CARI Analysis: Japan-ASEAN Economic Ties to Grow Despite COVID-19
CARI Analysis: Japan-ASEAN Economic Ties to Grow Despite COVID-19
Author: Mohd Imran Said Bin Mohd Shamsunahar | Research Editor: Eleen Ooi Yi Ling
Webmaster: Nor Amirah Mohd Aminuddin | Research Director: Hong Jukhee
As Japan undergoes a leadership change with the sudden resignation of Prime Minister Shinzo Abe, the geopolitical implications will be of especial interest for regional observers. A survey carried out by Japan Center for Economic Research and Nikkei between August 31 to September 4, 2020, on their expectations for the new Prime Minister found most respondents stressing Tokyo’s role in regional stability and development and greater cooperation with other Asian countries.
Since the establishment of formal relations in 1977, Japan has been one of ASEAN’s strongest regional partners. As another middle power navigating the ongoing Sino-US tensions and fellow proponent of the global rules-based order, Japan can be viewed arguably as a natural partner for ASEAN. The recent adoption of a bilateral commitment to cooperate on COVID-19, a recent upgrade to the Japan-ASEAN Comprehensive Economic Partnership agreement, and the expected signing of the Regional Comprehensive Economic Partnership (RCEP) in November 2020, were among the most recent initiatives in expanding the economic relationship. This relationship has been in development since the mid-seventies and was provided renewed impetus by Tokyo post-2008 to compete with Chinese influence in the region.
CARI Analysis: Japan-ASEAN Economic Ties to Grow Despite COVID-19 looks at these expanding ties between Japan and ASEAN through five main areas of focus; namely trade and global value chains, foreign direct investment and infrastructure development, supply chain relocation to ASEAN, financial cooperation through Japanese capital markets, and finally regional perceptions of Japan as a major power.
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1) Japan-ASEAN economic ties expected to be boosted through recent initiatives in trade liberalization and COVID-19 cooperation
1a. Great expectations for Japan’s new prime minister
As Japan undergoes a leadership change with the sudden resignation of Shinzo Abe, the geopolitical implications will be of special interest for regional observers. A survey carried out by Japan Center for Economic Research and Nikkei between August 31 to September 4, 2020 (shortly after Abe announced his resignation), which solicited responses from economists from ASEAN and India on their expectations for the new prime minister Yoshihide Suga, found most respondents laying emphasis on Tokyo’s role in promoting regional stability and development (particularly in the context of ongoing Sino-US tensions), as well as strengthening cooperation with other Asian countries.1
Carlo Asuncion of Union Bank of the Philippines stated that Japan should ‘”continue to be an important player in the geo-political situation in Asia’, while Somprawin Manprasert of Bank of Ayudhya in Thailand stated that greater cooperation between Japan and Asian countries would be necessary “to cushion external shock from outside of the region, especially protectionism and deglobalization’. 2
1b. Japan a natural partner for ASEAN
Since the establishment of formal relations in 1977, Japan has been one of ASEAN’s strongest regional partners at both the bilateral and multilateral levels. As a fellow middle-power navigating the increasingly tense regional competition between China and the United States, Japan is a natural partner for ASEAN in advocating for the international rules-based order upon which Asian prosperity was built upon.
Since the seventies onwards, Japan has been a close economic and development partner for ASEAN, as well as a long-standing supporter of ASEAN regionalism. On 28 August, 2020, economic ministers from ASEAN and the Minister of Economy, Trade, and Industry (METI) Japan met virtually for the 26th AEM-METI Consultations. The participating ministers acknowledged the economic challenges brought about by the COVID-19 pandemic, and reaffirmed their commitment to take collective actions to mitigate the economic impact of the virus, and to keep their markets open for trade and investment and maintain supply chain connectivity.3
The participating ministers referenced three ongoing initiatives to broaden and deepen bilateral ASEAN-Japan economic ties, including the First Protocol to Amend the Agreement on Comprehensive Economic Partnership among Japan and Member States of the Association of Southeast Asian Nations (the First Protocol to Amend the AJCEP), The ASEAN-Japan Economic Ministers’ Joint Statement on Initiatives on Economic Resilience in Response to the Corona Virus Disease (COVID-19) Outbreak, and the Regional Comprehensive Economic Partnership (RCEP) Agreement.
