Prime Minister Pham Minh Chinh and Japanese Prime Minister Kishida Fumio

A rock solid relationship

With a global focus often on the US and China, important relationships Vietnam has with other countries are often overlooked, such as with Japan. As 2023 marks 50 years of the diplomatic relationship between Japan and Vietnam, we take this opportunity to assess the significant linkages in their economic ties. Just as recently as last week, both countries have agreed to elevate their ties to a “comprehensive strategic partnership”, a top-tier relationship that Vietnam has only granted to China, Russia, South Korea, India, and most recently to the US, during President Biden’s visit in September.

A first look at their trade relationship merits attention. While the share of Vietnam’s exports to Japan has been gradually declining, as the US and China take up larger pieces of the pie, total trade between Japan and Vietnam has grown by a 15.2% CAGR since 1990. Undoubtedly, the impressive performance was aided by Vietnam’s accession to the WTO in 2007, followed by the economic partnership agreements between Japan and ASEAN (AJCEP) effective 2008, and between Japan and Vietnam (VJEPA) effective 2009. Total trade exceeded USD47bn in 2022, making Japan the fourth-largest trading partner of Vietnam, reflecting robust economic ties.

Even within the ASEAN bloc, Vietnam has become more involved in Japan’s trade activity. While ASEAN’s share in Japan’s trade has remained steady at just under 15%, Vietnam has nonetheless raised its significance within the bloc.

Looking more closely at the breakdown of Vietnam’s exports to Japan, in HSBC’s view, certain categories stand out: consumer electronics/machinery/transport (35%), textiles/footwear (26%), and raw materials (18%) such as wood and plastics. In fact, Vietnam’s emergence as a smartphone export powerhouse to Japan has materialised in 2016 and 2017, reflecting the shift in smartphone production by Korean tech giants offshore. Vietnam’s phone exports to Japan have been rising substantially during this period, eating into Korea’s share. Elsewhere, energy, once with a large portion in Vietnam’s exports (17% share in 2013), has declined in line with Vietnam’s transition to becoming a net energy importer.

That said, it is important to also look beyond export values in absolute terms. Indeed, some export sectors rely quite significantly on Japanese demand more than others. For instance, Japan has historically been the major destination for Vietnam’s exports of automobile parts and chemicals. Despite falling over the years, they remain a large share of around 20%. It’s a similar story for wires and cables where Japan is the third-largest export destination for these products.

“Opportunities also lie beyond increasing exports of major products currently being traded. For example, selected fruits, such as nuts, have been growing in demand. As discussed last month, it will be key for Vietnam to match its agricultural export products to international standards and to broaden its export base, which in turn can further strengthen its economic ties”, said HSBC.

Entrance of retail and finance

Beyond trade, it is no secret that Japan has been a key direct investor in ASEAN. For Vietnam, in particular, Japan has been its third-largest source of FDI, reaching close to USD70bn by 2022, trailing after Korea and Singapore. To complement its current supply chain, Japan has invested primarily in the manufacturing space, with large multinationals such as Panasonic and Canon establishing production facilities since early on.

Originally attracted by competitive labour costs, Japanese firms have continued to invest and expand operations in the region as an offshore export hub. This continues to be the case, with new opportunities arising especially in higher value-added areas such as semiconductors. Higher value-added manufacturing FDI by major foreign semiconductor firms will have positive spill-over effects to provide opportunities for Japanese companies to handle more complex production processes offshore.

Recently, it is not just greenfield investments in manufacturing. Rising income and the proliferation of discretionary spending have created opportunities in retail as well as financial services, subsequently attracting investment from Japanese firms. Japanese retail group Aeon, which stands out as a notable example, announced its intention to expand its number of department stores in Vietnam from six currently to 30 by 2030.

Total trade between Vietnam and Japan has flourished in the past 30 years

Mizuho, one of Japan’s megabanks, has steadily made share purchases in Vietnamese companies such as leading digital payment provider M-Service, as well as state-owned commercial bank Vietcombank. While competition in these spaces is intensifying, as evident from global peers such as Thailand’s Central Group becoming similarly more involved, it is clear that the growing consumer potential in Vietnam is an opportunity for a new group of Japanese firms looking to invest.

Enabling development

In addition, it is also important to remember that infrastructure and development have provided a platform for these opportunities to flourish. In this case, Japan has been the largest overseas development assistance (ODA) provider to Vietnam. Cumulatively, Japan has provided over JPY3trn in ODA to Vietnam, making the latter one of the top five recipients of Japanese ODA. In fact, most of these loans have been used to develop critical infrastructure, such as Noi Bai International Airport and Nhat Tan bridge, just to name a few. With preferential terms, including long maturity (typically 30-40 years) and low interest rates (typically 0.5-1.0%), these development loans have played a key role in enabling Vietnam’s recent growth.

In HSBC’s opinion, the other key area worth highlighting is the remittance flows from Japan to Vietnam, as an important source of steady foreign income. Japan, Taiwan, and South Korea are the top three destinations for Vietnamese overseas workers (ILO, 2023). One factor driving the flow is thanks to Japan’s technical intern training program, which allows foreign workers to stay for a maximum of five years to develop competitive skills to bring back to their home countries. The largest source of trainees for this program has been Vietnam, accounting for over half of all technical trainees.

Currently, the significant depreciation of JPY may lead to Vietnamese workers in Japan feeling the pinch, as money sent abroad is effectively less than before. In addition, recent controversies on how the trainee program is actually utilised by firms and the treatment of trainees have raised discussions among Japanese authorities on overhauling and improving the program, such as by potentially introducing more flexibility in workplaces as well as providing smoother pathways for permanent residency. In addition to raising the incentive for additional skills development for foreign workers, these reforms can potentially raise the inter-linkages between the two countries further.

All in all, Japan and Vietnam’s economic relationship carries significant weights on many metrics. While Japanese firms originally approached Vietnam as a cost-competitive offshore manufacturing base, the latter’s robust economic growth story has created new avenues for the relationship to develop, especially for higher value-added activities.