This slowdown in performance is despite the trend of the Japanese economy, which expanded steadily in the first half of the year, growing by 3.5 per cent and 2.2 per cent in the first and second quarters, respectively.

It is estimated that Japan's economy will grow by 2.8 per cent in 2006, compared to 2.6 per cent last year, which would be the highest rate of expansion in the last seven years.

The research said one major reason Japan's imports have been somewhat sluggish in terms of Thai products is that the country has begun to buy more from China. It is also the result of Japan's investment strategy of setting up factories in China over recent years, given the low wages and rather low cost of raw materials in China.

Japanese factories established there are now selling their products into the Japanese market, which has resulted in a rapid increase in the import value of such goods from China over the past five to six years.

In addition, the relative proximity of Japan and China is favourable to shipments between the two countries, making it faster and more convenient to sell than from here in Thailand.

Japan is currently the second-largest foreign investor in China - behind only Hong Kong - with an aggregate investment of $55.86 billion as at the end of July. This accounts for 8.5 per cent of China's overall foreign direct investment.

Japan's investments in China are primarily in industrial manufacturing projects such as the production of electrical appliances and computer components, plus real-estate development and infrastructure projects for the Chinese economy. For example, electrical power plants and facilities for the supply of fresh water, transportation systems, warehousing and telecommunications systems.

The Thai export products that have seen good growth in the Japanese market include mostly premium products that enjoy an export advantage, and are not in direct competition with China, such as rubber and rubber products, automobiles and auto parts, lenses, machinery and parts, as well as aluminium products.

However, KRC said it should be noted that if China develops more diversified products, including those similar to premium Thai goods, the Kingdom is likely to gradually lose competitiveness in the Japanese market to China.

Therefore, it added, Thailand needs to apply a strategy that focuses on product quality to strengthen its credibility in the Japanese market. There should also be greater diversification of products, and better differentiation from China's products by reflecting unique Thai qualities - One Tambon One Product merchandise in particular - which have the potential to attract high-end Japanese customers.

This strategy would help preserve the Thai share of the Japanese market.

Although Thailand still depends on traditional export markets such as Asean, the United States, the European Union and Japan - which together account for 60 per cent of Thai exports - the country has to expand into new markets, due to the competition from economies such as China, India and Vietnam.

Such a strategy would disperse export risk, the research house said.

At present, Thai exports to new markets account for about 38 per cent of overall export value, as compared to an average of some 28 per cent during the previous five years.

Moreover, Thai exports to new markets grew by 25.9 per cent in the first seven months of the year, compared to 11.6 per cent to established markets during the same period.

But Thailand would have a broader export network for future growth if it could also expand into new markets in other regions, KRC said.