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Brisk demand for Japanese goods in China is becoming a major driving force for Japan’s economy, helping the nation as it struggles to shake off more than a decade of stagnation.

The recent good news for Japan is China’s emergence as a massive market for products ranging from high-end digital gadgets to heavy-duty construction machinery.

That means China is no longer just an attractive manufacturing base with abundant cheap labor and low costs, cranking out products that are mainly shipped elsewhere in the world.

In no other area is that trend more apparent than in the high-tech consumer electronics sector.

“China is the most important market in the world for cellular phones,” a senior official of NEC Corp. said.

The company currently produces all of its cellular phones for overseas markets in China, which total 5 million units a year. Of the total, only 1 million are currently aimed at the Chinese market.

“At the moment, many of the cellular phones produced in China are for the European market,” said Akiko Shikimori, NEC’s public relations manager. “But we plan to raise the percentage of products for the Chinese market to about half from next year or the year after that, while increasing overall production.”

The cellular phones the company sells in the Chinese market are not low-end products. “Our strategy is to introduce the same level of products we sell here in Japan,” Shikimori said.

NEC’s production style is also typical of Japanese companies with manufacturing facilities in China. High-tech components such as semiconductors are exported from Japan and assembled into final products in China.

The automobile sector is another promising area.

Toyota Motor Corp., which began producing cars in China in 2002, has raised its annual output target from the initial 30,000 units to 50,000.

It plans to begin producing a luxury model in the country in 2005 in the hope of capturing a 10 percent share of the Chinese auto market around 2010.

China’s demand is also creating a windfall for Japan’s long-ailing industries.

Demand for construction machinery, which has dropped in Japan as the government slashes public works projects, is on the rise in China as it gears up for the 2008 Beijing Olympics and the 2010 World Expo in Shanghai.

The shipping industry is seeing profits surge as shipments increase among routes linking Japan, China and the United States.

Trade figures alone underscore China’s growing appetite for Japanese goods.

In 2003, Japan’s exports to China surged 33.2 percent from a year earlier to 6.63 trillion yen, while imports increased 13.0 percent to 8.73 trillion yen.

On the surface, that brings Japan’s trade deficit with China to more than 2 trillion yen. But that is only because the country’s exports to Hong Kong are not included.

Because most of the 3.46 trillion yen worth of goods exported from Japan to Hong Kong end up in mainland China, the actual balance is a surplus of about 1 trillion yen.

Brisk exports to China were a major reason behind the strong growth in Japan’s gross domestic product in the last quarter of 2003. In the October-December period, GDP expanded an annualized 7.0 percent, the fastest pace since 1990.

But in terms of outlook, all is not rosy. Economists point to risks ahead.

“At the moment, the Chinese economy is booming. But it could be overheating,” said C.H. Kwan, senior fellow at the Research Institute of Economy, Trade and Industry.

If the Chinese economy slows sharply, it will have a tremendous impact on Japanese businesses, the economists say.

“If the Chinese economy slows, it would push down Japan’s capital investment,” said Takamoto Suzuki, an economist at UFJ Institute Ltd., referring to another bright spot in the Japanese economy.

“That is because Japanese companies are investing in domestic facilities out of expectations for continued demand from China. If that is not what happens, they would have to carry out another round of restructuring,” Suzuki said. “For Japanese companies, a soft landing for the Chinese economy is crucial.”

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