1c. First Protocol entered into force on 1 August, 2020
On 15 June, 2020, the Japanese government notified the ASEAN governments that the legal procedures necessary for the entry into force of the First Protocol to Amend the AJCEP had been completed. The governments of Thailand, Singapore, Lao PDR, and Myanmar had already made similar notifications.4
The Protocol adds provisions concerning trade in services, movement of business people, and investments to the AJCEP (which entered into force in 2008). The Protocol is also the first bilateral economic partnership agreement between Japan and the Mekong countries of Cambodia, Lao PDR, and Myanmar. The Protocol includes rules and liberalization commitments from ASEAN Member States that are not included in the bilateral Economic Partnership Agreements and related agreements concluded between Japan and ASEAN member states in the past.5
The Protocol entered into force on 1 August, 2020, among Japan, Lao PDR, Myanmar, Singapore, Thailand, and Viet Nam. The remaining five other ASEAN Member States are expected to complete procedures and join by the end of 2020. The Japanese Foreign Ministry stated that the Protocol is expected to promote greater trade and investment between Japan and ASEAN.6
During the 26th AEM-METI Consultations the ministers reviewed the progress of the implementation of the AJCEP, and described it as a ‘vital component of post-COVID-19 recovery efforts’.7
1d. Japan and ASEAN to cooperate on COVID-19
On 22 April, 2020, the ASEAN Economic Ministers (AEM) and Minister of Economy, Trade and Industries of Japan adopted “The ASEAN -Japan Economic Ministers’ Joint Statement on Initiatives on Economic Resilience in Response to the Corona Virus Disease (COVID-19) Outbreak”. 8
Subsequently, on 29 July 2020, both parties adopted the ASEAN-Japan Economic Resilience Action Plan, which was designed to translate the Joint Statement into concrete actions. Malaysian Senior Minister cum International Trade and Industry Minister Datuk Seri Mohamed Azmin Ali would state during a digital meeting between ASEAN Economic Ministers and the Minister of Economy, Trade and Industry of Japan that the action plan ‘signifies a strong commitment and solidarity between Asean and Japan in combating the Covid-19 pandemic, both on the health and economic fronts.’9
The ASEAN-Japan Economic Resilience Action Plan was designed to accomplish three objectives: 10
- sustain the close economic ties developed by ASEAN and Japan;
- mitigate the adverse impact of COVID-19 on the economy;
- strengthen economic resilience in response to the economic challenges brought about by the COVID-19 pandemic.
During the 26th AEM-METI Consultations, the participating ministers noted the progress made in the implementation of the ASEAN-Japan Economic Resilience Action Plan. To enhance the implementation of the Action Plan, the ministers welcomed the launch of the “Dialogue for Innovative and Sustainable Growth (DISG)” to accelerate “Innovative and Sustainable Growth” across the region. The Ministers also referenced the specific support programs led by the Japan External Trade Organization in line with the Action Plan. These included 11
- a helpline for recovery & restoration,
- a strengthening of the regional supply chain, and
- DX platform for ASEAN-Japan collaborative innovation.
1e. Regional Comprehensive Economic Partnership (RCEP)
On 27 August, 2020, the economic ministers of ASEAN, Australia, China, Japan, South Korea and New Zealand met for the 8th Regional Comprehensive Economic Partnership (RCEP) Ministerial Meeting. During the meeting, the ministers acknowledged the economic challenges brought about by the COVID-19 pandemic, and stressed the imperative of keeping markets open and to cooperate in the fight against COVID-19.12
In light of ongoing uncertainties, the ministers recognised the importance of the RCEP Agreement in terms of enhancing business confidence, strengthening the regional economic architecture, and maintaining the stability of regional and global supply chains. The ministers also believed that the agreement would play a significant role in post-pandemic recovery efforts. The Agreement is expected to be signed at the 4th RCEP Summit in November 2020, and that the agreement would remain open to India to rejoin at a later date.13
1f. Both Japan and ASEAN seek to expand the economic relationship
The recent upgrading of the Comprehensive Economic Partnership agreement between ASEAN and Japan, the agreement to cooperate on COVID-19, and the expected signing of the RCEP Agreement in November 2020 are among the recent initiatives to expand the economic relationship between Japan and ASEAN. This relationship flourished from the mid-seventies to the eighties, as Tokyo sought to build stronger relations with ASEAN governments through more inclusive and constructive trade, investment, developmental assistance, and economic cooperation policies. After a lull following the end of the Cold War, there was renewed impetus by Japan after 2008 to regain influence in the region, partly as a counter to the rise of China.14
In the next five sections, this paper will look at the Japan-ASEAN relationship through five main areas of focus; namely trade and global value chains, foreign direct investment and infrastructure development, supply chain relocation to ASEAN, financial cooperation through Japanese capital markets, and finally regional perceptions of Japan as a major power.
