Japan reaches out

Japan reaches out

With ample liquidity supplied by its central bank and facing an anaemic economy back home, many Japanese companies do not have to look any farther west than Southeast Asia to ply their trade and expand their business empires.

As most Asean economies remain at the developing stage, lucrative opportunities exist for Japanese investors to cement their already solid foothold in the region.

Japan is no stranger when it comes to advancing its business interests abroad. For a third straight year, the amount of foreign direct investment (FDI) from Japan to the 10 Asean countries exceeded FDI in China and Hong Kong in 2015, valued at ¥20.1 trillion (US$180.9 billion) and almost triple the outstanding amount recorded five years ago, according to Bank of Japan data.

The glitzy Aeon Mall in Phnom Penh, the Nikon Corporation factory in Savannakhet province in Laos, and the Thilawa special economic zone in Myanmar are all testaments to the way Japanese companies have ramped up their investments in developing Asean countries.

"Asean markets are attractive from the Japanese perspective," said Ma Tie Ying, an economist with DBS Group Holdings of Singapore. "Many economies have great potential to grow, thanks to relatively low per capita incomes and a young population profile."

The openness of markets in the region, along with labour costs that are lower than in China, also attract Japanese investment, she said. Japanese investment growth in China was already slowing because of high labour costs early in this decade, and the slowdown accelerated after protests in China intensified in 2012 with the revival of a territorial dispute over islands in the East China Sea, prompting Japanese companies to diversify investment risks.

"Initially, the surge of Japanese foreign direct investment in Southeast Asia might be a strategy of diversification, responding to the Japanese earthquake disaster in 2011 and the deterioration in Japan-China political relations in 2012," said Ms Ma.

Asean is undoubtedly the prime target for Japanese companies to tap into vast opportunities for business expansion and to diversify their investment portfolio, Hirotoshi Ito, senior economist for Asia at Japan External Trade Organisation (Jetro), told Asia Focus, citing the 2016 Jetro Survey on Business Conditions of Japanese Companies in Asia and Oceania.

The Jetro survey was carried out between Sept 1 and 25 last year in China and between Oct 11 and Nov 11 in 19 other countries. It covered large companies and small and medium-sized enterprises (SMEs) in both manufacturing and non-manufacturing sectors, with 4,642 respondents (42.3%) out of 10,893 businesses contacted.

Looking at Asean as a whole, 60.8% of Japanese companies expected to generate profits and 23.8% forecast they would incur losses in 2016. Among those expecting profits, the highest proportion, 77.5%, operated in the Philippines, while the lowest proportion, 25.7%, operated in Myanmar.

Thanks to growth in domestic sales and improved product efficiency, the proportion of respondents forecasting higher profits for 2017 in Asean countries rose by 4.3 percentage points, but was still lower than last year's 5.3-point rise.

The survey also indicated that 50.1% of Japanese companies planned to expand their businesses in 2016, a slight increase from the previous year thanks to sales increases, while 47.1% remained unchanged. Two percent said they were considering downsizing and 0.7% were planning to relocate to other countries.

The chemical and pharmaceutical industries saw the highest percentage of companies with business expansion at 63.8% last year, followed by the wholesale and retail industries at 60.1%.

With a capable domestic workforce and a growing middle class, the Philippines and Vietnam are the two Asean countries seen as having potential to generate the fastest pace of consumption growth together with the fastest investment growth, said Su Sian Lim, Asean economist with HSBC.

Capital outlays in Vietnam should rise by 7.5% this year from 7% in 2016, while in the Philippines investment growth should remain in double digits, she said. Robust manufacturing activity, particularly in Vietnam, should result in further investment in the sector. Ongoing strength in the housing market there will also mean continued growth in residential investment.

"But an overarching driver of the strong investment story for both economies is the much-needed development of infrastructure -- ports, airports, roads, railways, power and water plants, and so forth," said Ms Lim.

Still, wage increases and difficulties with quality control seem to be the principal concerns among Japanese companies operating in Asean countries, said Mr Ito of Jetro. Those in more developed Asean countries such as Singapore, Malaysia and Indonesia regard higher wages as their primary concern, whereas companies in less developed economies such as Cambodia and Laos point to the difficulty with quality control. In Myanmar, power shortages and blackouts top the list.

In any case, the Japanese government intends to further strengthen ties with Southeast Asian countries by supporting infrastructure development. Following China's launch of the Asian Infrastructure Investment Bank and the "One Belt, One Road" programme, Japan has announced that it will provide $110 billion to fund Asian infrastructure over the next five years.

