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65 Years of Indonesia-Japan Diplomatic Relations: Investment Opportunities for Japan in IKN


Indonesia-Japan Diplomatic Relations

This year Indonesia and Japan celebrate 65 years of their diplomatic relations since the signing of the Japan-Indonesia Peace Agreement on January 20, 1958. With the signing of the agreement, Indonesia and Japan began to establish and strengthen partnerships in various fields such as economics, politics, security, social and culture. For Indonesia, Japan is one of the influential partners, and this underlies the emergence of a bilateral economic cooperation agreement between Indonesia and Japan, namely the Indonesia-Japan Economic Partnership Agreement (“IJEPA”), which aims to increase export, import and investment activities between the two countries.

Indonesia-Japan cooperation has shown a very significant impact in the economic field. In 2022, the total bilateral trade between Indonesia and Japan reached 34.79 billion US dollars, an increase of 33.35 percent from 2021. In fact, this trade value has even exceeded the value of bilateral trade between Indonesia and Japan before the pandemic in 2019, which was recorded at 31.6 billion US dollars. It was also recorded that Indonesia had the highest trade surplus with Japan in 2022, reaching US$ 6.3 billion, a jump of 158.5 percent from the surplus value in 2021.

At the end of February 2023, the Indonesian government invited the Japanese Business Federation (“Keidanren”) to invest in the Greater Nusantara (“Ibukota Nusantara” or “IKN”) project. Members of the federation are dozens of investors, residential developers, infrastructure and transportation companies, gas pipeline builders, as well as companies in the telecommunications and communications sector. The Indonesian government has not only invited Japan to invest in the IKN project, but has also enacted Law Number 3 of 2022 concerning the State Capital as a strong legal basis and assurance for investment activities in the IKN.

Great Opportunity for Japan

The IKN development project opens up great opportunities for Japanese investors, which can be realized through a collaboration between the Indonesian Government and Japanese stakeholders i.e., Japanese investors and government. Japan may provide financial support, expertise, and technology transfer for the IKN development project. 

The IKN development project, which is currently running very massively, is considered a mega project for Japanese investors after the Mass Rapid Transit (“MRT”) and Patimban Port projects which are also under cooperation with Japan. In addition to infrastructure construction, opportunities for cooperation in the IKN development project are also open in other fields including reforestation, infrastructure and housing management. Recently, the Minister of Finance of the Republic of Indonesia, Sri Mulyani, said that Japan is starting to show interest in investing in IKN projects in Indonesia, especially in the renewable energy sector, and this is associated with Japan’s commitment to net zero carbon emissions and also various infrastructure projects.

For the investment scheme, the Minister of Transportation of the Republic of Indonesia (“MOT“), Budi Karya Sumadi, offered Japan to cooperate in the IKN development project under the Public Private Partnership (“PPP“) scheme, both solicited and unsolicited scheme. The PPP scheme is a cooperation mechanism established between the Indonesian government and the private sector in providing infrastructure for the public interest. Indonesia and Japan have carried out several collaborations in the infrastructure sector under the PPP scheme, one of which was the Power Plant project in Central Java, which was a collaboration between Indonesia and the Japan Bank for International Cooperation. For this reason, the MOT hopes that the PPP scheme can be reapplied to several large projects in the transportation sector that have been designed to be built in IKN. Some of these transportation projects are as follows: 

  • Bus Rapid Transit (“BRT“)
  • Autonomous minibusses, and 
  • Autonomous BRT
  • In the railway sector, a 162-kilometer railroad and an airport with a runway length of up to 3,000 meters. The airport, which will be 40 kilometers from the IKN city center, is projected to be used for large airplanes.

The Indonesian government believes that building cooperation with Japan will positively affect the sustainability of the IKN development project because Japan is one of the countries trusted for extraordinary insights regarding smart forest cities, water quality, air quality, waste and housing management. 

To support investors participating in the IKN development project, the Indonesian government has prepared various incentives to facilitate doing business in the IKN. The incentives that will be given include tax holidays for investment, tax holidays for office relocation, super tax deduction for certain activities, land rights, special treatment at customs and excise, special tax treatment for financial centers, special treatment for value-added tax, and exemption from import duty and tax through the issuance of Government Regulation Number 12 of 2023 (“GR 12/2023”) regarding the Granting of Business Licenses, Ease of Doing Business, and Investment Facilities For Business Actors in the IKN.

Promising Project

The Head of the IKN Authority, Bambang Susantono, stated that there have been more than 140 Letters of Intent or letters expressing intent and interest in carrying out business activities, which in this case is investment in the IKN development project. Some of the investment sectors that are of interest to investors, especially foreign investors, are the infrastructure sector, which includes toll roads, housing, the development of commercial activities and the utility sector, such as health and education sectors. 

The Indonesian government continues to be committed to establishing cooperation with investors, one of which is by preparing cooperation schemes according to the scale of business actors such as direct investment, asset utilization cooperation, and build-use schemes as well as PPP.

The Indonesian government is optimistic that the IKN development project will get a lot of investors, so the Indonesian government, in this case The House of Representatives of the Republic of Indonesia (“DPR”), has decided to conserve the use of the state budget in financing this development project by allocating only 20% of the state budget for the IKN development project. The IKN development project is deemed as one promising project opportunity as seen from the government’s commitment to focus on the development of the Central Government Area (“KIPP”) and target the project area to be completed in 2024. The Indonesian government also believes that the IKN development project is a project that has long-term benefits because this project will change Indonesia’s image in the eyes of the world. Indonesia will show a better impression in that Indonesia appears with new urban concepts of capital city i.e., the concept of smart city, sponge city and environmentally friendly green city.

Apart from being one of the lungs of the world, the international community will be amazed that Kalimantan will be the new capital city of Indonesia, provided that the realization of the IKN development concept is as expected. The Indonesian Government promises that the environment of the IKN will remain beautiful because the IKN has the concept of a city surrounded by forests. To support this concept, a tree nursery area will be built, and many trees have now even been planted around the IKN Presidential Office. 

The IKN also has the concept of a sponge city, that is, a city that can absorb rainwater so that the water does not directly enter the drainage channels by increasing infiltration into the soil. As many as 20,000 tree seedlings have been prepared so that the IKN will not only become a green city but also a flood-free sponge city. Lastly is the concept of a smart city where the IKN is not only a green city but also a smart city with all the facilities that make it easy for the people to live.


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