There are two main components of the blossoming relationship. The first is that Japan is increasingly determined to diversify its ties to the Middle East. Unable to break the stranglehold of energy dependency, Tokyo is attempting to at least spread the load between as many states as possible. The days have passed when core relationships were nurtured with Abu Dhabi and Riyadh alone. One beneficiary of this diversification strategy has been Tehran.

The second component is equally important. Japanese companies are finding the Iranian market a source of rich opportunity. ‘Iran is a very exciting market for us. In terms of the number and size of projects we are pursuing there, it is second only to Brazil,’ says Mitsui & Company’s Yasuyuki Fujitani. ‘We want to be involved at all levels, from EPC [engineering, procurement and construction] to financing and offtaking. Depending on the situation we will look at the developer’s role too. Our aim is to be an integrated solution provider.’

From a policy angle, the driver might be Iran’s oil and gas reserves, but the commercial prospects are also excellent and it is becoming an important component in Japan’s regional view. Perhaps it is no coincidence that farda is Farsi for ‘tomorrow’. The Middle East as a whole – and Iran in particular – will have an important part to play in Japan’s future.

‘On a broad economic level, we have to reinforce ties between Japan and the Middle East,’ says Kazuhiro Morimoto, director of the Middle East & Africa office of the Trade Policy Bureau at the Ministry of Economy Trade & Industry (METI). ‘From our perspective it is about energy security and the opportunities available in emerging markets, and for the Middle East it is about securing markets for their energy exports and attracting foreign direct investment [FDI].’

As a result, Japanese corporates are taking a broader view of the region. Where the focus used to be on upstream energy opportunities, downstream investment is growing, along with the development of alternative lines of business.

Paving the way – as they have for much of the past several decades – are Japan’s ‘big five’ trading houses: Mitsubishi Corporation, Sumitomo Corporation, Mitsui & Company, Itochu Corporation and Marubeni Corporation. Among them, tactics vary and the geographic areas of focus differ. Itochu, for example, has concentrated its energies on Algeria and has an extremely strong presence there, while Mitsui has committed significant resources to Iran, particularly in the EPC arena. However, the underlying strategies of the trading houses in the Middle East are the same.

‘We look to take the role of project organisers or co-ordinators,’ says Masayuki Takashima, a board member and senior vice-president at Mitsubishi Corporation. ‘We are still traders but have moved up and down the value chain. We can do everything from providing finance and doing EPC to marketing and distribution. The purpose of our investment is to secure the source of the project or to source raw materials that can be processed in Japan and in Asia. Obviously, if we make equity investments we are moving up the value chain and improving our returns.’

To date, most of the investment has been in the energy, or energy-related, fields. Mitsubishi has been involved in Eastern Petrochemical Company (Sharq) of Saudi Arabia as one of the Japanese partners. ‘Investments like this and our stake in Oman LNG are about generating returns on investment and obtaining product,’ says Mamoru Hoshino, Mitsubishi’s manager for regional strategy. ‘The Middle East is vital for Japan, because we still highly depend on it for energy resources. The population there is also rapidly increasing, which will create problems like increased demands on water, electricity and employment. They need our assistance and co-operation in many ways. We are very excited in exploring the opportunities to work with them as a number one Japanese company on mutually beneficial projects.’

Mitsubishi’s experience has been matched by the other trading houses. Mitsui is a minor shareholder in Oman LNG and in Qatar Liquefied Gas Company (Qatargas) and is leading a Japanese consortium in International Methanol Company, a subsidiary of Saudi International Petrochemical Company. Both Itochu and Nissho Iwai hold stakes in Ras Laffan Liquefied Natural Gas Company (RasGas). Other commodity-based investments have been made. Mitsubishi has invested heavily in Nippon-Jordan Phosphates Company, for example.

The trading houses are also active lifters of crude and downstream petrochemicals from projects in which they have not participated as shareholders or financiers. For example, Mitsui signed this summer a four-and-a-half-year sales and purchase agreement with Qatar Petroleum to lift 300,000-325,000 tonnes a year of methanol: at prevailing prices the contract is worth about $160 million a year.

The trading houses do not limit their investment programmes to the sourcing of raw materials or downstream products for onward sale. They have been adept in taking the developer’s role on projects as a way of establishing markets for their own products and services, or for those of their clients. For example, Marubeni took a 40 per cent stake in Tunisia’s first independent power project, the 471-MW plant at Rades, and, with financial support from the Japan Bank of International Co-operation (JBIC), Japanese companies picked up significant equipment supply orders.

Other regional utilities projects have attracted the attention of the trading houses. Mitsui is part of a developer’s bid on the region’s first independent water project, Abu Dhabi’s Taweelah reverse osmosis (RO) desalination plant. Sumitomo has expressed enthusiasm for Saudi Arabia’s huge upcoming independent water and power project (IWPP) programme. And Mitsui is eyeing opportunities in Iran. ‘Our priority in the past has been export-driven projects,’ says Mitsui’s Fujitani. ‘But our interests are expanding, and we are looking at playing the developer role in the IPP sector in Iran.’

