Abenomics: Good for Indonesia
    Category: Column By : Paulius Kuncinas, Regional Editor, Asia. Oxford Business Group Read : 1121 Date : Monday, July 08, 2013 - 00:56:17

    Do the efforts of Japanese Prime Minister Shinzo Abe to revive Japan's economy matter to Indonesia? Yes, they do. Dubbed “Abeno-mics,” his efforts to break Japan's deflationary cycle could be a catalyst for infrastructure investment in Indonesia. The Bank of Japan plans to print as much as $1.4 trillion, equal to 158% of Indonesia's GDP, over the next 24 months—and this ocean of new liquidity could have an impact here.

    The first effect of Abenomics may not be beneficial. It will come mostly as yen linked carry trades in Asia's currency, bond and equity markets—possibly fueling volatility and speculative appreciation in the prices of assets. This movement of “hot money” wreak havoc on investors' abilities to make long-term investments, which are needed for infrastructure and other developments.


    Indonesia's currency is viewed as vulnerable because the country is running a small current account deficit of 2.7% of GDP. Although this deficit is largely caused by virtuous capital goods inflows, it still means Indonesia needs to rely on foreign capital to fund the gap. Consequently, a loss in investor confidence due to macroeconomic turbulence could cause sharp currency fluctuations and capital outflows, which particularly hit commodity exporters.

    However Abenomics has some silver linings for Indonesia. For example, Abenomics is intended to raise Japan's growth, which will lead to higher exports from Indonesia to Japan. Japan is already Indonesia's largest export destination, accounting for nearly 16% of the total in 2012. A Japanese recovery would partially offset the Chinese slowdown.


    Another advantage is that Abenomics should spur Japanese investment in Indonesia. It's no secret that Indonesia missed much of the regional manufacturing led by Japanese firms that instead went to places such as Thailand and Malaysia. Indonesia will continue to offer a compelling domestic consumption investment story, but it can and should position itself as a base by which to supply both the local and regional markets for manufacturers, thus boosting its export capacity.

    Therefore, the long-term benefits of Abenomics should outweigh the short-term pain, as Abenomics presents an opportunity for Indonesia. If only 10% of $1.4 trillion of Japan's new supply came to Indonesia, it could fund many of the infrastructure projects now being proposed. Thailand has been quick to see this opportunity; Prime Minister Yingluck Shinawatra was recently in Tokyo trying to persuade Abe to invest in Thai infrastructure projects worth around $66 billion over the next seven years. A similar approach ought to be adopted by the Indonesian government to convince Japan to invest here as well.