Japan's renewed engagement has pros and cons for SE Asia
As suitors go, Southeast Asia could do worse than Japan.
The world's third-largest economy came knocking on the door of the region last week, seeking a dynamic growth alternative to China and offering a higher level of investment in return.
With Tokyo still locking horns with Beijing over islands in the East China Sea, the emerging economies of Southeast Asia are looking more appealing to Japan's newly re-installed Prime Minister Shinzo Abe.
He made Vietnam, Thailand and Indonesia the destinations of his first official trip abroad, while other Japanese ministers called on Singapore, Brunei, the Philippines and Myanmar.
Some will gain almost immediately from Japan's stimulus package itself. Since the start of the year, Abe has unveiled 10.3 trillion yen (about Bt3.45 trillion) worth of fiscal first aid, and convinced Japan’s central bank to raise its inflation target and extend its money printing programme indefinitely.
With a third of the fiscal boost earmarked for construction works, certain sectors - such as cement makers in Malaysia - may enjoy a rise in orders, said Barclays economist Leong Wai Ho.
But he added that the impact will be limited elsewhere in the region as the increase in demand would be mainly for building materials, steel and fuel - industries that are dominated by North Asian producers such as China and South Korea.
Meanwhile, with more liquidity being pumped into the economy as a result of the continued monetary easing by the Bank of Japan (BOJ), Japanese banks and firms may direct the excess funds to Southeast Asia's economies, which are the world’s fastest-growing next to China. Indonesia and Thailand are estimated to have grown 6.3 per cent and 5.8 per cent respectively last year, against China’s 7.8 per cent.
Although the money printing also results in a weaker yen, making it more expensive for Japanese companies to expand abroad, costs of production in Southeast Asia are still low enough for these countries to be attractive investment destinations, said Credit Suisse economist Santitarn Sathirathai. This is especially true for countries with well-established industrial clusters, such as Thailand, he added.
Instant perks aside, Southeast Asia would reap significant rewards if the stimulus succeeds in reviving Japan’s economy, which is currently mired in its third recession in five years.
Japan's fiscal spending package will add 2 percentage points to gross domestic product this year and create about 600,000 jobs, according to government estimates.
To the extent that this re-energises Japan's cautious consumers, Indonesia and Malaysia would be the biggest gainers as a significant share of their exports to Japan are commodities and consumer goods that rely on domestic demand, noted Sathirathai.
Singapore, on the other hand, may not benefit as much because most of its exports to Japan are intermediate products - such as semiconductors and disk drives - which pass through Japan and are re-exported to an ultimate destination elsewhere, he added.
But there is also a flip side. The moves by BOJ to induce inflation may spark excess liquidity that flows out of the country into Southeast Asia, accelerating inflationary pressures in a region that has recently seen rapid wage growth, said HSBC's Japan economist Izumi Devalier.
Greater capital inflows into Southeast Asia could also exert appreciation pressure on the region's currencies, hurting exporters, added Sathirathai.
The biggest risk, however, may be simply that the stimulus fails to jolt Japan out of its deflationary langour in the long term. As structural problems such as bottlenecks in the labour market remain unsolved, the effect of the fiscal injection may peter out quickly. Extra stimulus spending is also unsustainable given Japan’s high debt burden, Devalier said.
Economists also pointed out that BOJ did not upsize its current "asset purchase programme", which will allow it to pump 101 trillion yen (Bt33.24 trillion) into the market this year by buying assets such as bonds. Instead, it extended the programme - which was to terminate by the end of this year - and pledged additional injections starting only next year.
The central bank also failed to set a deadline to achieve its higher inflation target of 2 per cent, up from an earlier goal of 1 per cent.
Still, the concerted effort by the government and the central bank should cause some of the stimulus to filter through the economy beginning in the second quarter, bringing about "a significant boost to short-term growth", Devalier said. This would deliver a lift to its trading partners as well.
"In summary, we think the overall impact is positive for Asia, with Southeast Asia potentially being the biggest beneficiary," she told The Straits Times.
Finally, Japan’s renewed engagement with this part of the world bodes well for trade talks. A more attentive Japan may well yield more productive negotiations for the Regional Comprehensive Economic Partnership and Trans-Pacific Partnership, which Asean is currently negotiating with Japan and other countries.
As Japan and Asean celebrate the 40th anniversary of Asean-Japan relations this year, Tokyo's charm offensive in the region marks an auspicious start to the year. Southeast Asia should return the attention.