2) Japan-ASEAN trade
2a. Total merchandise trade between Japan and ASEAN peaked in 2012 at US$264.5 billion
A perusal of the total merchandise trade between Japan and ASEAN between 2009 and 2019 found that merchandise trade peaked in 2012 at US$264.5 billion. In 2019, merchandise trade measured at US$225.9 billion in 2019 (Figure 1). 15
2b. Japan composed 8% of ASEAN’s total merchandise trade in 2019
Japan’s share of total merchandise trade with ASEAN by value has dropped slightly from 10.5% in 2009 to 8.0% in 2019 (Table 1). In 2018, Japan was ASEAN’s fourth largest trading partner behind China, the EU, and the USA. 16
2c. Thailand was Japan’s largest ASEAN trading partner in 2019
Thailand accounted for Japan’s largest trade partner in ASEAN in 2019, at US$57.8 billion. Viet Nam and Singapore followed at US$40 and US$37.1 billion respectively (Figure 2).
An analysis of trade with Japan for each ASEAN country between 2009 and 2019 differs depending on the country. While Thailand has consistently remained Japan’s largest trade partner in the region, trade with Cambodia or Myanmar has remained negligible (Figure 3).
2d. Japan was the largest source of foreign inputs used in ASEAN value-added exports from the 1990s to 2000s
According to a January 2019 study by the Japan-ASEAN Centre on ASEAN global value chains, Japan was the largest source of foreign inputs used in value-added exports from ASEAN from the 1990s until the beginning of the 2000s (Figure 4).17
Since then Japan’s share of intermediate inputs used in total exports by ASEAN has declined, although the report pointed out that this may be compensated by Japanese foreign affiliates operating within the region who can now directly produce and supply the inputs and components required within ASEAN. 18
3) Japan-ASEAN FDI
3a. The peak of Japanese FDI into ASEAN roughly coincides with the peak of trade in 2012
Between 2010 and 2019, Japanese FDI into ASEAN peaked in 2013 at US$24.6 billion. This roughly coincides with the peak in the trade in merchandise goods between Japan and ASEAN in 2012 (Figure 5). 19
3b. Japan was ASEAN’s second largest external source of FDI in 2018
Japan was the second largest source of extra-ASEAN FDI in 2018; composing 13.7% share of total FDI (Figure 6). 20
3c. Thailand, Indonesia and Singapore were the 3 largest destinations for Japanese FDI in 2018
Thailand, Indonesia and Singapore were the 3 largest destinations for Japanese FDI in 2018, with each of them receiving more than US$ 4 billion (Figure 7).
3d. In June 2019 Japanese-backed projects overtook Chinese-backed ones in ASEAN-6
Data by Fitch Solutions in June 2019 revealed that in terms of the total value of pending projects, Japanese-backed infrastructure projects in the ASEAN-6* outpaced that of China’s by US$367 billion to US$255 billion respectively. Vietnam alone had pending projects worth US$209 billion (Figure 8). 21
It should be noted that the figures from Fitch only counted pending projects; defined as ‘those at the stages of planning, feasibility study, tender and currently under construction’.22
Across ASEAN as a whole and by the number of projects, Japan still narrowly beat China by 240 to 210 (Figure 9).
3e. Qualitative-focused infrastructure development partner
In 2015, former Japanese Prime Minister Shinzo Abe gave two speeches which outlined how Japan would contrast itself with China’s model of international development partnerships (most notably through its landmark Belt and Road Initiative) with regards to ASEAN. Abe pointed to Japan’s experience in not just infrastructure financing and deployment, but also technology sharing, technical development, and human capital development. Abe emphasized the quality of Japanese infrastructure, especially in terms of ‘safety, reliability, and innovation’, and further argued that Japan would not engage in the practice of conditional financial assistance.23
Two quality-focused development concepts that have seen significant ASEAN-Japanese collaboration include the concepts of economic corridors, originally developed by the Asian Development Bank and now featured in ASEAN’s Master Plan on ASEAN Connectivity, as well as the ASEAN Smart City Network, formally launched in July 2018 and drawing heavily upon Japanese experiences, funding, technologies, and technical expertise.24
4) Japan and supply chain relocations to ASEAN
4a. In response to US-China trade tensions, Japan has sought to diversify its supply chains away from China
Intensified tensions between China and the US since 2018 has pushed more Japanese firms to expand operations in the ASEAN-6**, with a 2019 survey carried out by the Japan External Trade Organization finding 41% of companies surveyed considering expanding operations in Vietnam alone in the next three years, up 5.5% from the year prior. The response ratio for Thailand also improved from 34.8% in 2018 to 36.3% in 2019 among firms mainly found in the manufacturing industry. In comparison, the ratio of firms citing China was 48.1%, down 7.3 points from the previous year (Figure 10).25
A total of 71.1% of firms surveyed stated they would expand operations in the ASEAN-6 countries, the first increase in six years. This was attributed in part to risk aversion on the part of the Japanese companies (Figure 11).26
