Newly released figures by the ABS show that in 2022 Japanese direct investment (FDI) in Australia reached a new record high of $133.8 billion, 12% of all FDI in Australia. This was only a small increase over 2021, but still a new high. There are several factors for the small amount of increase: consolidation of existing investments: some divestments in the coal sector; the weaker yen; and the ongoing assessment stage of the numerous partnerships in the burgeoning hydrogen-related sectors.

Japan’s level of FDI in 2022 was the 3rd highest, after the USA and UK. Japan and the UK have been swapping 2nd and 3rd positions for the past 5 years. The USA’s position as number 1 remains, but the level of US FDI in Australia has fallen every year from 2018-22 ($219 billion in 2018, $184 billion in 2022, a fall of 15%). In contrast, Japanese FDI in 2018-22 has grown by 23%. China’s position remains at 6th highest at $44 billion, an increase of 5% from 2018-22. The big surprise in the past few years has been FDI from Canada, which reached $78 billion in 2022, an increase of 95% since 2018. It is not surprising then that Canada announced in 2022 that it is seeking to join the Indo-Pacific Economic Framework for Prosperity (IPEF), an institution that Australia and Japan were active in founding, as they were with the CPTPP.

Also recently released has been the now regular and valuable Hebert Smith Freehills publication, Japan-Australia Investment Report 2022 ( https://www.herbertsmithfreehills.com/insight/japan-australia-investment-report-2022-decarbonisation-and-energy-security ). The title shows the focus of much of the recent activity of Japanese investment. In relation to energy, there are some key drivers: transition; decarbonisation; security; and resilience. The full array of Japanese companies, from sogo shosha, utilities, technology, IT and AI and IOT and banks, etc, are heavily involved.

But the report also shows the wide array of other investments and partnerships in fintech, telecommunications, aviation, aerospace, real estate, food, beverages and healthcare. The complexity of the existing and emerging linkages is breathtaking and reveals how the established trust between Japan and Australia has become such a fruitful foundation for the joint pursuit of opportunity and the responses to challenges.

There is a pleasing complementarity between the major foreign sources of long-term investment and the mainstream perceptions amongst the Australian public. The Lowy Institute poll has just been released (poll.lowyinstitute.org) and it has some very positive results for the Australia-Japan relationship. Japan scored the highest level of trust amongst the Australians polled by the Lowy Institute in 2023 (85% favourable) to “act responsibly in the world”. Similarly, Japan and the UK scored equal 2nd (after New Zealand) for “warm feelings”. And Japan was far and away considered “Australia’s best friend in Asia.” This certainly provides support for Japan’s leadership efforts in the Indo-Asia-Pacific region.

Somewhat in contrast, the USA only scored 61% favourable in relation to acting responsibly in the world. Perhaps the largest global power is more likely to elicit mixed feelings, even amongst allies, but the result does have some policy implications at the geostrategic level. Analogous to the growing focus on resilience in economic activity and its corollary in the diversification of supply chains, there is a clear and rational move towards bolstering alliances by creating resilient and diversified security arrangements. For example, AUKUS includes the UK, with which Japan recently signed a Reciprocal Access Agreement. Australia and France also recently announced new efforts to upgrade their security relationship, which Japan is also pursuing with France. Japan and Australia are also key to the QUAD, which includes India and the US. Together and in plurilateral partnerships, Australia and Japan are creating resilience across economic and security domains.

Author: Manuel Panagiotopoulos

Managing Director, Australian and Japanese Economic Intelligence