With investments of $2.2 billion last year, Japan is now India's largest source of foreign direct investment replacing the United States as well as the largest donor. Bilateral trade reached $18.5 billion in 2012-13 with the two sides setting up a target of $25 billion for 2013-14. In an attempt to strengthen financial cooperation, the two nations have expanded the bilateral currency swap arrangement and signed the contract for its entry into force in January. Abe has announced a loan of 200 billion yen, or US$2 billion, for various infrastructure projects in India. Japan is part of several major infrastructure projects in India including the $90 billion Delhi-Mumbai Industrial Corridor and the planned Chennai-Bangalore Industrial corridor. India has invited Japanese companies to invest in the infrastructure sector in the politically sensitive northeastern region - an area where China has made territorial claims. India and Japan are also planning to collaborate to develop infrastructure in other regional states.
There are challenges to overcome. Compared to the Sino-Indian bilateral trade which is reaching $100 billion mark, Indian-Japanese trade is far below its full potential. The nuclear agreement continues to elude the two as Japan wants India to do more to demonstrate its non-proliferation credentials. Japan continues to insist on India relinquishing its right to conduct nuclear tests and an immediate cessation of nuclear cooperation if India violates its self-imposed moratorium, terms which Delhi has found difficult to accept. Without a civil nuclear energy cooperation pact with Japan, US and French companies cannot sell reactors to India. Despite this, Japan remains committed to supporting India's full membership in the Nuclear Suppliers Group, the Missile Technology Control Regime, the Australia Group and the Wassenaar Arrangement, a voluntary treaty on export controls for conventional arms trade.
Japan, for its part, wants more robust Indian support for its position on territorial disputes with China, but India has been cautious so far. Regional security competition is intensifying in Asia as China attempts to assert primacy and questions emerge about US credibility as regional security anchor. China's decision to set up the ADIZ last November and regular intrusions into Japanese territorial waters by Chinese ships have raised the stakes to dangerous levels, and Delhi's willingness to side with Tokyo on these territorial disputes is unclear.
China's attempts to test the diplomatic and military mettle of neighbors only bring Japan and India closer. While Delhi and Tokyo would prefer greater transparency and restraint on Beijing's part, there is need for both to be more candid about their specific expectations. In Abe's words, "a strong India is in the best interest of Japan, and a strong Japan is in the best interest of India." HIs idea of a new "arc of freedom and prosperity" connecting Asia's two major democratic economies now has real potential of being realized. Given Abe's admiration for India and his repeated articulation of the need for India and Japan to work more closely, Delhi recognizes this as an opportunity to alter radically the contours of Indo-Japanese ties.
India's Look East Policy and especially its ties with Japan are a rare foreign policy achievement for a nation consumed with policy paralysis and strategic diffidence. Though the Look East Policy predates Delhi's focus on Tokyo, Indian Prime Minister Manmohan Singh has described Japan as its "heart." The India-Japan entente is one of the most significant manifestations of Asian geopolitics undergoing fundamental transformation.
