The Wall Street Journal says major Japanese banks are looking to diversify their risks in Asia, building staff numbers in Malaysia and Indonesia. While the current big game for Japanese banks and others remains mainland China, competition from local lenders and a tough regulatory environment for foreign operators make expansion elsewhere more attractive.

Japan’s second largest bank by market cap, Sumitomo Mitsui Financial Group, wants to add to its 200 employees in Indonesia and last year announced plans to increase its Malaysian staff from 30 to 100. Joining them in the region are the other two of Japan’s ‘Big Three’, Mitsubishi-UFJ (MUFG) and Mizuho Financial Group , who have recently obtained commercial banking licences in Malaysia.

With their eyes on raising Japanese investment for large resource and infrastructure projects, they are teaming up with local banks, like MUFG’s alliance with Malaysia’s CIMB Group Holdings Bhd since 2006 and Indonesia’s CIMB Niaga since 2007. Mizuho has arrangements with Indonesia Eximbank and Malayan Banking Bhd (Maybank), and SMFG has made recent ties with Malaysia’s RHB Capital Bhd and Indonesia’s PT Bank Central Asia.

Syndicated loans, used to finance large scale projects, were worth around US$7.7 billion in Indonesia and Malaysia last year according to Thomson Reuters, up 15% despite investor queasiness following the worst of the global financial crisis. Japan’s banks will also face tough competition from other foreign banks with longer-standing operations in Southeast Asia, like HSBC and Standard Chartered.

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