The growth of intra-Asia trade was a key topic at Sibos 2012 in Osaka, with Japan already reaping some of the rewards on offer. Ben Poole reports.


Japan has traditionally been a supplier of sophisticated goods and parts to other Asian countries. Now it is becoming a supplier of credit and investment. The role of trade finance has been rising in Asia as a result of the banking crisis in Europe and to some extent in the US. Japan has become more of a supplier of cash flow and credit, while a tightening of regulation has helped give a boost to the country’s derivatives market.

“Japanese banks are increasing their share of trade financing in the Asia region, while increasing their long-term lending. Japanese direct investment into Asian countries is also rising,” says Masayuki Kichikawa, Japan chief economist with Bank of America Merrill Lynch (BofAML). According to the Japanese External Trade Organisation (JETRO), Japan’s outward foreign direct investment (FDI) in 2011 increased for the first time in three years, amounting to US$115.7bn, double that of 2010. While confidence clearly seems to be rising, the Fukushima earthquake last year brought into sharp focus the fact that even the strongest supply chains can be vulnerable. Strong supply chain risk mitigation programmes have been top of mind for Japanese corporates this year.

Strengthen the chain

While some supply chain risks are obvious to see and relatively easy to plan for, others have the potential to be overlooked until it is too late. In terms of big industry in Japan, the two main manufacturing sectors are automobiles and electronics. These two industries are diversifying their production side internationally. They have learnt a lot from both Fukushima and the flooding that occurred in Thailand in 2011 and are trying to tackle risks to the supply chain in three key ways:

  1. Further diversifying production sites. Traditionally, Japanese manufacturers have a large capacity in Thailand, China and Taiwan, but recently the trend has been to invest into more Asean countries, such as Indonesia.
  2. Strengthening risk management capabilities. Japanese manufacturers need to prepare for unforeseen supply chain problems on a country-by-country basis. Each country that they operate in will have its own inherent issues. For example, in India, the electricity supply is currently an important operational risk.
  3. Increasing inventory. Until the 2011 earthquake, Japanese manufacturers were well known for keeping their inventory levels very lean by optimising the timing of supply and production.

This was a good way of managing costs. However, this technique was directly challenged by the earthquake and subsequent events saw many supply chains disrupted. Manufacturers are now maintaining a higher level of inventory than before. That isn’t to say that inventories are now excessive, but companies are acknowledging the fact that they need to be able to cover the loss of supply chain and therefore calculate their optimal inventory level based on that. The competitive advantage that having a robust supply chain risk mitigation programme brings will be needed by Japanese manufacturers as they are facing competition from foreign rivals being wooed by incentives from the Japanese government.

Bucking the overall trend, inward FDI in the manufacturing industry in 2011 exceeded withdrawal. In total there was a net outflow of US$1.7bn of inward FDI from Japan, but the manufacturing sector achieved a healthy US$2.41bn net inflow. This was helped in part by subsidies such as the Subsidy Programme For Projects Promoting Asian Site Location In Japan, which was part of a series of measures taken by the Japanese government in 2011. From January to April 2012, inward FDI in Japan posted a net inflow of US$920mn due to increased investment from Asia, Switzerland and the US.

Trading partners

Japanese FDI has been going from strength to strength, and the JETRO report underlines the fact that emerging and local Asian economies are feeling the greater benefit of this. Japan’s FDI to Asia hit a record high of US$39.5bn last year. The report also notes that from 2000 to 2011, the percentage of total Japanese FDI to Europe and North America dropped from 70% to 50%, while over the same time period the percentage of FDI going to Asia jumped from 18% to 27%. Within this 27%, China remains important at around 12%, but it is the share of Asean countries that is providing the impetus for the overall rise in Asia, scoring a marked increase from their traditional 10% share of Japanese FDI.

JETRO states that the rate of return from Japanese FDI in China and Asean both exceeded 10%, compared to just 3% each from the EU and the US. These rates highlight the benefits of local regional investment for the Japanese economy. The ‘Asia Snapshot’ box story provides an overview of some of the countries in Asia that offer particularly good opportunities for growth. “Intra-Asian trade is maturing in my view,” says BofAML’s Kichikawa.

“Traditionally, Japanese manufacturers invested in Asian countries to diversify their production locations. But recently we are seeing manufacturers, and retailers, increasing their investment in Asia in an effort to capture the growing demand in consumption in growing Asian countries.” The direct investment from Japan to Asia is becoming more complex and the variety of direct investment is increasing.

There is a certain level of confidence in Japan that a steady but sustained amount of economic growth can be achieved by
its trade relationships within Asia. While China is feeling the pinch of a relative slowdown, it is still achieving growth rates that make it the envy of the West. With the potential that exists in a variety of other countries within Asia, Japanese companies have the chance to diversify their production facilities still further and protect their supply chains.

Simon ConstantinidesAsia snapshot

Simon Constantinides, regional head global trade & receivables finance Asia Pacific, HSBC, examines which Asian countries offer particularly good opportunities for trade growth.

  • China
    Using HSBC research, we forecast that by 2016 China will become the world’s largest two-way trade market of imports plus exports, so we are very bullish about opportunities there. China has also seen a shift from the finished goods market to the semi-finished goods market. There is a transient point now where products will come in, some work on them will be done in China while some other work will be done elsewhere. This change creates opportunities for China. The country has a very diversified manufacturing base, and there is still a very strong demand for commodities and raw materials.
  • India
    India is obviously an important market, but it is currently going through a bit of a tough time. The phrase that we hear from industrialists is ‘policy paralysis’. We would like to see India address some of the fiscal challenges that it has, such as inflation and a weakening rupee. But its economy, with its industrial base, still presents huge opportunities.
  • Malaysia
    Malaysia has a diversified manufacturing base. Malaysia has been investing in its infrastructure and this is continuing. You’ve got a business-friendly environment that has driven a very large export market for electronics. There is a good commodities base there.
  • Indonesia
    Indonesia is similar to Malaysia in many respects, particularly on the commodities and manufacturing side, with a powerful chemicals industry as well. The country has a diversified manufacturing base. We are very positive about Malaysia and Indonesia being strong markets.
  • Singapore
    Singapore is a key trading market and is very business-friendly. There is a strong rule of law, and it is very geographically accessible to both north and south Asia. Things are a little slow at the moment for Singapore in terms of its domestic production for exports – electronics and pharmaceuticals, for example – but that will come back. Singapore is still a key trading environment for all different types of commodities.
  • Bangladesh
    Bangladesh is an important market that has a very favourable wage structure. It has a huge population of around 160 million people and so has a big consumer demand potential. Its labour market is a good alternative to some of the more high-price markets where we see labour rates pushing up, such as Vietnam and China.
    There is a lot of potential in Bangladesh, which we are seeing through a lot of investment, and the country is looking to drive infrastructure growth. It will be a test to see how well the government does in delivering on its commitments to build out infrastructure.
  • Vietnam
    Vietnam is still a market of opportunity. It is going through some challenges right now. It has got inflation down below double digits, compared to nearly 18% last year. Vietnam does have labour rate wages rising quite aggressively, and they are trying to kerb inflation by restricting borrowing and lending. But they have a young and energised workforce, and a lot of natural resources available to the market as well.