As Myanmar has changed course since 2010 and pursued political and economic reforms, Japan is the country that has responded most enthusiastically, both to offer assistance and to take advantage of emerging investment opportunities. Although Japan is not seeking to be the monolithic major partner that China was to Myanmar while it was under international sanctions, the level of Japanese involvement has grown quickly.

The Japanese government has been strongly pushing Japanese companies to invest in Myanmar’s manufacturing sector. Its efforts have been focused on the Thilawa Special Economic Zone (SEZ), a project to develop a sprawling 2342-ha site south-east of Yangon into a base for foreign investment in factories.

FROM INDUSTRY TO INSURANCE: The Japanese government got behind the project in 2012, and in 2013 the industrial giants Mitsubishi, Sumitomo and Marubeni joined up. The Japan International Cooperation Agency (JICA), a government development assistance organisation, holds a 10% stake in the project, while the Japanese firms hold a combined 39% stake and Myanmar firms hold 51%. The SEZ was expected to launch a first phase of 189 ha in 2015, with 26 companies committed to locate as of November 2014, of which 12 were Japanese. The initial investments at Thilawa are expected to mainly produce apparel for export and fast-moving consumer goods and construction materials for the local market. Production of automotive parts, mainly by Japanese firms to serve domestic demand, is expected to be another key area. Among the first two Thilawa SEZ investors was Japanese automotive parts maker Koyo Radiator. Toyota and Suzuki, the latter of which has had an assembly plant in Yangon since the 1990s, were also reported to be among the initial investors. Outside the Thilawa SEZ, Nissan and its Malaysian regional partner planned to open a car assembly plant in 2015 in the Bago region, north-east of Yangon.

In infrastructure, JGC Corporation and two Singapore firms won a tender in October 2014 to build a $1.4bn new airport north-east of Yangon, while Mitsubishi and Jalux won a tender in November 2014 to renovate and operate Mandalay’s airport.

In capital markets, Daiwa Securities and the Japan Exchange Group are partners in the Yangon Stock Exchange opening in late 2015. In banking, Japan’s three largest banks – Mitsubishi UFJ, Sumitomo Mitsui and Mizuho – are among nine international banks that in October 2014 pledged to put up $75m each to obtain licences to serve foreign investors in Myanmar.

In coal power, Japanese private equity firm Industrial Decisions is a partner with Singapore and Myanmar firms in the proposed $1.7bn Paluzawa coal mine and power plant project, and Marubeni is partnering with Thai and Myanmar firms in the proposed $3.5bn Myeik coal power plant. In real estate, Mitsubishi is teaming up with Hong Kong, Singapore and Myanmar firms in a proposed $350m mixed-used development in downtown Yangon called The Landmark Development.

Many Japanese firms have a presence to support sales to the Myanmar market, and all the major Japanese automobile manufacturers have opened service centres. Komatsu Manufacturing has invested in a plant in Mandalay that reconditions mining and construction machinery for resale in Myanmar and regionally.

In some sectors not yet open to foreign investment, Japanese firms are lobbying in the country. Aeon, Japan’s largest retailer, has a representative office pushing for permission to build a shopping centre in Yangon. Four Japanese insurers have representative offices in Yangon – Sompo Japan Nipponkoa, Mitsui Sumitomo, Tokio Marine & Nichido Fire, and Taiyo Life – and some are expected to be among the first foreign insurers to receive limited licences to serve foreign investors in SEZs. Japanese involvement is small in the oil and gas sector. However, Nippon Oil has been a non-operating minority partner in the Yetagun offshore gas field since the block was awarded in 1990.

GOOD TIMING: To some extent, Myanmar’s growing economic relationship with Japan has benefitted from fortuitous timing. Myanmar’s reform drive happened to coincide with a worsening of relations between Japan and China as nationalist sentiment increased in both countries. Japanese companies have increasingly looked elsewhere for investment opportunities. Also, the return to power of Shinzo Abe in December 2012 ushered in an era of deliberate weakening of the yen through quantitative easing. The weakening yen has the effect of incentivising Japanese firms to invest abroad in order to profit from the yen’s depreciation. Abe and his predecessor Yoshihiko Noda have put a high priority on developing relations with Myanmar since the early days of its switch to civilian government. Indeed, The New York Times examined Japan’s emergence as Myanmar’s new closest ally in place of China in October 2012, before most of the Japanese investment projects were launched. As an advanced economy with high labour costs, Japan’s strong interest in manufacturing abroad dovetails with Myanmar’s strong interest in developing as a manufacturer and moving away from extraction and export of natural resources.

DEBT WRITE-OFF: Japan’s first move to support Myanmar’s reforms was to agree in 2012 to write off 60% of defaulted debts owed to it by Myanmar from 1987 and earlier, which had piled up to JPY500bn ($4.8bn) as interest accumulated and the yen gained in value. In 2013 Abe’s government agreed to write off 100% of the debt, clearing the path for Myanmar to begin receiving new Japanese official development assistance (ODA) loans. The Japan Bank for International Cooperation extended $942m of bridge loans to Myanmar to help it clear its debt arrears with the World Bank and Asian Development Bank, a manoeuvre that enabled the multilateral lenders to proceed with a restructuring and restore working relations with Myanmar.

GRANTS & ASSISTANCE: In June 2013, JICA signed agreements to extend JPY51bn ($485m) in new ODA loans, including JPY20bn ($190m) for investments in Thilawa infrastructure, JPY14bn ($133m) to rehabilitate a gas power plant in Yangon (partly to serve Thilawa) and JPY17bn ($161.5m) to fund regional infrastructure. In September 2014, JICA agreed another batch of JPY63bn ($599m) of ODA loans, including JPY20bn ($190m) to renovate the Yangon-Mandalay railway, JPY14.9bn ($142m) to develop irrigation in the Bago region, JPY23.7bn ($225m) to upgrade the Yangon and Thilawa area’s water supply and another JPY4.6bn ($44m) for Thilawa infrastructure. Those were all 40-year loans with 10-year grace periods and 1% interest. Meanwhile, Japanese grant aid and technical assistance spending in Myanmar jumped from an average of $45m a year in 2008-11 to $176m in 2013, according to OECD data. Myanmar was the second-largest recipient of grant aid from Japan in 2013 after Afghanistan.

Japanese approvals of grant aid to Myanmar, not including technical assistance, came to some $208m in the first half of 2014, according to Devex, a private group tracking development aid, citing data from Japan’s Ministry of Foreign Affairs.

Myanmar was by far the largest recipient of Japanese grant aid project approvals in the first half of 2014, with more than a quarter of the international total, according to Devex. The approvals included $41m for a Thaketa bridge connecting Thilawa to Yangon, $38m for railway control and safety improvements, $38m for Customs modernisation, and dozens of smaller projects. The Japanese government has also accounted for a large portion of ODA loans to Myanmar. Japan accounted for 35% of global ODA loans to Myanmar in 2013 and 19% of global official development grants to Myanmar that year, not including debt write-offs, restructurings or Japan’s bridge loan, according to OECD data.