Japan to the rescue?

By Imran Shamsunahar | 27 August 2019

It’s fair to say that ASEAN is finding itself in between a rock and a hard place. With the trade war between the US and China seeing no sign of concluding, the region’s export-oriented economies are already suffering. The Trump administration’s hostility towards free trade and China’s own inward pull has many ASEAN leaders worried about who is left to credibly stand up for globalisation and a rules-based order, both of which are vital for the bloc’s survival. Could Japan prove to be ASEAN’s salvation?

Commitment towards a liberal world order

Japan has increasingly been referred to as an example of a developed country which has so far avoided the spread of populism afflicting other much older and venerable democracies. Reasons put forth have included historically low levels of immigration, a tamed mainstream media, the high quality of its social services, including education and healthcare, and its relatively egalitarian economy. In an era where ethnic and class tensions are testing Western democracies and fracturing the liberal world, Japan seems committed to becoming more liberal, not less.

Japan and ASEAN share a common belief in upholding the postwar multilateral system upon which Asian prosperity has been built. After the withdrawal of the US from the Trans-Pacific Partnership (TPP) agreement, Japan proved indispensable in resuscitating the agreement and rebalancing certain concessions to address the demands of certain members. Japan proactively contributes money and personnel to global institutions such as the United Nations, the International Monetary Fund, and the Asian Development Bank. According to the Japan International Cooperation Agency, total contributions and subscriptions to international organisations in 2017 amounted to US$3.4 billion. Its close collaboration with international organisations such as the International Court of Justice (ICJ) and the International Criminal Court attests to Japan’s belief in the international rule of law.

Of smart cities and Samurai bonds

At a time when ASEAN must navigate the ongoing US-Sino rivalry and resist pressures to pick sides, Japan may provide a welcome partner as a fellow middle power. Japan accounted for 8% of ASEAN’s total merchandise export value in 2017. It also accounted for 9.9% of total FDI inflows in the same year, making Japan the second largest external source of FDI into ASEAN behind the European Union.

While there has been much media attention focused on China’s Belt and Road Initiative, the latest data from Fitch Solutions as of June 2019 argued that in terms of the total value of pending projects, Japanese-backed infrastructure projects in ASEAN’s six largest economies of Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam outpaced that of China’s by US$367 billion to US$255 billion respectively. Across ASEAN as a whole and by number of projects, Japan still narrowly beat China by 240 to 210.

Japan’s infrastructure drive into Southeast Asia is distinguished from China’s by its focus on providing quality and sustainability in place of deep pockets. Japanese Prime Minister Shinzo Abe has promised support for the ASEAN Smart Cities Network (ASCN) programme, for example, which seeks to create environmentally friendly cities using artificial intelligence and networked devices in 26 pilot cities across ASEAN. Japan, already knowledgeable in smart city innovation, is well placed to provide the technological know-how and funding required.

For ASEAN governments worried about Beijing’s so-called ‘debt diplomacy’, the Japanese bond market provides an alternative source of external financing. While Japan’s highly indebted government can never challenge Beijing’s state-backed chequebook diplomacy head on, it has managed to shift the liability of providing foreign aid onto its huge capital market instead. This is done by allowing ASEAN governments to issue yen-denominated bonds guaranteed by the Japanese government, allowing the former to take advantage of Japan’s low interest rates environment.

ASEAN governments have certainly proven receptive, with Malaysia having issued 200 billion yen (US$1.9 billion) worth of ‘Samurai’ bonds in March 2019 to fund infrastructure developments. As of August 26, Malaysian Prime Minister Tun Mahathir Mohamad announced a second round of Samurai bonds was in the works. The Indonesians for their part issued 177 billion yen (US$1.7 billion) worth of bonds in May of this year, while the Philippines issued 92 billion yen (US$870 million) worth of their own bonds in early August.

A trusted partner

Beyond building infrastructure and providing ready cash, Japan also trumps over China in the ASEAN market of public approval. In a January 2019 region-wide survey conducted by the ISEAS-Yusof Ishak Institute, Japan was ranked the most trusted major power in Southeast Asia with 65.9% of respondents expressing confidence in Japan ‘doing the right thing’ in global affairs (China concurrently was ranked the least trustworthy).

Trade spat with Korea dampens Japan’s pro-globalisation shine

However, Abe’s pretensions of being a champion of free trade may be severely tested by the recent trade spat taking place between Japan and South Korea. On July 4, the Abe administration has decided to tighten controls on the exports of three chemicals used for making semiconductors and flat panel screens used in smartphones and TVs, thereby constricting South Korea’s high tech economy.

Abe followed this on August 2 by formally stripping Seoul of its white list status, further restricting the export of certain materials to South Korea. Under the latter measure, the export of around 1,120 dual-use items to South Korea will now require individual authorisation instead of fast track approval. South Korea, for their part, intends to remove Japan from its own white list by September.

While Japan justified their actions on the grounds of national security, many aren’t buying it. Tokyo’s move is widely seen as a response to a South Korean court ruling on October 30 ordering Japanese firms to pay reparations to former wartime labourers from the colonial period. This was followed by a court decision in January to freeze the Korean assets of Japanese firm Mitsubishi Heavy Industries (one of the firms ruled against) in order to sell them off.

Japan objected to the rulings, stating that all issues related to reparations from the colonial period were settled under a 1965 treaty which normalised bilateral ties. While the Japanese are frustrated by what they perceive to be a constant demand for apologies and reparations from South Korea, there is also a very real economic incentive for refusing to abide by the rulings. Accepting the verdict could see other former victims file their own lawsuits against some 300 Japanese companies accused of using slave labour during Japanese rule. Potential reparations could balloon to US$20 billion or more.

Experts meanwhile warn the spat could challenge the existing US-led security architecture in East Asia, with Seoul having decided on August 22 to scrap an intelligence-sharing agreement with Tokyo. Meanwhile, Japan’s espousals for international liberalism may prove hollow if Abe continues to insist on intermeshing politics and trade, as well as attempting to interfere in the judicial system of another country.

Another headache for ASEAN?

The Japan-Korea spat will no doubt be another headache for ASEAN, already reeling from the Sino-US trade war. Having three of the largest economies in the world plus Korea choosing to weaponise trade will further disrupt regional supply chains and hurt ASEAN growth. Whether Japan will be the new saviour of globalisation is dependent on whether Abe is ultimately willing to choose realism over nationalistic impulse.

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