BMI View: Japanese Prime Minister Shinzo Abe is actively seeking to boost his country's influence in South East Asia to counterbalance China , with the US broadly supporting Japan as part of its ' pivot ' towards Asia. South East Asian economies should benefit from increased Chinese and Japanese economic incentives as a result.
Japanese Prime Minister Shinzo Abe is actively seeking to revive his country's influence in the Asia-Pacific region, and he is motivated primarily by a desire to counterbalance China's rising power. For many decades after World War II, Japan was the most powerful country in Asia. However, China's economic rise over the last decade and Japan's economic weakness since the early 1990s, have led to China assuming the mantle of regional leadership.
South East Asia's Importance To Japan
Japan has for many decades regarded South East Asia as economically crucial, as evidenced by the fact that it pursued its Imperial expansion in the region in the 1940s. In the post-World War II era, South East Asia became a key battleground between the US on the one hand and the USSR and China on the other, with the US fighting a decade-long war in Vietnam to prevent the spread of Communism in the region . Japan eschewed military commitments in South East Asia due to the constraints imposed upon its armed forces under its post-war constitution, but its rapid economic growth allowed it to serve as a regional anchor. As Japan's economy matured in the 1980s, the country invested heavily in countries such as Indonesia, Malaysia, and Thailand, among others. However, as Japan's economy stalled in the 'lost decade' of the 1990s, it was less able to serve as a locomotive for the region - a role that was assumed by China. During the 1997-1998 Asian financial crisis, it was the US - not Japan - that led the economic rescue efforts, via the IMF. In addition, t he US overruled Japan's proposal to create an Asian Monetary Fund. During the 2000s, as China's economy boomed, the People's Republic overtook Japan in terms of size as a trade partner of many South East Asian states. Beijing also became an active lender to the region for infrastructure projects. By comparison, Japan has been cutting its Official Development Assistance (ODA) for many years , due to its severe fiscal problems .
Nevertheless, Japanese economic engagement of South East Asia has been strong. Japanese companies are heavily invested in Thailand's auto manufacturing, and Japan receives considerable commodity imports from Indonesia. Meanwhile, Japanese companies are said to be keen to establish a greater presence in Vietnam as an alternative to China.
Japan's New Opportunity In South East Asia
Despite China's increasing trade and investment in South East Asia, Beijing has been unable to develop an undisputed sphere of influence in the region. Regional states are unwilling to find themselves politically subordinate to the People's Republic. Reports in the international media suggest that there is increasing consternation about China's rise, especially in Vietnam and the Philippines, which have territorial disputes with China in the South China Sea. Meanwhile, Myanmar, which has long been a quasi-satellite state of China due to its isolation from the West, has sought to 'break free' of Beijing by seeking a rapprochement with the US and Europe. For its part, the US has been pursuing a 'pivot' towards Asia, with the un stated intention of counterbalancing China. Given that Japan is a close ally of the US, and given that Japan is still a formidable economy, Tokyo has an opportunity to reassert its influence in South East Asia. The table below lists some recent initiatives by Japan in the Asia-Pacific region.
|Countries||Programme||Date and status when reported|
|Source: BMI, international media.|
|ASEAN||ASEAN Satellite Network - aimed at enabling Japan and ASEAN members that operate Japan-made satellites to share data||Proposed||02-May-13|
|Currency swap agreements with Indonesia and Philippines and talks to renew lapsed contracts with Malaysia, Singapore and Thailand||06-May-13|
|Cross-border collateral scheme - to increase ease at which Japanese firms can obtain local currency funding for their operations with JGBs as collateral||Proposed||06-May-13|
|Japan invested in local currency bonds issued by Indonesia, Malaysia, the Philippines, Singapore and Thailand (via dollar-denominated Pan Asia Bond Index Fund)||06-May-13|
|Japan participated in a military training exercise in northern Thailand which was attended by the United States and six Asian countries - Japan, Indonesia, South Korea, Singapore, Malaysia, and Thailand. Dubbed Cobra Gold 2013, the exercise covered combat training, as well as disaster relief||11-Feb-13 to 21-Feb-2013|
|Cyber-defense network - system will enable the quick and seamless communication between officials in each country and possibly enable joint countermeasures if one country is attacked. Among the 10 nations already interested in participating are Thailand and Indonesia||Proposed||08-Oct-12|
|Sri Lanka||Japan and Sri Lanka agreed to strengthen bilateral cooperation in Indian Ocean maritime security and coast guard patrols, including greater exchanges between their defense authorities to fight piracy. (Japan provided US$800mn to help Sri Lanka expand its main port in Colombo)||15-Mar-13|
|Vietnam||Japan and Vietnam plan to hold maritime security talks in Hanoi. |
Japan will provide patrol boats as part of Vietnam's efforts to improve its maritime security capabilities.
