Declining investment in China by Japanese companies has been disappointing, but a trilateral pact between Japan, China and the Republic of Korea may buffer the falling trend, analysts say.
Latest data from China's Ministry of Commerce showed investment by Japanese companies in China in the first quarter plunged 46.8 percent year on year.
Japan External Trade Organization (JETRO) statistics showed that last year Japanese companies invested 9.09 billion U.S. dollars in China, down 33 percent year on year. The sum accounts for 6.8 percent of all overseas investment Japanese companies made last year.
Ding Yibing, professor with Economics School of Jilin University, said declining investment has been a trend for the past three years.
Li Tie, vice chairman of the International Trade Association of China(ITAC), said investment was suffering because of souring Sino-Japan relations.
"Japan is turning right-wing on the whole and disputes concerning the Diaoyu Islands have made the situation worse, leading to instability in investment and trade exchanges," said Li.
Japanese investors are attracted by China's market scale and growth potential. But a shift towards Association of Southeast Asian Nations (ASEAN) countries has taken shape, said Minoru Arahata, director of the Dalian branch of JETRO.
The organization's statistics said Japanese companies invested 22.8 billion dollars in Singapore, Thailand, Indonesia, Malaysia, the Phillipines and Vietnam last year, almost triple to that of China, Japan's biggest trading partner.
He told Xinhua that China's rising land and labor costs have led to Japanese companies exploring other Southeast Asian countries where labor is much cheaper.
Masahito Tasuda, managing director of JETRO, said investment from Japanese enterprises has witnessed structural changes due to not only labor costs in China but also political disagreements between the two countries.
Analysts hope both countries can work together.
China should pay more attention to intellectual property protection and offer preferential assistance for foreign direct investment, while Japan should restructure its investment model to shift focus from labor and material costs to market and technology, according to Li Tie.
The trilateral pact, which took effect on Saturday, will help facilitate investment among China, Japan and ROK.
The deal is considered a prelude for a Free Trade Agreement among the countries.
"The new pact has promised a more stable, transparent investment environment to lower risks," said Ding.
According to Li, the agreement not only helps Sino-Japan economic ties, but also promotes political relations.
"Trade connections between China and Japan are deeply intertwined as Japan's capital and technology is required in China while Japan needs the Chinese market and investment environment," said Li.