Taiwanese President Ma Ying-jeou had two things to brag about in his National Day address last month: One was a landmark trade pact signed in June 2010 with China, the island’s largest trading partner, while the other was significantly improved relations with its second-largest trading partner, Japan.

Japanese investment in Taiwan exceeded $444 million last year, the highest level since Ma first took office in 2008, and from this January to September rose to its highest point in the past five years.

With trade prospering, Tokyo and Taipei signed an investment agreement in September last year allowing for greater freedom of bilateral economic exchanges — an important step closer to inking a free-trade pact.

A couple of months later, the two sides revised an aviation pact, lifting restrictions on the flight numbers, destinations and airlines operating these routes, and in April, Taipei and Tokyo signed a memorandum of understanding to speed up patent applications. An industrial cooperation accord is also expected by year’s end.

Ma has been looking to capitalize on such progress, touting this as the best period for bilateral ties since Japan diplomatically recognized China in 1972 and cut official relations with Taiwan.

There are several reasons for this growing economic interest in Taiwan. Besides a slowing economy, shrinking workforce and rising energy costs at home, the yen’s long-term appreciation has hurt Japanese exporters.

Additionally, escalating tensions between Tokyo and Beijing over the Senkaku Islands in the East China Sea have caused many companies to rethink plans to invest in production facilities in mainland China.

In terms of relocating operations, Taiwan offers several advantages over other destinations, starting with its location, which is both near to Japan but also to China’s vast market for Japanese goods. Even more important is Taiwan’s capacity as a world leader in high-tech manufacturing, with production facilities, infrastructure and a skilled workforce already in place.

By tapping Taiwan’s location and manufacturing capacity, Japanese firms also benefit from the 2010 trade pact with China, which cut tariffs for Taiwanese imports, as well as more recent deals, such as one signed in August that protects investments in China that originate in Taiwan, including Japanese-Taiwanese partnerships.

A study by Nomura Research Institute estimates that Japanese businesses are 10 percent more likely to be successful in China if they collaborate with a Taiwanese firm than if they go it alone.

In addition, Japanese relations with Taiwan are marred with little of the historical animosity that exists with China. The anti-Japanese demonstrations that erupted across China over the Japan-administered Senkakus, over which Beijing claims sovereignty, is just the latest expression of feelings that have remained raw following Japan’s brutal wartime invasion and occupation of its giant neighbor.

By comparison, Taiwan, which also claims the Senkaku islets, benefited from Japan’s 50-year colonial rule of the island through 1945, at least compared with its harsh and brutal rule of the Korean Peninsula, and the two sides remained close even after Japan’s defeat in the war.

With China showing greater assertiveness in the region, analysts agree that closer ties between Taiwan and Japan are in both countries’ interests.

Daniel Twining of the American Enterprise Institute said the future of Taipei’s relations with Tokyo is becoming nearly as important as cross-strait relations with Beijing. Twining said the two sides should work to build closer diplomatic and military ties to reinforce Taiwan’s relations with the United States and to give Taipei greater leverage with Beijing.

For its part, Tokyo should continue to diversify its security partnerships in Asia, Twining said, elevating Taiwan in its strategic planning to reflect the very negative implications of any transition of Taipei from ally to adversary for Japanese interests.

As Wong Ming-hsien of Taiwan’s Tamkang University pointed out, the two sides’ alliance is crucial to their strategic futures insofar as it could help not only coordinate security against Chinese aggression but also counterbalance South Korea’s increasing economic dominance.

Japan’s interest in Taiwan is thus one more step in its “China plus one” strategy, initiated to seek business options in Asia outside China.

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