The New Direction of Japanese Investment: Turning Towards ASEAN and India

Japan’s strategic shift to build reliable supply chains with like-minded nations, particularly in response to geopolitical risks associated with economic security issues with China, signifies a significant realignment in its global economic strategy. A key focus of this realignment is strengthening cooperation with emerging and developing countries in the Global South. This move reflects a declining interest in China as an investment destination, with Japanese companies increasingly focusing on ASEAN member states and India.

In the early stages of this strategic shift, Japan has shown a particular interest in deepening its cooperation with India. This collaboration has been evident in various sectors, from technology and infrastructure to defense and space research. The Japan-India partnership is seen as a cornerstone of Japan’s broader strategy to diversify its economic alliances and reduce dependency on any single market. Key infrastructure projects like the Delhi-Mumbai Industrial Corridor and the Mumbai-Ahmedabad High-Speed Rail Corridor, often called the Shinkansen project, demonstrates Japan’s substantial investment in India’s development. Collaborations have extended to technology and innovation in IT, telecommunications, and advanced manufacturing. In defense, joint exercises like ‘Dharma Guardian’ and ‘Malabar’ have strengthened military ties. Additionally, in space research, JAXA and ISRO have worked together on the LUPEX mission to explore the Moon’s south pole, underscoring the depth of their scientific partnership.

Additionally, there have been notable cases of cooperation between Japan and ASEAN countries. Japanese companies have been actively investing in Southeast Asia, focusing on industries like electronics, automotive, and renewable energy. These investments are often supported by the Japanese government’s initiatives to strengthen economic ties with ASEAN countries. Companies like Sony and Panasonic have expanded their operations in Thailand and Malaysia. In the automotive industry, Toyota and Honda have set up manufacturing plants in Indonesia and the Philippines. Additionally, in renewable energy, Japanese firms are involved in solar and wind energy projects in Vietnam, such as the Krong Pa Solar Power Plant, and wind energy projects in the Philippines.

Furthermore, in an effort to mitigate supply chain vulnerabilities, the Japanese government has been incentivizing companies to shift their production back home or to Southeast Asia. This policy aims to reduce Japan’s reliance on Chinese manufacturing and ensure more resilient supply chains amidst global uncertainties. The issue became apparent when Japanese companies like Nissan faced production halts due to part shortages from China, and Iris Ohyama struggled with mask supply amidst surging local demand and export controls from China. In March, Prime Minister Shinzo Abe announced the government’s intention to bring production back to Japan and diversify into Southeast Asia. Subsequently, $2.2 billion was allocated in Japan’s coronavirus economic recovery package to subsidize this transition. The first round of subsidies amounted to $535 million, aiding 57 companies to open factories in Japan and 30 others to expand in Southeast Asia. Japan’s Ministry of Economy, Trade and Industry (METI) has been working to reduce the country’s dependency on China, a response to various disruptions including the 2008 financial crisis, the 2011 earthquake, and the recent pandemic, as well as U.S.-China trade tensions. The subsidies target suppliers of emergency goods like masks and industries vulnerable to economic shocks, including auto and aviation parts, hygiene products, fertilizer, medicines, and paper products. Iris Ohyama, utilizing the subsidy, has opened a mask factory in Sendai, Japan, and has been gradually shifting production out of China due to rising costs and stricter regulations. However, for large items with complex supply chains, production is likely to continue in China and East Asia. Japanese automakers have mostly decided to remain in China, with a survey showing an increase in companies planning to expand their business there.

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