Japanese companies cautious on Indonesia

Japanese companies cautious on Indonesia

TOKYO (Reuters): Japanese firms are cautious about investing in Indonesia despite a new IMF reform program endorsing deregulation of foreign investment to help cope with political and economic instability, officials said yesterday.

The reform package calls for Indonesia to remove all formal and informal barriers to foreign investment in palm oil plantations by Feb. 1. It proposes that Indonesia lift all restrictions on investment in wholesale and retail trade.

Formalizing the reform program, Indonesia's President Soeharto last week issued a decree allowing foreign investment in palm oil plantations.

"Basically we welcome the reform program, as it allows us to expand our range of activities in Indonesia," said an official of Japanese trading firm Itochu Corp.

"We are cautiously watching whether planned reforms will be smoothly implemented, and if the March presidential election will lead to political stability. Without such issues cleared, we cannot increase investment in Indonesia," he said.

An official of trading firm Mitsubishi Corp. said it would withhold any decision to increase investment in Indonesia until after the presidential election.

"We won't be able to decide whether to increase investment until several months after the election," the official said.

"Despite the recent economic crisis, we still believe Indonesia, blessed with natural resources, retains growth potential," he said. "We are studying when the country will emerge from this crisis."

Japan was the second-largest foreign investor in Indonesia in 1997, investing in 94 projects worth $5.4 billion, down from 145 projects worth $7.7 billion in the previous year.

This was the first year-on-year drop in Japan's direct investment in Indonesia since 1993.

Kaori Ueno, an overseas research department staff of Japan External Trade Organization (JETRO), said the drop was a correction to rapid investment expansion for the preceding three years, which was led by large-scale investment in energy projects and automobile parts manufacturing.

In the three years to Dec. 31, 1996, Japan's direct investment in Indonesia doubled each year due mainly to Indonesia's deregulation of foreign investment in infrastructure projects and measures aimed at raising local content in automobile production by foreign makers, she said.

Japan's direct investment in Indonesia is expected to continue to decline in 1998 because of the currency crisis and political uncertainty, she said.

"It looks questionable whether the Indonesian government will actually carry out the planned reform program," she said.

Japan is the world's major consumer of palm oil, importing 331,200 tons of palm oil in 1996. Of the total, more than 97 percent came from Malaysia, with 1.7 percent from Singapore.

Japanese demand for palm oil has been steadily growing recently, thanks to its image as a healthier and more environmentally friendly product than animal oils and fats.

But Japanese trading firms say they are wary of investing in palm oil plantations because of expected low profitability and a high production risk.

"Agriculture is a difficult sector to invest in, even in Japan, let alone in Indonesia," said an official of Japanese trading firm Mitsui & Co. Ltd.

JETRO's Ueno said Japanese firms view retailing as a more profitable business in Indonesia than palm oil production, given the nation's second-largest population in Asia and emergence of middle-class consumers.

Japanese department store Sogo Co. Ltd. shares its management know-how with an Indonesian firm operating a Sogo brand store in Jakarta. A Sogo spokesman said the company will study the possibility of investing in the Indonesian firm if restrictions on foreign investment are lifted.

Hanshin Department Store Ltd., which shares management know- how with another Indonesian firm, said opening of a Hanshin store at mid-year has been postponed for an unspecified period due to the ongoing turmoil.