Japanese companies are re-balancing their investment in Asian economies – away from China, historically their most important Asian destination, and toward the Association of South-east Asian Nations (Asean). Japanese FDI in China fell by 33% to $9.1bn in 2013, according to provisional data from the Japan External Trade Organisation. This is a marked shift from the past two years when FDI in China was about $13bn per year. Rising country risk was cited as a key reason behind the fall in FDI to China, along with issues such as intellectual property protection, rising labour costs, and the rule of law.
FDI in the Chinese territory of Hong Kong also fell by some 44% in 2013. In contrast, very strong growth was recorded in FDI flows to Thailand, Singapore, the Philippines and Vietnam.
Similar developments can be seen in Japan's trade. Exports to China saw a double-digit decline in 2013 for the second year in a row. China is thus no longer Japan's leading export destination. It now ranks second after the US for the first time in five years. The slowdown in domestic demand was one factor behind the fall in exports. Exports of automobiles also fell drastically after Japan-related demonstrations in China.
This trend seems set to continue over the next few years, according to a survey by the Japan Bank for International Co-operation (JBIC). China has fallen from first to fourth place in its ranking of the most promising countries for Japanese companies to do business in. China had topped this ranking since the survey's inception in 1989.
Looking at individual industry sectors, China is still the leading destination for the Japanese chemicals business, but it ranks second for electrical equipment and electronics, third for general machinery, and fifth for automobiles, which are the most vulnerable to public opinion.
Indonesia, India and Thailand have moved ahead of China in the ranking of most promising places to do business, ranking first, second and third, respectively. However, Thailand’s recent political difficulties, which surfaced after the survey was conducted, may reduce its future attractiveness. Both Myanmar and the Philippines have moved up JBIC’s list to eighth and 11th places, respectively.
The active diplomacy of Japanese prime minister Shinzo Abe will also reinforce the trend in favour of Asean and India. In recent months, he has visited all 10 Asean countries and India to court their diplomatic friendship, while relations with China have deteriorated. Mr Abe also hosted an Asean-Japan summit in Tokyo in December 2013, when he made big promises of overseas development assistance and investment loans. This will no doubt create business for Japanese companies, and the resultant infrastructure improvements will also support future Japanese FDI.