Recent market turmoil may have spurred an exodus of funds from Southeast Asia's markets, but Japanese companies are piling in – and shunning China.
In the wake of the Bank of Japan's massive easing program, Japanese bank lending and capital is pouring into Southeast Asia, with acquisition activity picking up, HSBC said in a report. "Corporate Japan is also taking the plunge, setting up more and more factories across Southeast Asia."
It's more than just caution over investing in China, it said. "China is no longer the highly competitive export platform it used to be," HSBC said. "It also reflects the growing pull of markets like Thailand, Indonesia, and Vietnam as promising consumer markets in their own right and increasingly competitive export platforms."
Why is investment swinging away from China?
"We can see from a survey of Japanese exporters that they are becoming increasingly worried about the political situation between Japan and China," said Robert Prior-Wandesforde, head of economics for Southeast Asia at Credit Suisse, citing a survey from Japan External Trade Organization, or Jetro. Last year, a territorial dispute over the East China Sea islands flared up, spurring tension between China and Japan, with violent protests on the mainland leading some Japanese firms to shut down factories temporarily.
Japan's currency has weakened sharply in the wake of the BOJ's April pledge to pump $1.4 trillion into the Japanese economy over the following two years, marking the world's most aggressive quantitative easing program.
(Read More: Corporates take emerging market volatility in stride)