japan's efforts to rebuild its disaster-stricken areas may lead to an increase in its imports from China, said Zhou.

From 2002 to 2010, China had an accumulated trade deficit of US$236.23 billion with Japan. In 2010, it increased to $55.6 billion, according to CASS.

Japan is likely to relocate its product component factories to other countries, including China. That may boost Japan's imports and alter the trade deficit, Zhou added.

Zhang Xiaoji, senior researcher at the Development Research Center of the State Council, said that China's trade deficit with Japan is not likely to widen in the short term.

"The aging population in Japan will result in a labor shortage and reduce industrial production, indicating a decrease in exports," he said.

On Tuesday, Moody's Investors Service said that a downgrade of Japan's sovereign debt rating is likely, once it has completed a three month review, which will consider the economic effects of the recent natural disasters and the nuclear crisis.