India's Finance Minister Palaniappan Chidambaram speaks behind Indian (L) and Japanese national flags during an interview with Reuters in Tokyo April 2, 2013. (Issei Kato /Reuters)

As Indian Finance Minister Palaniappan Chidambaram wraps up an investment promotion trip to Tokyo on Wednesday, he has reason to hope that corporate Japan will send more money his country’s way.

Shinzo Abe, Japan’s new prime minister, is an admirer of India, having talked about a new “arc of freedom and prosperity” linking Asia’s two largest democracies while on a high-profile visit to New Delhi in 2007 during his first stint in the post.

But New Delhi is now courting cash-rich Japanese companies worried about economic and political changes in China, which has traditionally absorbed the bulk of their emerging-market investments.

India badly needs extra foreign capital to fund a current-account deficit that climbed to record levels in the last quarter, while Japanese businesses have long been among the country’s most generous investors.

“Japanese companies and investors would like options other than China for a variety of reasons,” Chidambaram told Indian television. “And India offers a huge market that is governed by rule of law and that makes India as attractive as, if not better, than China.”

Akira Kajita, research director at the Japan External Trade Organization, a government-linked institution, says that after years of focusing on China, Japanese companies have begun to take a “more regionally balanced” approach.

Partly a result of what HSBC economist Trinh Nguyen calls a structural shift in foreign direct investment globally, this trend sees multinationals shifting away from China in the face of rising labor costs and an appreciating currency, and toward other emerging Asian economies.

India will by no means be the sole beneficiary, but the scale of its internal market alongside its vast, youthful and cheap labor force provide selling points that rival destinations such as Vietnam or Burma will struggle to match in the longer term — a theme Chidambaram drove home during his trip this week.

A Japanese official said that the Tokyo and Delhi governments were arranging for Indian Prime Minister Manmohan Singh to visit Japan before the end of May for a summit with Abe.

Examples of new Japanese investment in India are not hard to find. On Tuesday, carmaker Honda unveiled plans for a $460 million plant in the northwestern state of Rajasthan, following recent investment announcements from the likes of Nissan and Toyota Motor. Investments by electronics groups, including Sony and Panasonic, have also been growing, with Yoshi Yamada, Panasonic’s senior managing director, saying last month that his company would make India the “centerpiece” of future growth plans.

Elsewhere, All Nippon Airways is examining investments in India’s recently liberalized airline sector. Anshuman Thakur, an investment banker at Morgan Stanley specializing in Japanese deals, cites rising interest elsewhere from consumer goods, retail and high-tech manufacturing groups.

Overall, Japan has been India’s largest source of foreign direct investment from a major industrialized nation over the past two years, investing a record $3 billion in 2011 — part of a trend that is also expected to see bilateral trade increase to $25 billion by 2014, roughly double the level four years before.

Japanese groups still face the same problems of erratic regulation, bureaucracy and corruption that hamper other investors in India. Those looking to establish Chinese-style large manufacturing facilities will also face specific problems, not least over land acquisition and poor infrastructure.

Nonetheless, many analysts feel those barriers are surmountable, in particular because political forces are also pushing Japanese investment in new directions.

Territorial disputes over islands in the East China Sea have spawned not just rising diplomatic tensions but also heightened business fears in the face of often violent Chinese public demonstrations and boycotts of Japanese goods.

“Without any question, anti-Chinese feeling is driving a pivot in Japanese investment,” said Ian Bremmer, head of Eurasia Group, a risk consultancy. “India and Southeast Asia are the two areas that will see the greatest uptick, while Abe is personally invested in India; he feels strongly about it.”

The path to higher investment is unlikely to be smooth, of course. Japanese companies remain cautious abroad, while the performance of some high-profile Indian forays provides ample cause for concern.

NTT DoCoMo is one prominent example: The Tokyo-based telecommunications group spent $2.7 billion in 2008 for a minority stake in a joint venture with the Tata group, an investment that has since produced one of India’s least successful mobile operators.

One year later, drugmaker Daiichi Sankyo took a $3.9 billion writedown just months after taking control of generics manufacturer Ranbaxy Laboratories — one of the largest foreign deals involving an Indian company and arguably one of the worst involving a Japanese firm.

But the event that most shocked Japanese business opinion came last July, when carmaker Maruti-Suzuki, one of Suzuki Motor’s most successful and established Indian businesses, witnessed rioting at one of its factories outside New Delhi in which a senior manager was killed and dozens of staff hurt.

Even so, India’s finance minister believes the effect of such problems can be overcome, positioning his country as Japan’s future investment partner of choice. It’s a view that finds widespread support among business leaders, as well.

“Japan needs a partner that can offer low-cost manufacturing, where China is waning, and a big domestic market,” said Pradip Shah, founder of IndAsia, a Mumbai-based financial advisory group. “And India should be first in line.”

— Financial Times

Ben McLannahan in Tokyo contributed to this report.