The collaboration between Indian steel company JSW Steel and Japanese steel company JSE Steel that was announced last week is just the latest example of growing Japanese interest in the India story.
The initial agreement between the two steel companies does not mention any equity investment, but most stock market analysts believe it is a matter of time before JSE Steel buys a stake in JSW Steel.
The deal follows several high-profile Japanese investments in India over the past two years. Japanese telecom company DoCoMo spent $2.7 billion to buy a stake in Tata Teleservices in February.
Japanese pharmaceuticals firm Daiichi Sankyo spent $4.6 billion to take control of Ranbaxy Laboratories in June 2008.
This is in addition to the $4 billion that the Japanese government has promised as funding for the ambitious Mumbai-Delhi freight corridor, after it put up money for building the Delhi Metro in 2002.
The economic case for trying to attract more Japanese direct investment is clear. Japan is an ageing country with a huge current account surplus while India is a dynamic economy that needs foreign capital.
The geopolitical implications are important as well. Both Japan and India are worried about the growing importance of China in the region and its clout with the US, given that it is an important source of funding of the consumption binges and gaping trade deficits of the world’s only superpower.
Like rejected suitors, India and Japan are trying to build an alliance that is also cemented by the fact that both countries are democracies with market economies.
The Japanese had three years ago spoken of building an arc of freedom across Asia, with Japan and India at the two ends. India has its own Look East policy.
The two countries have also been involved in on-off discussions about a comprehensive economic partnership agreement.
Japanese investment in India is still very small if one looks at the data over the past six years, fluctuating between 3.75% of total foreign direct investment inflows in 2005-06 and 0.54% in 2006-07. Trade, too, is modest.
The two governments would do well to encourage more trade and investment between companies in their respective countries.
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