Japan Inc investing less in China now

JAPAN'S business investment in China has plunged dramatically in the wake of fights between the two countries over territorial and other issues while Asean has emerged as a major alternative pole for Japanese investment, according to new data from the Japan External Trade Organisation (Jetro).

This shows that the impact of the sharp deterioration in Japan-China relations over the past two years on Japanese patterns of investment in Asia has been profound. "Japanese companies have realised the risks they face," said Jetro chairman and CEO Hiroyuki Ishige at a briefing.

Japanese foreign direct investment (FDI) in Asean almost doubled last year from 2012 to reach a record 2.33 trillion yen (S$28.5 billion), reflecting what Jetro said is optimism over the expansion of Asean consumer markets.

By contrast,the amount of Japanese investment going to China dropped 18 per cent to 887 billion yen (S$10.9 billion).

Jetro's new data presented by Mr Ishige to the foreign press almost all showed that China is becoming a less attractive investment destination for Japanese business while the Asean region appears to be becoming far more attractive. Meanwhile, India's attractiveness remains more or less stable.

Tokyo has been cautioning businessmen for some time not to "overconcentrate" investment in China, and the business view in Japan now seems to be getting more aligned with the government's.

Japanese FDI in Thailand more than tripled last year to just over one trillion yen, boosting the total going to Asean very significantly. But this was largely due to big Japanese merger-and-acquisition (M&A) deals in Thailand. Meanwhile, the amount of Japanese FDI in Singapore (always volatile) also almost tripled to 355 billion yen last year compared to 2012.

A Jetro survey showed that "China fell from first to fourth place" as a promising investment destination for the medium term - the first time this has happened since such surveys began in 1992. "Indonesia, where market expansion expectations are high, took first place for the first time."

Mr Ishige denied a suggestion at last week's briefing that there were signs of "anti-Chinese bias" in the way the picture was presented. He stressed his own efforts to build links with local governments in China and to persuade them to be more welcoming towards Japanese investment.

But at the same time he acknowledged that the view of China taken at Japanese company headquarters in Japan is often more pessimistic than that taken by the local headquarters of Japanese firms operating in China.

Anti-Japanese riots in a number of Chinese cities in the latter half of 2012 - after the then Japanese government "nationalised" the Senkaku islands (known in China as the Diaoyu islands) in the East China Sea - were followed by a sharp drop in already declining Japanese investment in the world's second largest economy.

Aside from heightened risk awareness quoted by Mr Ishige as one reason behind the declining attractiveness of China as an investment destination for Japanese business - and the consequent drop in plans for future investment there - rising labour costs in China are also cited.

Basic salary levels per worker in China, while slightly below those in Malaysia and on a par with those in Thailand, are significantly above the levels in the Philippines, Indonesia, Vietnam, Cambodia, Bangladesh and India, according to Jetro.

"There are few cases of Japanese companies completely withdrawing from China," said Jetro. "Many (cases) involve the transferring of production, mainly in labour-intensive industries such as apparel" from China to other parts of Asia.