Abstract: Japans direct investment in China has played an important role in promoting Chinas economic development. Japans direct investment in China can be divided into three phases: full startup, deepening of cooperation, and adjustment and transformation. It is mainly focused on the manufacturing sector and on the eastern coastal areas. Through an analysis of international economic theories, using the empirical method of regARMA combination model and Granger causality test, we found that Japans direct investment in China had the following effects on Chinese economy: (1) promoting Chinese industrial upgrading, (2) pushing the development of SinoJapanese trade, and (3) generating a technology spillover effect in China which improved the technology level of China. China should strengthen its efforts to guide Japans direct investment in China and enhance the quality of Japans direct investment in China, so as to contribute to the restructuring of Chinese economy.

Key words: Japans direct investment in China, industrial upgrading and transformation, SinoJapanese trade, technology spillover effects, economic restructuring