More than a decade of deflation has had such a negative impact on the Japanese stock market that some leading United States institutional investors are investing only in Japanese companies with a presence in fast-growing China. A report issued yesterday by Goldman Sachs pointed the way for Japanese companies: they must invest more aggressively on the mainland. 'There was a big move that took off in the early 1990s with a big China theme, but investors got 'un-excited' as quickly as they got excited, but now there is a feeling that the China phenomenon is real,' said Kathy Matsui, Goldman's chief Japan strategist, who met with a group of 20 leading US institutional investors last week. Japan's negative growth against China's fast growth is forcing institutional investors who traditionally invest in Japan to realign their strategies. 'China appears to be this year's most popular theme,' said Ms Matsui. 'And nearly every investor is anxious to find those Japanese firms poised to benefit [and lose] from the China phenomenon. 'Notably a growing number of Japanese equity portfolio managers are travelling to Tokyo via Shanghai and Beijing these days.' In the past, most Japanese companies set up only low-end manufacturing operations on the mainland. But increasingly, some are moving their high-end production there, not only to take advantage of the cheap labour but also to cater to rising domestic demand. 'Most Japanese used China as an export platform but now many see China as a future consumer market,' Ms Matsui said. She listed Japanese cosmetics maker Shiseido, carmaker Honda and machinery maker Koito Manufacturing as firms with large mainland sales operations. 'Although average incomes are still quite low, you're starting to see Japanese [carmakers] sell vehicles in China with sticker prices that are not that much less than in the US,' Ms Matsui said. For various reasons, including historical, Japan Inc has minimised its investments in China. From 1965 to March last year, Japanese firms invested only 2.6 trillion yen (about HK$168.48 billion) on the mainland, just 2.4 per cent of their total global investments and significantly less than the 2.9 trillion yen in Hong Kong. However, this trend is likely to change. 'Japanese investments in China are exploding now,' said Ms Matsui. 'The Japanese are desperate to play catch-up.' Japan's slow growth will probably drag on, forcing foreign institutional investors to invest primarily in companies with China angles for a while. 'This won't be a short-term trend,' she said. Graphic: jap06gbz