Whether it is the Japanese vehicles seen on the roads, contractors working on large-scale power plants or shops selling stationery and other goods, the growing influence of Japanese companies in the Middle East is increasingly evident.

In 2014, Japanese exports to the GCC reached a total of $24.9bn, an increase of 11 per cent on the previous year, according to statistics from Japan External Trade Organisation (Jetro).

The UAE is a particularly strong market for Japanese firms, with exports to the country rising by 12 per cent year-on-year to reach $9.5bn last year.

Contract awards

Exports are rising rapidly across a variety of sectors and Japanese firms have been winning major deals for infrastructure projects of late. In March, Japan’s Mitsubishi was awarded the contract to build the $500m Ras Abu Fontas A3 desalination plant in Qatar, just one of many deals in the power and water sector snapped up by Japanese firms recently.

The influence of Japan is increasingly being seen in the food, drink and fashion industries as well. Japanese bakeries, confectioners, sushi restaurants, as well as lifestyle retailer Muji are becoming more and more popular in the region.

“In the next year, I expect to see a lot more involvement from Japanese firms on the ground in the GCC,” says Kwabena Ayirebi, regional head of global trade and receivables at UK-based HSBC’s Middle East and North Africa (Mena) subsidiary, who works closely with Japanese firms looking to expand in the region.

One of the driving factors behind this interest in the Middle East is the depreciation of the Japanese yen by the central bank of Japan over the past two years. It is a move taken to boost the country’s economy and improve the competitiveness of its exports globally. The policy is beginning to work in the Middle East as Japanese companies ramp up their market share in the region.

Implementing Abenomics

Since returning to power in late 2012, Japan’s Prime Minister Shinzo Abe has been implementing various economic policies in an effort to end years of stagnation. It is a batch of policies that has become known as Abenomics, and involves monetary easing tactics that have weakened the previously strong yen in an effort to boost exports and the Japanese stock market, as well as reforms to the country’s tax system.

Over the past two years, the yen’s value has fallen by about 30 per cent against the dollar. Its decline accelerated in the second half of 2014, particularly as a result of the Bank of Japan’s stimulus programme, which was announced at the end of October.

The yen is currently trading at about 119 to the dollar, a decline from 109 in October and about 100 earlier that year.

The depreciation policies are clearly benefiting exports, with figures from the Washington-headquartered IMF stating that Japan’s global exports grew 7.2 per cent in 2014 and 1.7 per cent in 2013. This compares with a decline of 0.1 per cent in 2012. The prime minister’s policies pushed Japan out of recession in the fourth quarter of last year, when the country recorded growth of 2.2 per cent, following two quarters of contraction.

More competitive

Although analysts debate whether Abe’s tactics are sufficient to dramatically overhaul the Japanese economy, the policies have started to improve Japan’s competitiveness in the Middle East.

Naoki Tamaki, Dubai-based chief representative for the Middle East for export credit agency (ECA) Japan Bank for International Cooperation (Jbic), says the depreciated yen has helped Japanese companies secure contracts in the region.

The devalued yen has helped firms prepare competitive bids, with lower-priced tariffs in the case of power and water projects.

The rapid depreciation seen at the end of last year will only further benefit Japanese firms in the region. “Since last August, the yen has significantly depreciated, making Japanese products even more competitive compared with two years ago,” says Tamaki.

Japanese companies have been increasingly successful in the projects market in recent years, even before the sharp decline in the yen’s value. In 2013, Japanese contractor Sumitomo was part of the consortium that won the contract to develop Al-Zour North, Kuwait’s first independent water and power project (IWPP).

Other projects involving Japanese contractors, including the Shuweihat 2 and the Fujairah 2 IWPPs in the UAE and the Ras Laffan C IWPP in Qatar, have all been signed in recent years.

Utility contracts

Looking ahead, Japanese companies are pursuing contract awards across the region and are particularly focused on the Gulf’s power and water sector. As well as winning the deal for the Ras Abu Fontas desalination project this year, Mitsubishi emerged as the preferred bidder for Qatar’s next IWPP in March. The Mitsubishi-led consortium is said to be in the final negotiations for the contract.

Japanese contractors are also enjoying success in Oman. A consortium led by Mitsui was awarded a deal by Oman Power & Water Procurement Company (OPWP) to develop the 400MW Salalah 2 independent power project in March.

Japanese companies are not only winning contracts due to a depreciated yen, there are other factors at play too.

“We are seeing an uptick in interest from Japanese companies in the Middle East, but this is not necessarily related to currency depreciation; it is more of a strategic desire for growth from Japanese companies to explore new markets,” says Ayirebi from HSBC Mena.

Financial support

Contractors have also told MEED that bidders are keen to include Japanese firms in their consortiums for large infrastructure projects in order to secure financial support from Jbic. The ECA can provide guarantees, export credit financing and investment loans to support projects, and can be a useful way of plugging the funding gap on large-scale project financings.

For example, Jbic provided $645m to support the project financing of Kuwait’s Al-Zour North IWPP, which closed two years ago.

A depreciating yen will not only help Japanese contractors win awards, but will also reduce the cost of exports in other sectors unrelated to large infrastructure projects, making Japanese goods more appealing in the region.

Cheaper Japanese goods will help the country vie for market share against other major Asian exporting powers such as China and South Korea.

“Japan has the potential to compete against these other countries,” says Masayoshi Watanabe, Dubai-based managing director at Jetro.

Diversifying exports

Traditional exports such as motor cars and machinery continue to dominate Japan’s trade with the Gulf. According to Jetro, exports of Japanese vehicles to the GCC in 2014 were valued at $14.7bn, close to a 9 per cent increase on 2013 figures. The sector represents 60 per cent of total Japanese exports to the region.

However, exports from other sectors are beginning to gather pace as well now. Japan’s food and beverage industry is seeing particularly high growth in the UAE market, expanding by 38 per cent in 2014 compared with the previous year. Non-alcoholic beverage exports to the UAE were valued at $41.8m last year.

There is a drive towards further diversifying Japanese exports to the Gulf, says Watanabe. “There are three sectors we are focusing on. The food industry, fashion and the last one is medical equipment,” he says, talking specifically about the UAE.

Riskier markets

Japanese firms are also looking beyond the Gulf to new and potentially riskier markets. The opening up of Egypt in particular is on their radar.

Last month, Japan International Cooperation Agency (Jica) provided a $57m loan to the Egyptian government to fund an irrigation project in the Upper Egypt region.

Cairo also has plans to massively expand its conventional power and renewables sector in the coming years, as well as building new desalination plants. Some 54GW of new power generation capacity is planned to be built at a cost of $70bn. These are areas where Japanese firms will be keen to be involved.

Although expansion across the Mena region forms a part of most Japanese exporters’ strategies, the depreciating yen is helping to clear the way for potentially even greater regional success.