One step down the value ladder, the trading houses regularly partner specialist Japanese engineering contractors on EPC bids, such as Mitsui’s presence alongside Chiyoda Corporation and Italy’s Snamprogetti on the EPC contract for onshore facilities at RasGas’ third and fourth trains.

‘We tie up with the likes of Chiyoda, JGC and others as organisers and intermediaries that have the weight to help arrange finance,’ says Mitsubishi’s Takashima. ‘Our role is to support Japanese companies that do not have the physical presence or the relationships on the ground that we have developed. It is hard for them to build the knowledge, the databases, the contacts and the relationships that we have in the Middle East through our broad range of activities. We are happy to see our role evolving, to add value wherever it is needed and to enhance our capabilities. For example, we mainly offer regional support to Japanese companies, but Europeans come to us and we are pleased to work with them too.’

Although they have moved up the value chain into EPC contracting and the developer role, the big five still have trading as their core instinct. ‘We use our balance sheet where the returns are good and if there is extra advantage from service provision or a trading perspective,’ says a Tokyo-based businessman. ‘But we are traders at heart and are looking to sell machinery, equipment, end product, whatever, and to source raw materials and products that we can sell into other markets.’

The two-dimensional approach is itself set to expand as the Middle East’s markets grow and their economies mature. With Asia still subdued following the 1997 financial crisis, Japanese exporters are looking for new consumer markets for their products, as well as sites for fresh production facilities. Historically, Japanese retail products, ranging from automobiles to white goods, have been well received in the region, but the Arab world has been neglected for reasons of size. However, the region’s demographics suggest this might change: over the next 10 years the region’s population will hit 300 million and it will become a significant market for consumer goods.

‘From a strategic point of view, the main interest is in building strong mutual relations to underpin our energy dependence on the region, but it’s not just enough to buy energy and this has led to significant upstream investment,’ says METI’s Morimoto. ‘However, wider possibilities are now being looked at from pharmaceuticals to textiles.’ Compared to FDI in the oil, gas and petrochemicals sectors, Marubeni’s stakes in Saudi Japanese Textile Company and Saudi Japanese Pharmaceutical Company might appear small, but they are important indicators of the future expansion of Japanese investment in the region.

‘I hope this will continue, but it will depend on the progress of liberalisation in the region,’ says Morimoto. ‘Serious efforts are under way at the moment – particularly in Saudi Arabia – to open markets and this will make the Middle East more attractive to investors. In the face of intense competition in Asia, we are starting to look at the Middle East as an area where we can gain first-mover advantage, both in terms of selling products and services and setting up manufacturing facilities.’

Government and private sector institutions are increasingly trying to educate Japanese companies about the Middle East. ‘In the past, too many companies were unwilling to look beyond India,’ says Yoshiki Hatanaka, director of the Energy & Environment Programme at the International Development Centre of Japan (IDCJ). ‘The psychological gap between India and Europe still exists, but we are working to promote Japanese business in the Middle East, particularly FDI and JV [joint venture] business. We are still behind US and European companies, but the slump in the domestic economy and in the Asian region is encouraging people to examine the Middle East more closely, particularly those SMEs [small and medium-sized enterprises] with specialist technologies.’

In recent months, the Japan Co-operation Centre for the Middle East (JCCME) has opened two regional desks – one in Kuwait city and another in Riyadh – with the assistance and co-operation of the IDCJ, to help support Japanese companies seeking opportunities in the Middle East. One of the implications of Japanese SMEs raising their game in the region will be a more varied itinerary for Middle Eastern businessmen visiting Japan: many of the SMEs are based outside Tokyo and there is a particular concentration in Osaka. What they find when they get there will be different too. The inhabitants of this business-focused city are far more commercially minded than many of their compatriots. While the normal phrase of greeting in Tokyo is ‘Konichi-wa’, meaning ‘How are you?’, in Osaka it is ‘Mokari makka’, meaning ‘Are you making profit?’.

‘The difference between attitudes in Osaka and those in Tokyo is like the difference between the Hijaz and the Nejd,’ says a Japanese businessman with long experience of the region. ‘The difference will be felt when business links improve.’ The significance of the shift in the centre of gravity has not been wasted on Emirates airline, which recently launched a direct service between Dubai and Osaka and, in December, will be carrying the governor of Osaka to the UAE on a mission to promote business links.

As such ties develop, so the economic relationship between Japan and the Middle East will mature. The dynamic of need – defined on Japan’s side by primary energy security and on the Middle East’s as a market for fuels – will change. The new dynamic will be based on FDI and broad business development. As the film Farda shows, Japan and the Middle East have much to offer each other.