TOKYO - China is set this year to replace the United States as Japan's biggest export destination for the first time in modern history, likely cushioning the blow to the Japanese economy from a US slowdown.

Workers are seen walking amid piles of containers at a port in Yingkou, northeast China's Liaoning province, in this October 25, 2007 file photo. China is set this year to replace the US as Japan's biggest export destination for the first time in modern history. (Agencies)

From January to September, Japanese exports to China totalled 12.756 trillion yen (USD113.1 billion), slightly topping the 12.568 trillion yen of exports to the United States.

Given that China-bound exports are surging while shipments to the United States have been sluggish largely because of US housing loan problems, the gap is likely to widen in the final three months of this year, economists say.

The fate of the US economy, though, will remain more important for Japan for some time, economists say, because a large part of Japan's exports to China consists of machine parts that are assembled and then sold to the United States and other countries.

"It's true that demand from China is very strong," said Takumi Tsunoda, economist at Shinkin Central Bank.

"But I don't see a structural change taking place yet. In the long run, Chinese markets will become more important for Japanese companies, but we're not there yet," Tsunoda said.

China's blistering growth has offered much-needed growth opportunities to many Japanese companies, which are struggling to deal with steady but slow economic growth at home.
In particular, hyper-growth in China's urban development has boosted demand for a wide range of Japanese products from machines to steel.

This year, Japan's exports to China look set to top 16 trillion yen, twice the level of just five years ago.

But not all of that is driven by demand from China itself. Exactly what percentage of Japanese exports to China ends up on the Chinese market is hard to determine, economists say.

But Chinese government data shows that about half of China's total imports are destined for processing and re-export. That implies the US market will remain the biggest for some time in terms of final product demand for many Japanese firms.

Japanese trade data also shows that an increase in shipments of various parts -- for machines, consumer electronic goods and automobiles -- made a hefty contribution to overall export growth.

Japanese companies such as Toyota Motor Corp and Matsushita Electric Industries have been using China as a production base to take advantage of cheap labour costs.

While many economists say Chinese demand now plays a big role in the Japanese economy, they doubt that China alone can be the sole engine of growth.

Many economists say the Japanese economy will be able to grow as long as damage to the US economy from subprime mortgage losses remains limited.

"But if we have a US recession, that'll be a different story," said Seiya Nakajima, chief economist at Itochu Corp.