A fear of China's economic growth, particularly with regard to its recent evolution into the “factory of the world,” is often expressed in the Japanese mass media. This paper reviews the development of trade and investment relations between Japan and China and examines the validity of this “China fear,” pointing out the ways in which China continues to lag behind Japan on many economic fronts and describing strategies that Japan could use to improve its performance. Japanese firms need to focus on producing more specialized high-tech products. At the same time, to cope with competition from China, they must take more drastic measures to keep costs down in the production of low-tech products. Some Japanese enterprises have already initiated new approaches in management, production, and distribution. The views of three of Japan's leading economists are critically reviewed, with a focus on how Japanese firms might draw profitable lessons from China's situation, improve their joint ventures with Chinese firms, and benefit from China's large market by concentrating more on local conditions.

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