Avenue of the Americas, NYC, NY 10020July
Economy Offers Investors a Source of Global Diversity
over the U.S. economy has led many investors to regain their appreciation
for the benefits of international diversification. As a result, Japan
the worlds second largest economy is beginning to
attract more attention from global corporate and portfolio investors.
While the long term implications of this trend remains to be seen, the
Nikkei 225, Japans primary market index has outperformed
the U.S. Dow Jones Industrial, S+P 500 and NASDAQ, as well as most major
European, indexes over the past year.
almost a decade of sluggish growth and stagnation since the collapse
of its bubble economy in the early 1990s, Japan is showing signs that
it is emerging from its troubles. Dramatic changes in its regulatory
infrastructure have lead to a surge in foreign direct investment. While
still small compared to the levels seen in the U.S. and other major
economies, incoming investment is playing a leading role in changing
the corporate dynamic and way that business is conducted in Japan.
Further change is indeed necessary and substantial steps need to be
taken to build on the momentum that has been achieved. Nevertheless,
the growing attractiveness of Japans refined and highly sophisticated
market containing more than 100 million consumers with ¥1,400
trillion in personal assets is increasingly recognized by U.S.
and foreign businesses, who are coming to understand the opportunity
and potential that it offers.
In recognition of these trends and the importance of facilitating cross-border
investment flows between Japan and the U.S., a bilateral Investment
Initiative was established in June 2001. In addition to high- and working-level
discussions, the Initiative has organized public symposiums in the U.S.
and Japan, including two events earlier this month in New York and Chicago.
During these forums, senior public and private sector leaders, including
representatives from prominent U.S. firms such as Goldman Sachs, Johnson
and Johnson, Pfizer, Solo Cup, Walmart, WL Ross and Co. and others recounted
their experiences, and offering advice for U.S. investors and executives
seeking to enter and operate in the Japanese market.
Japan External Trade Organization (JETRO) provides the following information
examining these issues in greater detail.
Maintains Progress in Achieving Comprehensive Economic Reform
essential need to initiate comprehensive change in the Japanese economy,
its government adopted a comprehensive "Action Plan for Economic
Structural Reform" in 1996.
This has led to a wide range of initiatives designed to enhance corporate
competitiveness and flexibility. Programs include measures to promote
small and medium enterprises, to utilize information technology,to increase
the flexibility of Japanese labor markets and to reduce the high cost
of doing business in Japan.
While much more needs to be done, significant progress has been achieved
since this initiative was introduced five years ago. Achievements include
an end to the prohibition on holding companies, introduction of stock
swaps and transfers, facilitated listings and use of stock options,
establishment of technology licensing organizations, enhanced information
technology policies and deregulation of financial services, energy and
Over the past year one major success includes significant reform of
Japans Commercial Code. "This will allow Japanese firms for
the first time", in the words of Vice Minister of Economy, Trade
and Industry Hidehiro Konno, "to speak a common language in terms
of corporate governance with their colleagues in the U.S. and other
markets ." Changes include measures enabling more transparent accounting,
additional liberalization of stock options, increased labor mobility
and improved real estate liquidity. This will help to further advance
increasing foreign investment flows as well as to promote productivity
and economic growth.
to Japans Commercial Code Allow Adoption of U.S.-Style Corporate
Specifically, in April,
2003, large Japanese firms will be able to adopt a U.S.-style corporate
governance system. As opposed to the present system, which is comprised
of separate boards of directors and statutory auditors, Japanese firms
will be able to establish nomination, compensation and auditing committees
within their boards of directors. This change will provide the board
with more power to monitor and influence the internal affairs of the
company. The majority of members in each committee will be comprised
of outside directors. It will facilitate the ability of these companies
to delegate the authority needed to effectively manage their financial
and operating needs.
Next year companies will also be able to use certifications issued by
lawyers and accountants as an alternative to reports by court-appointed
inspectors to value in-kind capital contributions. This will facilitate
their ability to enact and consummate mergers and acquisitions. Furthermore,
the requirement that foreign companies conducting continuous business
operations in Japan have to set up a branch office will be abolished.
Additional reforms over the past year include a further liberalization
of restrictions on stock options. Permission has also been granted to
utilize the Internet and other electronic means to exercise voting rights
and to release shareholder notices. Companies are also now able to satisfy
their disclosure requirements by making the full text of income and
balance sheet statements available on company web sites and other Internet
forums for five years. Other notable recent reforms include a relaxation
of restrictions on equities pricing and the issuance of tracking stocks.
New Mark to Market Accounting Standards in 2001
the "Big Bang" reform of Japanese financial services in November
1996, the Business Accounting Council carried out research on the accounting
practices of the U.S. and other major industrial countries. This was
done to identify best practices and measures that would enhance competition
and market discipline in a manner that satisfies the objectives of being
"free, fair and global".