Japan won an order for the construction of a nuclear power plant (in 2010) that Vietnam hopes will be completed in 2020.
|To be held in May||18-Jan-13|
|Japan has provided non-refundable aid for more than 25 technical projects to develop Vietnam's agriculture and rural areas, and four major irrigation projects valued at US$450 million||04-May-13|
|Taiwan||Fishing accord signed allowing Taiwanese fishing boats to fish in waters near the Senkaku/Diaoyu islands||11-Apr-13|
|India||Japan provided JPY220.4bn in loans for four projects, including the Delhi-Mumbai Industrial Corridor project||28-Mar-13|
|Myanmar||Construction of an industrial complex is already under way in Thilawa near Yangon as part of a joint venture with Japan's Marubeni Corp. and two other Japanese trading companies. (due to start operation in 2013)||Q113|
|Japan will help Myanmar develop a system to increase intellectual property protection and fully establish its legal systems. The government sent lawyers and Justice Ministry officials to Myanmar|
|Japan forgave about JPY300bn of Myanmar's debt and resumed fully-fledged development aid||21-Apr-13|
|Previously, Japan wrote off almost US$6bn in Myanmar's debt and provided a new loan of about US$600mn|
|Mongolia||Japan offered Mongolia loans of JPY4.2bn to help with renovation cost of thermal power plants||02-Apr-13|
|Japan greed to start vice foreign minister-level talks to discuss diplomatic and security issues and hold a policy dialogue with the US|
|Philippines||Japan provided the Philippines with 10 multi-role response vessels to beef up the Philippines' surveillance capacity as well as a high-tech communication system for maritime safety||09-Mar-13|
|Japan donated approximately US$2mn through the United Nations World Food Programme (WFP) for victims of Typhoon Pablo last December.||Dec-12|
|Japan extended a PHP23.63bn loan for infrastructure development (upgrading Lines 1 and 2 of the Manila Light Rail Transit and to build the Bohol International Airport). Japan also extended a PHP383mn grant to build a mini-hydropower plant in Ifugao.||Q113|
|Indonesia||The two nations signed a bilateral cooperation agreement to create an emergency (disaster) warning system. Japanese manufacturers NTT Data Corp. and Hitachi Ltd. will bear the development and manufacturing tasks of the project to help create the system.||29-Apr-13|
|The Japan International Corporation Agency (JICA) offered Indonesia new technology to help develop underground reservoirs as a solution to its incessant flood control issue. It is being funded by JICA.||Proposed||08-Nov-12|
|Japan has agreed to contribute US$13bn to jointly funded infrastructure projects in Jakarta worth roughly US$43bn. The development plans include the construction of roads, railways, airports, and power plants in the Indonesian capital and its surrounding areas by the year 2020. Out of 45 projects approved by the two countries' governments, 18 are seen as priority developments that will begin before the close of 2013.||08-Oct-12|
Japan's Means Of Influence In South East Asia
Trade relationships: Although China overtook Japan in 2010 to become the world's second-largest economy, Japan still has considerable economic weight in Asia, and is among the biggest trade partners for most countries in South East Asia. For example, Japan is the biggest export destination and import source for the Philippines; the top export destination for Indonesia and its third-biggest source of imports; the third-ranked trade partner of Malaysia; the second or third major export destination of Thailand and its top source of imports; and one of the top three trade partners of Vietnam. Japan is also Myanmar's fourth-ranked export destination. Therefore, any sustained revival of the Japanese economy would be a boon to the region.
