Japanese Investment in Indonesia Derailed?

6 February 2019 Jarryd de Haan, Research Analyst, Indian Ocean Research Programme

Background

Construction of the second phase of Jakarta’s Mass Rapid Transit (MRT) project has been postponed due to issues with land acquisition. The first phase of the project, which runs from Lebak Bulus in South Jakarta to the Hotel Indonesia traffic circle in Central Jakarta, is complete and is scheduled to be opened to the public in March 2019. The second phase will extend this route from the Hotel Indonesia traffic circle to Kota. Construction of the second phase was due to begin in January 2019, but no new date has been set. It will be financed by a loan of $883 million from the Japanese Government.

Commentary

Land acquisition issues have long plagued various infrastructure projects across Indonesia. In 2007, a document released by the World Bank estimated that the numerous land acquisition delays to those projects had cost Indonesia approximately US$5-10 billion. Those issues still persist today and as well as delaying the MRT, have stalled the construction of the Jakarta-Bandung high speed rail line. While they potentially cost the Indonesian government billions of dollars, land acquisition delays also present a significant headache for investors. Speaking at an investor conference in 2017, a senior Chinese diplomat called on Indonesia to do more to support investors; adding that ‘We need to understand the policy and law relating to labour, tax and especially land… Chinese companies really want details. If there’s no land, there’s no business.’

It is possible that investors from Japan are beginning to feel the same way, although they still represent a significant proportion of investors in Indonesia. At a recent meeting with Japanese investors, Mirza Adityaswara, the Senior Deputy Governor of Bank Indonesia, did note that the amount of portfolio investment coming from Japan is too small. Currently, Japan accounts for approximately 3.4% ($2.88 billion) of the total value of foreign portfolio investment in Indonesia.

The level of foreign direct investment (FDI), on the other hand, is much larger, with Japan accounting for 17.5% of all incoming FDI, the second largest contributor behind Singapore. That type of investment also includes the funding of projects such as the MRT and is much more vulnerable to issues such as land acquisition. So, while encouraging more portfolio investment, Indonesia must also preserve the level of FDI coming from Japan, which is essential to fund much-needed infrastructure projects.

From Japan’s perspective, there are also strategic reasons for continuing its investment in Indonesia. Most of Japan’s investment in Southeast Asia is underpinned by the foreign policy concept of a ‘Free and Open Indo-Pacific ’(FOIP), a strategy coined by the Japanese Government under Prime Minister Shinzo Abe in 2016.

A key strategy under the FOIP pertaining to ASEAN countries is to improve the environment for FDI, further promote quality infrastructure, promote the use of Japanese technology and strengthen connectivity in the region. Additionally, a side benefit from continuing Japanese investment in Indonesian infrastructure is to counterbalance the impact of China’s One Belt One Road (OBOR) strategy. As noted by Emirza Adi Syailendra, a senior analyst at the S. Rajaratnam School of International Studies, ‘Japan does not want to accept Chinese primacy and is interested to preserve the political and strategic independence of countries in Southeast Asia by providing an alternative to China’.

It is in the interest of both countries to maintain Japanese FDI levels in infrastructure projects in Indonesia. So while land acquisition issues may persist and delay those projects, it is likely that Japan will continue to be a major contributor to Indonesia’s FDI.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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