Japan embraces ASEAN region despite investment risks

 20150822001168722734-minihighres-400x238Japan is investing twice as much money in South Eastern Asian countries than it is in China. Many countries which were invaded by the Japanese in the last century now want Japan to help their economies grow.

This week I attended a conference about the ASEAN countries at Asia House in London. It gave a valuable insight into an extremely diverse region, from the small but wealthy city state of Singapore to the still largely rural economies of Laos and Mynanmar, formerly known as Burma. Japan’s trade body, JETRO, says that Japan’s investment into the ASEAN nations jumped 120% over the past year to $23.6 billion. A report by PWC Australia explains that this largely came at the expense of China, which saw Japanese investment decrease by 33% to $9 billion.

There are three principle opportunities for the Japanese in the ASEAN region. Firstly, there is an opportunity to grow the market for Japanese products and services.  Secondly, there is a chance to invest in infrastructure. And thirdly, Japanese companies are seeking to build products in reliable factories with workers who will accept lower wages than the Chinese.

Although parts of the ASEAN region remain poor, there are many countries where rapid economic growth is creating a growing middle class. Consumer spending is ASEAN countries is set to reach two trillion US dollars by 2020, according to PWC. That makes it an attractive market for Japanese companies, who face a shrinking domestic market on the Japanese islands. So, Honda is busy selling cars in Indonesia, Mizuho bank is issuing bonds in Thailand and food and drinks companies such as Kirin and Suntory have set up their regional headquarters in Singapore.

Another opportunity for Japanese businesses is infrastructure. Earlier this year, the Japanese Prime Minister Shinzo Abe pledged to invest more than a hundred billion dollars in Asian infrastructure projects, much of it through the Asian Development Bank. That should benefit countries such as Thailand and the Philippines, which want Japanese money for transport projects, renewable energy and rural development. The Japanese have extensive experience in these areas although they are cautious helping industries which might become rivals to Japan.

It is not always a straightforward process. For example, Japan offered to build a Shinkansen high speed railway in Indonesia but the government asked the Chinese to build it instead. As Richard Dailly of Kroll said at the Asia House conference, the competition pitted a Chinese state enterprise against corporate Japan – something of an uneven battle.

Another incentive for Japan to expand in the ASEAN region is the relatively low cost of labour, especially in comparison to China, where wages are rising. Japanese car manufacturers have long been producing in Thailand but the political situation there – a military government – makes investors cautious. Instead, Vietnam and Indonesia are seeing heightened Japanese investment interest.

Mr Abe has committed Japan to the Trans Pacific Partnership trade deal, which is primarily expected to enhance Japan’s trade with the United States. Four ASEAN members – Brunei, Malaysia, Singapore and Vietnam – are also TPP signatories and others, including Thailand, Indonesia and the Philippines, are considering joining. This could create a good trade environment for Japan.

The ten countries of the ASEAN region have another ambition: to become a single market. The impression I got from the meeting at Asia House is that this will be a slow process. Yet if a single market increases prosperity in the ASEAN region, that would be welcomed by Japan, which also stands to benefit from its neighbours’ economic progress.