China and Japan are the largest economic and military powers in East Asia.
As the Cold War era recedes and the Asian region grows economically, the
relationship between these two giants is moving to centre stage in regional
and world affairs. Tendencies towards either co-operation or rivalry will have
repercussions throughout the region and globally. The regional and
international communities will need to pay more consistent attention to issues
in China-Japan relations in order to position themselves to respond to
substantial opportunities and risks.

Against this background, this report has two main objectives:

• to assess prospects for the long-term strategic relationship between
  Japan and China, and the implications for the political and security
  environment in East Asia; and
• to evaluate trends in the growing economic relationship between Japan
  and China.

A very wide range of factors could influence the China-Japan relationship
in the long term. Chapter 1 contains an analysis of the main issues which need
to be taken into account, including internal political developments in each
country, the economic relationship, community attitudes and relations with
third countries including the United States. The chapter provides a summary of
the strategic implications of economic and security issues described in
subsequent chapters and also outlines the implications of various scenarios
for the long-term relationship.

Chapter 2 traces the development of the trade relationship and gives
projections for trade flows to 2015. A modelling exercise undertaken for this
report suggests the China-Japan trade relationship will by then account for a
much larger share of world trade than at present, possibly more than the
current US-Japan trade relationship. China's relative importance as an
exporter and a market will grow much more rapidly than Japan's.

Trends in Japan's direct investment in China are outlined in Chapter 3.
Investment has surged in the early 1990s and business surveys suggest it will
continue to grow. Japan's investment is diversifying, both in terms of the
sectors involved and its geographic location in China. Small Japanese
companies are particularly heavily committed to China as an offshore
manufacturing base.

Japan is China's major source of official development assistance (ODA).
Chapter 4 describes trends in the aid relationship, including the new focus on
projects related to the environment, inland areas and agriculture. The
opportunities for Australian companies to win contracts with Japanese ODA
programs in China are discussed.

Chapter 5 surveys the defence and security relationship, including an
account of the security aspects of foreign policy, the size and structure of
the defence forces and contacts in the military security area.

Chapter 6 suggests some implications for Australian business of the growing
economic relationship between China and Japan. Some Japanese customers for
Australian exports are now moving to China. Opportunities will also increase
for Australian companies to co-operate with Japanese firms located in China.
Case studies of 15 Japanese companies doing business in China have been
included in Appendix 111 to provide a point of comparison for Australian
companies doing business in the same sectors.

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