Among the specific functions to be expanded into ASEAN, 53.5% of the firms surveyed wanted to expand sales in the ASEAN-6 in 2019, while a further 17.5% wanted to expand production of general purpose goods (Figure 12).27
4b. Japanese government subsidizing companies to expand to ASEAN
On 7 August, 2020, it was reported by Bloomberg that the Japanese government was providing subsidies worth US$114 million to 30 companies seeking to diversify their production to Southeast Asia, part of the first round of a multi-billion dollar program to diversify supply chains away from China in the aftermath of COVID-19. 28
4c. The Supply Chain Resilience Initiative (SCRI) and ASEAN
In mid-August 2020, Indian and Japanese news outlets reported that India, Japan, and Australia have been in discussions on launching a trilateral Supply Chain Resilience Initiative (SCRI) to reduce supply chain dependency on China. The SCRI was reportedly proposed by Japan, who is keen to launch the initiative by November 2020. 29
The objectives of the SCRI is two-fold: to attract FDI into the Indo-Pacific and to build mutually complementary relationships among partner countries. It was also reported that the initiative would be opened to ASEAN after an understanding was reached between the three core partners. 30
5) Japan-ASEAN Financial Ties – Samurai bonds
5a. Japan’s bond market is an alternative source of foreign financing for ASEAN countries but not without risks
The Japanese bond market (often referred to as the ‘Samurai bond’ market) offers financing at low interest rates for foreign governments and private borrowers. Interest rates in the Japanese bond market are often lower than domestic rates in ASEAN due to Japan’s low interest rate environment. 31
It allows ASEAN governments such as Malaysia and Indonesia to raise money from Japan’s huge capital market with Tokyo providing the necessary guarantees for investors. This in effect creates government-backed bonds which ASEAN governments would then utilize to borrow necessary funds for infrastructure investments, etc.32
Borrowing from the Samurai market is unlikely to be explicitly called “infrastructure” debt. But the money is fungible, and governments borrowing money in global bond markets are free to direct it to whichever key projects they judge to be of merit.33
There are limitations to how many bonds the JBIC can guarantee. The more bonds ASEAN countries issue, the more Japan will be forced to reduce its guarantees. This will result in higher coupon rates for borrowing countries. 34 Holding large amounts of foreign currency debts also exposes ASEAN countries to foreign currency risks and the possibility of sudden reversals in capital flows.35
5b. Between 2018 and 2020, Malaysia, Indonesia, and The Philippines have issued their own Samurai bonds
- Malaysia: In November 2018, Japan offered 200 billion yen (US$1.75 billion) in Samurai bonds to help Malaysia balance its financial dependence on China. Malaysia successfully issued the number of bonds guaranteed by the Japan Bank for International Cooperation (JBIC) in March 2019, with an oversubscription of more than 1.6 times at 324.7 billion yen against the initial 200 billion yen offered. A proposed second public offering of Samurai bonds to be finalized by the end of the first quarter of 2020 was reportedly scrapped due to the Malaysian government having no immediate need for foreign financing.36
- Indonesia: On 3 July 2020 the Indonesian government raised US$930 million through the issuance of five-tranche Samurai bonds. The money raised was to be used to finance Indonesia’s budget deficit, including COVID-19 relief and recovery efforts. Indonesia’s issuance was reportedly the first issuance by an Asian country since the pandemic struck in 2020.37
- The Philippines: The Philippines Finance Secretary announced in June 2020 that Manila was looking to sell yen-denominated bonds in the second half of 2020, and that they will be helped along by the A-status rating recently awarded to them by the Japan Credit Rating Agency [JCR].38
6) Japan the most trusted power in ASEAN
6a. Japan the most trusted to ‘do the right thing’
In the ISEAS-Yusof Ishak Institute’s The State of SEA Survey Report 2020 published in January 2020, Japan remained the most trusted major power in the region, with 61.2% of respondents expressing confidence that Japan would ‘do the right thing’ in providing global peace, prosperity, and governance (Figure 13).39
Among the respondents who stated they trusted Japan, 51% viewed it as a ‘responsible stakeholder that respects and champions international law’ (Figure 14).40
ASEAN-Japan relations will be further boosted despite the COVID-19 pandemic. The recent adoption of the ASEAN-Japan Economic Resilience Action Plan, the First Protocol to Amend the AJCEP, and the expected signing of the RCEP Agreement are projected to help further elevate the already significant economic relationship between Japan and ASEAN. However, the impact of the appointment of the new Prime Minister Yoshihide Suga on Japan-ASEAN Relations remains to be seen.