Japanese funding drives Vietnam economic growth

When Japan’s Prime Minister Shinzo Abe met with Prime Minister Dung late last year at the Japan-Vietnam Summit Meeting, it was not just an indication of their strong personal relationship but also a reflection of the potential they see for increased economic cooperation between the two Asian economies.

While Japanese corporates have been investing in Vietnam for years, their role as project financiers is set to grow in the future. Vietnam’s enormous future infrastructure requirements can only be satisfied if the country draws overseas funding, and there is little doubt that a major portion of this will come from Japan.

The two countries have complementary investment needs. With depressed yields at home, Japanese institutional investors are increasingly looking abroad for higher returns to fund, amongst other things, retirement obligations for their aging population.

Meanwhile, Vietnam desperately needs to tap into overseas pools of liquidity for the investment funds needed to inject into and resuscitate its lifeless domestic economy and get it on track to realize its fullest potential.

The success of Dung’s ambitious ‘Made in Vietnam’ campaign will rely heavily on constructing infrastructure by creating an enabling policy framework and a conducive environment to expand not just the foreign manufacturing sector but, most importantly, the domestic manufacturing sector.

This will, inevitably in the long run, lead to enabling millions of young Vietnamese to find employment with local companies.

Over the next five years, Vietnam needs billions – if not more – to invest in infrastructure development along with tens of millions of portfolio funds to provide liquidity to the domestic economy, which are holding back economic growth.

Japan will most likely play the pivotal role in providing funds for both of these purposes.

Economic Cooperation

Economic cooperation is the key aspect of the bilateral relationship. According to 2013 statistics, Japan is Vietnam’s fourth largest trade partner after China, the US, and the Republic of Korea (RoK).

Japan is also currently Vietnam’s third-largest export market behind China and the US. In 2011, Japan officially designated Vietnam as a market-based economy, making it the first country to do so.

Beyond this, both Vietnam and Japan are in the final stage of the Trans Pacific Partnership (TPP) negotiations. The free trade pact, which currently includes 12 countries representing 40% of global GDP, is expected to deepen trade and investment between the two countries at a much faster pace once finalized.

As of January 2015, Japan was the second biggest investor in Vietnam, with total registered investment of approximately US$37 billion, behind only the RoK. However, Tokyo is leading in terms of investments actually realized.

With respect to preferential loans, Japan has been Vietnam’s largest donor nation in terms of official development assistance (ODA), having committed up to US$2 billion in 2012. As of 2012, the cumulative ODA fund from Japan had reached US$22.7 billion.

Over the years, numerous bilateral agreements have been signed to create institutional frameworks for promoting bilateral trade and investments. In April 2003, Vietnam Prime Minister Phan Van Khai and his Japanese counterpart Junichiro Koizumi launched the Vietnam-Japan Initiative to improve the business climate in Vietnam.

In December 2008, the Japan-Vietnam Economic Partnership Agreement (JVEPA) was endorsed to speed up economic cooperation, trade liberalization of goods and services, and investments between the two nations.

And in July 2013, Japan and Vietnam agreed to a ‘joint crediting mechanism’ that enables Japanese firms to purchase carbon credits while helping Vietnam lower its own carbon emissions.

Under the umbrella of these agreements, Vietnam has been trying to attract small-and-medium businesses from Japan in an effort to help develop its supporting industries. In 2013, the Long Duc Industrial Park located in the southern province of Dong Nai launched the Kansai Supporting Industry Complex to cater to small businesses from the Kansai region.

Following suit, in December 2014, the Vietnam-Japan Techno Park built in the Ho Chi Minh City-based Hiep Phuoc Industrial Park completed its first phase and became a popular destination for Japanese companies in the support manufacturing industry.

In the context of growing foreign invested enterprises presence in Vietnam, Japanese technology, expertise, and investment are what Vietnam really needs to advance its domestic economy.