"Southeast Asia has strong needs for infrastructure and should be an important recipient [of Japanese funds]. And what goes around comes around," said Ms Ma of DBS. "Infrastructure investment is circular in the sense that by reducing business costs it stimulates even higher levels of FDI down the road."

THE TRUMP FACTOR

The Asean-Japan Comprehensive Economic Partnership, which covers trade in goods and services, investment and economic cooperation, has been benefiting both sides since it took effect in late 2008. The Japanese government was hoping to see a further boost for FDI into Southeast Asia through the Trans-Pacific Partnership (TPP), but US President Donald Trump dashed those hopes when he pulled his country out of the pact in January.

If, against all odds, the TPP somehow manages to go ahead, Japanese manufacturers would be able to strengthen their supply chains in participating countries, thanks not only to lower tariffs but also because of common standards in labour, environment, intellectual property and other aspects. The TPP would also cut barriers in service sectors, including financial, telecommunication, e-commerce and other new areas, making investment all the more attractive.

While Japanese Prime Minister Shinzo Abe has remarked that the TPP would be meaningless without the US, there are calls in his country for Japan to move ahead with the TPP framework even without US participation.

"We do not want to exclude any options so we need to prepare Plan B and Plan C, but our first priority is to push [the TPP forward] and convince [others of] a basic understanding of economics," said Yoshitaka Yamamuro, representative for the Asia Pacific region at the Overseas Human Resources and Industry Development Association.

Japan is also willing to be one of the negotiating countries for the Regional Comprehensive Economic Partnership (RCEP) -- involving Asean plus China, Japan, South Korea, India, Australia and New Zealand -- on condition that it provide sufficient trade liberalisation and fair quality of trade, he said.

As Asean prepares to celebrate its 50th anniversary in August, Prof Hikari Ishido of the University of Chiba said the regional bloc's centrality is the main driving force pushing the RCEP forward to achieve greater liberalisation.

Although the TPP is given only a marginal chance of advancing, Japan's pragmatic approach, dubbed "flexible rigidity", is evident as the country could opt for bilateral negotiations if multilateral agreements stall, said Prof Ishido, noting how the government switched its focus from multilateral negotiations to bilateralism in the late 1990s when it saw that World Trade Organization talks were taking a very long time.

But Japan could be at a disadvantage if it engages in bilateral trade negotiations with the US since the latter has been trying to open up the former's agricultural sector.

"Prime Minister Abe needs to talk about how Japan can keep protecting the five 'sacred sectors' [rice, wheat, beef and poultry, dairy products and sugar]. But that is an Achilles heel so it is the weakest point of Japan's trade-based strategy," said Prof Ishido.

"Bilateral [trade negotiations] might not function if Japan continues to protect its agricultural sector. I do not think a US-Japan free trade agreement will be a smooth one."

There is still hope, meanwhile, that the TPP could be resurrected by the next US government, assuming that Mr Trump is not re-elected in 2020, said Prof Ishido.

Deborah Elms, executive director at the Asian Trade Centre, offers a different view as she thinks the existing 11-nation pact is not dead as Japan could still assume the mantle of leadership and set the rules of trade in Asia.

"The eleven [remaining TPP signatories] can still proceed, but it requires some level of political will to see that this remains a viable option," said Dr Elms.

"The reality is those eleven [countries] have incredible [market] access to one another. They do not need to have the US market open at the moment because it is already open, assuming that the Trump administration does not close it off."

But the challenge is the idea of setting a standard is an "unfamiliar role" for Japan as it has not been seen as a regional leader even though its economy is the third largest in the world, she said.

"It is especially challenging because they have to worry about what would be the response from the Trump administration. Would they be hostile to the idea of how Japan would pick up the TPP and drive it forward?"

Do you like the content of this article?
COMMENT

Liverpool down Watford 2-0

LIVERPOOL: Mohamed Salah scored twice as Liverpool extended their Premier League lead to 11 points with a 2-0 victory over bottom-ranked Watford at Anfield on Saturday.

21:26

Singapore invokes fake-news law again

SINGAPORE: The Singapore government invoked its fake news law on Saturday to order an opposition party to publish corrections on two social media posts and an article on its website about local employment.

21:19

14-year-old accused of killing Yala forestry official

YALA: A 14-year-old boy stands accused of firing the shots that killed a senior forestry official in Yala, police said on Saturday after arresting all three suspects including the mastermind.

19:23