Foreign direct investment (FDI): Japan is a major foreign investor in South East Asia, with figures from the Japan External Trade Organisation (JETRO) showing that total outward foreign direct investment to Asian countries between 1995 and 2012 amounted to US$266.4bn, or 28% of the total that Japan invested abroad over the same period. Although China was by far the biggest recipient of Japanese FDI, with US$90.3bn, the ASEAN Four (Thailand, Indonesia, Malaysia, and the Philippines) received US$72.9bn. The respective figures for these countries were US$31.4bn, US$19.6bn, US$11.3bn, and US$10.6bn. A sustained revival of the Japanese economy would support further FDI in South East Asia, especially with Japan keen to diversify its investment away from China, due to geopolitical tensions.
Development assistance: Japan's Official Development Assistance (ODA) peaked at JPY1,169bn in FY1997, and by FY2009, it had slid to JPY672.2bn, which was the lowest since 1986. The decline reflected Japan's increasingly severe financial situation. Nevertheless, organisations such as the Japan Bank for International Cooperation (JBIC) and Japan International Cooperation Agency (JICA), through which Japanese ODA is channelled, play an important role in promoting development in emerging economies. Japan also provides assistance to emerging Asian economies through its powerful role in the Asian Development Bank (ADB), and a Japanese national has held the lender's presidency ever since it was founded in 1966.
Financial assistance: Japan's proposal to create an Asian Monetary Fund after the 1997-1998 Asian financial crisis was blocked by the US, but Japan maintains bilateral currency swap agreements with several Asian countries and is a participant in the Chiang Mai Initiative (CMI) currency swap arrangement, which includes the 10 members of ASEAN plus China and South Korea.
Security cooperation: Owing to the constraints placed on the Japanese armed forces after World War II, Japan has played a minimal role in South East Asia's security. However, recent Japanese prime ministers, including Shinzo Abe, are in favour of Tokyo playing a bigger part in the region, and Abe is hoping to amend Japan's constitution for this reason. In December 2012, Abe stated that he wants Japan to participate in the Five Power Defence Arrangement between the UK, Malaysia, Singapore, Australia, and New Zealand. Abe has also spoken of creating a 'security diamond' between Japan, India, Australia, and the US state of Hawaii, linking the Indian and Pacific oceans. He sees both initiatives as aimed at counterbalancing Chinese power in the Asia-Pacific region. Although we see little chance of a NATO-style formal military alliance emerging to 'contain' China, because this would be seen as an overly provocative move, we believe that the coming years will see increasing military cooperation between Japan, Vietnam, the Philippines, and India - all of which are concerned about China's rise.
Constraints On Japanese Influence
Japan's ability to exert influence in South East Asia will depend on its future economic performance. If Prime Minister Abe's 'Abenomics' sets Japan onto a path of sustainable recovery, then the country's economy will be viewed favourably in the region, and we could witness greater Japanese FDI in South East Asia.
However, there are considerable constraints to Japan playing a more active role in South East Asia. The first is economic. Due to its massive fiscal deficit and colossal debt burden, Japan simply lacks the economic resources that China has at its disposal.
Secondly, Japan's 'revolving door' political leadership makes it difficult for its prime minister to play a high-profile role in regional affairs. Abe's six predecessors, including Abe in his first stint as premier (2006-2007), barely lasted a year in office. It is unclear if Abe can break the recent tradition of misfortune. That said, Japan's foreign policy bureaucracy will continue engagement with South East Asia, regardless of who is prime minister.
Thirdly, Japan's fiscal challenges and domestic constraints preclude a major expansion of its armed forces, and this will limit its ability to play a substantial role in regional security. The Japanese public is also very cautious about any role that could embroil it in regional conflicts.
South East Asia To Benefit From Sino-Japanese Competition
Nevertheless, as Abe seeks to increase Japan's regional clout, we expect South East Asian countries to benefit economically from the 'bidding war' between China and Japan. Quite simply, Beijing and Tokyo will be keen to win political support through aid and investment, and South East Asian states will thus be in a good position to maximise their rewards.