Prime Minister Abe's historic speech at last week's Shangri-La Dialogue focused regional and global attention (and Chinese ire) on Abe's desire for greater and more proactive Japanese security engagement in Southeast Asia. The International Institute for Strategic Studies' Shangri-La Voices series provides a useful caution on the domestic hurdles facing Abe's pursuit of this strategic rebalance.

But Japan is also in the midst of an economic rebalance towards Southeast Asia. This rebalance is sharper, and has some key differences to Abe's security shift. First, Prime Minister Abe is a minor figure; second, Japan's domestic situation is the primary driver, not a constraint; and third, the economic rebalance could well have a greater and more positive impact on Southeast Asia than the security rebalance.

Japanese investors are moving more money out of the demographically declining Japanese market and putting a larger share in Southeast Asia. But China (and India), despite their larger market sizes, are not the beneficiaries of these outflows. The rising cost of labour in China, not the rising tensions in the East China Sea, explain Japan's economic rebalance away from China. In 2013 alone, the six largest Southeast Asian economies (Indonesia, Malaysia, Thailand,  Vietnam, Singapore and the Philippines) received 2.5 times more FDI inflows from Japan than China received, and 11 times more than India received. Q1 2014 figures show an even sharper differentiation, with Southeast Asia's big six receiving more than four times as much Japanese FDI as China and 20 times more than India.

When it comes to portfolio outflows from Japan, the figures are even starker. According to a 19 May report in the Edge Malaysia newspaper by Bank of America Merrill Lynch researchers (not online), since 2010 there has been a net outflow for Japanese portfolio investment from China and a surge of inflows to Southeast Asia. Southeast Asia now accounts for 7.2% of Japanese overseas equity holdings, up from 4.3% in 2010, while China's share has fallen from 1.3% in 2010 to 0.7% at the end of 2013. Japanese bank lending to Southeast Asia is also growing much faster than Japanese cross-border lending to China.

While America's rebalance to Asia is seeing greater progress on the security side than the economic one, Japan is experiencing the opposite.

Photo courtesy of Wikipedia.