SIGNIFICANT reforms undertaken by member-countries of the Association of Southeast Asian Nations (Asean) like the Philippines will make them more attractive to Japanese multinationals as investment destinations over the medium to long term.
US-based think tank IHS Inc. said Japanese foreign direct investments (FDI) into the region for 2011 to 2013 amounted to $56.3 billion, far exceeding the $35 billion in Japanese FDIs that went to China over the same period.
“Japan’s pivot to Asean partly reflects a number of ‘push factors’ driving Japanese firms away from making new FDIs into China, notably the escalation of bilateral political tensions between the two nations since 2012, and the rapid rise in manufacturing wage costs in coastal China,” Rajiv Biswas, Asia Pacific chief economist at IHS, said in his Asia letter titled “Japan’s Asean Pivot.”
Biswas said the region has become particularly attractive for Japanese companies facing a mature domestic consumer market and aging demographics at home.
This increased impetus to invest outside of their home market also comes on the back of key policy thrusts of “Abenomics”, a strategic effort to support Japanese multinationals to seize new growth opportunities in emerging market regions since Japanese Prime Minister Shinzo Abe took office in December 2012, Biswas said.
“Asean has many ‘pull factors’ that are attractive to Japanese multinationals, such as the region’s combined GDP [gross domestic product]reaching $2.4 trillion in 2014, with a total population 635 million people and a rapidly growing middle class, representing one of the fastest-growing market opportunities over the next two decades,” he said.
The IHS economist added these pull factors are creating surging interest in the Asean economies from Japanese firms across many manufacturing industries, including energy, electronics, automotive, construction equipment, industrial machinery and food products, as well as companies in service industries such as banking and logistics.
Biswas said there have been significant trade liberalization initiatives undertaken by a number of Asean economies, including the removal of internal tariff barriers to trade in goods through the implementation of the Asean Free Trade Area (AFTA).
AFTA was established for the Asean-6 nations (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) in 2010 with a somewhat longer transition period for the other four Asean nations (Vietnam, Myanmar, Cambodia and Laos).
“The next stage of economic integration is already in progress through Asean negotiations for the Asean Economic Community (AEC), which aims to liberalize trade in services and remove barriers to investment amongst Asean countries,” he said.
The economist added the region has also constructed a network of Free Trade Agreements (FTAs) with other key trade partners, including China through the China- Asean FTA, as well as FTAs with Australia, India, and New Zealand.
Beyond the regional trade initiatives, Biswas said there are significant changes at the national level that are helping to boost Asean competitiveness.
In the Philippines, he highlighted the undergoing economic revitalization under President Aquino to boost FDI inflows over the medium term, including the introduction of new rules to allow 100-percent foreign ownership in the local banking sector.
“The Asean region offers considerable opportunities for Japanese firms, not only as hubs for manufacturing production, but also because of the large population and fast-growing consumer middle classes in some of Asean’s largest economies, including Indonesia, the Philippines, and Vietnam,” Biswas said.