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Japan is incentivizing its companies to shift manufacturing out of China and adding Bangladesh to a list of preferred destinations for relocating the factories, moves that could give the South Asian nation’s economy a boost.

“As the pandemic started in China, Japanese companies needed to diversify” their supply chains further, Naoki Ito, the Japanese ambassador to Bangladesh, said in an interview. “This will provide an opportunity for Bangladesh.”

Japan’s nudge to relocate companies comes at a time when a Special Economic Zone (SEZ) is in the making in Bangladesh to lure Japanese firms’ production facilities. The industrial zone sprawling on 1,000 acres in the Araihazar subdistrict, 32 kilometers away from the nation’s capital Dhaka, is expected to bring in $20 billion in Japanese investments, according to the Bangladesh Economic Zones Authority.

Japanese manufacturers have already been seeking lower labor costs and supply-chain diversification by moving some output out of China for years as wages rose and infrastructure in countries like Vietnam and Bangladesh improved. Over the last 10 years, the number of Japanese companies operating in Bangladesh has tripled to about 300, according to Ito.

Japan has allocated $350 million in special loans to develop the $1 billion industrial zone, Ito said, making it the largest such assistance for an SEZ in Asia.

The Araihazar industrial park, which will be operational by 2022, is seeking to draw new investments from automakers, such as Suzuki Motor Corp. and Mitsubishi Corp., according to Ito. Japan Tobacco Inc. and Honda Motor Co. are among the largest Japanese investors in the South Asian nation so far.

Bangladesh occupies a geographically strategic location linking South Asia and Southeast Asia. One of the world’s most populous countries, Bangladesh has 160 million people residing in a land area that’s just about 40% of Japan.

The South Asian economy, which grew an estimated 5.2% in the year ended June, sees 7.4% expansion in the current financial year. While that’s slower than the 8.2% pace it previously forecast, it still puts the nation ahead of regional peers on the growth metric.

The country nestled between India and the Bay of Bengal sea is a destination with “good and strong” prospects for Japanese companies, Ito said. “The pace of recovery is faster in Bangladesh, compared to the neighboring countries.”

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