As S.East Asia embraces Myanmar, Japan sizes up investments

* Japan sees potential for gradual rise in investment

* Cautious, not ready to resume full-fledged trade

* Reflects signs of reform, which have gathered pace

* ASEAN to consider Myanmar for group's chair in 2014 (Writes through)

By Ben Blanchard and Yoko Nishikawa

NUSA DUA, Indonesia, Nov 16 (Reuters) - As Southeast Asia applauds signs of reform in Myanmar, Japan hinted on Wednesday at the prospect of more investments in the reclusive, authoritarian state following a wave of Chinese money, illustrating its growing allure in Asia.

Japan is not ready to resume full-fledged trade and aid but sees the potential for a gradual rise in investment, said Kimihiro Ishikane, deputy director-general of Japan's Foreign Ministry's Asian and Oceanian Affairs Bureau.

"We'd like to do something but we should go gradually," he told reporters on the Indonesian resort island of Bali during a regional summit. "We are cautiously observing."

That sentiment is echoed in Southeast Asia, whose foreign ministers endorsed Myanmar's request to chair Southeast Asia's regional bloc in 2014, urging leaders of the 10-member South East Asian Nations (ASEAN) to do the same on Thursday in Bali.

Such changes add to speculation the resource-rich country of 50 million people may soon emerge from half a century of isolation, a process that gathered steam after the army nominally handed power to a civilian parliament in March after the first elections in two decades.

"Foreign ministers welcomed developments in Myanmar and said it's important developments must be kept and the momentum must be kept," said Indonesian Foreign Minister Marty Natalegawa, whose country holds the current rotating ASEAN chairmanship.

"The chairmanship of ASEAN... will create further motivation for Myanmar to continue their reforms," he told a news conference.

But it is also a gamble for Southeast Asia.

Myanmar's chairmanship could provoke Western boycotts of some ASEAN meetings and summits, particularly if Myanmar fails to sustain its reforms, embarrassing the region at a time when it wants to be seen as a counterpoint to China's growing influence in Asia.

The United States and European Union have applauded a recent freeing of political prisoners but say they want more reforms before considering lifting sanctions imposed in response to decades of human rights abuses in the former British colony also known as Burma.

JAPAN SIZES UP MORE INVESTMENT

As the West clamours for more change, Myanmar's trade in Asia is on the rise. In September, for instance, a mission by Japan's biggest business lobby, Nippon Keidanren, visited Myanmar and the Japanese textile industry has begun to consider specific investment projects.

The Japan Chamber of Commerce and Industry plans to send a mission to Myanmar, and there will be a workshop on supporting its economic reforms from December through January, say officials in Japan's foreign ministry.

Japanese aid guidelines to Myanmar were relaxed after Nobel Peace Prize-winner Aung San Suu Kyi was freed from 15 years of house arrest last year, Ishikane added, clearing the way for Japanese involvement in some small infrastructure projects.

Recent overtures by Myanmar's government have included calls for peace with ethnic minority groups, some tolerance of criticism, the suspension of an unpopular Chinese-funded dam project and the legalisation of labour unions. President Thein Sein has also defied sceptics by reaching out to Suu Kyi.

The country, as big as France and Britain combined, sits between booming India and China with ports on the Indian Ocean and Andaman Sea that, if developed with proposed rail and pipeline projects, would allow cargo ships to bypass the Straits of Malacca.

That would open the way for faster delivery of oil from the Middle East and Africa to China and other countries in the region straddling the Mekong River such as Thailand.

"This will connect ASEAN and especially the Mekong with India," said Ishikane. "This will give an outlet for avoiding the Malacca Strait ... it is a very important part of connectivity which is currently lacking or missing."

China now ships 80 percent of its imported oil through the Straits of Malacca, a congested sea lane shared by Singapore and Malaysia just a few nautical km (miles) wide in places. Experts have long feared a trade-crippling terror attack or a blocade there.

Backed by Chinese money, Myanmar is building a new, multi-billion-dollar port through which oil can reach a 790-km (490-mile) pipeline now under construction - with Chinese investments and workers - that will be cut across Myanmar and link refineries in western China.

Another parallel pipeline will pump Myanmar's offshore natural gas to China.

Chinese pledged investment in Myanmar reached above ${esc.dollar}14 billion in the 2010/11 (April-March) fiscal year, causing total foreign direct investment promises to soar to ${esc.dollar}20 billion from just ${esc.dollar}300 million a year before, official data show.

Southeast Asia have sought to ramp up engagement, largely to counterbalance China's influence and to gain a toehold in a country whose proven gas reserves have tripled in the past decade to around 800 billion cubic metres, equivalent to more than a quarter of Australia's, BP Statistical Review figures show. (Writing by Jason Szep; editing by Neil Fullick)