Japanese companies are flocking to Vietnam in record numbers seeking cheap labour and growth markets and business is booming for the Hanoi branch of Izakaya Yancha, a Japanese restaurant chain.

“Many Japanese men in their 40s like to hang out here with their Vietnamese girlfriends after going to karaoke,” says Shinya Nakao, the restaurant’s manager. “We expect more Japanese companies to move to Vietnam, so we’re planning to open a second branch this year and maybe some more after that.”

It may be bad news for these executives’ wives and children, who are increasingly being left at home as companies cut back once-generous expatriate packages. But the rising tide of Japanese investment is welcome in Vietnam, where several years of macroeconomic instability have dented confidence among investors.

A record 208 Japanese companies set up in Vietnam last year, pledging to invest just over $1.8bn, according to Jetro, the Japanese trade promotion body. In 2010, 114 Japanese companies came to Vietnam, vowing to invest $2bn.

While Japan still ranks behind Taiwan, South Korea and Singapore in terms of registered foreign investment capital in Vietnam, Japan is leading the way in terms of implemented investments, says Hirokazu Yamaoka, Jetro’s chief representative in Vietnam.

The latest wave of investment, which has been propelled by the strong yen, is part of a broad push into emerging markets backed by the Japanese government, which is concerned about low growth and an ageing population at home.

Tony Foster, managing partner of the Vietnam office of Freshfields Bruckhaus Deringer, the law firm, says Japanese companies have been “jolted into action” since the earthquake that struck the east of the country in March.

“Japanese companies are realising that they’re not going to survive just in Japan,” says Mr Foster, who advised Mizuho, the banking group, last year on its $567m acquisition of a 15 per cent stake in Vietcombank, one of Vietnam’s biggest state-controlled institutions. “The Japanese government is also supporting diversification into Vietnam for geopolitical reasons.”

Export-focused manufacturers such Bridgestone, the world’s biggest tyre maker, and Panasonic, the electronics group, are setting up factories in Vietnam to take advantage of cheap wages. Unskilled workers in Vietnam are typically paid a half to a third of the $300 a month their counterparts might receive in the manufacturing clusters of southern China.

Companies such as Sapporo, the brewer, Mizuho, and Unicharm, which makes female hygiene products, are attracted by rapid domestic growth in Vietnam, which has one of the fastest-expanding middle classes in Asia, according to the Asian Development Bank.

“Until recently, many Japanese manufacturers were looking to China, but it is more and more difficult because the currency is strong and wage costs are rising rapidly,” says Mr Yamaoka. “There are also political issues between Japan and China.”

A senior executive from a Japanese trading house with a presence in Vietnam says Japanese companies like the political stability of one-party, Communist-ruled Vietnam, which comes free of the historical animosity and present-day rivalry that looms over China-Japan relations.

However, wages and social tensions are also rising in Vietnam, which suffered a record number of labour strikes last year, as average annual inflation exceeded 18 per cent, the highest rate in Asia.

But companies such as Tamron, which makes lenses for the world’s leading camera brands, are not deterred by this economic instability.

“Vietnam is very friendly for Japanese investors and the wage levels are acceptable,” says Shoji Kono, a corporate vice-president at Tamron, which plans to build a Y1bn ($13m) factory near Hanoi that will eventually employ 2,000 people.

Tamron set up its first overseas factory in Foshan, in the industrial heartland of China’s Pearl River Delta. It is one of many global manufacturers, not just Japanese, that want to diversify their production away from China to cut costs and reduce their dependence on one manufacturing base – a risk exposed last year by the floods in central Thailand and the earthquake and tsunami in Japan.

Western diplomats say Japanese companies investing in Vietnam benefit from high-level political backing. Japan is one of Vietnam’s largest aid donors and political and security ties between the two countries are growing as both look anxiously over their shoulder at an ever more assertive China.

Japan provided Vietnam with Y100bn of official development assistance in 2010, about a third of the total it provided to the whole of south-east Asia. Much of Japan’s aid is focused on infrastructure and Tokyo is not shy about directing its cash toward projects that directly benefit Japanese companies, such as the large, new Lach Huyen port in Haiphong, northern Vietnam.

While there are many opportunities, conditions in Vietnam are far from ideal for foreign investors. In addition to widespread corruption, red tape and high inflation, the country’s infrastructure is still underdeveloped.

Tamron, along with many manufacturers, will be installing generators to protect against possible power cuts. But, says the executive from the Japanese trading house, Japanese companies – and their shareholders and boards – are more willing than their western counterparts to adapt to tough conditions in developing countries and play the long game.

“Japanese companies have a more long-term view,” he says. “We accept the situation, consider the best way forward, and don’t complain to anybody.”