In 2013, the rupee was in free fall. Between May and August it fell from 56 to 69 to the dollar. Forward markets were offering deals on the Indian currency at a 100.
A worried Japanese Prime Minister Shinzo Abe ordered his government to intervene. Tokyo offered to give India access to Japan’s foreign exchange reserves and massively expanded an existing currency swap. In September a $50 billion swap was signed with a clause allowing for the ceiling to go as high as India wanted. Realising the floundering Congress-led government had just been thrown a $ three trillion lifeline, speculators fled. The rupee stabilised.
This was not about altruism – though Abe was as much a friend of Prime Minister Manmohan Singh as he is of Narendra Modi. India was a crucial element in his grand vision to “normalise” Japan and end its outsourcing of its defence and diplomacy to the United States. In a 2007 book, Abe had written it would “not be a surprise if in another decade Japan-India relations overtake Japan-US and Japan-China ties.”
India fits into Abe’s vision in three ways.
The first is a source of legitimacy. A more assertive Japan arouses concerns across the Asia-Pacific because of its wartime record. Having a democracy like India endorse this new Japan is a constant theme with Abe.
The second is providing an alternative manufacturing base for Japanese industry. Japan has been the largest FDI source into China. Its firms now seek alternatives, scared by Beijing’s nationalist tantrums and rising labour costs. Most Japanese see India as a hostile business environment. But egged on by Tokyo and Suzuki’s success, the number of Japanese firms is slowly rising even if they struggle to execute their projects here.
The third is to help reduce China’s predominance. Abe, like many Asian leaders, is worried at Washington’s geopolitical wobble when it comes to Beijing. He wants a coalition of largely democratic Asian countries to help counter China’s influence. India, while too far to be of military use to Japan, is the only Asian country big enough to provide balance. However, even this requires India’s GDP to be a few multiples larger. Hence, Abe’s galloping to the rupee’s rescue two years ago.
“A stronger India and a stronger Japan working together helps ensure China rises in an Indo-Pacific region in which leading democracies are strong,” says Richard Fontaine of the Centre for a New American Security.
The convergence with Modi’s hopes for the Indian economy is evident.
Modi has placed reviving manufacturing at the heart of his economic policy. As ex-Gujarat chief minister he is familiar with the $ 100 billion Delhi-Mumbai Industrial Corridor that Japan has designed and is building — a corridor that would provide hundreds of Japanese firms the world-class logistics base they need to export from India.
Japan is a world leader in dozens of other areas. It’s the world leader in most forms of civil nuclear reactor technology. This door opens with the breakthrough in nuclear negotiations. Japan has long curbed its ability to make weapons in deference to the US. Abe has a dream of setting up a Japanese military-industrial corridor in India, something he cannot do at home. Japan already does this with its nuclear reactors —all of which carry US brands like Westinghouse and GE.
Japan will also benefit from these mega-plans. Building the corridors, bullet trains and reactors will create profits and jobs in Japan. Yet the ultimate aim is strategic: a stronger Modi India will strengthen an Abe Japan.
Concrete in the air
The difficulty is converting these castles in the sky into concrete on land.
The industrial and freight corridors are coming up with painful slowness, already a year or two behind schedule. The number of Japanese firms has doubled in the past seven years, but less than half make profits. Says HK Singh, ex-Indian ambassador to Japan, “Japan has committed $ three to four billion in aid to India. But actual disbursements are only $ 1 billion, thanks to red tape.”
The US-2 seaplane deal, potentially Japan’s first arms export, is held up by an Indian defence ministry focused on price rather than strategy.
Another approaching headache will be trade policy. Indian policies are pulling it further away from entry into the Asia Pacific Economic Cooperation forum let alone the more stringent Trans Pacific Partnership. Yet these are the cornerstones of Japan’s trade and investment policy. If Modi does not correct course, India and Japan will end up discriminating against each other in trade—blowing a hole in strategic relations. Japanese firms will also curb investments in a country with limited market access to the rest of Asia.
New Delhi has its grouses with Tokyo. India had signalled for years that a nuclear deal would be a litmus test of Japan’s seriousness about strategic ties and was frustrated at Abe’s foot-dragging. The deal is now almost done, though requires passage by the Japanese Diet. Though with Abe having a solid majority, says Takehiro Horimoto, South Asian expert at Shohi University, “There is zero difficulty for the Abe agreement to get the agreements through the Diet.”
That China continues to be economically more important for India and Japan than either of them are to each other is a reminder of how more needs to be done.
Both capitals have schools who believe panda-hugging is the better policy option. There will always remain a question of whether the relationship will go south without an Abe or Modi. “The close bonhomie is not only because of personal relations but structural relations, and the latter factor is more important,” believes Dr Horimoto.
China’s own actions will provide enough glue to keep India and Japan together long enough for the two to find other reasons to be close. Modi and Abe have noticed Beijing has doubled down on its claim to the South China Sea and is slowly breaking down resistance among the Southeast Asian countries.
An economically powerful India would make Japan breathe easier regarding China. A militarily more assertive Japan would ease strategic pressure on India. “China cannot dominate Asia as long as both India and Japan are strong and allied with each other, and while working closely with the United States,” says Daniel Twining, Asia expert at the German Marshall Fund. Senior Indian officials openly compare today’s Asia with 19th century Europe and China with Germany, there is almost an inevitability to what Modi and Abe are doing.