The upturn in the economy has still to be reflected in Japan's total export figures. Data for the first eight months of the year shows an 8 per cent decline in total exports, due largely to a dramatic slump in sales to China. But even with buoyant Chinese demand, direct exports are unlikely ever to return to the volumes of the 1980s, as Japanese firms, chasing cheaper costs, are moving more of their manufacturing capacity abroad.

'Japanese exports have fallen this year primarily because of the fall in Asian demand, especially China,' says Mitsuhito Ono, Assistant Director for the Middle East and Africa at the Japan External Trade Organisation (JETRO). 'Structurally our exports will continue to decline as Japanese companies shift more of their production overseas.' Plant engineers Mitsui Engineering & Shipbuilding, for example, now only procure 10 per cent of their goods and services in Japan for their overseas contracts, compared to 30-40 per cent five years ago.

The GCC has managed to buck the general downward trend this year. Exports in the first eight months of the year rose by 5 per cent on the same period last year. Higher oil revenues in the Gulf states have created expectations of further rises next year. 'We are hopeful that Japanese exports to the Middle East will continue to rise while the oil price is high,' Ono adds.

A significant factor helping Japanese exports to the Middle East has been the depreciation of the yen. Over the past year the yen has fallen from $1= Y87 in the middle of 1995 to $1=Y115 in September of this year. Consequently, Japanese goods are now competitive again in the price sensitive Middle East market. Car exports to the GCC, for example, are expected to rise to 200,000 vehicles this year, from 130,000 in 1995.

Firm markets

Saudi Arabia and the UAE, traditionally Japan's strongest export markets in the region, have remained firm. Exports to both countries rose by almost 3 per cent in the first eight months of this year, compared to the same period in 1995. Exports to Morocco have nearly doubled as the country recovers from the impact of last year's drought.

Trade with Iran continues to decline, a consequence of Tehran's financial difficulties and US political pressure to isolate the country. The decline this year came despite the Bank of Tokyo-Mitsubishi's agreement last November with the Bank of Iran to reschedule Y20,000 million of debt owed to small-scale Japanese traders. The dispute had been a deterrent to smaller Japanese companies entering the Iranian market.

'We would be exporting more to Iran if it were not for Tehran's tight import restrictions,' says Toru Tachibana, senior economist at the Japanese Institute of Middle Eastern Economies (JIME). 'Our foreign ministry is also very reluctant to support trade with Iran. MITI [the

Ministry of International Trade & Industry] is more keen but in the end MITI has to fall in line with the country's foreign policy.'

As older markets have declined, new ones have emerged. Following the signing of the Oslo accords between Israel and the PLO in September 1993, Japanese companies have been focusing their attention on Israel. Trade between the two countries has picked up, largely on the back of Japanese imports of Israeli diamonds and the export of cars. Tomen has also become the first major trading house to open a representative office in Tel Aviv.

'The Japanese government has been put under a lot of pressure from the US to get Japanese companies to stop sticking to the Arab boycott of Israel,' says Tachibana. But Japanese enthusiasm for entering the Israeli market has been tempered by the election of a Likud government in May. 'The mood has changed since Netanyahu's election,' says the Middle East Institute of Japan's Isamu Nakashima. 'I see no major Japanese investments in Israel at the moment.'

The government has been actively encouraging Japanese companies to invest in countries participating in the Middle East peace process. However, Japan's private sector has shown little enthusiasm. At the first Middle East & North Africa economic summit in Casablanca in 1994 only five Japanese companies bothered to attend. About 50 companies were represented at last year's summit in Amman, but most attended because they had come under intense pressure from the foreign affairs ministry and MITI. A similar number of companies were represented at this year's Cairo conference, but only after further government prompting. 'The private sector did not really pay much attention to the Cairo summit,' says Nakashima. 'All they saw at the first two summits were huge project ideas but nothing concrete.'

The Middle East peace process is not the only area where the private sector has been reluctant to follow the government's line. Another point of friction has been the reluctance of Japanese firms to invest in the six states of the GCC.

The issue of investment continues to cloud Japan's relations with the GCC, and there is little prospect of the situation changing dramatically in the near future. Japan may well be one of the GCC's biggest trading partners and import about 80 per cent of its energy needs from the region, but the Middle East accounts for less that 1 per cent of Japanese foreign direct investment. This has led to a chorus of complaints from Gulf states.

The Japanese government wants to see new investment in the Gulf just as much as the GCC does. It realises that the country will be reliant on Middle East oil indefinitely and that in 20 years time other Asian countries, notably China, will be competing for supplies. From the official perspective, Japanese investment will help cement relations and guarantee uninterrupted oil flows in the future. There is also concern that a poor investment record might affect Japan's future role in the Neutral Zone concession, operated by the Saudi Arabian/Kuwaiti/ Japanese joint venture Arabian Oil Company (AOC). The concession is due for renewal at the end of the decade, and although there are strong indications that Japan's involvement will continue, this has not stopped the bureaucrats in Tokyo from worrying.

Unfortunately for the government, the private sector is far from convinced about the economic benefits of investing in the GCC. 'Political will is not enough to bring investment. We are making efforts but it's up to the private sector. We cannot force them to drink water,'

says Akira Yamada at the Economic Co-operation Bureau at the Foreign Affairs Ministry.

The small size of the market, high costs and the quality of the workforce in the GCC are the main deterrents to potential Japanese investors. 'Tell me how we are supposed to produce competitive goods in Saudi Arabia,' says one company executive.

Despite the deterrents to investing in the GCC, three new joint ventures between Saudi Arabian and Japanese companies have been signed this year. The agreements have been hailed as a new era of economic co-operation between Tokyo and Riyadh, although some analysts argue that they provide symbolic rather than substantial evidence of a Japanese investment drive.

The three projects are:

A joint venture between Farouk Maamoun Tamer & Company and the Japan Industrial Development Organisation (JAIDO) to build a pharmaceutical plant. An agreement was signed in Tokyo in March.

A joint venture between the Saudi Binladin Group and JAIDO and Japan GCC Industrial Investment Corporation to build a plastic metallisation plant. An agreement was signed in June.

A joint venture between International Aquaculture Company of Saudi Arabia and Kohyo Company of Japan to build a prawn-aquaculture processing plant on the Red Sea coast. An agreement was concluded in May.

Although Riyadh has led criticism about Japan's poor investment record, Japanese trade officials argue that Saudi Arabia makes little effort to try and attract Japanese investors to the kingdom. In May JETRO organised a conference for countries wishing to attract Japanese business which was attended by delegates from Iran, the UAE, Egypt, Jordan and Turkey but not from Saudi Arabia. Dubai is alone in having a permanent trade promotion office in Tokyo. Little wonder the emirate attracts the lion's share of Japanese companies active in the GCC.

The debate surrounding the low level of Japanese investment in the GCC is unlikely to go away. But the newly emerging economies of Asia continue to offer Japanese companies a far more conducive investment environment than the Middle East. Even the best efforts of the Japanese government cannot direct private capital where it doesn't want to go.