India – Japan can have a coordinated investment policy for India.

  • Capital and Funding from Japan to improve the viability of Infra projects in India.
  • India need Japanese tech companies to make investments in India
  • Give benefits to Japanese companies and others too, to create semiconductor chip manufacturing in India and develop the Indian industry in a phased manner.

Let us call it “the Complimentary Macro Situation” for India and Japan. The investment and trade need for India and Japan has never been in more sync than before.  Japan is a country which has cheap capital, adverse demography, need for making investment abroad and their companies need to retain their global market share.

On the other hand, India needs investment in the manufacturing sector, generate employment, technology, and cheap capital. India also needs help in increasing exports so that its external sector and buying of energy from abroad become more sustainable.  

It was not a coincidence when Japan made noises that they will talk to India and try to address its concerns on RCEP. I believe that Japan understands this need more than India and that is why they are ready to take the first step to create a better environment for Japanese investments in India. In the last 10 years, the message from Japan is clear. They have invested in dedicated Japanese manufacturing parks in India and have also ready to invest in cost heavy infra projects like Bullet Trains. 

We had a look at these contours, which makes coordinated investment policy lucrative for both countries:

Game Changer: Parity of — Japanese Yen and Indian Rupee:

The chart below indicates that both Yen and INR have very little relative movement in the last 10 years. The currencies are almost pegged to each other.  We must see this in a special India situation where India had “Policy Paralysis” from 2010-2014 and after that, the economy has slowed down due to various reasons. Going forward, the Indian economy is likely to do well, and this may result in the appreciation of INR vis-à-vis Yen. Since the Japanese economy is stagnating due to demography and high debt, their growth prospective is towards stagnation. This Japanese situation is not likely to improve for the next 10-15 years. This makes Yen almost long-term carry trade between these currencies.

How the new currency dynamics can be used by India and Japan:

  1. Indian corporates should see this as an opportunity and start taking Japanese Yen dominated foreign currency debt. While USD is likely to appreciate and this makes currency hedging expensive ( 5-6%). On the other hand, Yen vs INR would be stable or Yen may depreciate. Thereby,  hedging cost will be almost half of the cost mentioned for USD. The cost is only on account of the transaction fee, which is to be paid for hedging and not on account of the adverse currency movement itself. Appreciating INR may also neutralize the transaction cost in the future.
    1. Indian Industry has two major disadvantages (Energy cost and Finance cost) as compared to their global competitors. With Yen dominated loans, finance cost can be reduced to a considerable extent extent by AAA-rated Indian corporate companies. Capital intensive companies can be the main beneficiaries.     
    1. It is not a coincidence that Japan wants to invest in high-cost India Infrastructure projects. The visibility of long term zero financing costs in Japan makes them the most competitive for making these investments. There is no other country which can compete with Japan on this. For India reduced financing cost results in viability improvements for the projects. Readers may be surprised that with Indian financing cost the usage requirement for a given infra project is almost 2 times verses if the investments done by Japanese companies in their currency.  Considering this some of the Road and Rail projects should be planned and opened for Japanese investments if costly Indian financing is making those projects unviable.
    1. Japan is not fussy, anymore in providing high tech to India either through 100% owned subsidiaries or with Indian companies. It is in the interest of India to establish a mechanism for fast tracking Japanese investment in India. These high-tech investments will ultimately help in making the Indian industry more competitive and also help in increasing exports.

The Difference between Japan and other RCEP countries: While all other RCEP countries want to export goods to India, Japan wants to export capital and goods to India. Since capital is also exported, the adverse impact on the CAD on account of import of goods, more or less gets neutralized in the case of Japan.

What is favourable for Japan for making investments in India :

  1. Proven model: – Large Japanese companies are already in India for the last 30-50 years and have been able to generate better returns than their parent companies in Japan.
    1. The capital employed by these companies even for exports from India at the end of the day, provides better returns and makes investments more efficient than making the same investment in Japan.
    1. India has a lucrative royalty payment policy and dividend distribution policy for foreign investments.  The IRR need for making investments is happily met from Indian investments for most of the world and more so for Japan.
  2. Japan needs to export capital and set up factories in the countries where cheap labor and market are available.
  3. Japanese experiment with Indonesia is not giving encouraging results considering the geography of the nation and lack of availability of skilled manpower. Other countries in East Asia are mostly dependent on China for their trade and industry and not so open for Japanese investments.
  4. Japan wants to deploy its capital for getting better returns then its domestic market and India provides this opportunity.
  5. The problem with China: South China Sea problem, discourages Japan to make long term investments in China.
  6. There is not geopolitical conflicting interest and alignment of Japan and India will be welcome by countries important both for India and Japan.

Considering the above points, we hope to see more Japanese investments in India for the next 10-20 years. Reference : Currency map:

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