Over the past five years the Council has developed a series of measures
designed to improve disclosure of consolidated financial information.
This includes measures to improve the accounting treatment of cash flow
statements, R&D costs, retirement benefits and taxation.
As of last year, Japanese accounting rules were reviewed entirely and
revised accordingly. Consolidated cash flow statements have become mandatory.
Tradable securities are now measured at fair-value, with any unrealized
gains and losses included on income statements. Other securities, including
cross-shareholdings must also be measured at fair-value, with unrealized
gains or losses recorded on the firms balance sheet. Other measures
will help to more accurately gauge the effect of hedge, derivatives
and retirement benefits accounting.
Measure to Enhance Labor Flexibility and Pension Portability
shifts from a system based on lifetime employment to one that rewards
labor flexibility, the perceptions of both workers and business owners
have begun to change. Many are beginning to appreciate the benefit of
mid-career hiring. The number of temporary workers has risen from 570,000
in 1993 to 1,390,000 in 2000 and the ratio of temporary/part time to
regular workers has risen from 20.8% to 27.2% over the same time period.
As a result, Japan is seeking to adopt human resource practices that
emphasize the needs of workers and to establish a better evaluation
system to determine vocational abilities. This includes an expansion
of alternatives in corporate pension practices, such as the introduction
of defined contribution and hybrid plans that enhance pension portability.
Steps have also been taken to help Japanese workers advance their careers
by facilitating their ability to change jobs and to obtain the skills
and training needed to compete in a globalizing world economy. This
includes a dramatic expansion of the number of jobs eligible for temporary
employment and a general relaxation of measures regulating the employment
placement industry. Measures have also been adopted to promote employment
of women and displaced middle-aged and elderly workers.
Recognizing the need for ongoing and comprehensive restructuring on
the firm level, Japan has also been active in clarifying the rules and
standards that govern corporate divestiture and the dismissal of workers.
This is being done to avoid useless disputes and to allow the rational
application of judicial precedents and standards that will protect both
workers and shareholders and allow for a more rational and transparent
divestiture and reorganization process.
Japan Perceived as Source of Potential
Growth in the Face of Market Turmoil
As the U.S.
economy continues to work off the excesses of the late 1990s Internet
bubble, foreign corporate and portfolio investors are coming to more
fully appreciate the underlying attractiveness of the worlds second
Possessing a Gross Domestic Product (GDP) about half as large as the
U.S. or Europe and more than four times the size of China
Japan is one of the worlds most affluent and sophisticated consumer
and industrial markets. It contains more than 100 million consumers
with ¥1,400 trillion in personal assets.
Despite its economic problems -- per capita income in Japan remains
larger than the U.S. and major European nations. On average, households
headed by persons in their sixties hold assets averaging about ¥60
million, of which roughly ¥20 million is accounted for by financial
assets. This combination of scale and income level makes Japan an ideal
market for the upscale goods and services that constitute a major portion
of U.S. exports.
Japan also possesses one of the best-educated work forces in the world.
49.3% of its students go on to Universities and Junior Colleges. This
compares to only 45.9% in the U.S. and 21% in Singapore. Japanese workers
are also extremely diligent. According to the International Labor Organization,
Japan firms lost only about 5% as many man/days to strikes and labor
unrest as companies in the U.S. in 1999 and Japan consistently ranks
as one of the safest countries in the world.
Recognition of this trend has caused FDI inflows into Japan to increase
significantly in recent years. The value of transactions rose from ¥598
billion in 1997 to ¥3,283 billion yen in 2000 an increase
of over 500%. The number of M&A transactions has also grown substantially,
from 531 transactions in 1995 to 1241 in 2000. Entrepreneurship is also
on the rise. While unemployment has risen modestly, over one million
people are said to be hoping to start businesses. Of this figure, over
half state they are already making preparations.
Japan Offers Safe Haven and Upside
Potential to Corporate and Portfolio Investors
While Japan has far to go in delivering on the promises of reforms
measures enacted in recent years, investors have begun to realize
the stage is being set for an environment that can lead to an increased
valuation of Japanese assets. Many perceive Japan to be a relative
safe haven during a turbulent time. While the long term implications
of this trend remains to be seen, the Nikkei 225, Japans primary
market index has outperformed the U.S. Dow Jones Industrial,
S+P 500 and NASDAQ, as well as most major European, indexes over the
In the recent New York Investment Initiative Symposium organized by
the Japanese and U.S. governments, Wilbur L. Ross, Jr., Chairman and
CEO of WL Ross & Co. LLC emphasized that Japanese real estate,
stock and country club membership prices remain at twenty year lows.
