During the Indonesian President's visit to Japan earlier this week, both countries agreed on a bilateral economic partnership, while coordination with regard to energy supplies and investments will be increased.
On November 29, President Susilo Bambang Yudhoyono of Indonesia completed his three-day visit to Japan.
Japan is Indonesia's largest trading partner, accounting for 22% of exports and 13% of imports.
The President was accompanied by a high level delegation including Boediono, the coordinating minister for the economy, Mari Pangestu, the trade minister, Fahmi Idris, the industry minister, Purnomo Yusgiantoro, the energy minister, Hatta Rajasa, the transportation minister and Hassan Wirajuda, the foreign affairs minister.
In Japan, the President had meetings with Emperor Akihito, Prime Minister Shinzo Abe and a group of Japanese businessmen.
Japan agreed, among others, to fund the feasibility study and construction of a mass rapid transport (MRT) system for Indonesia's capital Jakarta.
Meanwhile, on November 28, Yudhoyono and Abe officially announced an Economic Partnership Agreement (EPA). Negotiations have been underway since July 2005, and comprise 13 areas in which cooperation will be increased.
Under the economic partnership, both countries will gradually reduce 90% of their trade tariffs to zero over a period of 10 years. Ten percent of tariffs will continue to exist in order to protect the industries, and ensure domestic market access.
Indonesia will start by immediately abolishing 35% of duties on imported goods from Japan, while discarding the rest within three to ten years. Japan will also immediately drop part of its tariffs, mainly on a number of agricultural products, while the rest will be eliminated within 10 years as well.
The two countries will further increase cooperation with regard to capacity building, aimed at raising the competitiveness of Indonesian products from the industrial, agricultural, fisheries and forestry sectors.
Japan will also assist Indonesia to revive its real sector, to improve resource utilisation for manufacturing and services, among others by supporting the establishment of a Manufacturing Industry Development Centre.
Development of the real sector in Indonesia has been sluggish despite recovering macro-economic growth, mainly due to sharp increases in fuel prices and high interest rates. Labour needed for this development and the activities associated with it will help to alleviate the country's high unemployment and underemployment.
While Japan would have liked to secure liquefied natural gas (LNG) supplies from Indonesia within the EPA framework, this thorny issue has not been included.
Earlier this year, the Indonesian government indicated that it plans to cap LNG exports in order to ensure sufficient domestic supply. These statements, first made by energy minister Purnomo Yusgiantoro in February but later echoed by Vice President Jusuf Kalla during his visit to Japan in July, raised concerns among Indonesia's large LNG customers such as Japan, South-Korea, Taiwan, as well as large LNG producers in Indonesia.
In March, President Yudhoyono explained that existing contracts will be honoured, but that after the expiration of these contracts, more gas will be allocated for domestic use. Indonesia aims to develop its domestic industry in order to alleviate poverty and unemployment. By allocating part of its gas production for domestic use, at local prices, the government hopes to lower production costs for companies in Indonesia and thereby convince foreign investors to establish their industries in Indonesia.
Indonesia provides roughly 28% of Japan's natural gas imports, with major contracts expiring in 2010.
The country's natural gas reserves are estimated at 182 trillion cubic feet, enough for 60 years at current production. However, production rates are declining. On November 28, Halida Miljani, special advisor on international affairs to Minister Pangestu, told local press that Indonesia is currently experiencing an energy shortfall to the point that it is threatening supplies to the domestic market.
During the press conference announcing the EPA last on November 28, President Yudhoyono mentioned that after expiration of the existing contracts, Indonesia would like to continue exporting LNG to Japan. However, this would have to go hand in hand with increased investment by the Japanese in the upstream gas sector in Indonesia, thus ensuring increased production and availability of gas to satisfy both Indonesia's domestic demand, while maintaining the level of exports.