One of Indonesia’s most significant economic partners has always been Japan. Japan’s presence is visible across various sectors in Indonesia, both in government and the private sector. Japanese products, like Toyota cars and Sony electronics, are widespread, supported by factories set up by these major corporations. Toyota, for example, is one of Indonesia’s largest investors. In mid-2022, Toyota announced a massive investment of 27.1 trillion Rupiah (or 2.5 billion US dollars) to produce electric vehicles in Indonesia. Like many Japanese companies, Toyota has played a major role in helping shape Indonesia’s economy. However, beyond corporate investment, the Japanese government is also a key contributor.
The Japanese government plays a crucial role in Indonesia’s development, particularly in terms of foreign debt. While debt is often viewed negatively due to instances of “debt diplomacy” and “debt traps,” especially regarding China’s high-interest loans, Japan stands out as a more reliable partner. To understand Japan’s impact, let’s explore Indonesia’s foreign debt situation.
Foreign debt refers to borrowing money from outside the country, such as from Japan or China, international banks like the World Bank or the Asian Development Bank (ADB), or through the issuance of bonds on international markets. These loans are repaid over varying time periods, with interest rates differing widely. China, for instance, has been known for high-interest loans. A 2022 BBC report stated that China’s loans have rates around 4%, which is close to commercial market rates and significantly higher than loans from countries like France or Germany. This has sparked debate over China’s lending practices.
In contrast, Japan offers loans with much lower interest rates, often around 0.1%. This makes Japan an attractive option for countries like Indonesia, though political complexities sometimes lead to China being favored.
As of November 2023, Indonesia’s total foreign debt stood at 204 billion US dollars, according to Bank Indonesia. Japan has consistently been Indonesia’s largest bilateral lender since 2013, although the debt owed to Japan has decreased from over 20 billion dollars in 2013 to around 8 billion dollars. Nevertheless, Japan remains Indonesia’s largest source of bilateral debt. Additionally, Indonesia owes about 10.5 billion dollars to the Asian Development Bank (ADB), which counts Japan and the US as its biggest backers.
The Japan International Cooperation Agency (JICA) plays a critical role in Japan’s development efforts in Indonesia. JICA has supported infrastructure development by providing loans to build projects like railways, roads, schools, and hospitals. Since 1960, Japan has accounted for 45% of the total official development assistance (ODA) to Indonesia, making Japan the largest donor to the country. Indonesia, in turn, has been Japan’s largest ODA recipient globally. This strong relationship underscores the deep economic and political ties between the two nations.
Looking at specific projects, Japan’s assistance to Indonesia dates back to the 1960s. In 1968, JICA provided ODA loans for the Kali Kanto, Karangkates, and Riam-Kanan projects, which aimed to electrify Indonesia. At that time, Japan’s loans carried higher interest rates. For instance, the Karangkates project was funded by a 936 million Japanese Yen loan with a 3.5% interest rate and a 19-year repayment period.
Today, the terms of Japanese loans have become much more favorable. In 2018, Japan provided a 70 billion Yen loan (roughly 634 million dollars) for the Jakarta Mass Rapid Transit (MRT) Project Phase 2 at an interest rate of just 0.1%, with a repayment period of 40 years. These favorable terms demonstrate Japan’s commitment to supporting Indonesia’s economic growth. While the loans are highly advantageous, they come with certain conditions.
One condition often tied to Japanese loans is the requirement that the borrowing country purchase goods and services from Japan. In the case of the Jakarta MRT project, Indonesia likely had to source much of the construction materials and technology from Japanese companies. This benefits Japan economically and strengthens its global business influence. For example, a Japanese-Indonesian joint venture won a 4.6 trillion Rupiah (317 million dollars) contract for the Jakarta MRT project in 2021. This joint venture between Sumitomo Mitsui Construction and Indonesia’s Hutama Karya also worked on the first phase of the project.
Another aspect to consider is the strategic significance of these loans. By offering highly favorable loan terms, Japan positions itself as a key development partner for Indonesia, strengthening diplomatic and political ties. This relationship extends beyond financial transactions, fostering long-term collaboration between the two countries.
Japan’s strategy can be seen as a counterbalance to China’s Belt and Road Initiative (BRI), through which China promotes its own global infrastructure projects, including in Indonesia. By offering low-interest loans, Japan presents itself as a more sustainable and reliable partner for long-term development, aiming not just for economic returns but also to maintain influence in a region where China’s presence is rapidly growing.
Indonesia’s challenge now is to balance its relationships with both Japan and China. Favoring one over the other might not be sustainable in the long run. The Indonesian government appears to be managing this balance, but it remains a complex task.