The dramatic decline in popularity of China (falling from 62.1 percent in last year's survey to 37.5 percent in 2013) was caused by concerns over China's slowing economic growth, intensifying competition with rivals as well as bilateral political tensions (Japan and China having a territorial dispute over islands in the East China Sea).

The main reason why Japanese companies are enthusiastic about investing in Indonesia is mainly because of Indonesia's rapidly expanding middle class in combination with the large population (over 240 million people), thus forming a huge consumption class. According to consultancy firm the Boston Consulting Group, the Indonesian middle class numbers 74 million in 2013, equivalent to about 30 percent of the total Indonesian population. Amid strong economic growth, the firm expects this figure to almost double to 141 million people by 2020. An expanding middle class implies that more products will be consumed (as this group is eager to improve their quality of life), thereby strengthening the contribution share of domestic consumption to the country's gross domestic product (GDP) growth, which currently stands at 55 percent. This can be a catalyst to spur further economic development in Southeast Asia's largest economy.

For Japanese companies, Indonesia's middle class is a lucrative market to sell automobiles and electronics. Car sales in Indonesia reached record highs in recent years due to robust economic growth in combination with a still relatively low per-capita car ownership ratio.

Based on data provided by the Indonesia Investment Coordinating Board (BKPM), Japan is currently the largest investor in Indonesia and investments from the land of the rising sun have shown a sharply increasing trend since 2010. The most popular sectors for Japanese investments are Indonesia's transportation sector and machinery & electronics sector.

Investment Realization in Indonesia:

Country      Q1-2013
     Q2-2013      Q3-2013
Japan     US$ 1.2 B     US$ 1.1 B     US$ 1.3 B
USA     US$ 0.9 B     US$ 0.5 B     US$ 0.6 B
South Korea     US$ 0.8 B     US$ 0.5 B     US$ 0.4 B
Singapore     US$ 0.6 B     US$ 1.4 B     US$ 1.1 B

Source: BKPM

Click here to download BKPM's official report Domestic and Foreign Direct Investment Realization in Quarter II and January-June 2013.

Further Reading:

Indonesian Population
Popular Low Cost Green Car Boosts Indonesian Car Sales in 2013
UK Business Confidence in Indonesia Subdued Amid Economic Challenges