Why Japanese Business Can Thrive by Expanding into Indonesia

Japan’s investments in Indonesia have been key to Southeast Asia’s economic growth. This partnership has benefited both countries for many years. The symbiotic relationship is a testament to the mutual benefits of Japan’s investments in Indonesia. Indonesia has valuable natural resources, a growing middle class, and a good location, making it a great place for Japanese businesses to expand in Southeast Asia. 

Japan’s technology and financial support have greatly helped Indonesia develop its industry and infrastructure, creating a safe and trustworthy environment for investment. This article examines Japan’s investments in Indonesia. It discusses the important sectors, challenges, and opportunities for investors. 

Key Reasons Why Japan Should Invest in Indonesia 

In 2023, Japan invested USD 4.63 billion in Indonesia, making it the fourth-largest foreign investor in the country. These investments focused on transportation, utilities, and real estate. These sectors match Indonesia’s development goals. Japan’s investments have been pivotal in: 

• Modernizing Indonesia’s automotive sector 
• Supporting infrastructure projects like mass rapid transit (MRT) systems 
• Investing in energy sectors, particularly renewable energy and carbon capture technology 

Indonesia’s appeal to Japanese businesses is not just significant; it’s strategic. Japan’s growing middle-class population creates a strong market for its products. Additionally, the country has many natural resources that provide a reliable supply chain for industry needs.  

Furthermore, Indonesia’s proximity to Japan simplifies logistics, making it an attractive hub for expanding Japan’s presence in Southeast Asia and accelerating the mutual economic progress between the two nations. 

3 Best Sectors for Japanese Business to Invest in Indonesia 

Three key sectors attract Japan’s investment in Indonesia: automotive, infrastructure, and energy. These sectors align with Japan’s strengths and Indonesia’s modernization goals, fostering mutual benefits for both countries. 

Automotive 

Indonesia and Japan are enhancing their automotive partnership, focusing on vehicle electrification and biofuels to achieve net zero emissions. At the 5th Indonesia-Japan Automotive Dialogue in June 2023, representatives from Indonesia’s Automotive Industry Association (Gaikindo) and Japan’s Ministry of Economy, Trade, and Industry (METI) reaffirmed their sustainability commitments.  

Indonesia is advancing Hybrid Electric Vehicles (HEVs), Plug-In Hybrid Electric Vehicles (PHEVs), Battery Electric Vehicles (BEVs), and biofuels, supported by Japan’s technology and strategic initiatives, such as the ASEAN-Japan Next Generation Automotive Industry Collaboration Initiative. 

Infrastructure 

Japan’s investment in Indonesia is significantly reflected in the development of Jakarta’s mass rapid transit (MRT) system. Former President Joko Widodo launched the construction of a new MRT line, funded by a nearly $1 billion loan from Japan, to alleviate the city’s traffic congestion. This 25 km (15-mile) line will connect Bekasi, on Jakarta’s eastern border, to the western edge and is expected to be completed by 2031. 

This new line follows the successful opening of the first MRT line, an 8 km (5-mile) stretch funded by the Japan International Cooperation Agency (JICA) in 2019, which will be expanded further north by 2029. These projects are part of Indonesia’s strategy to modernize its transportation network and strengthen its urban infrastructure, positioning it as a key trade hub in Southeast Asia. 

Energy Sector 

Japan plays a crucial role in Indonesia’s energy transformation through joint ventures in renewable energy projects. A notable example is the $7 billion carbon capture and gas field initiative in Papua involving Mitsubishi Corporation and other international partners.  

Production at the Ubadari field will begin by 2028. This project aims to unlock 3 trillion cubic feet of gas resources and sequester 15 million tonnes of CO2, marking Indonesia’s first significant effort in carbon capture technology. 

READ MORE:

• How Can Indonesia Prosper From the Japan-ASEAN Partnership? 
• A Closer Look at Indonesia-Japan Relations
• Indonesia-Japan Relations to Drive Electric Vehicle Market 

Policy Framework and Agreements Facilitating Japan’s Investment 

The amended Indonesia–Japan Economic Partnership Agreement (IJEPA) and insights from the JETRO survey highlight the collaboration between the two nations. These frameworks strengthen economic ties and position Indonesia as an attractive destination for Japanese businesses, driving mutual growth and regional economic integration. 

Indonesia–Japan Economic Partnership Agreement (IJEPA) 

Indonesia and Japan will implement the amended Indonesia–Japan Economic Partnership Agreement (IJEPA) in 2025, enhancing trade, investment, and industrial collaboration. This updated protocol introduces key chapters on trade in goods and services, e-commerce, intellectual property, and government procurement while streamlining policies for the movement of natural persons.  

These amendments aim to reduce trade barriers, promote digital commerce, and bolster bilateral cooperation in strategic sectors. The agreement also strengthens Indonesia’s integration into the Regional Comprehensive Economic Partnership (RCEP), solidifying its position in the regional economy. 

Japan External Trade Organization (JETRO) 

A JETRO survey revealed that nearly 50% of Japanese businesses in Indonesia plan to expand their operations, driven by strong domestic demand and favorable market conditions. Additionally, 71.4% of companies reported profitability in 2023, the highest among ASEAN nations.  

Key advantages cited include Indonesia’s large market size, competitive labor costs, and political stability, though challenges such as rising labor costs and tax procedures persist. These insights demonstrate the optimism of Japanese businesses and their role in Indonesia’s economic growth trajectory. 

Challenges for Japanese Businesses in Indonesia 

While Indonesia offers immense opportunities for Japanese businesses, several challenges can impact business operations and expansion plans. 

Rising Labor Costs 

Indonesia’s growing economy and increasing wages present a challenge for labor-intensive industries. As wage levels rise, Japanese businesses face higher operating expenses, making cost efficiency a critical priority. 

Regulatory Uncertainty 

Japanese businesses often encounter unclear government management policies and sudden regulatory changes. These issues can create operational delays and hinder long-term planning, necessitating better communication between businesses and policymakers. 

Tax Complexity 

Time-consuming tax procedures and inconsistent enforcement of taxation rules complicate doing business in Indonesia. Despite improvements in transparency, further streamlining tax systems is essential to ease the burden on foreign investors. 

Prospects and Strategic Initiatives for Japan’s Investments 

Indonesia presents opportunities for Japanese businesses, but a deep understanding of its legal and regulatory frameworks is crucial to mitigate potential risks. Key considerations include:  

• Establishing a business presence 
• Minimum capital requirements 
• Foreign investment restrictions 
• Necessary business licenses. 

Industry-specific regulations may also apply, such as divestment obligations in mining and shareholder requirements in construction. Japanese businesses should be prepared for regulatory changes, political instability, and geopolitical risks that could impact investment strategies. 

Maximize Your Investment in Indonesia with InCorp 

Navigating the complexities of Japan’s investment in Indonesia can be challenging, but InCorp (an Ascentium Company) offers expert services to simplify the process. With our assistance, you can ensure a smooth entry and ongoing compliance with local regulations. Our services include: 

• Company Registration: Comprehensive support to register your PT PMA and ensure compliance with local regulations. 
• Investor KITAS: Assistance with obtaining the Investor KITAS (a long-term visa for foreign investors) to legally stay and operate in Indonesia. 

Maximize your investment potential and ensure seamless operations in Indonesia by completing the form below.