This is far below the level currently seen in the U.S. even accounting
for the recent downturn. Ross also noted the reduction in cross shareholdings
(from 18% in 1990 to 10% in 2000) and other equity holdings by Japanese
banks will make a larger supply of securities available to foreign
investors. Other key advantages include the ability of Japanese markets
to provide a liquid source of diversification for investors seeking
a safe haven in view of current market trends. Additionally, Japanese
government spending and a comparatively lower cost of leverage can
enhance the return of equity investors in Japanese securities. Finally,
foreign direct investors can obtain very low cost financial leverage
to enhance potential returns and can profitably hedge their yen investment
back to U.S. dollars.
Investment is Beginning to Change the Business Dynamic in Japan
Only a few years ago
foreign companies and investors considered Japan to be a relatively closed
market. They found it very difficult to establish themselves and to acquire
the human resources needed to succeed in an environment in which the most
promising candidates sought to enter a lifetime career path with a few
select Japanese government or corporate entities.
Over the past few years a rising number of foreign companies -- who have
entered Japan through either greenfield or the acquisition of Japanese
assets have begun to radically change entire sectors and the way
that business is conducted in Japan.
Change is most visible on the consumer level and firms such as Starbucks,
Toys-R-Us, Walmart, Costco and the Gap have dramatically changed the face
of Japanese retailing. Citibank and other U.S. financial institutions
as well as foreign-owned Shinsei Bank and Kansai Sawayaka Bank have introduced
major innovations in the field of financial services. Equally notable
is the success achieved by Carlos Ghosn at Nissan, who one Japanese government
official has described as a "Japanese national hero". Less well
known are the success of major U.S. pharmaceutical firms such as Johnson
and Johnson, with $1.5 billion in 2001 revenues and Pfizer which
ranks third in overall pharmaceutical sales in Japan and first in cardiovascular
and second in anti-infective sales.
In addition to resuscitating specific troubled enterprises, foreign investment
is helping to introduce new business models and practices in Japan. It
is changing the way in which Japanese firms market, finance and operate
their enterprises and is presenting more options to Japanese consumers.
Employment practices are also changing, with many prominent students from
prestigious Japanese universities now preferring to begin their careers
with foreign firms. This was simply unheard of in the past. It is also
encouraging a shift away from lifetime employment to an environment that
allows mid-career transition.
Japan Hopes to
Accelerate the Involvement of Foreign Investors in Coming Years
For more than 50 years,
Japan maintained its own style of employment and financial systems, with
corresponding corporate governance and other institutions and practices.
Today, however, in recognition of the need to speak a common language
with other global trading and investment partners, all these systems are
changing. The objective is to shift from a system that gave priority to
high efficiency to a new system that facilitates the smooth transfer of
resources from low- to high-productivity sectors. Drastic reforms have
been made to help Japan transform itself into a more market-oriented system.
In the years to come Japan hopes to build on these efforts, to accelerate
-- both its ongoing restructuring and reform efforts as well as the increasingly
important involvement of foreign companies and investors.
As one of the three top global economies, Japan possesses one of the worlds
most sophisticated and affluent consumer markets. Combined with its leading
edge in numerous technologies and manufacturing processes, along with
its high quality, highly motivated workers and well-maintained industrial
infrastructure, Japan represents an excellent place to track market trends
and to sell U.S. products and services. In addition to the attractions
of its own domestic market, Japan can also serve as a hub for expansion
to the vast Asian market.
U.S. corporate and portfolio investors who are seeking to expand their
international market presence and to achieve greater diversity in their
portfolio investments will find a welcoming environment and source of
future growth that is perhaps unmatched in the world. Furthermore, it
is by no means farfetched to say that no global business strategy can
be complete without investment in Japan.
This thought is reflected in the words of John A. Thain, President and
Co-Chief Operating Officer of the Goldman Sachs Group, who delivered a
keynote address at the recent N.Y. investment seminar. Mr. Thain noted
that "as a global firm, Goldman Sachs is concerned with not only
the US market, but also global markets with the Japanese market being
especially vital." He further explained that "Goldman Sachs
has about 1200 employees in Tokyo, making it their second largest office
after New York, making it a very important part to their business."
|For additional information,
please contact Satoshi Miyamoto, Executive Director of JETRO NY at Tel:
212-997-0416, Fax: 212-997-0464, E-mail: Satoshi_Miyamoto@jetro.go.jp
Focus: Koizumi Visit
Foreign Direct Investment
Emergency Economic Package
Focus: Action Plan
Small Business Development
Focus: New Enterprise Development
Focus: Economic Recovery 4
Focus: Economic Recovery 3
Economic Recovery 2
Focus: Economic Recovery
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