A slowdown in the Japanese economy following an earthquake and tsunami that struck Japan on March 11th may have a temporary, negative impact on trade and investment flows with Indonesia. However, reconstruction efforts could increase demand for Indonesian goods, services and labour in the second half of the year. The 9.0-magnitude earthquake and the resulting tsunami have claimed more than 12,000 lives, with thousands still missing. The disaster has also destroyed important infrastructure, including roads, railways, ports and power stations, and has threatened to cause a meltdown at the Fukushima Daiichi nuclear power plant. The damage has also disrupted manufacturing supply chains.

Japan is Indonesia's third-largest export market after the EU and China. In 2010 Indonesia's exports of goods excluding oil and gas to Japan were equivalent to US$16.2bn, or 12.5% of the total, according to BI. (Indonesia's export dependence on Japan is even greater if oil and gas exports are included.) Meanwhile, in 2010 Japan was Indonesia's second most important supplier of imports. Indonesia imported goods excluding oil and gas from Japan worth US$16.8bn, equivalent to 15.7% of the total. Disruptions to trade in both directions will affect importing and exporting firms across Indonesia. Producers of primary commodities, including coal, timber and gas, will lose orders, while some smaller industries may also face difficult times. Balinese small- and medium-sized enterprises, which export a range of goods to Japan, including fish, marine products, handicrafts, silver and textiles, were anticipating a 10% fall in trade as a result of the disaster. At the same time the Association of Indonesian Automotive Manufacturers (Gaikindo) reduced its sales forecast for this year to 800,000 units, from 850,000 previously, owing to a shortfall in the availability of component parts supplied to local manufacturers by Japanese firms. Tourism will also be disrupted, as Japan constitutes the fourth-largest market for visitors to Indonesia. However, post-tsunami reconstruction is likely to create new demand for Indonesian goods, services and labour, and a reappraisal of the safety of nuclear power may lead to Japan increasing its reliance on coal- and gas-fired power plants, creating a deeper market for Indonesian exports of coal and liquefied natural gas (LNG).

Japan was also the largest source of foreign direct investment in Indonesia in 2010, with direct investment totalling US$3.7bn, according to BI. The Japanese government is a major donor, and so the viability of public and private investment projects that depend on Japanese capital is likely to come under some doubt in the coming months, as Japanese capital is drawn into the reconstruction effort that is now getting underway. Japan's current commitments to infrastructure in Indonesia exceed US$50bn, with projects now at risk including Jakarta's mass rapid transit system, as well as coal and geothermal power plants. The Fukushima nuclear disaster has also prompted renewed debate about the wisdom of plans to construct Indonesia's first nuclear power plant. Indonesia is one of the world's most earthquake-prone countries, with a poor record on health and safety. Despite strong local opposition at the proposed sites, the government plans to construct a nuclear plant by 2019.