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Japanese Prime Minister Yoshihiko Noda, right, is escorted by Chinese Premier Wen Jiabao inspect a guard of honor during a welcoming ceremony at Great Hall of the People in Beijing, China, Sunday, Dec. 25, 2011. Noda arrived in Beijing on Sunday for talks focused on North Korea and promoting stability in the closed country after the death of Kim Jong Il.Andy WongAP

Nearly 40 years after China and Japan officially pronounced their relationship "normal," it seems anything but. An old grudge over disputed islands has produced foolish rhetoric from Tokyo, anti-Japan riots in Chinese cities, and even an attack on the Japanese ambassador's car. Yet the bad blood doesn't change the potential for closer Sino-Japanese ties.

Both have reason to get along. Japan is short of workers, despite a recent rise in unemployment, while China's labour market is still in surplus. Japan has a superior education system and high-tech abilities, China a huge population of budding consumers.

Financially, Japan has one of perhaps three government bond markets deep enough for China to invest sizeable chunks of its $3.2 trillion of foreign currency reserves.

Flare-ups tend to stem either from Japan's treatment of China during the Second World War or from their mutual claim to sovereignty over the Senkaku-Diaoyu islands. Currently it's the latter that dominates. After a group of Hong Kong protesters landed on the remote rocks, Japan's prime minister unhelpfully affirmed them an integral part of Japan.

Economically, however, the story is one of harmony. China's share of Japanese exports has increased from 3.5 per cent in 1990 to 19 per cent in 2012 so far. Japanese technology is powering China's high-speed rail boom, and the automation of its production lines. Apart from tariffs on onions and mushrooms in 2001, and a recent filing over "rare earth" metals, Japan hasn't brought trade cases against China directly. Tokyo even kept quiet about China's suppression of the yuan, as the yen climbed.

Cooler heads should prevail. After Chinese cities staged anti-Japan riots in 2005, bilateral trade in U.S. dollar terms grew 12 per cent, and the number of Japanese tourists in China increased too. Despite suspicions that China sometimes encourages citizens to let off steam through anti-foreign displays, riot police broke up Guangdong's protests with alarming vigour.

While Japan and China together account for a fifth of the world's output, only 9 per cent of Japan's outbound investment stock is in China, and 11 per cent of its annual flow. The two may never be friends, but put history aside and they can be great partners.

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