China has done much to promote its policies of economic openness in recent years, culminating with its entry into the WTO last year. China is expected to be not only a vast market for foreign enterprises, but also a supplier of inexpensive manufacturing products to the world economy. In contrast, Japan’s economy has suffered from a prolonged recession in recent years. Why hasn't it recovered? Some people have argued that a main cause of deflation Japan has suffered is the increasing quantity of imports of inexpensive products made in China. Moreover, increasing Chinese products may compete favorably against Japanese products both in Japan and abroad. This trend is one cause of de-industrialization in Japan. In this research we examine how the coming Chinese economic expansion will affect the world economy—and especially the Japanese economy—by using CGE model simulations. Simulation results show that China's development has not so big effects on other countries in terms of macro economic variables, but makes industrial structures change. But if other countries cannot adjust to those effects because of domestic economic structure such as stickiness in labor market, problems like excess supply occur. Problems caused by trade are not an international issue; it’s a domestic one.