JAKARTA: When Japan’s central bank raised interest rates to their highest level in 30 years, the decision barely made a ripple for most people in Tokyo. In Jakarta, however, it landed like a jolt.
By lifting its benchmark rate to 0.75%, Bank of Japan governor Kazuo Ueda didn’t just steady a sliding yen. He quietly pulled the plug on a financial arrangement Indonesia had relied on for years. Cheap Japanese money—once plentiful and predictable—is no longer a given. And for Indonesia, that means the cost of building its future just went up.
For decades, Japanese investors had been a silent force behind Indonesia’s growth. Thanks to ultra-low interest rates at home, Japanese funds flowed overseas in search of better returns. Indonesia, with its higher yields and relative stability, became a favourite destination. That money helped fund roads, ports, factories and government programs, while keeping the rupiah steady and borrowing costs manageable.
That comfort zone is now shrinking.
As returns in Japan improve, big institutional investors are bringing their money back home. The result is less capital sloshing around emerging markets like Indonesia. The immediate worry is a weaker rupiah and rising bond yields—bad news for a government already spending heavily on infrastructure and social programs tied to its “Golden Indonesia 2045” vision.
Indonesia’s central bank is now in a bind. To keep the rupiah from sliding too far, it may have to raise interest rates—even if the economy would benefit from lower ones. That choice comes with consequences. Higher rates mean pricier mortgages for families and tighter loans for small and medium-sized businesses, the very firms that powered Indonesia’s recovery after the pandemic.
Big companies are feeling the strain too. Many Indonesian conglomerates borrowed in foreign currencies, including yen. As the yen strengthens, those loans become more expensive to repay. For manufacturers in West Java or miners in Sulawesi, that translates into thinner profits and less room to invest or expand.
The impact goes beyond balance sheets. It also touches geopolitics.
Japan has long been Indonesia’s most trusted economic partner, offering high-quality investment and a counterweight to China’s growing influence. Projects like Jakarta’s MRT and Patimban Port are physical reminders of that relationship.
But as financing from Japan becomes more expensive, that partnership faces a test. Infrastructure backed by Japanese loans may start to look like a luxury Indonesia can no longer easily afford.
Nowhere is this more visible than in Indonesia’s push to build an electric vehicle industry around its vast nickel reserves—a cornerstone of President Prabowo Subianto’s industrial ambitions. Japanese automakers still dominate Indonesia’s car market, but they’ve been slow to embrace electric vehicles. China hasn’t waited. Its companies, backed by deep state support, have moved fast and aggressively.
With higher borrowing costs at home, Japanese firms may struggle to finance a rapid EV expansion in Indonesia. Every rate hike in Tokyo raises the cost of building a factory in places like Karawang, Indonesia’s industrial heartland—making Chinese players like BYD and CATL look increasingly attractive.
As Japanese investment grows more cautious, China’s capital is ready to step in. Beijing’s financing is often patient, strategic and less sensitive to short-term market swings. The risk for Indonesia is not just greater Chinese involvement but growing dependence—especially in its green transition and manufacturing future.
By the middle of the decade, Indonesia’s financial map may look very different. Less Japanese investment could be matched by more yuan-based trade and financing, pulling Jakarta closer into China’s economic orbit.
Japan’s rate hike marks the end of an easy chapter for Indonesia—one where cheap yen financing helped smooth the path to growth. The dream of “Golden Indonesia 2045” is still alive, but the road ahead is steeper, more expensive and far less predictable.
In stabilising its own currency, Japan may have unintentionally closed the door on its role as Indonesia’s main financial backer. And as that door swings shut, Southeast Asia’s largest economy must navigate a future that costs more—and offers less room to stand apart.
