Chart of the Month - May 2026

While China overtook Japan as Australia’s largest export destination in 2009, Japanese foreign direct investment in Australia is currently over four-times that of China’s.

Japanese FDI flows in Australia has increased significantly since 2019 (see chart below) helping Japan overtake the UK as Australia’s second largest source of FDI (see second chart below). LNG has been a major recent focus, but we are now entering the era of critical minerals. When Japanese PM Sanae Takaichi visited Australia earlier in the month, she signed bilateral agreements on energy, defence, and critical minerals.

Stages of the relationship

“A defining characteristic of engagement between Australia and Japan has been

the ability of our policy makers to agree on a common vision for the future of the

bilateral relationship.” Michael L’Estrange, Department of Foreign Affairs and Trade, secretary, 2006.

In 1957, Australia’s relationship with Japan changed forever. Turning the page on past hostilities, Australia and Japan signed the Australia-Japan Commerce Agreement. Japan’s post-war economy was taking off, and Australia had the wool, coal, and iron ore it needed.

As the UK turned towards Europe, Japan became even more important. By the late 1960s, Japan was Australia’ largest export destination.

The 1976 Basic Treaty between Australia and Japan underlined the importance of the relationship between the two countries and sought to deepen it. It also included greater protection for Japanese investments.

The 1980s saw Japanese investment branch out from mining. Japanese banks set up operations in Australia. Japanese tourism and investment in the tourism industry boomed. Japanese companies also invested in the Australian alumina and aluminum industries.

Investment in coal and iron ore rose to prominence in the 1990s, which inadvertently helped Australia benefit from the China boom in the 2000s.

In 2015, Australia and Japan removed a range of tariffs between the two countries with the Japan-Australia Economic Partnership Agreement (JAEPA). This included greater access to the Japanese market for Australian agriculture.

Trade was further opened up when both countries entered into two regional multilateral FTAs: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership  in 2018 and the the Regional Comprehensive Economic Partnership Agreement (RCEP) in 2022. This has likely contributed to increased Japanese investment in Australia in recent years.

LNG

Japan had invested in Australia’s North-West shelf gas fields as early as 1985, back when LNG was an afterthought to coal. In the 2000s, Japan’s investment in Australia’s LNG capacity bore fruit. However, Australia was not the only source of LNG Japan cultivated. But starting in the late 2010s, Australia’s share of Japanese LNG imports increased (see chart below) as Japan increased its practice of on-selling LNG to other countries, a practice that Qatar discouraged. Today, Australia supplies around 40% of Japan’s LNG imports.

Critical minerals

Japan has already experienced China flexing its critical mineral muscles. Back in 2010, an incident between a Chinese fishing boat and the Japanese coast guard escalated into a Chinese ban. In Janaury, this year, China imposed a ban on some rare earth mineral exports to Japan after Japanese PM Takaichi said that a Chinese attack on Taiwan would be an existential threat to Japan. 

So as early as 2010, Japan invested billions in loosening its dependence on China for critical minerals. Even back then, this included investing in Australian critical minerals: in 2010, a AUD 250 million deal was signed with the Australian rare earth company Lynas.

Since then, Japanese investment in Australian critical minerals has continued and the new critical minerals agreement will only see this part of the Australian and Japan relationship grow stronger.

Final thoughts

In this uncertain world, it is good to have partners you can trust. Australia and Japan have helped power each other’s economic growth for decades. And while China’s economic importance to both countries has grown as China has grown, the relationship between Australia and Japan has become even more strategic for both countries.